By Wayne Taylor & Jerry Love, Louisiana Baptist Foundation
As usual the title given to a bill recently passed by congress doesn’t reflect what the legislation actually does. Most of the provisions in the American Taxpayer Relief Act of 2012 don’t apply to all American taxpayers; most of the provisions apply to upper income earners.
The new legislation also provides very little relief to taxpayers. It wasn’t even passed or signed in 2012. Neverthe-less, it is a legislative act and must be dealt with.
The Louisiana Baptist Foundation assists individuals with gifts that benefit Baptist churches and Baptist ministries in Louisiana and worldwide.
As part of our service to Louisiana Baptists we attempt to stay current and provide information on changes in the tax code in general, especially how it impacts charitable giving.
Here is a summary of the good, the bad and the ugly of the so-called American Taxpayer Relief Act of 2012.
The Good
n The IRA Charitable Rollover was renewed through 2013. This reinstates the ability for individuals age 70 ½ and above to make a Qualified Charitable Distribution (QCD) up to $100k directly from an IRA to a charitable organization (other stipulations also apply).
A QCD does not count as income but there is no income tax deduction for the gift to charity (advantageous to individuals who don’t itemize their deductions). The provision was established in 2006 but was allowed to expire at the end of 2011.
Congress’ most recent action makes the Charitable Rollover retroactive to Jan. 1, 2012. In addition to making a distribution to charity from an IRA for 2013 a person can:
n Make a distribution to a charitable organization (including your church) from your IRA before the end of January 2013 and treat the distribution as if it were made in 2012. (This actually allows two distributions in 2013 – one for 2012 and the other for 2013).
n Make an out-of-pocket contribution to a charitable organization (again, including your church) prior to Jan. 31, that will offset any Required Minimum Distribution (RMD) or other withdrawal taken in 2012, up to the $100,000 limit. This would allow the RMD or any distribution up to the limit to be counted as a qualified distribution under this provision.
(It appears that any charitable contribution made in 2012 could offset the IRA distribution; consult your personal tax advisor.)
n The estate and gift tax exemption was permanently set at $5.12 million per person. The “portability” feature that allowed married couples to combine their exemptions was left in place. The top tax rate did move up modestly from 35% to 40%. This exemption is also indexed for inflation. This is especially a relief to owners of family businesses and farms who generally have much of their net worth tied up in property.
n Alternative minimum tax (AMT), designed originally to make sure upper incomers paid at least a fair amount of tax, has affected many middle income households over the last number of years. This year’s tax act permanently raises the AMT threshold and has indexed it to inflation. The changes in the AMT also apply to the 2012 tax year.
The Bad
n The highest marginal income tax rates rose to 39.6%. Also the capital gains and qualified dividends tax rate moved from 15% to 20%. Both of these provisions affect single taxpayers making over $400K or married filing jointly taxpayers making over $450K per year.
n Those individuals with moderately high incomes will find that the 1991 Pease Amendment was reinstated. This law reduces itemized deductions by 3% of the amount a taxpayer’s income exceeds $250K for singles, or $300K married filing jointly. The law was completely phased out during the Bush administration. Thankfully no other limits were placed on charitable deductions at the current time.
n The Healthcare surtax on investment income moves in at 3.8% for taxpayers with incomes over $200K single, or $250K married filing jointly.
The Ugly
n Unfortunately for all working Americans, the Social Security payroll tax holiday is over. The payroll tax was reduced to 4.2% for 2011 and 2012 as an effort to put more disposable income into the hands of consumers.
The payroll tax holiday comes to an end with the Social Security tax rate rising to 6.2% for all taxpayers. For those earning higher incomes an additional .9% Medicare tax also kicks in. The good that can be salvaged from this point in the law is that it extends the time period before Social Security becomes insolvent.
This article was compiled by Jerry Love and Wayne Taylor from a variety of sources available to the Louisiana Baptist Foundation. For advice on your specific tax situation please consult your tax advisor.