How the Fiscal Cliff Legislation Affects Your Charitable Giving

By Lori A. Matt-Murphy, Associate Vice President for Gift Planning

Fiscal Cliff Legislation Affects Your Charitable Giving As the new Associate Vice President for Gift Planning at the University at Albany, it’s my job to know and understand new legislation as it relates to charitable giving to the University. Let me take a moment to explain what the American Taxpayer Relief Act of 2012 really means for charitable giving. Here is a brief summary of how charitable gifts by people in different financial circumstances are affected:

All individuals aged 70 1/2 and over who have an IRA.
The charitable IRA rollover has been extended through December 31, 2013. This year, if you are at least 70 1/2 you can transfer up to $100,000 from your IRA to charity and the amount transferred will count towards your required minimum distribution and will not be included in taxable income.

Individuals with income of $200,000 or less and couples filing jointly with income of $250,000 or less.
The tax rates on both compensation (earned) and investment income are unchanged for this group, so the tax savings from charitable gifts remain the same.

Individuals with income between $200,000 and $400,000 and couples filing jointly with income between $250,000 and $450,000.
The tax rates on compensation income were not changed by the recent fiscal cliff legislation. However, the pre-existing Affordable Care Act imposes a 3.8% surtax on the portion of investment income (capital gain, dividend, interest, and rental) that exceeds $200,000 for single persons and $250,000 for couples filing jointly.

You can mitigate the bite of this tax increase by giving appreciated assets (such as stocks). In the past, contributing appreciated securities in lieu of selling them avoided a 15% tax on the gain; now contributing them will avoid paying an 18.8% tax on that portion of the gain that exceeds the $200,000/$250,000 threshold.

Individuals with income exceeding $400,000 and couples filing jointly with income exceeding $450,000.
The tax rate on compensation income in excess of those threshold amounts increases from 35% to 39.6%, and the tax rate on capital gain and dividend income increases from 15% to 20%. Additionally, investment income in excess of the $200,000/$250,000 threshold is subject to the 3.8% surtax for funding national health programs.

Thus, people in this highest income group are subject to these federal rates: 

39.6% Compensation (earned) income 

43.4% Interest and rental income 

23.8% Capital-gain income 

23.8% Dividend income 

As a result of these higher rates, you can realize greater tax savings from all types of charitable gifts, whether made with cash or appreciated property. The most significant increase in tax savings will result from gifts of appreciated property.

Charitable bequests
The exemption from federal estate tax is $5,250,000, indexed for inflation. The excess over that amount is taxed at a rate of 40%. (In 2012, the tax rate for estates in excess of the exempted amount was 35%.) 

The increased tax rate means that estate-tax savings will be larger for high-net-worth individuals who leave charitable bequests.

Note: The new legislation designed to avoid the fiscal cliff contains many provisions not discussed here. This article deals only with certain provisions that have the most implications for charitable giving. For more information on how charitable deductions can be more valuable to you, contact Lori Matt-Murphy at lmatt-murphy@albany.edu or 518/437-5099.