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Tax Quote of the Week
"Taxation . . . in most communities is a long way off from a logical
and coherent theory."
-- Oliver Wendell
Holmes Jr.
House Votes 225-200 to Extend Estate Tax
On December 3, 2009 the House passed the Permanent Estate Tax Relief for
Families, Farmers and Small Business Act of 2009 (PETRFFSBA). The Act would
make the $3.5 million estate tax exemption and the 45% estate tax rate
permanent. It also continues the existing rules that permit estates to pass
on property with a stepped-up basis.
When children and other heirs receive property in an estate, the cost basis
is increased up to fair market value at death. This greatly reduces tax
complexity. In many circumstances, the children or other heirs may sell
inherited property with no capital gains tax.
The Joint Committee on Taxation estimates the cost of the bill to be $233.6
billion over 10 years. Under an exception to the "pay-as-you-go"
rules in the House, the bill is not offset by tax increases.
House Ways and Means Chair Charles Rangel (D-NY) supported the bill. He
stated, "This is a fair and responsible bill which eliminates any
doubt as to the future of the estate tax, allowing businesses, large and
small, to focus on jump-starting our economy and putting Americans back to
work."
A permanent extension of the estate tax rules was promoted last week by
House Majority Leader Steny Hoyer (D-MD). He indicated, "This bill
simply continues present law at current rates and exemptions. But it does
not abolish the estate tax altogether, which would be a severe
mistake."
Rep. Hoyer suggested that eliminating the estate tax would add billions to
the deficit, permit concentration of wealth and make "inequality even
starker" in America. He noted that President Theodore Roosevelt
stated, "The man of great wealth owes a particular obligation to the
state because he derives special advantages from the mere existence of
government."
House Republicans were joined by 26 Democrats in voting against the bill.
The Ranking Minority Member of the House Ways and Means Committee is Rep.
Dave Camp (R-MI). He stated, "Death should not be a taxable event.
Death should not force the sale of family farms or the dissolution of small
businesses."
Rep. Camp believes that the extension of the 45% rate is "considered
confiscatory. No Americans should have the federal government take nearly
half of their worth."
Rep. Camp also was very concerned that the $3.5 million exemption was not
indexed for inflation. He noted that as property values increase "more
family farms and small businesses" will be subject to the estate tax.
PETRFFSBA will now be sent to the Senate for action in the coming weeks.
Will the Senate Act on Estate Taxes?
At present, the Senate is totally immersed in the ongoing debate over
healthcare. With both parties submitting amendments, it is still uncertain
whether there will be a vote on a healthcare bill by the end of December.
Nevertheless, Senate Finance Committee Chair Max Baucus (D-MT) and Budget
Committee Chair Kent Conrad (D-ND) advocate passing an extension of the
estate tax. Sen. Baucus favors a permanent extension of the $3.5 million
exemption and 45% estate tax rate. Sen. Conrad prefers an extension for two
years. Both Senators plan to offset the cost of the extension with other
tax increases.
However, in the view of Sen. Joh Kyl (R-AZ) and Sen. Blanche Lincoln (D-AR),
there should be a higher estate exemption and lower tax rate. Both have
supported a $5 million exemption with indexing for inflation and a top
estate tax rate of 35%. The 40 Republican Senators are expected to support
this provision. If Sen. Lincoln joins the 40 Republican Senators, it may be
difficult for Sen. Baucus to pass an estate tax extension by the end of the
year with the required 60 votes.
Editor's Note: Your editor and this organization do not take a
position with respect to the statements by leaders of either party on
estate tax reform. If the House and Senate act to extend the current estate
tax for one or more years, there will be greater stability in the estate
planning world. If the Senate fails to act, then the estate tax is repealed
on January 1, 2010 and is followed on January 1, 2011 by reinstatement of a
$1 million exemption and 55% top rate.
IRS Standard Mileage Rates
In IR-2009-111 (3 Dec 2009), the IRS announced the standard mileage rates
for 2010.
For 2010 the standard mileage rates for use of a car, van, pick-up or panel
truck will be:
1. Business miles -- 50 cents per mile.
2. Medical or moving expenses -- 16.5 cents per mile.
3. Charitable mileage -- 14 cents per mile.
The rates for business miles and medical or moving expenses are slightly
lower than the previous year due to a reduction in average fuel costs.
Business mileage may be used on cars that are owned or leased. An
individual may also choose instead of mileage to deduct the actual costs.
