The American Taxpayer Relief Act of 2012 enacted in Washington
last week creates a unique opportunity for charitable giving.
Individuals with IRAs who have attained age 70½ may make a
tax-free rollover to charity of up to $200,000, if they act during
January 2013.
Here's how it works. The new law restores the ability of an
individual who has attained age 70½ to make a tax-free IRA
distribution (commonly referred to as a "rollover") to
charity of up to $100,000 during 2013. And if the individual acts
during January 2013, he or she can rollover an additional $100,000
and have it treated as if it was rolled over in 2012 (a year in
which the IRA charitable rollover had temporarily expired until the
enactment of the new law). In addition, an individual who took a
personal IRA distribution during December 2012 may be able to treat
up to $100,000 of the distribution as a tax-free 2012 distribution
to charity - to the extent the individual transfers up to $100,000
in cash to charity during January 2013. Therefore, individuals
looking to "double up" on IRA charitable rollovers - and
contribute up to $200,000 of IRA assets tax free to one or more
charities - can do so if they act quickly.
There continue to be important limitations on IRA rollovers to
charity. The donee organization cannot be a supporting organization
or a donor-advised fund, and as a general rule, a private
foundation is eligible for an IRA rollover only if it is an
operating foundation. The individual cannot receive any quid
pro quo or consideration for the distribution, and he or she
must obtain written substantiation from the donee organization that
it received the distribution and provided no goods or services in
consideration for it.
Although there was a great deal of debate in Washington about
whether the new law would impose a new cap on the charitable
deduction, Congress ultimately did not pursue that option. Instead,
the law revives a cutback in the deduction -- the so-called
"haircut" on itemized deductions, also known as the
"Pease limitation" -- that had been phased out starting
in 2006. The actual effect of restoring the full Pease limitation
remains to be seen, but many donors may be less daunted in their
charitable giving if their deductions are reduced by an old but
familiar "haircut" formula than by any of the new
concepts that were circulating in Washington in December.
One well-known aspect of the legislation - the increase in marginal
tax rates for individual taxpayers earning over $400,000 and
married couples earning over $450,000 - means that the tax savings
generated by charitable gifts could now be greater for taxpayers in
the top bracket than in 2012, when tax rates were lower. In other
words, higher tax rates could mean that gifts to charity for
top-rate taxpayers will reduce taxes more this year than in 2012.
However, the restoration of the "haircut" on itemized
deductions could offset some or all of the tax savings that would
otherwise be attributable to higher marginal rates. The
"haircut" reduces the total amount of itemized deductions
by 3% of the amount by which the taxpayer's adjusted gross
income exceeds an "applicable threshold" (but the amount
of itemized deductions may not be reduced by more than 80%). The
"applicable threshold" is $250,000 for individual
taxpayers and $300,000 for married couples. Each donor's
situation should be reviewed carefully by his or her tax
advisors.
The new law also extends, through the end of 2013, the special rule
allowing the deduction for certain conservation easements to offset
up to 50% of the donor's contribution base (generally speaking,
his or her adjusted gross income) for the tax year (rather than the
general limitation of 30%), with a 15-year carryforward of amounts
over the 50% limit.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.