Agreement on IRA Rollover and Tax Extenders

After months of negotiation, Senate Finance Committee Chair Max Baucus (D-MT) and House Ways and Means Committee Chair Sander Levin (D-MI) have announced an agreement.

The House and Senate both previously passed bills that would extend over 40 tax provisions, including the IRA Charitable Rollover. Because there were different tax offsets in the House and Senate bills, extended negotiations were required to find tax increases acceptable to both.

The House bill paid for the tax extenders by increasing the tax rate on hedge fund managers. Currently, the “carried interest” or income of hedge fund managers is taxed at capital gain rates. The House proposed to tax this income at the higher ordinary income rates.

Under the compromise published in the American Jobs and Closing Tax Loopholes Act of 2010 (H.R. 4213), the “carried interest” amounts will be subject to increased tax. For hedge fund managers, 75% of income is taxed at ordinary rates and 25% is taxed as long-term capital gain.

The House plans to vote on the bill the week of May 24. Former Chair of the House Ways and Means Committee Charles Rangel (D-NY) stated, “For a lot of members, it’s a very difficult vote and they don’t want to take a vote unless they have assurance that the Senate is going to pass it.”

Sen. Max Baucus indicated that he expected to find the 60 votes required for passage in the Senate. As is true in the House, a number of Senators who represent regions with financial service firms are concerned about the change in the tax on hedge fund managers. However, Sen. Baucus indicates that the votes are likely to be sufficient to pass the bill.

Editor’s Note:
Because the tax extenders portion of the bill includes the educational deduction for teachers, a research and development credit for business and many other popular provisions, similar bills normally pass by large margins. Even with the tax offsets, it is probable that the bill will pass in the next few weeks. Charities should begin planning their fall IRA Charitable Rollover marketing campaigns. Because most individuals with larger IRAs take their required minimum distributions in the fall, there is still time to have a successful IRA Rollover Campaign in 2010.

Seven Charitable Extenders for 2010

The American Jobs and Closing Tax Loopholes Act of 2010 includes seven charitable extenders. After passage, these changes will be applicable from January 1, 2010 until December 31, 2010.

The seven charitable provisions include:

1. Conservation Gift Limits
– Gifts of property for conservation purposes benefit from increased deduction limits. The normal 30% limit for appreciated property gifts is increased to 50% and the carry-forward limit is extended from five years to 15 years.

2. Food Inventory Gifts
– An enhanced deduction for contributions of “apparently wholesome” food will be available for all donors. The deduction is the lesser of twice the basis or basis plus one-half of the appreciation.

3. Book Inventory Gifts
– C Corporations may claim an enhanced deduction for book inventory gifts to public schools. K-12 schools qualify.

4. Computers and Software
– Corporations may make gifts to elementary, secondary and post-secondary schools of computer equipment. These contributions will qualify for the enhanced deduction.

5. IRA Charitable Rollover
– Each IRA owner may make a transfer of up to $100,000 per year to a qualified charity. The IRA charitable rollovers are tax-free and not included in adjusted gross income.

6. Rents from Subsidiary Charities
– Rents, royalties and annuities may be distributed from a subsidiary charity to a parent. Payments at fair market value will not be subject to the unrelated business taxable income rules.

7. S Corporation Appreciated Gifts
– An S corporation may give appreciated stock or land to charity. Only the basis to the S corporation will be used to reduce the shareholder basis, even though the full fair market value deduction is claimed by the shareholder.

Estate Tax — Deal or No Deal?

Negotiations on estate taxation have continued all year between Sen. Max Baucus (D-MT) and Senators Jon Kyl (R-AZ) and Blanche Lincoln (D-AR). Senators Kyl and Lincoln have steadfastly supported an increase in the estate exemption to $5 million per person and a reduced estate tax rate of 35%.

On May 17, Sen. Kyl reported that he had reached a general agreement with Sen. Baucus on estate tax reform. Sen. Kyl indicated that the exemption would be moving to $5 million and the estate tax rate to 35%.

However, on May 18, Sen. Baucus denied the existence of any deal. He stated, “There’s no agreement on the estate tax on either the substance or process. None whatsoever.”

Last December the House passed the Permanent Estate Tax Relief for Families, Farmers and Small Business Act of 2009 (H.R. 4154). This bill extends the estate tax at the 2009 exemption level of $3.5 million and maintains a top rate of 45%. Because the Senate failed to act, the estate tax was repealed on Jan. 1, 2010. If the Senate is unable to act this year, then the estate tax returns on January 1, 2011 with a 55% top rate and an exemption of $1 million (with an indexed increase for inflation).

A factor that complicates the estate negotiation process is the passage of “pay-as-you-go” rules. Current budget rules exclude an estate tax compromise from required offsets for two years, but any other future revenue loss must be offset. Waiver of the “pay-go” rules requires 60 votes in the Senate.

Because Sen. Lincoln would need to vote in favor of any compromise in order for there to be a potential of gaining 60 votes, it may be later in 2010 before there is an estate tax bill.

Editor’s Note:
In the initial comments by Sen. Kyl, he indicated that the general agreement would require approximately $60 billion in offsets or tax increases. The challenge facing Sen. Baucus and the rest of the Senate is that all of the reasonably easy tax offsets have previously been used for other bills. It is now becoming very difficult to find tax increases that are acceptable to 60 senators.

Small Charities May Regain Lost Exemptions

On the May 17 filing deadline for charities, an estimated 200,000 smaller organizations had not filed the required Form 990-N e-postcard. These organizations (except churches, which are not required to file) no longer qualify as tax-exempt and gifts to them are not deductible.

If an organization does not file either Form 990 or, for those with receipts of $25,000 or less, the Form 990-N e-postcard, then the organizations exempt status terminates after three years. That deadline occurred for many organizations on May 17 of this year.

Even with a major communications effort on the part of the IRS, a significant number of smaller organizations did not know about the deadline. Therefore, IRS Commissioner Douglas Shulman indicated that the IRS may permit some organizations to receive retroactive reinstatement of their exempt status.

He promised an IRS revenue procedure in the near future and noted, “The guidance will offer relief to these small organizations and provide them with the opportunity to keep their critical tax-exempt status intact.” He also suggested that any small organization that had not yet done so should immediately file the Form 990-N e-postcard.

Editor’s Note:
IRS Exempt Organizations Division Director Lois Lerner had previously indicated that any organization losing its status would be required to refile IRS Form 1023 and pay a fee. It now appears that the IRS will issue guidance that allows organizations (with reasonable cause) to file late and retain exempt status. However, organizations should not rely on the promise of future lenience and counsel to these smaller organizations should urge their leaders to file immediately.

Comments are closed.

Advanced Asset Management
4555 Wilson Ave SW, Suite 2
Grandville, MI 49418

Phone: (616) 531-5220