IRS End-of-Year Advice
1. Before December 31 – You may make your charitable contributions this month. Credit card gifts are valid if made by December 31, even if you pay the bill next year. Checks are also deductible if postmarked by U.S. Mail by December 31. IRA charitable rollovers may fulfill the 2016 required minimum distribution (RMD). These are permitted for IRA owners age 70½ or older and have a maximum limit of $100,000 per year.
2. Moved or Name Change – Taxpayers who moved should notify the IRS using Form 8822. Those who have name changes should notify the Social Security Administration. You will want to be certain that your Social Security records are updated so you receive appropriate credit for your payments.
3. Filing Returns – The filing season next year will start on January 23 and continue until Tuesday, April 18 (unless you file for extension). The IRS expects 153 million electronic returns to be filed. If you are obtaining a refund for the earned income tax credit (EITC) or the additional child tax credit (ACTC), Congress requires the IRS to hold the refund until at least February 15th. Koskinen stated, “For this tax season, it is more important than ever for taxpayers to plan ahead. People should make sure they have their year-end tax statements in hand, and we encourage people to file as they normally would, including those claiming the credits affected by the refund delay. Even with these significant changes, IRS employees and the entire tax community will be working hard to make this a smooth filing season for taxpayers.” Koskinen notes that the IRS Free File program is available on www.irs.gov for taxpayers with incomes of $64,000 or less. Many taxpayers also will take advantage of the Volunteer Income Tax Assistance (VITA) and Tax Counseling for the Elderly (TCE) programs. To find a location near you, go to www.irs.gov and search for “free tax preparation.”
4. Mileage for 2017 – The 2017 business rates will be down by one half cent to 53.5 cents per mile. Medical and moving mileage rates will be 17 cents per mile. The charitable rate is unchanged at 14 cents per mile. You also have the option as a taxpayer to calculate actual costs for your vehicle usage.
5. Flexible Spending Arrangements (FSAs) – The 2017 limit for FSAs is $2,600. If your employer permits use of this plan, you can allocate $2,600 in pretax salary to the plan and use it for qualified medical expenses. These are typically co-pays, deductibles and medical products. They also may include dental and vision care. Some employer plans permit you to carry over $500 of unused FSA benefit to the next year.
High Gear for Tax Reform
While the Senate and House have adjourned, tax staffers are very busy writing potential provisions for a 2017 Tax Reform Act. Senate Majority Leader Mitch McConnell (R-KY) and Speaker of the House Paul Ryan (R-WI) discussed tax reform in media appearances this week.
McConnell would like to have both business and personal tax reform. He would hope to reduce rates in both cases. McConnell also stated a “preference on tax reform is that it be revenue neutral to the government.”
Ryan supported a 15% tax rate during his media appearance, but he stated that it may end up closer to 20%. Ryan noted, “We are going to work on this bill and try and get it as best we can so that it stays deficit neutral.”
House Ways and Means Chairman Kevin Brady (R-TX) convened the Republican members of the Ways and Means Committee in Washington this week. They are reviewing specific policy options for a tax bill. Brady indicated he hopes to have the full proposal for the tax reform bill in place by January 20, 2017.
Reince Priebus, incoming Chief of Staff for President-elect Trump, explained the White House position on business taxation. Priebus stated, “We want to see the potential for a change in that border adjustability so that American jobs are protected.” Priebus was referring to the concept of a border adjustment tax. It is designed to favor exports over imports. While this tradeoff could increase employment in the United States, there is opposition from some trade groups.
Chairman Brady also has been reviewing the border adjustment tax. He commented, “We are proposing bold changes. We know that. All of them affect different businesses differently, so we are listening very closely to how we can make sure we smooth that out in transition.”
Editor’s Note: Senate Finance Committee Chairman Orin Hatch (R-UT) must pass tax reform using a Senate process called reconciliation that requires only 51 votes. He has indicated that he may prefer one large tax bill because of the reconciliation process. This bill will include changes in individual taxation and corporate taxes. It is likely to repeal the alternative minimum tax and the estate tax. The entire process will be easier under the dynamic scoring principles of the Joint Committee on Taxation (JCT). Hatch and Ryan appear to favor a revenue-neutral reform bill. There will be great challenges in reducing rates because revenue neutrality will require the repeal or reduction of most business and personal itemized deductions. The House and Senate leaders hope to complete tax reform by August of 2017.
Charitable Giving Coalition Opposes a Gift Deduction Cap
The Charitable Giving Coalition (CGC) is an alliance of nonprofits and charitable associations. It sent a letter on December 15 to President-elect Donald Trump urging him to not set a cap on charitable deductions.
As Chairman Brady and his staff review several thousand proposals for different aspects of tax reform, one potential option is a cap on charitable giving.
CGC notes in the letter, “As you contemplate caps or restrictions on itemized deductions ($100,000 for individuals and $200,000 for couples/families filing jointly), we encourage you to exempt the charitable deductions from those restrictions.”
CGC notes that the charitable deduction is unique among all deductions because it encourages gifts “to those in need.” There is an estimated $2.50 in total benefit that is the result of each $1 of charitable deduction. The charitable deduction is quite unique in that it is the only deduction allowed for people who are giving a benefit to another needy person.
The Giving USA report shows that Americans gave $373 billion to charity in 2015. Over 10% of U.S. workers (over 13 million persons) are employed by nonprofits.
CGC suggests that Congress should be looking for ways to expand philanthropic support of those in need.
Editor’s Note: Chairman Brady has repeatedly expressed support for charitable giving. His challenge is that all of the other itemized deductions will be reduced or repealed in order to lower the tax rates. CGC and other nonprofit voices will need to continue to express support for charitable giving if the charitable deductions are going to continue at their current level in the 2017 Tax Reform Act.
Applicable Federal Rate of 1.8% for December — Rev. Rul. 2016-27; 2016-47 IRB 1 (18 Nov 2016)
The IRS has announced the Applicable Federal Rate (AFR) for December of 2016. The AFR under Section 7520 for the month of December will be 1.8%. The rates for November of 1.6% or October of 1.6% 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 2016, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.