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Tax Quote of the Week
"There is a prevailing maxim, among some reasoners, that every new tax
creates a new ability in the subject to bear it and that each increase of
public burdens increases proportionably the industry of the people."
– David Hume
Jobs Bill May Drop Tax Extenders
The Senate has been preparing a bipartisan bill to encourage employers to
hire the unemployed. The Hiring Incentives to Restore Employment Act (HIRE)
was released jointly by Senate Finance Chair Max Baucus (D-MT) and Ranking
Member Charles Grassley (R-IA).
The key provisions of the act are a new hiring credit and a payroll tax
exemption. For persons who have been unemployed for 60 days, employers can
hire them in 2010 and be exempt from payroll taxes for the year. In
addition, the employer will receive an additional $1,000 tax credit per new
employee who is on the payroll for at least 52 weeks.
There also is a restoration of the $250,000 equipment expensing option.
This tax benefit phases out for companies that acquire more than $800,000
in equipment per year. Finally, the Baucus-Grassley bill would extend
unemployment and health benefits.
The bill proposes several offsets or tax increases. The "black
liquor" tax credit that was not intended to be used by paper products
companies would be repealed. There would also be technical changes in the
economic substance tax rules and a reduction in funding for the Medicare
Improvement Fund.
Sen. Grassley and Sen. Baucus stated, "First, we will work to ensure
that the scope of the Finance Committee package retains its bipartisan
character. Second, we are committed to timely consideration of permanent
bipartisan estate and gift tax reform."
Following the release of the bill description by Sen. Baucus and Sen.
Grassley, Majority Leader Harry Reid (D-NV) stated that the Senate will
consider the job creation bill, but may not include the 31 tax extender
provisions in the original draft. Sen. Reid suggested that a later bill
would take up the tax extenders.
Editor's Note: The IRA Rollover and 30 other tax extenders are in
the Baucus-Grassley bill, but apparently will be dropped from the Reid
version. These 31 tax extenders are very popular. Sen. Reid may be saving
this popular section for another bill. It is also clear from the joint
statement that Baucus and Grassley are attempting to develop an estate tax
compromise. In a letter this week from the Texas Society of Certified
Public Accountants, they noted, "The expiration of the estate and
generation skipping transfer taxes at the end of 2009 and the imposition of
the carry over basis rules are causing tremendous uncertainty for taxpayers
and their advisors." With the turmoil in the entire estate planning
profession, all advisors hope that Baucus and Grassley are able to craft a
compromise that provides estate tax certainty for 2010.
Council of Economic Advisors Supports Upper-Income Tax Increases
The While House Council of Economic Advisors released a report on February
11, 2010, that supported the proposed increase in tax rates for
upper-income persons next year. The President's budget has proposed
increasing the top tax rates and reducing itemized deduction tax savings.
The Council of Economic Advisors (CEA) stated, "For ordinary income,
the top rate of 39.6%, while higher than in the past eight years, is not
high compared with rates that prevailed during most of the past several
decades and even during most of the Reagan Administration."
In the view of CEA, the increases on the top taxpayers will have a
potential beneficial effect for all other taxpayers. The tax revenue
produced from these increases will "enhance medium and long-term
prospects for economic growth." In the view of CEA, this growth will
be a positive for all other taxpayers.
However, the CEA continued with a cautionary note. It stated, "Thus,
barring a substantial and sustained quickening of economic growth above
it's usual trend rate, further steps will be needed to get the deficit down
to the target in the medium and long run."
The CEA report concluded that a goal of the White House is to reduce the
deficit to 3% of gross domestic product. If these White House plans are
successful, the debt as a percentage of gross domestic product would be
limited to 70%.
The Federal Government also published the potential revenue raised with
these tax increases. The following table shows the proposed increases and
the 10-year estimated tax revenue of $968 billion.
