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Tax Quote of the Week
Q. I understand that Congress is considering a so-called "flat"
tax system. How would this work?
A. If Congress were to pass a "flat" tax, you'd simply pay a
fixed percentage of your income, and you wouldn't have to fill out any complicated
forms, and there would be no loopholes for politically connected groups,
and normal people would actually understand the tax laws, and giant talking
broccoli stalks would come around and mow your lawn for free, because
Congress is NOT going to pass a flat tax.
– Dave Barry
Tax Freedom Day is April 9
Each day the Tax Foundation reports the date when Americans have on average
worked enough to cover taxes. For the year 2010, the 99th day, or April 9,
will be Tax Freedom Day.
Tax Freedom Day this year is two weeks earlier when compared with 2007.
This occurs for three principal reasons. First, the recession has reduced
tax revenue. Second, there were temporary tax cuts for 2009 and 2010.
Third, in 2010 the partial loss of itemized deductions and the exemption
phase out for higher-income taxpayers are both eliminated. In addition,
there is at present no estate tax.
However, if the $1.3 trillion deficit is considered, the picture changes
substantially. If the government were to collect sufficient revenue to
balance the budget, then Tax Freedom Day would be May 17, 2010.
While the $1.3 trillion budget deficit is financed, taxpayers will either
be required to pay interest on that amount or eventually will pay off that
debt. With the deficit considered, Tax Freedom Day would be the latest
since World War II.
Healthcare Reconciliation Bill Signed
The Healthcare and Education Reconciliation Act of 2010 (H.R. 4872) was
signed by President Obama on March 30, 2010. Under the House and Senate
rules, it was necessary to pass an additional bill to modify the prior
healthcare bill. The reconciliation bill delayed the 40% excise tax on
plans for single persons with taxable income over $10,200 or families over
$27,500 until the year 2018. The 3.8% income tax on unearned income
(dividends, royalties, annuities and interest) for upper income persons
will take effect in 2013. A 2.3% tax on medical devices was also included
in the bill.
House Chair of the Ways and Means Committee Sander Levin (D-MI) was clearly
pleased with the bill. He stated, "The landmark health reforms set
forth under this law will put more money back in seniors' pockets as we
close the Medicare prescription drug donut hole faster, will limit the
scope of the excise tax on high-cost health insurance plans to protect
middle-class families and will expand access to high-quality, affordable
care to millions of additional families."
The bill did produce a different response from 13 state attorneys general.
The 12 Republicans and 1 Democrat filed federal lawsuits challenging the
constitutionality of healthcare reform. The attorneys general claim that
requiring individuals to purchase a product is an unconstitutional
expansion of the U.S. Constitution's commerce clause.
Several companies also were forced under the accounting disclosure rules to
immediately take a charge against profits. In 2006, Congress passed a
prescription drug benefit known as Medicare Part D. To encourage companies
to continue offering prescription drug benefits to retirees, Congress
provided a tax-free 28% payment for the prescription drug benefit from $250
to $5,000 per retiree. This subsidy was also deductible by the companies.
The reconciliation bill made this corporate drug benefit no longer
deductible. Caterpillar immediately reduced profits by $100 million, and
Verizon charged $970 million against profits for the lost deduction.
Congress plans to hold hearings on the charges by these companies. Rep.
Henry Waxman (D-CA) sent a letter to four companies and requested their
presence at a hearing on April 21, 2010 to explain why they took the
immediate charge against earnings.
Baucus Predicts IRA Rollover "Soon"
The Senate this week rejected a bill to extend unemployment insurance
benefits and COBRA benefits for a month. In March, Sen. Max Baucus (D-MT)
introduced the American Workers, State and Business Relief Act (H.R. 4213)
and included in that bill an extension of the unemployment and COBRA
benefits. The Senate passed this bill on March 10, 2010. It also included
various tax extenders such as the IRA charitable rollover for 2010.
The House previously passed its extenders bill on December 9, 2009.
However, the House and Senate bills had different provisions regarding tax
offsets to pay for the extenders.
In the Senate debate on the 30-day extension Sen. Baucus stated,
"These benefits are the only thing keeping food on the table for many
folks in Montana and across the country who are struggling to find jobs and
make ends meet. I implore my colleagues not to stand in the way of
extending unemployment and COBRA insurance so hard-working American
families and communities don't lose the benefits they depend on for
survival and we work to create jobs and pass a more permanent
solution."
Editor's Note: The House and Senate are attempting to work together to
produce a uniform bill. Sen. Baucus indicated that they are attempting
"to merge the two bills and send legislation to President Obama
soon." The current challenge is coming to agreement on the tax offsets
to pay for the tax extenders, the unemployment extension and COBRA
benefits. When the bill passes, it will include the IRA charitable
rollover, retroactive to January 1, 2010.
Applicable Federal Rate of 3.2% for April -- Rev. Rul. 2010-11; 2010-14
IRB 1 (18 Mar 2010)
The IRS has announced the Applicable Federal Rate (AFR) for April of 2010.
The AFR under Section 7520 for the month of April will be 3.2%. The rates
for March of 3.2% or February of 3.4% also may be used. The highest AFR is
beneficial for charitable deductions of remainder interests. The lowest AFR
is best for lead trusts and life estate reserved agreements. With a gift
annuity, if the annuitant desires greater tax-free payments the lowest AFR
is preferable. During 2010, pooled income funds in existence less than three
tax years must use a 4.6% deemed rate of return. Federal rates are
available by clicking
here.
