On January 1, Congress passed The American Taxpayer Relief Act of 2012 to avoid the so-called “fiscal cliff.” The law raises tax rates to a maximum of 39.6 percent for individuals with incomes over $400,000 and married couples filing joint returns with incomes over $450,000. It also raises capital gains and dividend rates from 15 percent to 20 percent for taxpayers above the same thresholds. The maximum estate tax rate rises from 35 percent in 2012 to 40 percent for years beginning after December 31, 2012.
Of significance for nonprofits is the reinstatement of a limitation on itemized deductions for high earners, including that for the charitable contribution deduction for individuals with incomes over $250,000 and married couples filing joint returns with incomes over $300,000.
While many believe the higher taxes and deduction limitations will negatively affect charitable giving, the Chronicle of Philanthropy, quoting a study by the Urban Institute, recently reported that the “income-tax provisions adopted by Congress to avert the year-end ‘fiscal cliff’ will increase charitable giving by an estimated 1.3 percent, or $3.3-billion, in 2013.” According to the Chronicle, “The study also took into account the decision to raise the capital-gains tax from 15 percent to 20 percent. That provides an additional incentive for people to donate stock or other property that has risen sharply in value. Not only will they escape the higher capital-gains tax, they will also get the bigger 39.6-percent tax savings on their gift.”
The Urban Institute study suggests that the new limitations on deductions will have “negligible effects” on charitable giving.
Among the other provisions of the law that may impact charities is an extension of the limit on IRA contributions to charitable organizations. That provision imposes a limit for taxpayers age 70 1/2 or older of $100,000 from a Roth or traditional IRAs to certain charitable organizations to permit excluding the withdrawal as part of gross income. Taxpayers can make a rollover in January 2013 and have it treated as if made in 2012.
