At publication time, the House of Representatives had passed a $1 trillion budget on a vote of 296 in favor and 121 opposed.  The bill was sent to the Senate late Friday, December 16, 2011.

The Senate will vote either late Friday night or Saturday on the bill.  It is expected that the Senate will pass the bill by a substantial margin and the President will immediately sign the bill.

While the government will technically shut down at midnight on Friday night, it is expected that there will be no interruption in government services.

The $1 trillion budget is the result of negotiations last August.  Prior to the increase of the federal debt limit above $14.3 trillion, the leaders of Congress and the White House came to a last-minute compromise.  Under that compromise, the discretionary budget for the balance of the fiscal year from December 16 to September 30, 2012 reflects the $1 trillion limit.

The government debt has increased substantially since August.  The $14.3 trillion debt amount in August has increased to $15.12 trillion.

Editor's Note: Budget negotiations now are less pressing until next year.  Congress will need to pass a budget for the year that starts October 1, 2012.  Because 2012 is an election year, it is probable that there will again be a compromise and no government shutdown.

Payroll Tax Cut by Year End?

On December 16 the House passed the $1 trillion budget and then adjourned.  Majority Leader Eric Cantor (R-VA) indicated that the House could be recalled if needed.  He stated to the House Members that he would give them a 24 hour notice if there is a recall.

The House also passed the latest version of the 2% tax cut on Social Security contributions.  Under the House plan, the reduction from 6.2% to 4.2% for Social Security contributions in 2012 will save $1,000 for many taxpayers.

The Senate remained deadlocked on the payroll tax cut.  Senate Democrats continue to seek to raise taxes on upper-income individuals to pay for the payroll cut.

Senate Republican Leader Mitch McConnell (R-KY) stated, "Today, the House of Representatives will vote on a bill that extends the temporary payroll tax cut as well as unemployment insurance, and which won't add a dime to the federal deficit."

McConnell also noted that the House bill includes a provision to start construction of the Keystone XL Pipeline.  He described this as "the biggest shovel-ready project in America."

The White House again reissued its call to Congress to pass the payroll tax cut.  In a press release, the White House stated, "This is a time to help the middle-class and all those trying to reach it by extending the tax cut worth $1,000 for the average family."  The White House hopes that Congress will "come to an agreement" before the end of the year.

Editor's Note: If the Senate is able to develop a compromise bill, the House may return for a vote late next week or during the final week of December.

End of Year Giving Tips

On December 14, 2011, the IRS published IR-2011-18 and suggested a number of tax tips for end-of-year charitable giving.  These included several specific recommendations.

1.  IRA Rollover – For individuals age 70&#frac12; and older who are IRA owners, they may have their IRA custodian make a direct transfer to qualified charities of up to $100,000.  These direct transfers may fulfill part or all of the required minimum distribution for this year.

2.  Clothing and Household Goods – Deductions for gifts of clothing and household goods are permitted if they are in "good used condition or better."  A gift item that has a value over $500 may be of a different quality, provided that there is an appraisal.

3.  Gifts of Money – All gifts of money must be documented through a bank record or receipt.  The gift should show the date, amount of the gift and the name of the charitable organization.  Bank records may include a cancelled check, a bank statement or a credit card statement.

Gifts may also be made through payroll deductions.  In this case, the taxpayer should retain a pay stub, Form W-2 or a pledge card that shows the amount, the date of the gift and the name of the charity.

If the gift is $250 or more, a contemporaneous written acknowledgement from the charity is required.  This receipt must be in the taxpayer's possession on the date of filing his or her tax return.

4.  Timing – A contribution is deductible in the year when it is given.  Credit card contributions may be made through December 31.  Similarly, checks that are sent through U.S. mail by December 31 are deductible if they clear in the normal course.

5.  Charities – Deductions are only permitted for gifts to qualified charities.  IRS Publication 78 is available on www.irs.gov and lists the qualified charitable organizations.

6.  Itemized Deductions – Individuals who wish to claim their charitable gifts will need to itemize deductions on Schedule A of Form 1040.  Normally, a taxpayer will itemize only if his or her charitable gifts, state and local taxes, mortgage interest and other deductions are larger than the standard deduction.

7. Clothing and Household Item Receipts – The taxpayer should obtain a receipt from the charity.  It must list the name of the charity, the date of the gift and a reasonably-detailed description of the gift items.

8.  Boat, RV or Car – The gift is usually limited to the gross proceeds from sale if the vehicle is valued at over $500.  The charity will send IRS Form 1098-C to the taxpayer and this should be attached to Form 1040.

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.