The good news is that givers to churches are traditionally more dedicated than others. They are more committed to God’s work than concerned about tax deductions for their gifts.
The so-called “fiscal cliff” negotiations in December between President Obama and Congress placed the charitable deduction very much on the table. Since 1917, the deduction has served as a vital giving incentive for charities. There were talks of percentage caps, dollar caps, tax credit substitutes and a variety of other alternatives, which could have cost churches and charities billions of dollars in contributions. Even church supporters were concerned. Anything that would hurt charitable giving is a negative for churches.
Thankfully, the fiscal cliff deal, formally titled the “American Taxpayer Relief Act,” did not result in a flat percentage or aggregative cap on itemized deductions.
There were positives and negatives in the fiscal cliff legislation impacting givers to churches—the “Pease limitation” was included, while the “IRA Rollover” was extended.
Looking at what happened through the fiscal cliff negotiations and with an eye toward the future, how does all this impact churches? Congress is far from through discussing issues which could impact charitable giving incentives.
The Pease limitation, what some have called a “back-door tax,” was reinstated and became a permanent provision of the tax code through the fiscal cliff deal. Taxpayers must decrease itemized deductions by 3 percent of the amount by which adjusted gross income exceeds a threshold amount. The Pease limitation is not new. It’s been with us in some form since 1990 (except for its repeal in 2010 that lasted through 2012). Plus, it is such an obscure provision that few donors associate it with gift considerations. Bottom line: there’s very little impact on churches associated with the reinstatement of the Pease limitation.
It appeared the special charitable rollover provision relating to contributions from Individual Retirement Accounts was history after it expired on Dec. 31, 2011. Through the fiscal cliff deal, it was renewed retroactively for 2012 and prospectively for 2013, allowing taxpayers age 70-1/2 or older to make direct IRA or Roth IRA distributions up to $100,000 per year to qualifying charities without having to pay income tax on the withdrawn amount.
An additional bonus is that taxpayers can make these distributions by Jan. 31 and treat them as having been made in 2012.
Advantage for Churches
The extension of the IRA charitable rollover provision is clearly helpful to many churches, as retired attendees may desire to give to their churches while meeting their IRA required minimum distributions each year. (In my February column, I will share more ideas of how churches can help givers use this IRA option.)
The most significant element of the fiscal cliff law was the increase in the highest marginal federal income tax rate, from 35 percent to approximately 40 percent (applying to individuals earning more than $400,000 per year and households above $450,000).
Otherwise, the current income tax rates were preserved for most Americans. Especially for higher income donors in your church, the higher marginal rates may provide an additional encouragement to donate generously and reduce individual income tax. The higher capital gains rates in the law likewise provide an added incentive for donating appreciated assets and avoid paying the increased taxes on capital gains.
A significant issue that received little attention in the fiscal cliff talks was the payroll tax reduction which expired on Dec.31, 2012. Lawmakers did not renew the two-percentage-point cut in the employee share of the social security tax. Church attendees who are employed saw smaller paychecks as of January 1, unless they got a raise that offset the impact. Self-employed individuals saw a similar increase in self-employment social security tax.
Major fiscal and tax policy issues remain unresolved. In the first quarter of 2013, the president and Republicans will duel again over raising the federal debt ceiling and the mandatory spending cuts known as sequestration. The GOP wants federal spending trimmed for every dollar in higher debt. The President will ask for increases in revenue by limiting business deductions. In the end, the ceiling
will be raised. Will the charitable deduction be on the chopping block again? It is unclear.
Churches continue to have mostly clear sailing on the charitable giving incentives front. While it is helpful for church leaders to have a good working knowledge of charitable gift incentives, enabling them to have meaningful discussions on the tax aspects of charitable giving with attendees, churches should continue their focus on teaching biblical principles of generosity.
Dan Busby is president of president of ECFA ( Evangelical Council for Financial Accountability), an accreditation organization that sets standards for governance, financial management and fundraising/stewardship for churches and other nonprofits across the country.
Publication date: January 25, 2013