By Joseph Gillmer, Vice President, CCS
With the election in the rearview mirror, Congress and the White House are focusing on budgets and taxes. Specifically, they are attempting to avoid the so called “Fiscal Cliff,” a scenario where a variety of Federal taxes will increase while across-the-board spending cuts will occur at the same time—January 1, 2013. There are several aspects of charitable giving that could be impacted by Congressional decisions (or lack thereof) for 2012, 2013 and beyond. Below is a breakdown of the key charity-related tax issues on the table that would be addressed by The “Family and Business Tax Cut Certainty Act of 2012” (FBTCC Act of 2012,) a bill that has passed the Senate Committee on Finance but requires full passage in Congress to take effect. The bill would extend certain expired or expiring tax provisions through December 31, 2013. The staff of the Joint Committee on Taxation (JCT) estimates that enacting the bill would reduce revenues by about $205 billion from 2013 to 2022 period. More than 60% of that revenue reduction would arise from a two-year extension of relief from the individual alternative minimum tax (AMT.) The charitable tax deduction “extenders” are a smaller, but important part of the FBTCC Act of 2012.
Individual Charitable Deduction Extenders
Charitable IRA Rollover
The Charitable IRA Rollover was first enacted with the passage of the Pension Protection Act in 2006. It provided the ability for individuals 70 ½ or older to direct traditional or ROTH IRA funds to charitable organizations up to $100,000. These gifts to charitable organizations, while not tax deductible (because they were pre-tax assets,) allowed individuals to fulfill part or all of his or her Required Minimum Distribution. The Charitable IRA Rollover provision has required approval from Congress as part of tax “extender bills” every year or two years since 2009. The latest provision expired at the end of 2011.
The FBTCC Act of 2012 would reinstate the Charitable IRA Rollover to the beginning of 2012 and extend it through 2014. The Joint Committee on Taxation and Congressional Budget Office estimate that the Charitable IRA Rollover would cost the federal government about $877 million in lost tax revenue for 2013 and 2014. That equates to $2.5 to $3 billion in charitable giving through the Charitable IRA Rollover in 2013 and 2014. While the permanent expiration of the Charitable IRA Rollover does not necessarily mean that charitable giving would drop by several billion dollars over the next two years (as many donors use the gift vehicle as a substitute for other types of giving as opposed to wholly new giving,) the loss in giving would number in the hundreds of millions of dollars – real dollars that could be going to worthy causes.
Contributions of Capital Gain Real Property Made for Conservation Purposes
The FBTCC Act of 2012 that would extend the Charitable IRA Rollover would also extend for two years the increased contribution limits and carry-forward period for contributions of appreciated real property (including partial interests in real property) for conservation purposes. The Joint Committee on Taxation and Congressional Budget Office estimate that the extension of the enhanced contribution limits of capital gain real property for conservation purposes would cost the Federal Government about $132 million in lost tax revenue for 2013 and 2014.
Annual Gift Tax Exclusion
The annual gift tax exclusion is one change taking effect in January 2013. The annual gift tax exclusion amount, which is adjusted annually, will be $14,000 for 2013, as announced by IRS last week (Internal Revenue Bulletin 2012-45.) Taxpayers will be able to make gifts of up to $14,000 per person in 2013 without any federal gift tax consequences. This means that an individual can provide up to $14,000 to any number of individuals without owing federal gift taxes (as long as the gift does not exceed $14,000 to any ONE individual) While the annual gift tax exclusion is not in the category of charitable deductions (and separate from FBTCC Act of 2012,) many individuals take into account what he or she can give to family members in a given year when considering a budget for charitable support.
Business Charitable Tax Deduction Extenders
The FBTCC Act of 2012 also provides provisions to extend several charitable avenues for businesses.
New Markets Tax Credit
Through the New Markets Tax Credit (NMTC) program, the federal government has been able to leverage federal tax credits to encourage significant private investment in businesses in low-income communities. The program provides a 39%tax credit spread over seven years. Many nonprofit organizations have been able to utilize new markets tax credits as part of a larger campaign for their capital needs over the last several years.
The FBTCC Act of 2012 would provide support for two more years of the new markets tax credit, permitting a maximum annual amount of qualified equity investments of $3.5 billion each year. The Joint Committee on Taxation and Congressional Budget Office estimate a two-year extension of this proposal will cost the federal government $32 million in 2013 and 2014 and about $1.8 billion over a 10-year period ending in 2022.
Enhanced Charitable Deduction for Contributions of Food Inventory
The FBTCC Act of 2012 would provide a two-year provision that would allow businesses to claim an enhanced deduction for the contribution of food inventory. The Joint Committee on Taxation and Congressional Budget Office estimate a two-year extension of this proposal would cost the Federal Government $314 million.
Basis Adjustment to Stock of S Corporations Making Charitable Contributions of Property
The FBTCC Act of 2012 would provide a two-year provision that would allow S corporation shareholders to take into account their pro rata share of charitable deductions even if such deductions would exceed such shareholder’s adjusted basis in the S corporation. The Joint Committee on Taxation and Congressional Budget Office estimate a two-year extension of this proposal would cost the federal government $224 million.
Latest on the Federal Estate Tax
Under current law the federal estate tax exemption is scheduled to change from $5 million in 2012 to $1 million in 2013. In addition, the estate tax rate is scheduled to revert from the current 35% rate for assets in an estate transferring to non-charitable beneficiaries that exceed the $5 million exemption to 55% for assets that exceed $1 million.
What would that mean in terms of an impact on charitable giving? The Congressional Budget Office concluded in reports published a couple years ago that repealing the estate tax would reduce charitable bequests as much as 28%. It is thought that the lower the exemption, the more individuals would need consider whether to give a significant amount of assets to either charity or the Federal Government. At a higher exemption or no federal estate tax at all, more individuals would just transfer assets to heirs, which would be why charitable support would drop in a high exemption or estate tax repeal scenario.
The Future of the Federal Estate Tax
President Obama has voiced support for a federal estate tax for 2013 to follow the rates of 2009: $3.5 million estate tax exemption and a 45% estate tax rate. On the left, there are legislators who are in favor of allowing the exemption to revert back to $1 million and 55% tax rate. On the right, there are legislators who are in favor of a permanent repeal of the estate tax.
If Congress acts before the end of the year, it will likely be a compromise that will set the estate tax exemption between $3.5 million and $5 million with an estate tax rate of 35-to 45%. As mentioned above, if Congress does nothing, the exemption automatically drops to $1 million with a 55% rate, effective January 1, 2013.
* CCS does not provide legal or tax advice. Donors and potential donors need to consult with tax professionals.
