The recently passed American Taxpayer Relief Act of 2012 has potential implications for charitable giving. The Act reinstitutes the so-called Pease Amendment (named after the late Ohio Congressman Donald Pease). That Amendment, which was eliminated from the Internal Revenue Code in 2010, provides a floor for itemized deductions before any may count against adjusted gross income. (This floor does not apply to casualty losses or medical or investment interest expenses.)
Under the Pease Amendment, itemized deductions for a taxpayer are reduced by 3% of the amount by which the taxpayer’s adjusted gross income exceeds $300,00 for couples or $250,000 for individuals. Hence, a couple filing jointly and earning $1 million in a tax year would have to have itemized deductions over 3% of $700,000 – or $21,000 – before their itemized deductions (including charitable donations) would count against adjusted gross income.
Estimates vary as to the impact of this limitation on charitable contributions. The range runs from a small effect (a 1.9% decline) to a big effect (more than a 5% decline, amounting to a total $7 billion decrease in nationwide charitable giving). Even if the effect of the Pease limitation is minor, Congress and the President may revisit further limits on charitable deductions in the next round of budget negotiations. Many in the nonprofit community will be watching.
Should you have any questions, please contact David A. Lips at 317-977-1463 or dlips@hallrender.com.
