Update (Part 1): The Fiscal Cliff, Taxes and Charitable Giving
By Mark Hefter, Esq., Director of Planned Giving, American Technion Society and President-Elect, Association of Fundraising Professionals, Greater NY Chapter
The House voted and passed the bill on Jan 1, 11pm, which the Senate passed earlier that morning, that would halt the automatic expiration of most of the Bush tax cuts, effective at 12:00 AM. Here, in brief, are the main relevant points of the bill:
Income Taxes – the ordinary income tax tables that expired last night are to be reinstated, except there is a new 39.6% bracket for joint filers with taxable income over $450,000; for single filers, the threshold is $400,000.
Capital Gains and Dividends – those subject to the new 39.6% ordinary income bracket would be subject to 20% taxes on capital gains and dividends. Everyone else would still pay no more than 15%.
Itemized Deductions (including the deduction for charitable contributions) – the three percent haircut is back, for joint filers with AGI over $300,000, and for single filers with AGI over $250,000. Ditto for the phaseout of personal exemptions.
Estate Tax – the current estate, gift and generation-skipping tax structure is retained, except that transfers exceeding $5 million per transferor would be taxed at a flat rate of 40%, up from 35%.
All of the above listed threshold amounts are to be adjusted for inflation in each calendar year. Each provision is “permanent” (i.e., they have no automatic sunset date).
The new bill should have minimal, if any, effect on the tax incentives for charitable giving. What effects there may be may make it slightly more cost effective for high income individuals to give to make major gifts.
Finally, the Charitable IRA Rollover is back for another year. Eligible transfers made in January will be treated as though they were made in 2012. Donors may also elect to treat otherwise eligible transfers made to charity in December 2012 as qualified charitable rollovers. This is also bit of good news.
Even with the passing of the bill, Congress will have to deal with the other parts of the so-called fiscal cliff, meaning the situation will be revisited at least once in the coming few months.