Grantor created a charitable remainder unitrust (Trust) with
the intent that, upon her death, the Trust would terminate and the
principal and income would be distributed to her private foundation (PF).
PF is an exempt organization under Sec. 501(c)(3) and has been classified
as a private foundation within the meaning of Sec. 509(a). Following
Grantor's death, an error was discovered in the drafting of the Trust. The
scrivener used boilerplate language and inadvertently included a reference
to Sec. 170(b)(1)(A) that requires a charitable remainderman to be
classified by the IRS as a public charity, rather than a private
foundation. Therefore, under the terms of the Trust agreement, PF did not
qualify as a charitable remainderman. Following the submission of
affidavits from the trustee and draft of Trust stating that Grantor's
specific intention at all times was that PF receive the assets on Grantor's
death, Trust sought a reformation to correct the scrivener's error.
The Service ruled that under Sec. 664 the judicial reformation of Trust
would not cause it to fail to qualify as a charitable remainder unitrust.
Charitable remainder trusts, as split-interest trusts described in Sec.
4947(a)(2), are subject to Sec. 4941 which imposes an excise tax on acts of
self-dealing. Under Sec. 4941(d)(1)(E) self-dealing includes any direct or
indirect transfer to or for the benefit of a disqualified person. Under
Sec. 4946(a) a disqualified person includes a substantial contributor to a
private foundation, a family member of a substantial contributor and a
foundation manager. Because there were no disqualified persons that would
benefit from the reformation, the Service held the reformation would not
result in self-dealing.
In PLR 200152018, a donor requested a ruling on converting the
income interest from a charitable remainder unitrust into a charitable gift
annuity. The PLR had four specific requests. First, that the donor would
receive an income tax deduction for a portion of the value of the income
stream transferred to charity for the gift annuity. Second, that there
would be a charitable gift tax deduction for the same portion. Third, that
the transfer of the unitrust income interest for a gift annuity would not
accelerate underlying capital gain in the income interest. Finally, that
the percentage of capital gain and basis as of the date of creation of the
trust could be utilized for calculating the tax-free portion of the gift
annuity payouts.
In the ruling, the IRS found that there was an income tax deduction
allowable for the present value of the remainder interest in the charitable
gift annuity. It also found that there would similarly be a gift tax
deduction and the transfer of the unitrust income interest in exchange for
the gift annuity would not accelerate the underlying capital gain. On the
last issue, the IRS found that a prorated basis would not be allowed and
all payouts to the annuitant would be ordinary income and capital gain.
Mac Swenson loved the great outdoors. He grew up in the Big Sky
country of Montana. As soon as he could walk, Mac was on a pony. By his
teen years, Mac was riding horses every day. On weekends, he watched with
admiration as the older cowboys practiced riding bucking broncos at the
local rodeo grounds.
By age twenty, Mac was riding the rodeo circuit. He soon moved up to the
most exciting event at the rodeo - bareback riding on the wild and powerful
Brahma bulls. Mac was lean and tough and soon gained a national reputation
as a skilled and fearless Brahma bull rider. At a rodeo in Burwell,
Nebraska, Mac watched with great interest as a lovely and charming young
lady named Glenda Olson was crowned the rodeo queen. Mac was head over
heels in love. They soon married and he used the rest of his rodeo winnings
to buy a small ranch near the Beartooth Mountains in Montana. Over the
years, Mac and Glenda raised four children and steadily built up the ranch.
Both loved the great Big Sky country and planned to spend the rest of their
days watching the sun set over the Beartooth Mountains.
As Mac and Glenda reached their sunset years, the ranch was now more than
7,000 acres. One day a new neighbor moved in to the ranch next door. Glenda
said, "You know, Mac, our four children have left for the city and no
one is here to manage the ranch. I know we both love it here, but
eventually you may need to think about selling." A few weeks later,
their neighbor Bob Brown stopped in for a visit. He and Mac enjoyed talking
about cattle, the weather and the hay crop. After hearing how Mac and Glenda
had built up their ranch over the years, Bob mentioned that he was looking
for a way to expand the size of his ranch.
If Mac and Glenda are ready to consider retirement, how can they do this in
a way that reaches their goals? Mac and Glenda want to live in their home,
would like to give up managing the ranch, need a good retirement income and
want to pass some benefits on to their children. And while he always pays
his fair share of taxes, Mac would like to make this transition with no
added taxes. But there is a mortgage on the ranch. What can Mac and Glenda
do?
Note: Case studies, articles, commentary and other materials in the
GiftLaw system are included solely as educational information. Articles and
editorial comments are offered as an educational service to friends of this
organization, and may not always reflect our official position on any
issue. Since case studies or articles may not always reflect the current
AFR or tax law, it may be necessary to run any illustration with a current
version of Crescendo to obtain updated information. If professional
services are required, all persons shall consult with their qualified
professional advisors. Tax Quotes are courtesy of Jeffery L. Yablon,
Washington, D.C.
©
Copyright 1999-2010 Crescendo Interactive, Inc.
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