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Tax Quote of the Week
"The complexity of our [tax] code in the main is not there because of
some mischief. Most of it is there in the effort to do more perfect
justice."
-- Russell B. Long
Senate Finance Committee Passes Healthcare Act
While there still is a long road to healthcare reform on October 13, 2009,
the Senate Finance Committee, finally passed the America's Healthy Future
Act (AHFA). The vote was all 13 Democrats in favor and 9 of the 10
Republicans opposed. The sole Republican vote in favor of the bill was Sen.
Olympia Snowe (R-ME).
Sen. Snowe was immediately interviewed on several television news programs.
She indicated that "When history calls, history calls." Sen.
Snowe also added that she felt the bill was not "all that I want"
and she threatened to vote against a Democratic bill if it changed much
before the full Senate vote.
Sen. Baucus was clearly pleased. He stated, "The bill we passed today
puts patients and doctors -- not insurance companies -- in the driver's
seat. It includes strong provisions to end insurance company practices that
discriminate against those who are sick or have pre-existing
conditions."
Sen. Baucus highlighted five primary goals of AHFA. These are as follows:
1. It will reform the insurance market to enable people with pre-existing
health conditions to receive coverage.
2. It prohibits higher rates for women or people with a history of illness.
3. There will be no yearly or lifetime limits with policies.
4. Consumers will be able to choose nonprofit health co-ops as their
insurers.
5. There will be web-based insurance exchanges and Members of Congress will
be required to use them to purchase their insurance.
The ranking Republican on the Senate Finance Committee is Sen. Charles
Grassley (R-IA). He commended Sen. Baucus for the long process that has
been shepherded by Mr. Baucus. However, Sen. Grassley expressed serious
concerns about the bill. He reviewed several issues and is very concerned
that "this bill is already sliding rapidly down the slippery slope to
more and more government control of healthcare."
Sen. Grassley stated that his opposition to AHFA is based on five specific
issues. These are as follows:
1. AHFA is the greatest expansion of Medicaid since its creation in 1965.
2. The Secretary of Health and Human Services will have the power to define
benefits for all private health plans. Sen. Grassley believes this is
"a lot of power over people's lives."
3. Healthcare premiums for millions will "go up, not down."
4. There are a half trillion dollars in new fees and taxes. They may cause
consumers to pay higher insurance premiums starting in 2010, even before
the act takes effect. There will eventually be higher insurance premiums
for everyone.
5. There is a permanent new Medicare commission with wide-ranging authority
to make cuts in future Medicare programs.
Editor's Note: The AHFA will now be combined with a bill passed in
the Health Education Labor and Pension Committee led by the late Senator
Edward Kennedy. Majority Leader Sen. Reid (D-NV) and Sen. Baucus have not
indicated a schedule for the development of a single bill prior to a vote
by the full Senate. Given the rapidly approaching end of 2009, it seems
less and less likely that the legislative process for healthcare reform can
now be completed this year.
Small IRS Inflation Adjustments for 2010
In Rev. Proc. 2009-50; 2009-45 IRB 1 (15 Oct 2009), the IRS released the
inflation adjustments for 2010. Under various Congressional laws, there now
are 38 different tax sections or provisions that are updated for inflation
each year.
Because inflation has been close to zero for the past year, there are many
items that for the first time did not change at all. Other numbers and
limits reflect minor changes or adjustments.
Under the income tax rules, the brackets for married couples, heads of
household, married filed separately, single persons and estates and trusts
are adjusted each year. The adjustments for 2010 are very minor, with
upward rounding by $50 for some brackets.
The personal exemption will remain at $3,650. Standard deductions for
married couples of $11,400 and single persons of $5,700 are unchanged. The
standard deduction for heads of household is up from $8,350 to $8,400.
After three years of reductions in the phaseouts of the personal exemption
and itemized deductions for higher income persons, for the year 2010
neither phaseout will apply. Unless changed by Congress, there will be no
phaseout in the year 2010 of the personal exemption. In addition, the
previous reduction of 1% to 3% in itemized deductions above a given floor
will not apply for 2010. Both provisions under current law will return in
2011.
Because many charitable organizations recognize donors through gifts of
various small items with the logo of the charity, Congress passed an
exception for "token benefit" recognition plaques, memorabilia or
other gifts to donors. If the gift by the donor is of sufficient size, then
a gift premium of a mug, poster, key chain or other item with the charity's
logo is permitted.
For donors in 2010 who make gifts of $48 or more, a token gift with value
up to $9.60 is permitted. If there is a gift of $4,800 or above, the gift
value may be up to 2% of the amount donated. However, the token gift can
not exceed $96 in value regardless of the amount of the gift. If the value
of the premium transferred by the charity to a donor exceeds this
"safe harbor," then the gift claimed on IRS Form 1040 must be
reduced.
Estate Tax Adjustments in 2010?
The IRS also included gift and estate tax adjustments in Rev.
Proc. 2009-50; 2009-45 IRB 1 (15 Oct 2009).
