|Charitable giving strategies for the end of 2013
Five ways to give.
December 12, 2013
Charitable giving in the United States exceeded $316 billion in 2012, so it is no surprise that this continues to be a popular topic when it comes to year-end tax planning. Contributions in 2012 were almost 2% higher than in 2011. Religious organizations were the major recipients, receiving 32% of the total.
Being charitable has its rewards, both tangible and intangible, but one of them is that a tax deduction is generally available to individuals who itemize deductions on their individual income tax returns. While there may be concerns regarding the deductibility of charitable contributions, it should continue to be an important part of year-end tax planning strategies. That being said, a tax strategy in and of itself is not a reason to be charitable. A deduction or tax incentive is merely a byproduct of that generosity.
Below are some general guidelines and five ways to engage in charitable giving by the end of the year to be eligible for tax savings. Following that is a review of the impact of the “Pease” limitation on itemized deductions that applies to high-income individuals and its effect on the deduction for charitable giving.
General guidelines and ways to implement
Gifts to qualified charitable organizations (see the IRS website for a listing of qualified charities) are deductible on Form 1040, U.S. Individual Income Tax Return, Schedule A, Itemized Deductions. More specifically, contributions to public charities are deductible up to 50% of adjusted gross income (AGI). Gifts to private foundations, on the other hand, are deductible up to 30% of AGI. Deductible contributions constitute a tax savings of the total deduction at the individual’s marginal income tax bracket. For example, in general, an individual who donates $1,000 and whose marginal tax bracket is 28% would be eligible for a reduction in tax liability of $280.
Pease limitation’s effect on charitable contributions
ATRA revived and modified the Pease limitation (named for the member of Congress who sponsored the original legislation) on itemized deductions for higher-income taxpayers. (The Pease limitation was eliminated for 2010 through 2012.) Under the new Pease limitation, if a taxpayer’s AGI exceeds an applicable amount based on filing status, the amount of the taxpayer’s itemized deductions otherwise allowable for the tax year is reduced by the lesser of 3% of the excess of adjusted gross income over the applicable amount or 80% of the amount of the itemized deductions otherwise allowable for that tax year. For these purposes, itemized deductions do not include medical expenses, investment interest, casualty and theft losses under Sec. 165(c)(2) or (c)(3), and gambling losses under Sec. 165(d). The new Pease limitation “applicable threshold” levels for 2013 are $250,000 for single individuals and $300,000 for married couples filing jointly.
It is important to note that for the majority of taxpayers, the limitations are based on the taxpayer’s AGI, not the amount of their itemized deductions. Therefore, it is difficult to attribute the limitation to one deduction over another. A simple example illustrates the limitation’s effect.
Example: A married couple whose AGI is $1 million have $80,000 of potential itemized deductions. The amount above the AGI threshold, $700,000 ($1 million – $300,000), is subject to the 3% limitation; that is, $21,000 ($700,000 × 3%). The couple can now deduct only $59,000 ($80,000 – $21,000) of their itemized deductions. In this scenario, any additional deductible expense over and above the $80,000 would be fully deductible because the maximum limitation of $21,000 is applied without regard to specific deductions.
For 2013, consider charitable donations as part of year-end tax planning. Charitable organizations depend on Americans’ generosity, and this is an excellent way to give back while saving taxes at the same time.
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Andrew Gray, CPA, leads the not-for-profit industry tax practice for Daszkal Bolton LLP, a regional accounting and advisory firm, and has contributed thought leadership to several industry publications. He is a member of the AICPA and the Florida Institute of Certified Public Accountants and is a CPA certified in Ohio.