On January 1, 2013, in an effort to avoid the impending fiscal cliff, Congress passed the American Taxpayer Relief Act of 2012 (H.R. 8). Although discussions regarding tax policy and spending cuts will continue throughout the new year, the changes in H.R. 8 have immediate influence on taxpayers. Most notably, the legislation raises the top tax rate to 39.6% on household incomes above $450,000 and delays the $110-billion in federal spending cuts for two months.
In terms of how the fiscal cliff deal affects donors and nonprofits, there are both wins and losses. While the legislation does not include either the proposed cap on deductions at 28% for high-income taxpayers or the proposed limit on total itemized deductions, the legislation does contain provisions that will impact donors and nonprofits.
On the one hand, two changes provided for in H.R. 8 will be welcomed by nonprofits and donors alike. The fiscal cliff deal extends tax-free distributions from individual retirement plans for charitable purposes, otherwise known as the IRA Charitable Rollover, for people over age 70½. Additionally, it extends a provision permitting businesses to claim a deduction for donating surplus food to charity.
However, H.R. 8 reinstates a provision that was previously eliminated under the Bush tax cuts, also known as the “Pease Amendment.” This provision reduces itemized deductions by 3 percent of the amount that household income exceeds $300,000 ($250,000 for single filers). Although several deductions, including medical expenses, are exempt from the reduction, charitable contributions are not.
While it is too soon to tell what the true impact of the Pease Amendment will be, the charitable tax deduction was preserved in H.R. 8.
Nevertheless, Congress still has yet to deal with the $110-billion in federal spending cuts that were scheduled to take effect this week. The delay provided the government more time to negotiate and draw up legislation; however, the nonprofit world was forced into a state of uncertainty. Half of the proposed cuts are aimed at domestic social programs, most of which are either administered by nonprofits or which serve persons who would turn to nonprofits if the aid were cut.
Furthermore, members of Congress have announced that they still intend to proceed with a comprehensive tax-code overhaul in 2013. Therefore, 2013 could still be a year of advocacy and debate, with the reappearance of negotiations surrounding the charitable deduction and other giving incentives.
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