Last year, Congress passed the American Taxpayer Relief Act (ATRA). The overall effect of the law on charitable giving continues to be positive. Additional revisions in the law took effect January 1, 2014.
Adjustments in estate and gift tax law for 2014 continue to make it possible for many to include charitable gifts as part of their estate plans while also providing more for loved ones.
The income levels where minor reductions of itemized deductions are required have been raised and, in most cases, will not affect charitable gifts. See the following section to learn more.
Who does the itemized deduction phase-out affect?
When ATRA was enacted in January 2013, it reinstated the reduction in the amount of itemized deductions for certain taxpayers that was previously in effect from 1991 to 2009. Known as the Pease Amendment, this provision was designed to partially limit deductions for higher income taxpayers. Under its terms, total itemized deductions are reduced by 3 percent of the amount that a taxpayer’s adjusted gross income (AGI) exceeds a threshold amount. Beginning in 2014, the Pease Amendment again applies with a threshold AGI amount of $305,050 for married taxpayers who file jointly ($279,620 for heads of household; $254,200 for single persons).
Over the 18-year period the Pease Amendment was in effect, it proved to have little practical impact on the amount most donors could deduct. See the following examples:
Example 1: Mary and Stanley have an adjusted gross income of $250,000. Their charitable gifts and other itemized deductions total $50,000. Because their income falls below the threshold amount at which the Pease Amendment applies, they are not required to reduce their charitable or other deductions and their gifts remain fully deductible.
Example 2: George and Martha have an adjusted gross income of $500,000. Their itemized deductions include $30,000 in mortgage interest, $10,000 in state taxes and $10,000 in charitable gifts. The Pease Amendment will require that their itemized deductions be reduced by 3 percent of the amount their AGI exceeds $305,050. They must reduce their total itemized deductions by 3 percent of $194,960, or $5,849. If they are in the 39.6 percent tax bracket, this means their taxes are increased by $2,316, an increase of less than one-half of one percent of their AGI. Note that if they had made no charitable gifts, the $5,849 reduction would still apply, reducing their other deductions. Even if their AGI were $1 million, the Pease reduction of 3 percent of $694,960, or $20,849, would not even eliminate all of their mortgage interest, regardless of their charitable gifts or other deductions. As a result, since their charitable gifts are well outside the reach of the Pease reduction, there is no practical impact on the value of their charitable deduction.
Note that a small number of taxpayers who make very large charitable gifts and have very high incomes and/or no deductions other than charitable gifts could see a negative impact from the reintroduction of the Pease Amendment.
Check with your advisors for more information.