The following are some quick highlights of the Fiscal Cliff Tax Legislation that was enacted into law Monday night. The legislation only addresses major tax issues, while raising the debt ceiling limits and preventing the automatic sequestration spending cuts from beginning will be dealt with over the next two months:
• Charitable Deductions: Good news is that the charitable tax giving incentives were not specifically capped and no changes were made to the exempt status or classification of charities, such as nonprofit arts organizations. While no changes have been made in this first round of fiscal cliff negotiations, tax reform revenue raisers are still on the table as Congress and the White House negotiate staving off deep sequestration cuts in the next two months. Americans for the Arts will continue advocating the importance of this issue on behalf of the nonprofit arts sector.
• Personal Exemptions and Itemized Deductions: Unfortunately, the new tax law does reinstate both the Personal Exemption limitation and the “Pease limitation,” (named after former Congressman Donald Pease (D-OH)), which will reduce the overall amount of itemized deductions (including home mortgage, charitable, local and state taxes, etc) by three percent of only that amount that exceeds the threshold (but not to exceed 80% of total itemized deductions that would have been taken). These deduction limitations are not a cap and they only kick-in for married couples earning more than $300,000 and singles earning more than $250,000 annually.
Here’s how it works: If married taxpayers earn $1 million and have total itemized deductions of $190,000 (home mortgage interest, charity donations, state/local taxes combined) in 2013, they will not be able to deduct the full $190,000 from their income. They will only be able to deduct $169,000 ($190,000 – $21,000) because the PEASE limitation rule reduces the deduction by the equivalent of 3% of the amount of their income above the $300,000 threshold ($1 million – $300,000 = $700,000 is the amount above the threshold). The reduction would then be $21,000 ($700,000 x 3% = $21,000). These rules were in effect in the 1990’s, but had been temporarily phased out during the Bush-era tax cuts in the previous decade.
• IRA Rollover: extends for two years, retroactive to 2012, allowing donors age 70½ or older to donate to charities tax-free from their IRAs. Important note: donation deadlines have been extended by a month so that donors can designate their IRA distributions to a charity in January 2013, but still have the deduction apply to tax year 2012. Read the rest of this entry »