With Fiscal Cliff Averted Not-for-Profits Breathe Sigh of Relief, at Least for the Moment (article)

With Fiscal Cliff Averted Not-for-Profits Breathe Sigh of Relief, at Least for the Moment (article)

Congress on New Year's Day approved the American Taxpayer Relief Act of 2012 (2012 Tax Relief Act). The result? Most of the Bush-era tax cuts set to expire after 2012 were permanently extended, with some modifications for higher income taxpayers. Other tax relief provisions, many of which expired at the end of 2011, were extended through 2013 (or 2017 in a few cases).

While many not-for-profits cheered the portion of the fiscal cliff deal that most affects them – charitable giving incentives – they concede that their struggle will continue. That's because while Congress rejected some of the most potentially damaging actions affecting charitable giving, the deal to prevent the economy from careening over the cliff still included a promise of significant tax overhaul during 2013, as the measure did not address major federal spending questions.

Specifically, not-for-profits are concerned because Congress did not eliminate any of the $55-billion in federal spending cuts – about half of which are directed at domestic social programs – that had been scheduled to take effect the first week of January, instead simply delaying any action for two months. Many of these impending cuts are aimed directly at programs typically run by not-for-profits, and are expected to significantly impact many social service agencies if they are not eliminated.

Among the most worrisome federal budget cuts on the horizon thanks to sequestration—those across-the-board spending cuts set to begin January 1, 2013 for both defense and non-defense federal programs—are those aimed at educational institutions and students nationwide. Under sequestration most federal student aid programs are likely to be slashed between 7.6 - 8.2 percent. (The Pell Grant and a few other programs with special treatment are not immediately impacted because they are protected for one year from sequestration cuts.)

Also at stake are federal budgets that support academic research and development, such as for the National Institutes of Health, National Science Foundation, and Department of Energy. They face spending cuts of 8.2 percent, while defense research would see a 9.4 percent reduction under sequestration.

So where's the good news?

While the new deal increases the top tax rate from 35 to 39.6 percent on couples with taxable income over $450,000 ($400,000 for single filers) it does not cap the tax savings wealthy taxpayers reap for charitable gifts, local taxes, mortgage interest and other itemized deductions. That's good news for charities because analysts predict the lack of a tax-savings cap will continue to encourage wealthy donors to give generously.

The other options that had been on the table – the Obama-backed 28 percent cap on the tax savings wealthy donors receive when they write off their charitable gifts and other items, and the GOP-supported dollar limit of up to $75,000 for all deductions – would have greatly lessened the financial incentive for donors to give. Fortunately for charities large and small, neither of those measures made the final cut.

For the time being, the charitable deduction will continue to be tied to a donor's tax rate so someone in the new 39.6 percent tax bracket would enjoy a $396 tax savings on a charitable gift of $1,000. The same donor would only see a savings of $280 if Obama's proposed 28 percent cap had been implemented.

There were other glimmers of hope for not-for-profits in the new fiscal cliff deal. For one, individuals age 70 ½ or older now have until January 31, 2013 to donate up to $100,000 from Roth or traditional IRAs to charitable organizations without including the amount of their IRA withdrawals in gross income for 2012. These individuals can also make a rollover in January 2013 and have it treated as if made in 2012. Also, individuals age 70 ½ or older who took a distribution in December of 2012 may contribute that amount to a charity and treat it as an eligible charitable contribution provided the contribution to charity is made by January 31, 2013.

Here's an overview of what's in the fiscal cliff deal

For Individual Taxpayers

The fiscal cliff deal in general permanently extended the Bush-era tax cuts found in the Economic Growth and Tax Relief Reconciliation Act of 2001 (“EGTRRA”) and the Jobs and Growth Tax Relief Reconciliation Act of 2003 (“JGTRRA”).

Among the provisions permanently extended are:

  • The 10/15/25/28/33/35% tax rate structure for individuals (except for certain higher income individuals discussed below)
  • The 15% tax rate on long-term capital gains and qualified dividends (except for certain higher income individuals discussed below)
  • The marriage penalty relief that expanded the 15% bracket and standard deduction for married taxpayers filing jointly to twice that of single taxpayers
  • The increase in the child tax credit to $1,000
  • The increase in the maximum dependent care credit and eligible expenses
  • The increase in the adoption credit to $10,000 and related provisions
  • The $5,250 income exclusion from employer-provided educational assistance
  • The increase in maximum annual Coverdell education savings account contributions to $2,000 and related provisions
  • The increase in Adjusted Gross Income (AGI) phase-out limitation and waiver of 60-month limit on the above-the-line deduction for student loan interest

Tax Rate Increases

Starting this year the highest marginal tax rate will increase to 39.6 percent and the long-term capital gains and qualified dividends tax rate will increase to 20 percent for couples with taxable income over $450,000 or single filers with taxable income over $400,000. The tax increase on capital gains and qualified dividend income is in addition to the 3.8 percent Medicare tax on net investment income of higher income taxpayers that began January 1, 2013.

Itemized Deductions

For couples with AGI over $300,000 and single filers with AGI over $250,000 the overall limitation on itemized deductions and the phase-out of personal exemptions will be reinstated beginning in 2013. These thresholds will be indexed for inflation beginning in 2014.

