United States: Important New Provisions In The American Taxpayer Relief Act

From tax rates and tax extenders to the revival of the Pease limitation, the act includes a host of provisions affecting tax-exempt organizations.

On January 2, President Barack Obama signed the American Taxpayer Relief Act of 2012 (ATRA) into law. The law averts the scheduled income tax rate increases and spending reductions required by the Budget Control Act of 2011. Highlighted below are several of the many ATRA tax provisions of interest to tax-exempt organizations.

Tax Rates

  • Income tax rates. ATRA permanently extends the 2001 tax cuts for taxpayers in the 10%, 25%, 28%, 33%, and 35% brackets. It also imposes a 39.6% tax bracket for individuals earning more than $400,000 a year and couples earning more than $450,000 a year.
  • Unrelated business taxable income (UBTI). UBTI is taxed at the corporate tax rates for most organizations; however, charitable trusts may pay tax on UBTI at the individual tax rates.
  • Capital gains. ATRA permanently extends the 0% and 15% capital gains and dividends tax rates but imposes a 20% tax on such income to the extent that a taxpayer's income exceeds the thresholds for the 39.6% bracket. Qualified dividends continue to be taxed at capital gain rates.
  • Alternative Minimum Tax. ATRA permanently patches the alternative minimum tax by increasing the exemption amounts and indexing it to inflation. ATRA also allows taxpayers to use certain personal tax credits to reduce taxable income to the credit's full amount.
  • Pease limitation. ATRA revives the overall limitation on total itemized deductions, known as the Pease limitation, which reduces itemized deductions by the lesser of 80% of itemized deductions and 3% of the amount by which a taxpayer's adjusted gross income (AGI) exceeds the applicable amount. The applicable amount is $300,000 for taxpayers who file jointly, $275,000 for heads of household, $250,000 for individuals, and $150,000 for married individuals filing separately. The applicable amounts are indexed for inflation for years after 2013.
  • Personal exemption phaseout. ATRA reduces the value of personal exemptions (i.e., amounts claimed for taxpayers, their spouses, or their qualifying dependents) for high-income taxpayers such that the total amount of exemptions is reduced by 2% for each $2,500 by which the taxpayer's AGI exceeds the applicable amounts described above.
  • Gift and estate taxes. ATRA maintains the unified gift and estate tax exemptions at their 2011 and 2012 levels of $5 million, indexed for inflation ($5.12 million in 2012 and $5.25 million in 2013), with portability. The top gift and estate tax rate is 40% (35% for gifts made or for decedents dying after December 31, 2010 and before January 1, 2013).
  • Portability. ATRA enables spouses to elect to apply the unused portion of a decedent spouse's exclusion to the surviving spouse's own transfers during life and death. As a result, the total gift and estate tax exclusions for spouses may exceed $10 million.

Expiring Provisions

ATRA extended the following tax-exempt-related provisions until December 31, 2013:

  • Extension of tax-free distributions from individual retirement accounts to certain public charities for individuals aged 70½ or older, not to exceed $100,000 per taxpayer per year. (Under special rules, any qualified charitable distribution made during January 2013 shall be deemed to have been made on December 31, 2012.)
  • Enhancement of charitable deductions for contributions of food inventory (no extension of the similar provision that applied to contributions of books or computer equipment).
  • Modification of the tax treatment of certain payments under existing arrangements to controlling exempt organizations under section 512(b)(13) of the Internal Revenue Code (IRC).
  • Extension of the special rule for contributions of capital gain real property made for conservation purposes.
  • Extension of the basis adjustment to stock of S corporations making charitable contributions of property.
  • Extension of the New Markets Tax Credit, with a $3.5 billion allocation in 2012 and 2013.

Effect of Pease Limitation on the Charitable Contribution Deduction

One consequence of reviving the overall limitation on itemized deductions (section 68 of the IRC) is the limitation on the amount by which a taxpayer's charitable contribution deductions reduce his or her tax liability. The provision, which is commonly referred to as the "Pease" limitation after Congressman Don Pease from Ohio who originally proposed it, was first enacted in 1990 as a way of raising tax revenue without raising tax rates, but it has been repealed since 2006.

