Not Over the Cliff: Notes for the American Taxpayer Relief Act of 2012 (ATRA)

Below is what you would need if you had to take a college test on ATRA, and you only wanted to read the yellow soft-cover book that you would normally hide in your backpack.  We will augment this blog posting with more in-depth information throughout the month.

The law is actually better than many feared it would be in terms of its impact on charitable giving.  For example, neither President Obama’s proposal to cap deductions at 28%, nor the Republican plan to cap deductions at a fixed dollar amount made it into the final law. 

Here are the highlights for gift planners:

• Highest marginal income tax rates for single taxpayers making over $400K or married filing jointly taxpayers making over $450K moves to 39.6%.  Impact on planned givers: To the extent that the greater tax savings from taking a deduction against a higher rate means an increased incentive to give, there’s a little more incentive here for these high income donors.
• Capital gains and qualified dividend rates for taxpayers with incomes over $400K single or $450K married filing jointly moves from 15% to 20%.  Impact on planned givers: Higher tax rates for capital gains may mean gifts of appreciated property will be more attractive to donors as a way to avoid this tax.
• Return of the 3% “Deduction Reduction.”  This law reduces itemized deductions by 3% for every dollar a taxpayer’s income exceeds $250K single or $300K married filing jointly.  The law was introduced during the Clinton administration, but was completely phased out during the Bush years.  Impact on planned givers: This provision sounds bad, but hasn’t been shown over the years to be a significant drag on charitable giving.  One way to think about this is to say that it’s the state taxes or mortgage interest deduction that is affected by any 3% reduction, not additional charitable gifts.
• The charitable IRA rollover was extended for 2012 and 2013.  Impact on planned givers: From a marketing standpoint, the message to eligible people who waited was they can give in January 2013 and count it towards 2012 and then also give again anytime in 2013 and count it towards 2013.  There are more complicated rules for donors who drew on IRA assets to make gifts in 2012 that we will flesh out in future blogs and analyses. 
• The gift and estate tax exemption was kept substantially the same ($5 million, $10 million for married couples) as under 2012 law, with the top bracket moving up modestly from 35% to 40%.  Impact on planned givers: With higher exemptions (that will continue to be adjusted for inflation) there are precious few people with “estate tax problems,” although these are the precious few gift planners spend a lot of time cultivating.  The higher top rate for taxable transfers and the possibility of transfer tax repeal no longer on the horizon make lead trust gifts look even better.
• The Healthcare surtax on investment income moves in at 3.8% for taxpayers with incomes over $200K single or $250K married filing jointly.  Impact on planned givers: This new tax is a minor incentive for donors to make gifts of appreciated property.
• The social security payroll tax goes back to 6.2% from 4.2% for all taxpayers and for high income taxpayers the .9% Medicare tax kicks in.  Impact on planned givers: It’s important to remind donors that these taxes are unaffected by charitable contributions
• Finally, alternative minimum tax (AMT) thresholds increased and will keep up with inflation.  Impact on planned givers: Many fewer taxpayers will be in the situation where their deductions are limited by the AMT so that additional charitable gifts create no additional tax savings.