If there is no agreement on a deficit solution of $1.2 trillion or more, then in 2013 there will be substantial cuts for both defense and Medicare providers. The $1.2 trillion in cuts will be allocated over the next decade.
The Supercommittee Co-Chairs are Rep. Jeb Hensarling (R-TX) and Sen. Patty Murray (D-WA). In a media interview this week, Hensarling indicated that tax increases are "not going to happen." He stated, "We're facing a jobs crisis and a debt crisis. We're certainly not going to exacerbate one by trying to address the other." Hensarling noted that Republicans had made a concession by offering $250 billion in new revenue as part of a plan to lower the top individual rate to 28%. The six Democrats on the committee are discussing plans and may offer an alternative during the weekend.
A bipartisan group of senators and representatives held a press conference this week. House Democratic Whip Steny H. Hoyer (D-MD) spoke for the group and expressed a hope that a "Go Big" plan that involves a $4 trillion solution could be reached. He stated, "The committee, for the sake of our country and its sound fiscal future, should recommend a package of cuts, revenues and reforms consistent with the Bowles-Simpson, Domenici-Rivlin, and Gang of Six proposals."
If there is no agreement, Senate Majority Leader Harry Reid (D-NV) stated that he will not block the $1.2 trillion in automatic spending cuts. In addition, President Obama placed a phone call to Co-Chairs Hensarling and Murray. He also indicated that the White House would not stop the automatic reductions.
Editor's Note: Under the Budget Control Act of 2011, which created the Supercommittee and mandates the potential budget cuts, the Congressional Budget Office must score any bill two days prior to the deadline. Therefore, the actual deadline for action is Monday, November 21, 2011. A compromise by the Supercommittee must be reached this weekend in order for a committee vote on Nov. 23.
ACGA Support for Tax Initiatives
A Senate Finance Committee hearing was held on October 18, 2011 to discuss potential changes in the tax law relating to charitable deductions. Conrad Teitell, volunteer counsel to the American Council on Gift Annuities, prepared a statement for the record that was submitted to the Senate Finance Committee.
Teitell outlined five principles for considering changes to charitable deductions. These include the following.
1. Tax Incentives – A reduction in tax incentives would harm a broad spectrum of Americans served by charities.
2. Current IRA Rollovers – The option for an IRA rollover up to $100,000 per IRA owner over age 70½ will expire on December 31, 2011. This should be made permanent.
3. IRA Nonitemizer Deduction – For IRA owners over age 70½ who do not itemize (about 70% of taxpayers), the IRA rollover functions in a manner similar to a nonitemizer deduction. While the IRA transfer is not deductible, an IRA owner's taxable required minimum distribution is reduced by the amount of the qualified charitable distribution (QCD). This reduces taxable income by the amount of the IRA rollover.
4. Expanded IRA Rollover – The IRA rollover should permit the transfer from an IRA trustee to a charitable organization for a charitable gift annuity or to a trustee of a charitable remainder trust.
5. Decreased Federal and State Support – Budget cuts at both the Federal and the state level are frequently targeting social services and the most vulnerable citizens of our nation.
Teitell also outlined a proposed "All-American Charitable IRA Rollover Act of 2012." His proposed bill permits the current tax-free distributions to charities of $100,000 per year for IRA owners over age 70½.
However, he advocates an expanded rollover that would enable IRA owners over age 59½ to make QCDs up to $500,000 for a charitable gift annuity or to a charitable remainder trust. The QCD would be available for a one life gift annuity or CRT, or two lives for an IRA owner and spouse.
QCDs would not be deductible charitable gifts, but they are also not included in taxable income. A QCD is permitted for a public charity gift, but not for transfers to a donor advised fund or supporting organization. All payments from a life income agreement will be ordinary income.
Alternate Valuation Method Proposed Regulations
In 2008, the IRS published proposed regulations that amended Reg. 20.2032-1 with respect to the alternate valuation method for estates. In Reg-112196-07 (16 Nov. 2011), the IRS withdrew the 2008 proposed regulations and issued updated proposed regulations covering the alternate date valuation.
Under Sec. 2032(a), an executor may elect to determine the value of a gross estate on a date six months following the date of death. However, there are exceptions to this rule. If property is sold, exchanged or otherwise disposed of during that period, the assets are generally valued on date of distribution.
Following written comments from a number of estate attorneys, Treasury reissued the new proposed regulations to address alternate valuation method exceptions.
Reg. 20.2032-1(c)(1)(ii) indicates that during the alternate valuation period an estate may have an interest in a corporation, a partnership or other entity that is exchanged for interests in the same entity or a resulting entity. This exchanged interest may be valued at the six month date.
Reg. 20.2032-1(c)(1)(iii)(A) states that an estate may receive a distribution from a business entity or retirement trust that is includable in the estate. The estate may also value this item at the sixth month date.
Finally, the proposed regulations emphasize that post-death events will not be permitted to modify valuation unless specifically authorized by Congress. An example of an exception that is authorized is a conservation easement under Sec. 2031(c).
Applicable Federal Rate of 1.6% for December -- Rev. Rul. 2011-31; 2011-49 IRB 1 (17 Nov. 2011)
The IRS has announced the Applicable Federal Rate (AFR) for December of 2011. The AFR under Sec. 7520 for the month of December will be 1.6%. The rates for November of 1.4% or October of 1.4% 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 2011, pooled income funds in existence less than three tax years must use a 2.8% deemed rate of return. Federal rates are available by clicking here.
