With American taxpayers on the edges of their seats, Congress finally passed new tax legislation on New Year’s Day 2013 that halted most of the automatic tax increases due to take effect upon the expiration of Bush-era tax cuts. The American Taxpayer Relief Act (ATRA) of 2012 extended the 2012 income-tax rates for most taxpayers and added a rate increase for single-filers making more than $400,000 and joint-filers making more than $450,000. ATRA has also made the rates permanent, thereby avoiding in the future the kind of drama that gripped the country as the clock ticked down to — and eventually past — midnight on New Year’s Eve.
Increased Income-Tax Savings. Because of the new, higher tax bracket, higher-income taxpayers with significant charitable objectives are finding an added tax-saving incentive for giving under ATRA. The top marginal tax rate of 39.6% produces additional tax savings when compared to contributions in 2012.
Example: Thomas J, single, makes a gift of $50,000 to his favorite charity each year. His adjusted gross income for 2012 was $600,000, and he expects his income for 2013 to be similar.
Last year, when the maximum tax rate was 35%, Thomas’s gift produced tax savings of $17,500. This year, a $50,000 deduction in his 39.6% tax bracket will result in tax savings of $19,800 — additional savings of $2,300.
Caveat: ATRA reintroduces the gradual phaseout of certain itemized deductions for higher-income taxpayers. These itemized deductions will be reduced by 3% of the amount a taxpayer’s income exceeds a certain threshold — $250,000 for singles and $300,000 for married couples. This can result in a maximum reduction of 80% of itemized deductions.
In the example above, Thomas’s AGI exceeds the threshold by $350,000. That means that his itemized deductions must be reduced by $10,500 (3% x $350,000). As long as Thomas’s other itemized deductions (e.g., mortgage interest, real estate taxes, state income taxes, etc.) total at least $10,500 then his $50,000 gift still would produce tax savings of $19,800. If they were less, this phaseout provision could result in some reduction in the tax savings.