The Impact on the Charitable Deduction of the ATRA 2012 Phaseout of Itemized Deductions

Are You Concerned about your Client’s Reduced Charitable Deduction because of the Phaseout of Itemized Deductions under the American Taxpayer Relief Act of 2012?

How likely is it that you will have clients who have to reduce 2013 charitable deductions because of the phaseout of itemized deductions? Zero. Zilch.

Those clients that are affected will be easy to spot. Besides looking for someone wearing a necklace made of hen’s teeth, look also for the following:

  • Only clients who live in Alaska, Florida, Nevada, South Dakota, Texas, Washington or Wyoming.
  • Only clients living in any of the above 7 states who do not make home mortgage interest payments or do not pay property taxes.
  • Only clients living in the abovementioned states that will claim the charitable gift deduction as their only itemized deduction.

How does the Phaseout of Itemized Deductions Work?

Beginning 2013, itemized deductions are phased out for clients with adjusted gross incomes above $300,000 for married taxpayers filing jointly, $250,000 for single taxpayers, $275,000 for heads of households, and $150,000 for married taxpayers filing separately. The reduction is the lesser of 3% of the excess of adjusted gross income over the threshold amounts, or 80% of otherwise allowable itemized deductions.

Many Clients will be Affected by the Phaseout of the Itemized Deductions

The American Taxpayer Relief Act of 2012 (ATRA 2012) works to reduce the itemized deduction amounts for wealthy clients mainly because the largest share of itemized deductions are allocated to state income taxes. Even if your high-income client lives in a no state income tax state, property taxes, other taxes and the home mortgage interest is impacted most, once the reduction of the lesser of 3% of the excess of adjusted gross income over the threshold amounts, or 80% of otherwise allowable itemized deductions are applied to these deductions. The discretionary charitable deduction is not impacted, which means that the client’s charitable deduction amount is not reduced.

Bottom line. Clients with charitable contribution deductions, who live in states that have an income tax, or who have property taxes, or pay home mortgage interest, will not be affected by the phaseout rules.

Financial advisors can help clients understand that the tax benefits for their income tax charitable deductions will likely be the same under ATRA 2012 as they were before the law went into effect. We invite you to share this article with your clients so that they can quickly tell whether their charitable contribution deductions will indeed be reduced. The good news is that this will not happen, except for the very rare client. 

By: Dan Rice, Co-founder of CTAC

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