Short-Term Cliff Deal Reinstates IRA Rollover and "Pease" Provision

January 3, 2013

Washington, D.C. – The tax deal passed by Congress on January 1 has encouraging but mixed results for charitable giving, and leaves much further work to be done throughout the coming year. The “American Taxpayer Relief Act of 2012”, as the bill is named, protects communities from the most dramatic caps to charitable deductions that were under consideration, reinstates the IRA Charitable Rollover provision, but also includes reinstatement of a more modest limit to all deductions for higher-income earners. Because the deal is a short-term fix to the fiscal cliff, we can expect further advocacy needed in the months ahead as Congress deals with the unfinished business of mandatory spending cuts and tax reform.

Charitable Giving Incentives: The cliff package does not include a flat percentage or dollar cap on charitable giving incentives as had been feared in the final weeks of 2012.  It does, however, reinstate the so-called “Pease” limitation on all itemized deductions for families earning over $300,000 per year ($250,000 for individuals). The provision first took effect in 1991 as a federal revenue generator, but was gradually phased out in the 2006-10 tax years as part of a larger effort at tax simplification.  The League and the broader nonprofit community had called on Congress to exempt charitable donations from the Pease provision. However, beginning with the 2013 tax year, the provision will reduce all tax deductions, including charitable deductions, by 3% of the amount that adjusted gross income exceeds the $300,000/$250,000 thresholds. The Pease provision was set to return as part of the expiring Bush tax cuts, and has been on the table as a revenue generator throughout the fiscal cliff negotiations as it had been included in the President’s FY13 budget request, in the “Buffet Rule” proposals that were in play in the House and Senate in 2012, and in a tax package passed by the Senate last summer. Implementation of the Pease provision is complicated, so please see this sample scenario for more details.

IRA Charitable Rollover Reinstated: The IRA Charitable Rollover provision was also reinstated for 2012 and 2013 in the tax deal Congress passed yesterday. The IRA Rollover provision has proven to generate new and increased charitable donations. It permits donors age 70 ½ and older to make tax-free charitable gifts directly from their IRAs, up to an annual ceiling of $100,000, but had expired at the end of 2011. Under the bill passed yesterday:

  • The IRA Rollover is reinstated retroactively for 2012, and is available through 2013.
  • IRA Rollover gifts made through January 31, 2013 will count as 2012 contributions.
  • Qualifying personal IRA distributions taken in the month of December 2012 can be counted as a “charitable rollover” if contributed to a charity as cash by January 31, 2013.

Thank You – and Prepare for More in 2013!  Orchestra advocates sent nearly 4,000 communications to Congress urging protection against caps on charitable giving incentives and immediate reinstatement of the IRA Charitable Rollover provision. The League will continue to amplify your voice in Washington as budget negotiations and tax reform debates continue. As a reminder, you can always find the latest news and key developments relating to tax policy in our dedicated issue area center within the League's website.