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As is the norm in Washington, our new tax bill was named so that none could object — The American Taxpayer Relief Act of 2012 (ignore that the bill was voted upon and signed in 2013).
Well, Ari Fleischer, White House press secretary for former President George W. Bush, objects to at least one provision in the law. Fleischer says that he will give less to charity because of this provision.
The new law hits high-income taxpayers in a number of ways. First, the maximum tax rate for marrieds (singles) with taxable income above $450,000 ($400,000) has increased from 35 percent to 39.6 percent. The maximum rate for net capital gains and qualified dividends earned by those high incomes has also increased from 15 percent to 20 percent.
Second, high-income taxpayers, this time defined as marrieds (singles) with adjusted gross income (AGI) above $300,000 ($250,000), will lose some of the benefit from their itemized deductions and personal exemptions.
Yet another penalty for high income, this time defined by AGI above $250,000 (married) or $200,000 (single), a 3.8 percent surtax on their investment income, is separate from the 2012 (I’ll stick with the wrong date picked by Congress) law, because it is part of the Affordable Care Act.
But Fleischer is said to be specifically concerned with the itemized-deduction limit. I am not trying to pick on Fleischer, nor do I know his specific tax situation. But his warning about 2013 charitable contributions is generally (the tax law is fact-specific, so one must always say “generally”) misguided.
The Fleischer problem is caused by reinstatement of a 1991 rule that reduced itemized deductions for high-income people. This was the law from 1991-2009, it was eliminated for 2010 through 2012, but it is back in 2013.
A quick side note: One of the neat things about tax practice is that, like a boomerang, things that leave the law always seem to come back. So if you are like me, and never buy new clothes thinking that the old stuff will eventually come back in style, then you might also have what it takes to be a tax practitioner.
So this itemized deduction thing is just a prodigal son coming home. But Fleischer is the grumpy older son who refuses to celebrate the return. What the new (formerly old) rule says is that the high-income people must give back some of their itemized deductions, measured by 3 percent of their AGI above the high-income definition.
High income is defined as $300,000 if you’re married. So if your 2013 AGI is $500,000, you lose $6,000 (3 percent of $200,000). If 2013 AGI is $800,000 you lose $15,000 (3 percent of $500,000), and so on. You can never lose more than 80 percent of your total itemized deductions.
OK, I know you’re bored, so let’s get into even more detail. Let’s say your 2013 AGI is $500,000, you have mortgage interest and property taxes of $25,000, and, by December 2013, you have no charitable gifts. Your grumpy nature says, “No charitable gifts because of the tax law.”
Well, with no charitable gifts, you still lose $6,000 of itemized deductions (see 3 percent of $200,000 above). So you get $19,000 of the interest and taxes. Now let’s say that as Christmas approaches, your heart grows three sizes, and you decide to give $25,000 in 2013 after all.
Now your total itemized deductions are $50,000 ($25,000 + $25,000). You still lose only $6,000 because your AGI is unchanged. So your total deductions have grown from $19,000 to $44,000 as a result of the charitable gift — you got the full benefit of your $25,000 gift!
So you see, your Christmas giving causes your tax guy, Mr. Grinch, to advise, “Maybe Christmas … perhaps … means a little bit more, deductions that is!”
If you are high-income, you do not lose a percentage of each specific deduction. Once AGI is set, and your noncharitable deductions are at least as large as the lost amount, you effectively get the full benefit of charitable gifts.
You need to compare total deductions with and without the charitable gift — they will almost always be higher by the amount of the charitable gift, which means: Don’t stop giving.
James R. Hamill is the director of Tax Practice at Reynolds, Hix & Co. in Albuquerque. He can be reached at jimhamill@rhcocpa.com.