To calculate the Pease limitation, all limitations applicable to each deduction are applied first, then the otherwise allowable total amount of itemized deductions is reduced by 3% of the amount by which the taxpayer's AGI exceeds the applicable amount. The applicable amount is $300,000 for taxpayers who file jointly, $275,000 for heads of household, $250,000 for individuals, and $150,000 for married individuals filing separately. The applicable amounts are indexed for inflation for years after 2013. Certain deductions are not subject to the Pease limitation, including medical expenses, investment interest, and casualty, theft, or wagering losses. The total overall limitation is the lesser of (i) 3% of the amount by which AGI exceeds the applicable amount and (ii) 80% of the total itemized deductions.

For example, if an individual with an AGI of $500,000 in 2013 has deductible charitable contributions of $20,000, mortgage interest of $50,000, and state taxes of $30,000—for a total of $100,000 of deductions—the individual's Pease limitation would be $7,500, which is 3% of $250,000 (the amount by which the taxpayer's AGI exceeds the $250,000 applicable amount). As a result, the individual would be able to claim only $92,500 of deductions ($100,000 – $7,500), rather than the full $100,000.

The Pease limitation is applied in addition to the charitable contribution percentage limitations. Under current law, charitable contributions by individual taxpayers are limited to a specified percentage of the individual's contribution base. The contribution base is the taxpayer's AGI for a taxable year (disregarding any net operating loss carryback to such year). In general, the contribution limit is higher for contributions of cash and ordinary income property than it is for contributions of capital gain property, and it is higher for contributions to public charities (and certain operating foundations) than it is for contributions to nonoperating private foundations.

The Pease limitation was enacted on a temporary basis as part of the Omnibus Budget Reconciliation Act of 1990, effective for taxable years beginning after December 31, 1990, but prior to January 1, 1996. The legislative history states that the objective of the provision was to better reflect taxpayers' ability to pay taxes. It was believed that the higher an individual's AGI, the less likely that an otherwise deductible expense would significantly affect the individual's ability to pay taxes. The Omnibus Budget Reconciliation Act of 1993 permanently extended this limitation on total itemized deductions. The legislative history states that the permanent extension of the overall limitation on itemized deductions would enhance the progressivity of the federal individual income tax system.

The Economic Growth and Tax Relief Reconciliation Act of 2001 phased out and ultimately repealed the Pease limitation. The legislative history states that Congress believed that the Pease limitation was an unnecessarily complex way to impose taxes, that the "hidden" way in which the limitation raises marginal tax rates undermines respect for the tax laws, and that repealing the Pease limitation would reduce complexity for affected taxpayers. For example, computing the Pease limitation requires a 10-line worksheet that includes numerous computations using information from Schedule A of the Form 1040.

Tax Reform

In a January 1, 2013, press release, 1 House Committee on Ways and Means Chairman Dave Camp (R-MI) stated that tax reform is next on his committee's agenda. The Senate Committee on Finance has also indicated a willingness to take up tax reform, having held hearings for the past several years on various tax reform topics. It is therefore possible that the 113th Congress will address issues of interest to tax-exempt organizations, such as reforming the charitable deduction, in the coming legislative session.

Implications

The Pease limitation adds considerable complexity to calculating the amount by which itemized deductions, including the charitable contribution deduction, reduce income tax liability. It is unclear how this added complexity will affect charitable giving in 2013 and future years. Donors who are subject to higher marginal tax rates as a result of ATRA may have a greater incentive to make charitable contributions than they previously had. Exempt organizations may wish to apprise donors of the advantages of making charitable gifts through IRAs and other enhanced charitable deduction incentives that ATRA has extended until December 31, 2013.

Footnotes

1.View the press release here.

Copyright 2013. Morgan, Lewis & Bockius LLP. All Rights Reserved.

This article is provided as a general informational service and it should not be construed as imparting legal advice on any specific matter.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Duane Morris LLP
Ostrow Reisin Berk & Abrams
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Duane Morris LLP
Ostrow Reisin Berk & Abrams
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions