Deduction Limitations Impact Wealthy Donors in Ann Arbor

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While most people are fixated on tax rate increases adding to their income tax bill in 2013 and beyond, very few people are aware that the Pease limitation reinstatement can add to their income tax bills by phasing out some key itemized deductions.

Although some areas of the tax law became better after the fiscal cliff deal, now that the laws are more predictable, other areas took a hit – namely charitable giving and donors themselves.

The Fiscal Cliff Deal reintroduces the Pease Amendment, so named after former Congressman Donald Pease. Forbes recently wrote about this in an article titled “Pease Limitation Puts A Lid On Itemized Deductions For Wealthy Folks.” Indeed, as you can tell by the title of the article, the Pease Amendment is just one more of those “stealth taxes” working to decrease deductions rather than increase taxation. In this case, for example, this stealth tax chips away at the charitable deductions for high-earners.

For taxpayers with adjusted gross incomes (AGI) above $250,000 (or above $300,000 for joint filers), they will see an itemized deduction limitation kick in that is the lesser of (a) 3% of the adjusted gross income above the applicable amount, or (b) 80% of the amount of the itemized deductions otherwise allowable for the taxable year.

Among other itemized deductions, this hits the charitable deduction, deductions for mortgage interest, deductions for various lower level taxes, and so on with some specific exclusions. That can start to really add up in a year when you happen to have an increase in your AGI.

So, the tax game has gotten a bit more complex, and charitable giving has fewer tax deduction rewards for some individuals these days. Do you think this will impact the amount of charitable giving for 2013? Only time will tell.

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ReferenceForbes (January 9, 2013) “Pease Limitation Puts A Lid On Itemized Deductions For Wealthy Folks