It’s A Cliff-hanger

The lack of an agreement regarding taxes and the federal budget has the nation hours away from fiscal carnage so potentially devastating it will make a Herschell Gordon Lewis splatter film look like “Driving Miss Daisy.”

As Congress continues to not pass a budget and tax compromise, hanging in the balance are across the board tax increases that probably will impact charitable giving. Also teetering is a potential reduction in the charitable deduction from 35 percent to 28 percent or less.

In either case, nonprofit executives say, the budget battle will hurt giving and will result in programs being cut. Even with a deal, the impact will stick around. Right now, it’s still a waiting game.

“The bottom line is that the cliff has not had a calendar year 2012 impact on us because no one saw it coming quickly enough. The cliff impact will be felt in 2013 with likely diminished giving,” said Bob Mims, controller at Ducks Unlimited, a national conservation group based in Memphis, Tenn.

The first impact will be on employees. “Our managers continually impress upon our employees to continue to save as much as possible in their 401(k) plans and to diversify their asset allocations. It does not matter the age or tenure of our employees,” said Mims. “Each age demographic will likely face new and potentially unforeseen challenges as they approach their own retirements given the country’s deficit and debt trajectory. The best defense for our employees is better preparation for those times.”

David A. Shuster, JD, LLM, a tax principal and director of tax controversy services at Grassi & Co., in New York City and Jericho, N.Y., provided a checklist for the potential changes.

  • Expiration of Payroll Tax Holiday – An additional 2 percent tax on wages and self-employment income on earnings up to $113,700.
  • Additional Medicare Tax – An additional 0.9 percent tax on wages and in excess of $200,000 ($250,000 combined on a joint return, $125,000 for married taxpayers filing separate returns).
  • Medicare Contribution Tax on Net Investment Income – An additional 3.8% tax on lesser of; 1) net investment income (net income on interest, dividends, capital gains, and the like) or 2) income in excess of $200,000 ($250,000 combined on a joint return, $125,000 for married taxpayers filing separate returns). Capital gain that may be excluded from income tax on sales of personal residences will not be subject to this tax.
  • Long-Term Capital Gains – The top rate goes from 15 percent to 20 percent. Coupled with the Medicare tax on investment income, long-term rates will increase to nearly 24 percent for those in the highest income tax brackets.
  • Qualified Dividends – The top rate went 15 percent to 39.6 percent for those in the highest income tax brackets. Coupled with the Medicare tax on investment income, rates will increase to more than 43 percent for those in the highest brackets.
  • Expiration of the so-called “Bush Tax Cuts” on Individual Income Taxes – The current income tax rates ranging from 10 percent to 35 percent increased to rates ranging from 15 percent to 39.6 percent. The increased rates might not result in additional income tax for certain taxpayers subject to the Alternative Minimum Tax (AMT), as the additional tax from the increased rates might, in certain instances, be accompanied by an offsetting decrease in AMT.

Donors with less money to give is just one problem, according to Neal Denton, senior vice president, chief government affairs officer, government relations and policy of the YMCA of the USA.

“Some donors might make giving decisions in anticipation of changes to the tax treatment of deductions, but we’ll have a better sense of these patterns in time,” said Denton. “It likely won’t be our own organizational accounting challenges or even the end of year contributions that concern us the most, but the drastic cuts to social services that support families, communities and children in communities throughout the country.”