SPECIAL UPDATE: The Fiscal Cliff legislation (H.R. 8) and its implications for charitable giving
By Rick Dunham
As we are all well-aware by now, Congress has passed–and President Obama has signed into law–legislation known as H.R. 8 to avert the fiscal cliff facing the American economy. There are a number of complex provisions in H.R. 8, some affecting charitable giving.
The purpose of this special update is to provide a summary of the provisions which will most directly impact charitable giving and to provide a simple explanation of one of the more complex provisions of the new law called the Pease Amendment.
If you’d like a detailed analysis of the financial planning implications of H.R. 8, click here.
For charitable giving, here are the five highest-impact provisions.
- The tax rate stays the same for all taxpayers except for those individuals making $400,000+ and families making $450,000+. For these households, the tax rate increases to 39.6 percent from 35 percent.
- The tax rates on capital gains and dividends for these same households will increase to 20 percent from 15 percent and will stay at 15 percent for all others.
- The value of all deductions (including the deduction for charitable contributions) will be reduced by 3 percent of income over $250,000 for individuals and $300,000 for families, up to 80 percent of total deductions. This provision is the reinstatement of what is known as the “Pease Amendment” (see explanation below).
- The estate tax exemption stays at $5 million per person ($10 million per couple), indexed for inflation (so $5.25 million in 2013), but the tax rate on estates over this amount has been increased from 35 percent to 40 percent.
- There is a two-year extension on tax-free distributions for charitable purposes from IRAs held by those 70.5 years old and older. These distributions can be up to $100,000 per taxpayer, per taxable year.
There are a variety of opinions on the net impact of these changes on charitable giving, the most disconcerting being the reinstatement of the Pease Amendment. This limitation, known for its author, Congressman Pease, works this way. If a family makes $400,000 (which is $100,000 more than the $300,000 threshold), their total deductions would be reduced by $3,000 (which is 3 percent of the $100,000 difference above).
Some believe this provision will have little to no effect on giving. Others are concerned it will have a large impact. Frankly, only time will tell.
In reviewing these changes, I would encourage the following:
- With the rise in the capital gains tax for high income earners, there has never been a better time for your major donors to gift appreciated assets to your organization. By gifting an appreciated asset, the donor gets to write off the full fair market value of the asset rather than selling the asset and losing 20 percent of the value to taxes. In addition, the charity gets the full amount of the asset rather than the asset being reduced by 20 percent.
- Communicate to your donors that if they are 70.5 years old or older they can make a tax-free distribution from their IRA, up to $100,000. This is a great opportunity to steer money out of an IRA without any tax consequence but is only guaranteed for 2013 and 2014, so the clock is ticking if a donor wants to take advantage of this provision.
- Households making $450,000 or more will get a higher value for their contributions as their effective tax rate has been raised to 39.6 percent. The only caveat is related to their overall deductions and the impact of the Pease Amendment.
The best news from H.R. 8 is that the charitable deduction was not capped at 28 percent as the Obama Administration has proposed over the last 4 years, nor were deductions capped overall as the Republican leadership had been considering. However, we believe these proposals may be reintroduced in the coming months, so stay tuned…