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Provisions in Fiscal Cliff Legislation Affect Exempt Organizations

Reprinted from Exempt Organizations Advisory

On January 1, 2013, the House and Senate passed H.R. 8, The American Taxpayer Relief Act of 2012, a bill to avert the "Fiscal Cliff." The president is expected to sign the bill. [Editor's note: The president signed the bill after this article was written.] The bill contains a number of provisions of interest to tax-exempt organizations.

The bill raises marginal tax rates to a maximum of 39.6 percent for individuals with incomes over $400,000 and married couples filing joint returns with incomes over $450,000. The bill also raises capital gains and dividend rates from 15 percent to 20 percent for taxpayers above the same thresholds. In addition, the individual exemption amount for the estate tax remains at $5 million and is indexed for inflation. The maximum estate tax rate rises from 35 percent in 2012 to 40 percent for years beginning after December 31, 2012.

Although the bill does not include a cap or any other direct limitation on charitable deductions, it does reinstate a limitation on itemized deductions for individuals with incomes over $250,000 and married couples filing joint returns with incomes over $300,000. Most itemized deductions, including the charitable deduction, are reduced by the lesser of 3 percent of adjusted gross income over the threshold or 80 percent of itemized deductions. This limitation had expired in December 2010. The bill also phases out personal exemptions for taxpayers with incomes over the same thresholds.

The bill also includes extensions through 2013 of several provisions of interest to exempt organizations which had expired on December 31, 2011. These extensions are retroactive to January 1, 2012.

  • Qualified Conservation Contributions: The deduction limitation of 30 percent of the donor's contribution base is increased to 50 percent of the donor's contribution base over the amount of other charitable contributions.
  • IRA Rollovers to Charitable Organizations: Taxpayers age 70 1/2 or older can donate up to $100,000 from Roth or traditional IRAs to certain charitable organizations without including the amount of their IRA withdrawals in gross income. Taxpayers can make a rollover in January 2013 and have it treated as if made in 2012. Also, taxpayers who took a distribution in December of 2012 may contribute that amount to a charity and treat it as an eligible rollover to the extent it otherwise qualified as a charitable rollover.
  • Contributions of Food Inventory: The deduction for contributions of apparently wholesome food from any trade or business of the taxpayer is enhanced and is not limited to basis. This deduction is limited to 10 percent of the taxpayer's aggregate net income.
  • Payments from Controlled Organizations: The UBIT provisions exempt rent, royalty, annuity, and interest income paid to a controlling organization from controlled organizations as long as the payments are not in excess of fair market value and are made pursuant to a binding contract that was in effect on August 17, 2006, or an extension of such contract.
  • Basis Adjustment to Stock of S Corporations: For charitable contributions of property, the basis of an S Corporation shareholder's stock is reduced by the pro-rata share of the adjusted basis of the contributed property rather than the shareholder’s pro rata share of the contribution.
  • Qualified Tuition Related Expenses: The bill extends the above the line deduction for qualified higher education expenses for taxpayers with AGI below certain limits.

The bill does not extend enhanced charitable deductions for contributions of book inventory and qualified computer contributions.

The bill also does not extend the employee payroll tax cut that was part of the 2009 stimulus law. Thus, payroll taxes will increase from 4.2% to 6.2% on the first $113,700 of income. On December 31, 2012, the IRS released preliminary withholding tables assuming that a tax bill would not be enacted but indicated that it would provide additional guidance if new tax legislation is enacted. Given the passage of the bill, we expect to see such guidance in the near future.

Catherine W. Wilkinson and Suzanne Ross McDowell, Steptoe & Johnson
© 2013, Steptoe & Johnson LLP, 1330 Connecticut Ave., N.W., Washington, D.C. 20036. All rights reserved. Reprinted from Exempt Organizations Advisory, January 2, 2013.

Catherine W. Wilkinson is a certified public accountant, practicing in the Tax group of the Washington-based law firm of Steptoe & Johnson LLP. Suzanne Ross McDowell is a partner in the Washington office, where she focuses on the law of tax-exempt organizations with particular emphasis on tax, corporate governance, and commercial transactions. Exempt Organizations Advisory summarizes legal developments of interest to Steptoe & Johnson's exempt organization clients and friends of the firm. It is published on a periodic basis as developments warrant.

Topics: Legal