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House Healthcare Bill Taxes Higher Incomes

Tax Quote of the Week

"Thus the triple whammy: first, high [tax] rates reduce investment and growth; second, they encourage baroque loophole-seeking, which further exacerbates the unequal treatment of different kinds of income; third, the system gets ever more burdensome, shifting 6 billion person-hours yearly out of the productive economy and into the parasite economy of accountants and lobbyists." -- James P. Pinkerton

House Healthcare Bill Taxes Higher Incomes

On July 14, 2009 Speaker Nancy Pelosi (D-CA) released the updated Democratic healthcare plan. It included a government-sponsored health plan option, requires nearly everyone to have coverage and levies new taxes on higher-income citizens.

Speaker Pelosi and Democratic leaders said the America's Affordable Health Choices Act (AAHCA) "met the requirements set by President Obama for health care reform by lowering costs to consumers and businesses, letting people keep their current plan if desired, and preventing denial of coverage due to pre-existing medical conditions."

Specific provisions of the bill include:

A Health Insurance Exchange may be funded by the federal government and provides insurance for small business employees and individuals.
Pre-existing conditions are covered.
Low and moderate income persons (up to $43,000 for individuals and $88,000 for a family of four) receive government assistance on premiums.
There is a maximum amount of annual out-of-pocket spending for medical care.
Persons with incomes up to 133% of the federal poverty level may benefit through Medicaid.
The penalty for not buying insurance is 2.5% of your adjusted gross income.
A business with over $250,000 in annual employee payroll must offer insurance or pay 8% of payroll as a penalty.
Several measures are designed to reduce Medicaid and Medicare costs.

The funding for healthcare reform will come from high income taxpayers. If the proposed Medicare and Medicaid savings are reached then the tax surcharge will be:

Adjusted Gross Income	Surcharge %
Over $280,000 (Single)	1%
Over $350,000 (Married)	1%
Over $500,000	1.5%
Over $1,000,000	5.4%

If the proposed Medicare and Medicaid savings are not reached, then the tax surcharge increases to:

Adjusted Gross Income	Surcharge %
Over $280,000 (Single)	2%
Over $350,000 (Married)	2%
Over $500,000	3%
Over $1,000,000	5.4%

President Obama continues to pressure the House and Senate to pass a bill before the August recess. He hopes to sign the final bill by December of 2009.

Editor's Note: Because the tax is paid by taxpayers on their adjusted gross income rather than taxable income, it is taken with no deduction for charitable gifts, state taxes, mortgage interest or medical expenses.

House-Senate Debate on Healthcare Heats Up

House Majority Leader Steny H. Hoyer (D-MD) also supported H.R. 3200, America's Affordable Health Choices Act of 2009. He noted, "We will produce a product that will give the American people a sense of security and well-being." The House healthcare bill is designed to provide medical insurance coverage for all Americans who currently do not have insurance.

The House healthcare bill costs are covered primarily by a new surtax of 1% to 5.4% on high-income taxpayers.

Majority Leader Mitch McConnell (R-KY) opposed passage of the House healthcare bill. He suggested that citizens do not want "a government plan that forces them off their current insurance; denies, delays, and rations care; or costs trillions of dollars, only to leave millions of Americans with worse health care than they currently have."

He also is concerned about the Democratic plan to force "small business owners and seniors to pick up the tab through higher taxes and cuts to Medicare." In his view the new taxes on small business owners "could kill more than 1.5 million jobs."

Sen. McConnell concludes by stating, "Americans are concerned about the cost of reform. We should work hard to assure them that we are too."

Sen. Conrad Questions CBO Director Elmendorf on Healthcare Costs

At a July 16, 2009 hearing before the Senate Budget Committee, Congressional Budget Office (CBO) Director Douglas Elmendorf responded to questions from Sen. Kent Conrad (D-ND). Sen. Conrad started by noting that the CBO is an objective department responsible for estimating the costs of various programs without taking a policy position. He then summarized the five key observations of CBO on medical reform options. These five CBO findings are:

Without fundamental changes in the organization and delivery of care, expanding health insurance coverage will worsen the nation's long-term budget outlook.
Paying for reform over 10 years does not guarantee long-term savings.
The focus should be on savings within the health care system that will grow over time.
The government has two powerful levers for controlling costs: changing Medicare payment rules and limiting the tax exclusion for employer-sponsored insurance.
And, finally, identifying savings "game-changers" will take time and experimentation.

