American Taxpayer Relief Act Update


The following update provides a summary of pieces of this recent bill relevant to philanthropy.

The preservation of the charitable deduction in the current legislative proposal is a testament to the National Council on Foundation's collective efforts over the past few months to convey the importance of the charitable sector. However, Congress will address more comprehensive tax reform in 2013 and we must continue advocating about the important role philanthropy plays in our society. Both House Ways and Means Committee Chairman Dave Camp (R-Mich.) and Senate Finance Committee Chairman Max Baucus (D-Mont.) told their congressional colleagues that the passage of this legislation was just the first step toward more comprehensive tax reform.

KEY PROVISIONS

PEASE LIMITATION ON ITEMIZED DEDUCTIONS

In 2013, itemized deductions for higher income taxpayers will be reduced by the lesser of (1) 3 percent of the amount by which the taxpayer’s income exceeds $250,000 for individual filers, $275,000 for heads of households, or $300,000 for married couples filing jointly (these amounts are adjusted annually for inflation) or (2) 80 percent of the value of the taxpayer’s itemized deductions.  This reduction of itemized deductions is referred to as the Pease Limitation.

An example of the Pease Limitation’s Impact:
In 2013, a married couple filing jointly has $500,000 in adjusted gross income (AGI) and claims $50,000 in itemized deductions. Under the newly passed American Taxpayer Relief Act, the threshold for the Pease Limitation is now $300,000. Thus, the couple’s itemized deductions would be reduced by 3 percent of the amount of their AGI that exceeds $300,000 (which is $200,000). The couple can only claim itemized deductions of $44,000. Without the Pease Limitation, the couple could claim itemized deductions of $50,000.  

AGI

$500,000

Excess of AGI over $300,000

$200,000

3% reduction of the excess amount

x3%

 

____________

Reduction of itemized deductions

$6,000

The couple’s itemized deductions will be reduced by the lesser of $6,000 or 80 percent of the itemized deductions, which in this example is $6,000. Thus, the couple’s itemized deductions will be reduced from $50,000 to $44,000.

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