POSTED ON February 01, 2013

By: Richard Ruvelson

Happy Super Bowl weekend! This is the inaugural issue of our GHJ Nonprofit Tax Blog and I want to start out by saying how happy I am to be back in Southern California after 14 years and am enjoying the relatively warm weather. Although we had a cold spell recently, it’s still a lot warmer than the Twin Cities and I am enjoying my view of Catalina on the horizon. From my former office in Edina, Minnesota, I looked out upon the roof of a Macaroni Grill. Speaking of views, the passage of the American Taxpayer Relief Act of 2012 has provided tax-exempt organizations with a lot to take in. That being the case, I wanted to raise aspects of the new law that may have gotten lost in all the discussion over tax rates.

American Taxpayer Relief Act of 2012

While we are all, by now, aware of the American Taxpayer Relief Act of 2012’s (the Act) increase in tax rates on high income taxpayers and the limits on itemized deductions, there are a few additional items of interest to nonprofit organizations that I want to note in this the inaugural issue of our blog. I also want to share an interesting perspective that I heard during a CPE course on the Act from Steven G. Siegel, president of The Siegel Group. First, Siegel’s perspective.

Siegel briefly expressed concerns over a potential reduction in charitable giving by high income taxpayers due to the limitation on certain itemized deductions of high income taxpayers, also known as the Pease limitation (named for former Congressman Donald Pease). The Pease limitation, which applies to single taxpayers with adjusted gross incomes of over $250,000, heads of households with adjusted gross income of $275,000 and joint filers with adjusted gross incomes of over 300,000, limits itemized deductions to 97% of certain items, including state and local taxes (income, property, sales and intangibles), mortgage interest and charitable contributions. In no event can itemized deductions actually be reduced by more than 80% of the amount claimed. Siegel noted that for taxpayers living in high tax states, it may be possible to assert that it is state taxes that are being limited rather than the taxpayer’s charitable contribution deduction. This is a good perspective for all of you to keep in mind when discussing major gifts with potential donors. Also, remember the increased tax rate can increase the tax benefit of an individual's charitable gift.

Additional areas impacting tax-exempt organizations and donors:

  • The exclusion from income and employment taxes of $5,250 per year for qualified educational expenses paid upon behalf of employees has finally been extended permanently.
  • Special rules with respect to the contribution of capital gain real property for conservation purposes have been extended to included contributions made in 2012 and 2013.
  • The Internal Revenue Code provision allowing tax-free distributions from IRA’s to public charities by individuals age 70 ½ and older have been extended to include distributions made in 2012 and 2013. There is a planning opportunity through February 1st of this year for distributions taken personally by individuals in 2012 but transferred to a publicly supported charity before February 1, 2013. The maximum amount allowable is $100,000 per year.
  • The enhanced deduction for charitable contributions of food inventory has been extended for 2012 and 2013. Note that the enhanced deduction for the contribution of book inventory was not extended.
  • Other provisions extended included the American Opportunity Tax Credit, the deduction for qualified higher education expenses, enhancements to Coverdell education savings accounts and the deduction for teacher classroom supply expenditures.

Note that we are holding our next workshop on February 19, 2013. Jigna Mehta and I will be addressing the American Taxpayer Relief Act of 2012, Form 990 and 1099-MISC Reporting - Updates and Best Practices.