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Tax Quote of the Week
"All taxes discourage something. Why not discourage bad things like
pollution rather than good things like working or investment?"
-- Lawrence Summers
Senate Passes HIRE Act
On February 24, 2010, the Senate passed the Hiring Incentives to Restore
Employment (HIRE) Act by a vote of 70-28. Thirteen Republicans joined
Democrats in passing the $15.5 billion tax incentive bill that is intended
to boost employment.
Majority Leader Harry Reid (D-NV) rejected a proposal by Senate Finance Chair
Max Baucus (D-MT) to combine the jobs portion of the bill with tax
extenders and an extension of the 2009 estate tax law. Sen. Reid decided
that a smaller bill with just the unemployment provisions would be easier
to pass. He did indicate that the extenders bill will be taken up in the
near future.
The HIRE Act has four major sections. All of these are designed to increase
employment. These are as follows:
1. The Act creates exemption from Social Security tax for the year 2010 for
hiring people who have been unemployed for 60 days or longer. This
reduction in the 6.2% tax normally paid by the employer could save as much
as $6,621. There is also an additional $1,000 credit if the new employee
continues with the business for 52 weeks.
2. Expensing rather than depreciation of equipment is again restored at the
$250,000 level. For businesses with over $800,000 of equipment purchases
per year, this option is phased out.
3. Build America Bonds are extended. The bonds enable the purchaser to
receive a federal tax credit rather than interest. Build America Bonds for
renewable energy, energy conservation, and qualified school construction
also receive federal subsidy for 45% of interest payments.
4. Various provisions in the Highway Fund are extended. The extension will
permit contracts that were created in fiscal year 2009 to be completed in
subsequent years.
Editor's Note: Sen. Reid stated, "Toward the end of this week,
what we will do is move to the Finance Committee matters that they worked
on before, and they worked very hard. I'm glad that we have made progress
in that regard." He appears to be promising that he will take up the
balance of the Baucus-Grassley bill on tax extenders and continuing the
2009 estate tax law during 2010. Sen. Baucus has stated that he plans to
pass an extension of the 2009 estate tax law with an exemption of $3.5
million per person. If this is passed, it will be retroactive to January 1,
2010.
Fiscal Commission Appointments
President Obama and Sen. Reid announced additional appointments to the
Fiscal Commission. Following the rejection of a statutory Fiscal Commission
by the Senate, President Obama signed an Executive Order that created an 18
person "National Commission on Fiscal Responsibility and Reform."
Under the Executive Order, six members of the Commission are appointed by
the President and the other 12 are appointed by the Republican and
Democratic Leaders of both the House and Senate.
President Obama previously appointed Erskine Bowles, who was Chief of Staff
for President Clinton and former Senator Alan Simpson (R-WY) to Co-Chair
the Commission. His other four appointees are David Cote, CEO of Honeywell
International, Inc., Ann Fudge, who formerly served as CEO of Young and
Rubican, Andy Stern, President of Service Employees International Union and
former Office of Management and Budget Director Alice Rivlin.
Senate Majority Leader Harry Reid (D-NV) announced his three appointments.
He selected Senate Finance Committee Max Baucus (D-MT), Senate Budget
Committee Chair Kent Conrad (D-ND) and Assistant Majority Leader Richard
Durbin (D-IL).
Speaker Pelosi and the Republican Leaders of the House and Senate have yet
to act on their appointments. If all of the appointments are made, the
Fiscal Commission will start to review options to reduce the deficit. The
probable solution will involve a combination of increased taxes and reduced
spending.
White House Reduces "Cadillac" Healthcare Tax
On February 22, 2010, the White House published an updated healthcare
reform proposal. It retains many of the provisions of the Senate Patient
Protection and Affordable Care Act (H.R. 3590). In the Senate bill, there
was a 40% excise tax on insurers that offer "Cadillac" healthcare
plans. The excise tax is applicable for single persons with plans over
$8,500 and families with plans that cost more than $23,000 per year.
The updated White House proposal changes those limits to $10,200 for single
persons and $27,500 for family plans. In addition, the White House proposal
would not make the tax applicable until 2018.