The 2010 annual gift exclusion will remain at $13,000. If a spouse is not a
U.S. citizen who would qualify for the unlimited marital gift exclusion,
the gift exclusion to the noncitizen spouse is $134,000.
Farms and ranches with qualified heirs who "materially
participate" in the operation of that farm or ranch may qualify under
Sec. 2032A for special use valuation. The reduction in value in 2010 can be
a maximum of $1 million under special use valuation.
Sec. 6166 permits a 2% interest rate on a portion of an estate if the
payments are extended under that provision. The 2% dollar amount for 2010
is $1,340,000.
Editor's Note: The major issue for 2010 is whether the estate tax
provisions will indeed be applicable. It is expected that Congress will not
permit the estate tax to be repealed for 2010 and reinstated with a $1
million exemption and 55% tax rate in 2011. If the House and Senate in late
December pass a one-year extension of the $3.5 million estate exemption and
45% estate tax rate, the above estate tax adjustments will be applicable.
Applicable Federal Rate of 3.2% for October -- Rev. Rul. 2009-33;
2009-40 IRB 1 (18 Sept. 2009)
The IRS has announced the Applicable Federal Rate (AFR) for October of
2009. The AFR under Sec. 7520 for the month of October will be 3.2%. The
rates for September of 3.4% or August 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 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.
C bequeathed the residue of his estate to a trust
("Trust"). Spouse was to be paid net income from Trust on a
quarterly basis for life. The trustee of C's estate ("Trustee")
could invade all or part of the principal at Trustee's sole discretion.
Decedent's will expressly authorized Spouse, the executrix of C's estate,
to make the qualified terminable interest property ("QTIP")
election for all or any portion of Trust. However, C's will did not give
Trustee express authority to divide Trust into QTIP and non-QTIP trusts if
a partial QTIP election was made. It also did not authorize the severance
of either trust into a generation-skipping transfer (GST) exempt trust and
a GST non-exempt trust. Spouse's attorney ("Attorney") filed Form
706. On Schedule M of Form 706, Attorney made a QTIP election for an
undivided portion of Trust. On Schedule R, Decedent's entire GST exemption
amount was allocated to the undivided Trust.
Trustee requested an extension of time to sever Trust into QTIP trust and
non-QTIP trust to reflect the partial QTIP election. Sec. 301.9100-1(c)
says Commissioner may grant a reasonable extension of time to make an
election when evidence suggests the taxpayer acted reasonably and in good
faith. Based on the facts presented, the Service granted a sixty (60) day
extension for the Trustee to severe the Trust into two trusts. Trustee also
requested the QTIP trust be a "reverse QTIP" and be severed into
two trusts. The Service held the reverse QTIP trust and the non-QTIP trust
may each be severed into two trusts.
Editor's Note: QTIPs can be coupled with CRTs to provide for a
surviving spouse and ensure an income stream for children after the
termination of the QTIP. Allocating the correct amount to the QTIP and
ensuring proper drafting in the donor's will is paramount to ensure quick
resolution of the estate.
As the economy slowly recovers, real estate will begin to
become attractive again. However, there may be cases in which donors desire
income today, but the best value for their real estate will not be realized
for several years. This person is a "Difficult Donor" because he
or she wants the charity to invest to facilitate the gift. Harry and Helen
Green are age 85 and 83. Harry is a lifelong real estate investor. Four
decades earlier, Harry had the wisdom to buy a property next to a two lane
road. The property was quite inexpensive and at the time four miles from
the nearest town.
During those four decades, the road was expanded and became a four lane
highway. The town steadily increased in population. Commercial development
slowly moved toward the land. Four decades later, Harry and Helen's
property is now a good candidate for a shopping center or other commercial
development. The 20-acre parcel is large enough for a commercial building
and surrounding parking. At age 85 and age 83, Harry and Helen would like
to start receiving cash today from the property. There is no development on
the property, and they have paid fairly modest taxes for the 40 years.
However, they are tired of the negative cash flow and would like to receive
income.
But there is a major obstacle. As a real estate entrepreneur, Harry
understands markets and was quite successful in picking a property that
would eventually have significant value. However, the property cannot be
developed until it is rezoned for commercial use and several water rights
issues are resolved in a way that permits a large commercial building to be
constructed. Because property issues and rezoning takes time in this
community, it may be three to five years before the property could be sold
and developed. How can Harry and Helen receive cash today without great
risk to the charity?
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 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-dollar personal portfolio.
Somewhat late in life, Lucky Lucy discovered the wonderful world of
philanthropy. She volunteered at her favorite charity, and has 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. Lucy
thinks that this stock should be sold as soon as possible, but she would
like to receive a deduction this year. In addition, she thought that the
$5,000,000 could be placed in a supporting organization with a community
foundation to provide scholarships for students. Lucy is single, but comes
from a large family. She has thirty cousins, and many of their children are
now entering college. Since her supporting organization will distribute
$250,000 in scholarships each year, Lucy asked the community foundation CEO
if she could give scholarships to the children of her thirty cousins. She
likes the concept of a "Cousin's Scholarship" program. Would this
plan work? Can the supporting organization fund scholarships for her
cousins' children?
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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