After this summary, Sen. Conrad asked Director Elmendorf, "Everyone has said, virtually everyone, that bending the cost curve over time is critically important and is one of the key goals of this entire effort. From what you have seen from the products of the committees that have reported, do you see a successful effort being mounted to bend the long-term cost curve?"

CBO Director Elmendorf responded, "No, Mr. Chairman. In the legislation that has been reported we do not see the sort of fundamental changes that would be necessary to reduce the trajectory of federal health spending by a significant amount. And on the contrary, the legislation significantly expands the federal responsibility for healthcare costs."

Sen. Conrad also noted that he has called "the Deficit Reduction Caucus to action." His plan is for a bipartisan group of Senators to meet monthly to address the long-term budget problems. In his view, "The time for doing nothing has passed."

Editor's Note: Sen. Conrad and Senate Finance Committee Chair Max Baucus (D-MT) both point to the CBO projections to support a cap on healthcare insurance as a practical method for expanding medical insurance coverage while limiting increases in medical costs. They are both in discrete and diplomatic discussions with the White House and the House Democratic leaders on this topic. While the Senate cap on healthcare insurance deductions is not popular, the House alternative is major tax increases that will affect the unemployment rate.

Proposed Top State/Federal Tax Rates Over 50%

A study by the Tax Foundation shows that under the proposed House healthcare bill, the top tax rates in 2011 could exceed 50% in 24 of the 50 states. Earlier this year, Democratic leaders suggested that the top tax rate for federal taxes be raised to 39.6% in 2011. Many states have top income tax rates of 9% to 10%. Because the state tax is deducted on the federal return, the effective state tax is a lower percent. In addition, top earners will pay the healthcare surtax and 2.9% for Medicare tax.

With the proposed increases by 2011, the maximum tax rates in the top five states (assuming a net 3% healthcare tax and the top federal and state rates) are:

State	Top State Rate	Federal Rate	Surtax	Medicare	Top Rate
Oregon	11.00%	39.6%	3.00%	2.90%	55.18%
Hawaii	11.00%	39.6%	3.00%	2.90%	54.85%
New Jersey	10.75%	39.6%	3.00%	2.90%	54.71%
New York	8.97%	39.6%	3.00%	2.90%	54.55%
California	10.55%	39.6%	3.00%	2.90%	54.44%

Editor's Note: The combined top rates are not just an addition of the other rates, but reflect offsets such as the partial deduction of state taxes on the federal return. In addition, after the Tax Foundation issued these projections, the House raised the top surtax from 3% to 5.4% for incomes over $1,000,000 per year.

Applicable Federal Rate of 3.4% for July -- Rev. Rul. 2009-20; 2009-26 IRB 1 (19 June 2009)

The IRS has announced the Applicable Federal Rate (AFR) for July of 2009. The AFR under Sec. 7520 for the month of July will be 3.4%. The rates for June of 2.8% or May of 2.4% 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.

PLR THIS WEEK

PLR - 200927013 Testamentary Trust Reformation Qualifies for Deduction

Decedent's Trust provided for the estate residue to be divided into two charitable remainder trusts, Trust 1 and Trust 2, each paying income for the lives of Decedent's specified beneficiaries with the remainder to Institution, a charitable organization described in Sec. 170(c), 2055(a) and 2522(a). Trust 1 was to be funded with assets valuing $x and Trust 2 was to be funded with the residuary. However, because Trust 1 and Trust 2 did not contain certain provisions required by Reg. 1.664-1 and 1.664-2, the remainder interests passing to Institution did not qualify for the deduction permitted under Sec. 2055(a). In order to effectuate a Court order based on State law approving reformation of Trust 1 and Trust 2 with the required provisions, Decedent's trustees sought a ruling that the reformations will create qualified charitable remainder trusts for purposes of the Sec. 2055(a) federal estate tax deduction.

The Service ruled that Trusts 1 and 2 were reformable interests. Under Sec. 2055(a), the value of a taxable estate is determined by deducting from the gross estate the amount of transfers to or for an organization operated and organized exclusively for religious, charitable, scientific, literary or educational purposes. Sec. 2055(e)(2) provides that where Sec. 2055(a) charitable interests and noncharitable interests are transferred from the same property, a charitable estate tax deduction is only permitted for the charitable interest if the remainder interest is in a Sec. 664 charitable remainder trust. Sec. 2055(e)(3)(A) allows a deduction under Sec. 2055 for a qualified reformation.