Another section of the White House proposal would raise taxes starting in
2013. Individuals with incomes over $200,000 (single) or $250,000 (married)
would be subject to a 2.35% tax on earned income and a 2.9% tax on
investment income. This provision would be an increase from the normal
1.45% Medicare tax for higher income individuals. The 2.9% tax on all
investment income is also a change from current law.
The balance of the revenue to pay for the White House healthcare proposal is
raised through a 2.9% tax on manufacturers of medical devices.
After releasing the updated plan, the White House conducted a seven hour
Healthcare Summit. The Healthcare Summit was an opportunity for the White
House, Democratic leaders and Republican leaders from the House and Senate
to discuss healthcare reform in a televised format.
The Senate Republican Conference Chair Lamar Alexander (R-TN) presented his
party's recommendations for healthcare reform. He urged the President to
reject the potential option of using reconciliation to pass healthcare
reform.
Under the Senate budget reconciliation rules, a bill may be passed with 51
votes rather than the 60 votes required for the normal order of business
for major legislation in the Senate. Sen. Alexander quoted Sen. Robert C.
Byrd (D-WV). He noted that Sen. Byrd is "the constitutional historian
of the Senate" and that he has stated it would be "an outrage to
run the healthcare bill through the Senate like a freight train with this
process."
Editor's Note: Your editor and this organization take no position
with respect to these observations and comments. This information is
offered as a service to our readers because of the importance of the
healthcare debate.
Proposed 2.9% Tax on Charitable Trust and Annuity Payouts
Following the release by the White House of the updated healthcare
proposal, the Joint Committee on Taxation (JCT) published an analysis of
the revenue impact of this provision. According to JCT, the 2.9% tax would
apply to passive income. This includes interest, dividends, royalties,
annuity payouts and rents. The limits apply for individuals with incomes
over $200,000 and joint filers with incomes over $250,000.
This new tax on passive income could potentially have impact on both
charitable remainder trusts and charitable gift annuities. A charitable
remainder unitrust or charitable remainder annuity trust makes distribution
under the Sec. 664 four-tier accounting structure. The distributions are
first ordinary income, then capital gains, then other or tax-free income
and finally principal. Because most trusts have ordinary income, dividends
and rent payments, these amounts would be distributed first.
For upper-income persons who receive payments of ordinary income from a
unitrust or an annuity trust, there would be an additional 2.9% tax under
the White House plan. It appears that long-term capital gain that is passed
through will not be subject to that tax.
Similarly, for higher-income persons who receive payouts from a gift
annuity, the ordinary income portion of those payments will also be subject
to the 2.9% tax. For senior individuals, 60% to 80% of the payout is return
of principal and would not be subject to tax. However, the balance is
ordinary income and therefore could require payment of the 2.9% tax.
A representative of the American Council of Life Insurers named Frank
Keating wrote a letter to Secretary of the Treasury Timothy Geithner and
expressed concern about the proposed 2.9% tax on annuity payments. Mr.
Keating noted that "Americans face unprecedented difficulties" in
the current economic environment. He suggests that the 2.9% tax creates
"a disincentive for annuity products" that makes it more
difficult for Americans to enjoy a secure retirement. He urged Treasury to
oppose the 2.9% tax "on an important retirement security tool."
Applicable Federal Rate of 3.2% for March -- Rev. Rul. 2010-8; 2010-10
IRB 1 (19 Feb. 2010)
The IRS has announced the Applicable Federal Rate (AFR) for March of 2010.
The AFR under Sec. 7520 for the month of March will be 3.2%. The rates for
February of 3.4% or January of 3.0% 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.
A was a tax-exempt organization under Sec. 501(c)(3), formed
to "protect and enhance the physical environment and flora and
fauna" of Town by "engaging in the consideration and study of
planning, zoning and land use" in the Town region. During the year under
audit, A's primary activity consisted of being a party with other
petitioners in an Article 78 proceeding against the Planning Board of Town.
