Washington Hotline – December 18, 2012

White House Proposes $1.4 Trillion in Taxes

Discussions in Washington this week focused on the current White House proposal. The second fiscal cliff counteroffer reduced the initial $1.6 trillion request to $1.4 trillion in taxes over the next decade. The proposal includes an increase in the top two rates to 39.6% and 36% and numerous other tax changes.

Speaker of the House John Boehner (R-OH) was opposed to the $1.4 trillion in new taxes. He stated that the President is “calling for $1.4 trillion worth of revenue. That cannot pass the House or the Senate.”

Speaker Boehner continues to wait for more specifics from the White House on entitlement reform. He noted that the White House proposal to include corporate taxes was useful, but the principal negotiations will focus on individual taxes and entitlement reform.

Sen. Charles Schumer (D-NY) noted that time is growing more urgent. He focused on the need to pass an increased alternative minimum tax exclusion. Schumer stated, “We have to address the AMT” because “things become such a mess if we don’t.” If there is no compromise on AMT by December 31, the IRS will be unable to program their computers and calculate taxes payable.

The practical time limits are also now becoming a concern. Senate Majority Leader Harry Reid (D-NV) expressed concern that the compromise might not be in place by Christmas. He noted, “[U]ntil we hear something from the Republicans, there is nothing to draft. I think it is going to be extremely difficult to get done before Christmas, but it could get done.”

Sen. Reid is referring to the challenge of taking an agreement between the President and Congressional leaders and translating that into a bill that will be 1,000 pages or more. Sen. Kent Conrad (D-ND) suggested that it would be possible to “have a framework agreement, coupled with a down payment, coupled with a failsafe so you can be assured that the savings are realized and the revenue is realized.” If that framework were in place by December 31, then the bill could be drafted and voted on by the House and Senate by the end of January.

Editor’s Note: Your editor and this organization take no specific position on these comments. The entire nation remains hopeful that an agreement can be created before December 31. As IRS officials have noted, it takes four to six weeks after an agreement is created to program the computers and publish the new tax forms. Because the AMT exclusion and other tax extender provisions could affect your 2012 taxes, it is essential to have a framework agreement by December 31, 2012. Even if that compromise occurs, the final bill language normally requires three to six weeks to complete.

American Hospital Association Letter to Sen. Reid

The American Hospital Association (AHA) sent a letter this week to Majority Leader Harry Reid (D-NV). The AHA letter followed other efforts to support charitable giving on December 4 and 5. In the letter, Executive Vice President Rick Pollack expressed an urgent need for Congress to support charitable giving during the fiscal cliff negotiations.

Pollack noted that medical centers are facing a challenging future. In 2012, rating agency Moody’s stated that the outlook for the next several years for not-for-profit hospitals is negative. Moody’s expects Congress to make further cuts to hospital funding. The net result will be increased financial pressure on hospitals and medical centers.

Pollack noted that there was $39.3 billion in uncompensated medical care during 2010. This free medical care by hospitals has increased by 82% in the past decade.

This past year, the Association of Healthcare Professionals asked development directors throughout the nation to respond to a survey. The development directors were asked whether the potential changes in tax law would impact charitable giving. They estimated a reduction in charitable giving of 10% to 30% based upon potential changes. This could amount to a $1 billion drop in support for medical centers.

Pollack continued, “We urge you to continue to encourage private giving by excluding charitable giving from any limitations on deductions, thereby maintaining the existing federal tax charitable deduction.”

Editor’s Note: Charities are inevitability drawn into the fiscal cliff discussion. The White House has proposed a 28% limit on charitable giving tax benefits and various members of Congress have discussed a potential cap on itemized deductions. Both would reduce charitable giving. It is encouraging to see members of the philanthropic community stepping forward to advocate publicly in support of charitable organizations. Hospitals and other medical centers are clearly facing a challenging future and will need current and planned gifts in the future to provide the existing level of uncompensated care.

Landrieu and Pryor Support $5 Million Estate Exemption

In a letter to Majority Leader Reid and Minority Leader Mitch McConnell (R-KY), Sen. Mary Landrieu (D-LA) and Sen. Mark Pryor (D-AR) expressed support for extending the current estate tax exemption and rate.

The letter stated, “We therefore urge you to take up and pass without delay legislation to extend the current estate and gift tax rules for an additional year, thus providing critical protection from the estate tax to family farms and small businesses while Congress prepares to address larger budget and tax issues.”

Landrieu and Pryor noted that farms and ranches are twice as likely to owe taxes than other estates. In addition, creating an estate plan for a farmer or rancher may cost from $5,000 to $50,000. Because of the threat to the family farm, they urge Congress “to extend the estate tax rate at the current level of 35% with a $5 million exemption, in a way that is both fiscally responsible and allows for long-term planning for vibrant, family-owned small and medium businesses.”

Editor’s Note: Last week Sen. Baucus (D-MT) made a similar statement. With the support for a $5 million estate exemption by Baucus, Landrieu and Pryor, the Democratic heartland Senators are now lining up behind extending this exemption. While the estate tax is a small part of the fiscal cliff negotiation, this bipartisan support for the $5 million exemption increases its favorable prospects for enactment in 2013.

IRS Announces 2013 Pension Limits

In Notice 2012-67; 2012-50 IRB 671 (9 Dec 2012), the IRS published the pension plan limits for 2013. These include the following limitations:

1. Annual Benefit – Under Sec. 415(b)(1)(A) is $205,000.
2. Defined Contribution Plans – Under Sec. 415(c)(1)(A) may accumulate $51,000.
3. Elective Deferrals – For 401ks or similar plans are $17,500.
4. Maximum Compensation Limits – For qualified plan funding calculations is $255,000.
5. IRA Contributions – For 2013 for individuals may be $5,500.
6. Government Sec. 457 Plans – Also have a $17,500 limit.
7. Roth IRAs – For married taxpayers the limit is $178,000.
8. Roth IRAs – For single and other taxpayers, the limit is $112,000.

Applicable Federal Rate of 1.2% for December — Rev. Rul. 2012-31; 2012-49 IRB 1 (18 Nov 2012)

The IRS has announced the Applicable Federal Rate (AFR) for December of 2012. The AFR under Section 7520 for the month of December will be 1.2%. The rates for November of 1.0% or October of 1.2% 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 2012, pooled income funds in existence less than three tax years must use a 1.8% deemed rate of return. Federal rates are available by clicking here.

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