Parking fees, tolls, interest and state and local personal property taxes
may also be deducted.
However, if a taxpayer has claimed a Sec. 179 deduction for additional
first-year depreciation or depreciation on an accelerated schedule, then he
or she may not use the mileage method.
Medical and charitable mileage rates may be used provided there is
appropriate substantiation. For medical or charitable mileage, the taxpayer
may deduct the mileage amount plus parking fees and tolls. Interest and
local personal property taxes are not deductible as charitable or medical
expenses.
Applicable Federal Rate of 3.2% for December -- Rev. Rul. 2009-38;
2009-49 IRB 1 (17 Nov. 2009)
The IRS has announced the Applicable Federal Rate (AFR) for December of
2009. The AFR under Sec. 7520 for the month of December will be 3.2%. The
rates for November of 3.2% or October of 3.2% 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 2009, pooled income funds in existence
less than three tax years must use a 4.8% deemed rate of return. Federal
rates are available by clicking
here.
M is a private foundation that sought a Ruling that grants
made under its scholarship program will not be considered taxable
expenditures. M demonstrated that the scholarships will be awarded on an
objective and non-discriminatory basis to students at colleges and
universities. M's scholarships will be awarded based on prior academics,
test performance, recommendations, financial need, personal narratives,
performance in interviews with trustees and the cost of programs the
student intends to pursue. M's selection committee will consist of its
Board of Trustees. Members of the Board and their families are ineligible.
In addition, scholarships will not be awarded to those whose family made or
promises to make contributions to M.
Sec. 4945 imposes a tax on private foundations for any "taxable
expenditures" made. However, scholarships are not classified as
taxable expenditures under Sec. 53.4945-4(c)(1) of the Regulations provided
that the private foundation demonstrates that: (i) Its grant procedure
includes an objective and non-discriminatory selection process; (ii) such
procedure is reasonably calculated to result in performance by grantees of
the activities that the grants are intended to finance; and (iii) the
foundation plans to obtain reports to determine whether the grantees
performed activities that the grants are intended to finance. Because M
demonstrated to the Service's satisfaction that it will observe these
requirements, the scholarship payments will not be classified as taxable
expenditures.
Depression Babies Seek Security – Baby Boomers Move to
Retirement
With the massive changes in our financial system the past two years, baby
boomers and the depression babies are asking, "What is likely to occur
in the future?" While predictions are indeed difficult, by examining
the past and the present it is possible to make several projections about
the future. Part I of this article discussed the economy and wealth, the
impending tax increases on the affluent and the probable boom in financial
counseling. Part II will analyze charitable financial planning options for
the depression babies group and the baby boomers.
The sections for each will include a prediction, an analysis of the factors
surrounding that prediction, and an explanation of the likely impact on
major and planned gift donors.
Lucky Lucy Lindstrom finished college and headed west. She
started as a financial analyst with a large company in Seattle. After just
four years, she became a Registered Investment Advisor (RIA) and began
advising clients. Lucky Lucy also managed her own investments. With her
keen insight into financial markets, Lucy soon began to move from
traditional stocks and bonds into futures and commodities markets. Lucky
Lucy was so successful in these markets that she now manages only her
mega-million-dollar personal portfolio. Somewhat late in life, Lucky Lucy
discovered the wonderful world of philanthropy. She volunteered at her
favorite charity, and learned that giving someone in need a helping hand is
even more gratifying than making another million in the futures market.
Lucy had invested $1,000,000 in stock in a Canadian oil
"wildcatter" with the name Northern Long Shot, Inc. This company
has been drilling new exploratory wells in the far north. Recently, the
stock rose from the $1 per share that she paid to over $5 per share. After
this success, Northern Long Shot decided to "spin off" a smaller
company with a portion of the successful wells. Lucy exchanged her $5
million in stock for 60% of the stock in Northern Lite Shot, Inc. After the
exchange, Lucy decided to give the Northern Lite Shot stock to a private
charitable foundation to help those in need.
Lucy discussed options with her attorney. She asked her attorney about the
ability of her private foundation to receive the Northern Lite Shot, Inc.
stock. Her attorney noted that private foundations are subject to various
rules on self-dealing, minimum distributions and excess business holdings
and also must not invest in a way to jeopardize the charitable interest.
Lucy said, "Wow! There are a lot of rules for private foundations. Why
would my private foundation have to be careful with the type of
investments? After all, I am an RIA who has been very successful with
investments."
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 1999-2009 Crescendo Interactive, Inc.
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