Should You Reduce Your Charitable Giving? – New itemized deduction phase-out causing concern

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In 2013 federal tax legislation reintroduces the phase-out of itemized deductions for certain taxpayers. Because of this, many who are subject to itemized deduction phase-outs wonder if the benefit of charitable giving is reduced. Here is what you need to know.

  1. Most taxpayers are not impacted. The phase-out of itemized deductions for 2013 is based on Adjusted Gross Income (AGI) in excess of $250,000 for single filers, $300,000 for joint filers ($150,000 for married filing single), and $275,000 for head of household. So if your income is below these amounts your itemized deductions will not be reduced because of the new phase-out rules.
  2.  Alternative Minimum Tax (AMT) does not impact charitable giving. If you have been subject to the AMT in the past, please note that charitable giving generally does not impact this alternative tax calculation. Other things like state taxes and property taxes are a couple of items that do impact this alternative tax calculation
  3.  The phase-out calculation is based on income not deductions. This means that unless you are in a low or no tax state your charitable deductions will probably not be impacted by the deduction phase-out. Why? The itemized deduction phase-out amount is based upon your income. Say, for example, the phase-out calculation will reduce your itemized deductions by $8,000. Income required to produce this phase-out amount will also generate state taxes in most states in excess of this amount. Therefore the phase-out reduction will almost always be absorbed by your state income taxes.

Are there cases when the phase-out will eat up a lot of your charitable giving? Yes, especially in no or low tax states. Because of this risk it is a good idea to review the phase-out impact on your situation as soon as possible. Otherwise, you might be foregoing an opportunity to reduce your tax liability this year with planned charitable giving.