AMT Patch

The deal permanently extends the alternative minimum tax (AMT) patch, retroactive to 2012, which will prevent millions of taxpayers from getting hit with the AMT. For married couples the AMT exemption for 2012 rises from $45,000 to $78,750 and for single filers from $32,000 to $50,600. These thresholds will be indexed for inflation beginning in 2013.

Estate Tax Relief

The 2010 tax relief act reinstated the estate tax, increased the lifetime gift and estate tax exemption to $5 million and decreased the top gift and estate tax rate to 35 percent. Without Congressional action, in 2013 the lifetime gift and estate tax exemption would have fallen to $1 million and the top gift and estate tax rate would have increased to 55 percent. Thanks to the new act, the $5 million lifetime gift and estate tax exemption is permanently extended, though the maximum gift and estate tax rate climbs from 35 percent to 40 percent. The 2013 exemption is projected to be $5.25 million, up from $5.12 million in 2012.

Other estate and gift tax provisions from the 2010 act were also permanently extended, including carryover of any unused estate tax exemption to the surviving spouse.

A host of other tax benefits, most which had expired at the end of 2011, were extended through 2013 and retroactively reinstated. These benefits include:

  • Deduction for state and local sales taxes
  • Above-the-line deduction for tuition and fees
  • $250 above-the-line deduction for teacher classroom expenses
  • Exclusion of cancellation of indebtedness income from the discharge of qualified personal residence indebtedness (originally expired at end of 2012)
  • Deduction for qualified mortgage insurance premiums
  • Exclusion for employer provided mass transit and parking benefits
  • Charitable deduction for contributions of real property for conservation purposes
  • Tax-free distributions from IRAs for charitable purposes. (Qualified distributions from IRAs for charitable purposes made prior to February 1, 2013 may be deemed as made in 2012 and cash distributions from IRAs after November 30, 2012 and transferred to charity prior to February 1, 2013 may qualify as tax-free distributions in 2012.)

In addition, the American Opportunity Tax Credit for higher education expenses, expansion of the refundable child tax credit, and expansion and modifications to the Earned Income Credit were extended through 2017.

Payroll Tax Holiday Expires

Note that the payroll tax holiday was not extended so tax rates will increase to their pre-2011 levels in 2013. Employees and self-employed (“SE”) individuals with wages or SE income equal to or greater than the 2013 OASDI wage base limit of $113,700 will see a tax increase of $2,274 in addition to the 0.9% Medicare tax on earned income of higher income taxpayers that went into effect on January 1.

For Businesses

For businesses Congress extended several tax breaks through 2013, most of which had expired at the end of 2011. They have been retroactively reinstated but, unlike the Bush-era tax cuts, these provisions were not extended permanently.

Research Tax Credit

This credit, which had expired for an entire year, was reinstated for 2012 and extended through 2013 much to the relief of many taxpayers who had proceeded with their research activities in 2012 assuming that the credit would be reinstated.

Cost Recovery

The Section 179 immediate expensing election, which is designed to encourage investment in capital equipment but was scheduled to fall to $25,000 in 2013, was restored and extended. Businesses with adequate taxable income can immediately expense up to $500,000 of qualified tangible personal property in 2012 and 2013.

Also reinstated is a provision that allows immediate deduction of up to $250,000 of qualified leasehold, restaurant and retail improvement property. (Deductions begin to phase out once total qualified purchases for the year exceed $2 million.)

Additionally, the act extends both the 50 percent bonus depreciation provision to assets placed in service before January 1, 2014, and the election to accelerate AMT credits in place of bonus depreciation.

Other expired provisions were extended through 2013, retroactive to the beginning of 2012, including but not limited to the:

  • Work opportunity tax credit
  • New markets tax credit
  • Fifteen-year straight line cost recovery for qualified leasehold, restaurant and retail improvements
  • 100 percent exclusion of gain from the sale of qualified small business stock
  • Five-year recognition period for built-in gains of S corporations
  • Basis adjustment to stock of S corporations making charitable contributions of appreciated property
  • Subpart F exception for active financing income
  • Enhanced charitable deduction for contributions of food inventory

While Congress temporarily averted the fiscal cliff, expect automatic spending cuts, in conjunction with a negotiation on the debt ceiling and finalization of the FY2013 federal budget — to be addressed this spring.

In the meantime, we can offer you guidance on how the provisions of the 2012 Tax Relief Act apply to you or your business. For more information contact your CBIZ office.


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With Fiscal Cliff Averted Not-for-Profits Breathe Sigh of Relief, at Least for the Moment (article)Congress on New Year's Day approved the American Taxpayer Relief Act of 2012 (2012 Tax Relief Act). The result? Most of the Bush-era tax cuts set to expire after 2012 were permanently extended, with some modifications for higher income taxpayers. ...2013-01-24T18:01:00-05:00Congress on New Year's Day approved the American Taxpayer Relief Act of 2012 (2012 Tax Relief Act). The result? Most of the Bush-era tax cuts set to expire after 2012 were permanently extended, with some modifications for higher income taxpayers.