Other activities of A included operation and maintenance of a website which
promoted involvement in local legislation. Minutes from one of A's
executive meetings indicate website and print materials were to be reviewed
by X, who warned "topics should not be political or so 'lobby' for
legislature" to the extent that A would lose tax-exempt status. The minutes
from the executive meeting coupled other internal documents led the Service
to believe printed material regarding A's activities might be a reaction to
exclude any activities that would keep A from continuing to qualify under
Sec. 501(c)(3) or be an inaccurate reflection of A's activities.
The Service questioned whether A qualified for exemption. Sec. 501(c)(3)
requires tax exempt organizations to be "organized and operated
exclusively for [charitable] purposes... no part of the net earnings of
which is carrying on propaganda, or otherwise attempting to influence
legislation." The Service held that A's mission of preserving the
traditions, architecture and appearance of Town for the sole benefit of
residents of Town was not charitable, as it would be if it were for the
general public good. Further, Organizations whose activities substantially
attempt to influence legislation, whether by any local council or similar
governing body or by the public in a referendum, are considered an
"action" organization under Sec. 501(c)(3). Because 89% of A's
total expenses for the year were spent on litigation against the Planning
Board of Town and A advised readers to contact local legislative
representatives in support of A's programs, the Service determined A was an
"action" organization. A's primary activity of influencing local
environmental legislation does not qualify for exemption under Sec.
501(c)(3). Therefore, the Service issued a final adverse determination
letter as to A's exempt status because A's activities were not exclusively
charitable.
Ms. Ella Kelly was a fortunate and very healthy annuitant.
When she was age 92, she purchased a gift annuity paying 14% from a private
university in Florida (14% was the rate at that time for annuitants over
age 90). Ms. Kelly was so encouraged by her 14% gift annuity payouts that
she lived to be 111!
Another donor purchased a $100,000 gift annuity for cash from a west coast
charity. She also received a high percentage rate of return and was paid
one quarterly payment before passing away.
Some gift annuitants live a very long time – some pass away fairly quickly.
It is quite difficult to know what the probable life expectancy will be of
an individual. The concept of gift annuities and insurance is that the two
extremes will balance in the middle.
George Green was a man of humble beginnings. He was born in
Bulgaria and lived with his parents on their farm. But George was a
diligent student and determined to become a successful business owner.
After high school, he was able to get permission to come to America to go
to college. George applied to several colleges and was accepted as a
work-study student at a state college. He lived in the dorm, and worked
nights in the cafeteria. On weekends, he moonlighted as a waiter at a
five-star restaurant.
George was both resourceful and determined to succeed. He enrolled in
chemical engineering classes and studied every spare moment. His industry
was quickly recognized by the faculty. After graduation with honors, he
became a graduate assistant and also earned a master's degree in
engineering. Due to his early years on the farm, George always loved
nature. He interviewed and became a product development engineer with a
company that built emissions control equipment for automobiles. Soon,
George met Helen Wilson and they married.
George was too energetic to stay in one place. After saving $5,000, he
convinced Helen that it was time for him to go out on his own. George
started a company and initially did environmental consulting. As soon as he
could gather and borrow the funds, he also started to produce components
for emissions control equipment. After a terrific struggle, the business
took off and George began to manufacture probes for company smokestacks.
When asked if that was a good business, George responded, "It is a
great business. Companies buy my probes to measure their smokestack
emissions, and then the government changes the rules! They all then have to
buy upgraded probes!"
George incorporated the probe manufacturer as Green Probe. Ever the
entrepreneur, he later had a chance to buy a company that built converters
for automobiles. He bought the assets of that company and transferred them
into Green Converters. Finally, George started a third company to build
"smokestack scrubbers" that would clean the emissions from the
smoke of power plants. Since there later was a huge increase in the cost of
energy, power companies began to build more coal-burning plants, and his
"smokestack scrubbers" from Green Scrubber were in great demand.
Four years ago, George funded a unitrust with the GC stock and then GC sold
all assets to General Auto. George is now 79 and has now been approached by
Major Power Company, who would like to buy Green Probe (GP). So George
called CPA Arnie Arnst again and asked, "What should I do now? I still
feel like I am paying a lot of tax. Can I sell tax-free again?"
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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