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Proposed Tax Increase
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10 Year Tax Revenue
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Income Tax Rates 33% and 35%
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$364 Billion
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To 36% and 39.6%
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Itemized Deductions Capped at 28%
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$291 Billion
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Personal Exemption Phase-out and 3%
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$208 Billion
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Floor on Itemized Deductions
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Capital Gains Tax Rate 15% to 20%
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$105 Billion
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Total
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$968 Billion
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Sen. Conrad Calls for Deficit Fix
At a hearing on February 9, 2010, in snowbound Washington, Sen. Kent Conrad
(D-ND) highlighted the potential risks of continued large deficits.
He opened by noting that the past year was "the worst recession since
the Great Depression." He indicated that the economy had improved to
5.7% growth in the final quarter of 2009. While future growth will not
continue at that level, he was encouraged by the fact that the economy is
losing fewer jobs per month. The loss of jobs at one point was 800,000 per
month, but by January of 2010 the economy was losing 12,000 jobs per month.
Nevertheless, Sen. Conrad noted, "If you are someone who is unemployed
or can't find sufficient work, are underemployed, these numbers are cold
comfort to you. It is important to recognize that things are improving, at
least the freefall we were in has been stabilized and we are starting to
move back in the right direction."
Sen. Conrad noted that the deficit of $1.56 trillion in 2010 is projected
to decline to $706 billion by 2014. However, it is estimated that the
deficit will top $1 trillion by 2020. He notes that this is "an
unsustainable path, and I am concerned the President's budget does not
focus sufficiently on our long-term need to deal with the debt
threat."
At a continuation of the hearing on February 11, 2010, Maya MacGuineas of
the Committee for a Responsible Federal Budget (CRFB) outlined specific
steps to solve the debt problem.
MacGuineas indicated that the appropriate debt target should be 60% debt to
GDP ratio by 2018. Following that date, the debt could be slowly stabilized
and reduced back to a 40% debt ratio.
MacGuineas acknowledged that this will require a combination of reduction
in entitlement spending and discretionary spending, together with increased
tax revenue.
Speaking before the hearing also was Alice Rivlin. She is now Co-Chair of
the Bipartisan Policy Center Debt Reduction Task Force. Ms. Rivlin
indicated that the debt was 40.2% of GDP in 2008, and could rise to 80% to
100% of GDP by 2020. With the dramatic increase in debt, Ms. Rivlin
suggests that this is potentially going to "derail the economic
recovery and balloon the cost of servicing the Federal debt." She
suggests two essential components of a plan to reduce the debt. First,
there must be a combination of spending reductions and tax increases in the
plan. Second, any successful debt reduction plan must have the support of
both parties.
In order to facilitate future deficit reduction discussions, she and former
Senator Pete Domenici Co-Chair the Debt Reduction Task Force.
Editor's Note: Deficit reduction is always very politically
sensitive. The spending cuts will inevitably affect entitlements. Tax
increases in the future will similarly have impact on all Americans.
However, there is a slowly developing realization that successful fiscal
policy must be bipartisan and that changes are needed. Early changes will
be much less painful than later changes and could lead to a stronger
economy. The field of philanthropy learned a difficult lesson in 2009 –
when the economy is soft, giving is soft. Conversely, a strong economy
leads to a strong philanthropy sector. While the budget deficit debate
receives modest attention from the national media, it will have more impact
on the field of philanthropy in the next decade than any other action being
taken in Washington.
Applicable Federal Rate of 3.4% for February – Rev. Rul. 2010-6; 2010-6
IRB 1 (20 Jan. 2010)
The IRS has announced the Applicable Federal Rate (AFR) for February of
2010. The AFR under Sec. 7520 for the month of February will be 3.4%. The
rates for January of 3.0% or December 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 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.
Organization is tax-exempt under Sec. 501(c)(3) and classified
as a private foundation under Sec. 509(a). Organization's directors are A,
B and C; all of whom are siblings. N, a tax-exempt organization under Sec.