A qualified reformation, according to Sec. 2055(e)(3)(B), changes a reformable interest into a qualified interest if the difference between the actuarial value of the qualified interest and reformable interests does not exceed 5% of the reformable interest value, the nonremainder interests terminate at the same time whether before or after the qualified reformation and the change is effective as of the decedent's death. A reformable interest is defined as any interest for which a deduction would be allowed under Sec. 2055(a) at the time of decedents' death but for Sec. 2055(e)(2). While the initially drafted charitable remainder interests would have qualified for a Sec. 2055(a) estate tax charitable deduction, they failed to meet the requirements of Sec. 2055(e)(2) and Sec. 664. The Service ruled the judicial reformation of Trust 1 and Trust 2 is a qualified reformation under Sec. 2055(e)(3) and that an estate tax charitable deduction is allowable under Sec. 2055(a) for the present value of the charitable remainder interests passing to Institution.

To view the full PLR Click Here.

ARTICLE OF THE MONTH

Current Planned Gifts I - Gift Annuities

Most planned gifts involve a transfer to charity at a future time. For example, a charitable gift annuity, a charitable remainder trust, a charitable annuity trust, a pooled income fund or a life estate all involve a gift at a future time.

However, presidents and CEOs of charities generally prefer current gifts as opposed to planned gifts. All presidents and CEOs have many goals and projects that require current funding. Therefore, the gift planner will be very favorably received if he or she understands the different methods for converting a planned gift into a current gift.

It is indeed possible for a charitable gift annuity, a charitable remainder unitrust, a charitable remainder annuity trust, a life estate agreement or a pooled income fund to be converted into a current gift. The methods in some circumstances involve an outright transfer to charity. In other situations, there is the retention of a life income through a qualified plan. In most cases, there will also be additional charitable income tax deductions.

When a gift annuity is created, the annuitant receives the right to receive the payment for his or her lifetime. This annuity stream is a property right under state law that may be valued. Under the bargain sale rules, the donor has made a gift to charity but has retained the balance of the value. While the annuity contract typically does not allow assignment, there is an exception that allows assignment of the annuity contract value back to the issuing charity.

To view the full Article of the Month Click Here.

CASE OF THE WEEK

Exit Strategies for Real Estate Investors, Part 15

Karl Hendricks was a man with the golden touch. Throughout his life, it seemed every investment idea that he touched turned to gold. By far, Karl was most successful with real estate investments. It was definitely his passion.

Amazingly, Karl continued to buy and sell real estate at the age of 85. His most favored tax strategy for buying and selling real estate revolved around I.R.C. Section 1031. In short, Section 1031 allows taxpayers to exchange "like-kind" investment property without the recognition of gain or loss. This tax code does not exclude the recognition of gross income indefinitely, but merely defers the recognition to a later date.

Karl currently owns a $2 million building that has significant appreciation. He acquired the building pursuant to a Section 1031 exchange. In fact, this building is his fifth Section 1031 building. Like many real estate investors, Karl just kept "trading up" over the years. As a result, Karl's basis in his $2 million building is extremely low.

Karl decided he wanted to sell the building, but he did not want to pay the "ticking tax time bomb." In addition, he did not want do another 1031 exchange because he decided he was ready to retire from the real estate investment business.

Around this time, Karl learned of the benefits of a FLIP CRUT, e.g., income tax deduction, bypass of capital gain and future income stream. He especially liked the fact that the FLIP CRUT could simply invest in stocks and bonds, which was something a 1031 exchange would not allow. Thus, after Karl learned about the benefits of a FLIP CRUT, he eagerly wanted to move forward.

It looked like the perfect solution. However, Karl did have one concern. Specifically, he acquired his building via a 1031 exchange from an unrelated party just nine months ago. Therefore, Karl wonders if there is any required holding period before he could dispose of his 1031 property into a FLIP CRUT?

To view the solution to this Case of the Week Click Here.

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.

Indiana Community Foundations

July 20, 2009

Thank you for your interest in the Community Foundation of Grant County. To contact us, please call 765.662.0065 or check out our website at www.comfdn.org.

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Thank you for your continued interest in a better quality of life in Grant County.

Yours in Philanthropy,

Elizabeth A. Wright and Dawn M. Brown...
on behalf of the entire Community Foundation Team