By Kortney Christensen, CFP®,Vice President, Manager, Private Client Services
On “Giving Tuesday” and beyond, many of us enjoy making charitable gifts – even better if this activity provides a tax benefit. As you consider your 2012 charitable gift planning, keep in mind that many of the tax changes that may occur at the end of the year may determine whether your gifting program should continue in 2012 or be postponed until 2013.
Income tax rates are scheduled to go up in 2013 in the absence of any congressional action. In theory, the higher your income tax bracket, the larger tax benefit you will get for making charitable gifts. For example, let’s suppose you itemize, are in the top tax bracket and are considering making a cash gift of $10,000. The top tax bracket in 2012 is 35%. If you make a $10,000 charitable contribution on December 31, 2012 and are in the top tax bracket, your tax deduction will be worth $3,500 (not counting state tax savings), provided you meet the other conditions of making a fully deductible charitable gift.
In 2013, the top income tax bracket potentially could be 39.6%. If you are in the 39.6% bracket, and make the same $10,000 gift on January 1, 2013, your tax deduction will be worth $3,960 (again, not counting state tax savings). Everything else being equal, in my example, by waiting one day (until 2013), you would be able to offset an additional $460 in tax.
Unfortunately, things aren’t that simple. Starting in 2013, higher income taxpayers will be subject to an itemized deduction phase-out. This phase-out, called the Pease limitation, was temporarily repealed through 2012, but is scheduled to re-emerge in 2013. The phase-out limits your ability to fully deduct charitable contributions. According to CCH, the phase-out starts at an adjusted gross income (AGI) threshold amount of approximately $178,000 for married filing jointly and single taxpayers.
The rule works like this: If your AGI exceeds the threshold amount, your itemized deductions (not including medical expense, investment interest, casualty or theft losses or allowable wagering losses) will be reduced by the lesser of 1) 3% of your AGI in excess of the threshold amount, or 2) 80% of the itemized deductions otherwise allowable for the tax year. Compare this limitation to the example above on delaying charitable gifts. Those who may be subject to these limits may want to consider accelerating charitable gifts to 2012, rather than waiting to 2013. You need to run the numbers to understand which approach is better for you.
Beyond these current tax issues, there are many rules surrounding charitable giving that dictate whether and how much you are able to deduct on your tax return. Your tax deduction depends on items such as what you give and to whom. We’ve summarized many of these rules in our piece on charitable giving titled: “Understanding Charitable Gifts.” Ask your Benjamin F. Edwards & Co. financial consultant about getting a copy. Benjamin F. Edwards & Co. does not give tax advice, so please remember to consult with your tax professional on how these matters may affect you.