501(c)(3) and private foundation under Sec. 509(a), have related parties C
and D as trustees. By mutual agreement Organization's directors agreed to
divide Organization's assets and transfer one-third of its principal and
accrued income to N. The remaining two-thirds of the principal and accrued income
will be managed by A and B. C will resign as a director of Organization,
but remain a trustee of N and manage the transferred assets. Organization
has not and will not seek termination of private foundation status.
Organization requests a ruling that the transfer to N be treated as a
significant distribution of assets under 1.507-3(c)(1) and not result in
termination, or constitute notification of Organization's intent to
terminate Organization's private foundation status under Sec. 507(a)(1) or
constitute a taxable expenditure under Sec. 4945. Further, Organization
requests a ruling that the transfer to N will not result in N being treated
as a newly created foundation, give rise to any net investment income,
constitute any other taxable sale or disposition under Sec. 4940 of the
Code or be an act of self-dealing.
Based on Organization's transfer of more than 25% of the fair market value
of its net assets to N, the Service held the proposed transfer will be a
significant disposition of assets under Sec. 507(b)(2). Because
Organization had not (and claimed they would not) sought termination of
private foundation status, the proposed transfer of assets to N will not
terminate Organization's private foundation status under Sec. 507(a) and
will not result in a termination tax imposed by Sec. 507(c). Because
transferee organizations are treated as possessing those attributes and
characteristics of the transferor organization, N will not be treated as a
newly created foundation. Further, the Service held that the transfer of
assets to N will not constitute a sale or disposition of property that
would generate capital gains subject to excise tax under Sec. 4940.
Finally, the proposed transfer to N will not constitute an act of
self-dealing because N, a recognized tax-exempt organization, is not a
disqualified person under Sec. 4940(c).
Reinsurance of a gift annuity involves
payment of a premium by the charity to a company qualified to issue
annuities in that state.
When a charity receives a gift annuity, it usually has the option to retain
the annuity in a designated reserve fund and invest that fund. The charity
may make payments from the fund or pay a premium to a financial services
company that will then make the required annuity payments. The second
choice is commonly called "reinsurance" of the gift annuity.
Reinsurance involves evaluating the factors that will benefit the charity
with self-insurance, or the favorable factors that might lead to
reinsurance. The primary questions relate to the life expectancy of the
donor, the estimated return of the charity's annuity reserve fund and the
cost of reinsurance.
Bill Russell grew up on the Great Plains. During his youth, he
was a rodeo bull rider and gained fame as "Wild Bill" for his
daring exploits. But Wild Bill was an artist at heart and soon decided to
move on to his artistic pursuits. He traveled throughout America and Europe
and studied all of the great modern and classical artists. In France he was
greatly impressed by the delicate works of Impressionist painters Monet and
Manet and the bold colors and brush strokes of Van Gogh. Upon his return to
his beloved great plains of the west, Wild Bill combined the subtlety of
the Impressionists, the colors of Van Gogh and his own unique skills. His
Impressionist western landscapes and paintings of cowboys and life on the
ranch became treasured by art collectors nationwide.
Wild Bill was rapidly gaining a national reputation. His western
Impressionist art exhibits would draw art lovers from America and the
world. He was finally selling his paintings for $75,000 or more, and now
had another new experience - paying large income taxes.
One day Bill received a call from Wolf Point, Montana. A local attorney
told him that a distant relative had passed away and Bill had inherited a
sketch done many years ago. Bill asked about the sketch, and was told that
it was done by his great-great-great uncle Charles Russell. While it is a
small sketch, the attorney thought that it might be quite valuable.
After inheriting the Russell sketch, Bill admired it for a year. But the
Cowboy Western Museum called and suggested that the sketch would be a great
addition to their Charles Russell collection. So Bill called his CPA Helen
Swenson and asked about donating the painting. He thought, " Maybe I
could receive a large tax deduction and save taxes. But how does this work?
What do I need to do to give my Russell to the museum and get a large
deduction. I don't want to get into any trouble with the IRS."
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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