Time for a ‘Paycheck Checkup’
The passage of the Tax Cuts and Jobs Act (TCJA), brought many changes that will affect taxpayers. With the TCJA’s higher standard deductions ($12,000 for single taxpayers and $24,000 for married couples filing jointly), many taxpayers will have lower taxable incomes in 2018.
The Withholding Calculator is an excellent way to estimate a taxpayer’s appropriate withholding amounts for 2018. If an individual needs to make an adjustment, it is best to do so early in the year rather than during October or November. It would be difficult to make the change at a later date and have it reflect the correct amounts.
While many taxpayers will find their tax returns simplified due to the higher standard deductions, some taxpayers will still decide to itemize. Those who plan to itemize their deductions should consider four substantial tax law changes in 2018.
- State and Local Taxes (SALT) – The SALT deduction is limited to $10,000. Homeowners who live in states with substantial state income tax may have a property tax bill total over $10,000. In this case, your SALT deduction will be limited to $10,000.
- Home Mortgage Interest – The deduction for interest on a personal residence mortgage is generally limited to $1 million of debt for existing loans and $750,000 of debt on new loans.
- Miscellaneous Deductions – The TCJA repealed many deductions such as those for employee business expenses, investment expenses and tax preparation fees. Previously, most of these miscellaneous deductions were permitted if they were over 2% of adjusted gross income.
- Charitable Deductions – Gifts of cash are now deductible up to a limit that is 60% of adjusted gross income (the limit was 50% in prior years). Many CPAs are encouraging clients who desire to reduce taxes to increase their charitable deductions in 2018.
The IRS notes the Withholding Calculator does not request “personally-identifiable information, such as your name, Social Security Number, address or bank account numbers.” When using the Withholding Calculator, an individual can estimate the proper amount of his or her 2018 withholding.
If you desire to change your withholding amounts, contact your employer and complete a new IRS Form W-4. Because the average 2017 tax year refund was $2,800, many individuals who plan to use the new higher standard deductions may choose to reduce withholding and increase monthly income.
Donor Reliance on Tax Exempt Status
In Rev. Proc. 2018-32; 2018-23 IRB 1 (16 May 2018), the Service updated and superseded four Revenue Procedures and published a comprehensive guide to enable taxpayers to rely on nonprofit exempt status.
The Service regularly issues determination letters on exempt status. Donors may rely on these determination letters to support their deductions under Sec. 170(c) and Sec. 170(b)(1)(A). Under Reg. 1.170A-9(f)(5)(ii), a donor may rely on a determination letter until it is publicly revoked by the Service. An exception applies if the donor is responsible for the loss of tax-exempt status or knows that such loss of status is imminent.
The primary donor reliance method in the future will be the www.IRS.gov “Exempt Organization Select Check” tool. This electronic tool replaces the printed IRS Pub. 78, which has been discontinued.
Another useful database is the “Automatic Revocation of Exemption List”. This displays organizations that failed to file IRS Form 990, Form 990-EZ or Form 990-N for three consecutive years.
A new database, “Tax Exempt Organization Search” (TEOS), enables users to view determination letters and Forms 990 filed after January 1, 2018. An addition to reports is a “deductibility code.” This code assists taxpayers in determining whether an organization is qualified under Sec. 509(a)(1), Sec. 509(a)(2) or a subparagraph of Sec. 170(b)(1)(A).
The deductibility code assists taxpayers in determining proper gift deduction limits. These deduction limits are substantially different for public charities and private foundations.
There is a safe harbor for donors who are not foundation managers. The safe harbor applies to gifts and grants if the donor provides 25% or less of the aggregate organization support for the prior four taxable years.
There is an additional safe harbor for “unusual grants.” If a grant is an unusual size or amount, it may be excluded from the public status determination test. The donor must give cash, marketable securities or assets to further the exempt purpose of the entity. There can be no material restrictions and the donor may not be a manager or in control of the organization.
No Deduction for Quid Pro Quo Property
In Triumph Mixed Used Investments III LLC et al. v. Commissioner; No. 20412-14; T.C. Memo. 2018-65 (15 May 2018), the Tax Court denied a deduction for a gift of land to a city in exchange for certain development rights.
Triumph Mixed Used Investments III LLC (Triumph) and related companies owned a parcel of land adjacent to Lehi, Utah. After producing a master plan for commercial and residential development, Triumph agreed to deed 764 acres to Lehi as part of that plan.
Appraiser J. Philip Cook valued the 764 acres at $11,040,000. Triumph and related parties claimed a charitable deduction in that amount and did not report any consideration received. The IRS denied the deduction as a quid pro quo transaction.
The Tax Court noted the land transfer “was integral to the city council’s approval of both plans.” While Triumph claimed that any benefit was “incidental or nonexistent,” the Tax Court rejected that determination. It held that the transfer of “real property and the development credits to the city of Lehi” was in exchange for the development plan approval. Therefore, the transfer of the 764 acres did not produce a charitable deduction.
Because Triumph did not make an attempt to adjust the deduction for the consideration received and it received substantial value, the Sec. 6662(a) 20% penalty applied to the transaction.
Applicable Federal Rate of 3.4 for June — Rev. Rul. 2018-16; 2018-23 IRB 1 (16 May 2018)
The IRS has announced the Applicable Federal Rate (AFR) for June of 2018. The AFR under Section 7520 for the month of June is 3.4%. The rates for May or 3.2% or April of 3.2% 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 2018, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return. Federal rates are available by clicking here.