Washington Hotline – October – Week 4 – 2011

Senators Support Charitable Deductions
On October 18, the Senate Finance Committee held a hearing on charitable deductions.  Senate Finance Committee Chair Max Baucus (D-MT) opened the hearing with a statement of support for “rural philanthropy.”  He noted that many non-profit organizations in his home state of Montana were particularly focused on assisting those in the midst of “tough economic times.”  Sen. Baucus stated, “These partners rely on the benefits of the charitable tax deduction, which is why we must ensure the deduction is fair and effective.”

Baucus continued by stating that 86% of Americans who itemize claim a charitable deduction.  However, he also indicated that “only 27% of all Americans” benefit from charitable deductions because most taxpayers do not itemize.

The Ranking Member of the Senate Finance Committee is Sen. Orrin Hatch (R-UT).  He strongly supported the charitable deduction and opposed the White House proposal to limit tax savings from charitable gifts.  In several budgets and proposed bills, the White House has supported limiting the benefits of deductions for higher-income taxpayers by reducing the tax savings from 35% to the 28% bracket.

Sen. Hatch stated, “As state and local governments grapple with budget deficits and revenue shortfalls, Americans in crisis are turning for help in ever greater numbers to churches, charities, shelters and other social welfare groups.  Charitable donations are the lifeblood of charities and the last thing Congress should do is interrupt the blood supply.”

Finally, Sen. Charles Grassley (R-IA) is a former chair of the committee.  He agreed with Sen. Hatch and stated that “higher income taxpayers are more sensitive to changes in the tax rules.”  Grassley was concerned because “the tax increase resulting from limiting itemized deductions, including the deduction for charitable giving, will result in less money for charity.”

Several witnesses at the hearing also supported philanthropy.  Brian A. Gallagher, President and CEO of United Way, stated, “I urge the committee to preserve the charitable deduction for all donors.”  He noted that the proposed White House cap could reduce charitable giving from $2.9 billion to $5.6 billion per year.  This loss could have a very harmful affect on the ability of non-profits to serve those in need.

Independent sector President Diana Aviv echoed those same concerns.  She stated, “A 2010 study by the Center on Philanthropy at Indiana University found that 85% of high net worth households donated to basic needs charities in 2009, compared with 31% of other taxpayers.”  Aviv pointed out that charities providing assistance to the needy frequently receive gifts from higher-income donors targeted by the proposed White House reduction tax savings for charitable gifts.

Social Security Adjustments for 2012

On October 19, the Social Security Administration published a news release with increases in payments for 2012.  Based on the increase in costs this year and the economy, there will be a 3.6% cost-of-living adjustment (COLA) for 2012.  This will result in increases both in contributions for some workers and in payments for retired persons.

Those current workers with higher incomes may be required to make larger payments.  The Social Security wage limit for contributions (OASDI only) will increase from $106,800 to $110,100.  The Medicare contribution of 1.45% will continue to apply to all earnings.  Approximately 10 million workers are affected by this increased limit that changes their total contribution.

Social Security will continue to include the OASDI component of 6.2% and the Medicare portion of 1.45%, for a total of 7.65%.  This contribution is required by both the employer and the employee.  Self-employed persons will pay the total 15.3%.

The potential reduction in payments for individuals between age 62 and their full retirement age is also indexed.  The exempt portion increases from $14,160 to $14,640 per year.  During the final year prior to the full retirement age, the limit in earnings prior to the full retirement date is increased from $37,680 to $38,880.  Workers who exceed the applicable limit will lose $1 for every $2 in earnings above that amount.

The maximum payment at full retirement age will increase from $2,366 per month to $2,513 per month.  For all individuals receiving Social Security  payments, the average payout is projected to increase from $1,186 to $1,229 per month.

Estate Exclusion Rises to $5.12 Million

In Rev. Proc. 2011-52; 2011-45 IRB 1 (20 Oct 2011), the IRS published inflation adjustments for income, gift and estate taxes for 2012.

There are several changes that affect gift and estate taxes.  The applicable exclusion amount for gift and estate taxes is now indexed.  It will increase from $5 million in 2011 to $5.12 million in 2012.  The annual exclusion amount for present interest gifts will remain $13,000.

For qualified farm and ranch property, the reduction due to special use valuation under Sec. 2032A will be limited to $1,040,000.  Gifts to a non-citizen spouse are limited to $139,000.  Finally, for the extension of estate tax payments under Sec. 6166, the 2% interest portion of the estate tax is increased to $1,390,000.

Multiple changes were made to income tax provisions.  There are updated brackets for married couples filing jointly, single persons, heads of household, married filing separately and trusts.  The top 35% tax bracket will be $388,350.  For trusts, the top bracket starts at $11,650.

The “kiddie tax” exclusion will continue to be $950.  Standard deductions will also increase.  The married couple filing jointly deduction will be $11,900.  Heads of household will receive $8,700 and single persons $5,950.  The aged/blind additional deduction of $1,150 or $1,450 for single persons and heads of household will remain unchanged.

The personal exemption will increase to $3,800.  Those who qualify for expensing deductions may use a limit up to $139,000.

Finally, charitable gift limits for token gifts also will increase.  A “low cost” article is a premium for donors with the logo or other identifying information of the charity.  If a person makes a gift of $49.50 or more, the charity may transfer a “low cost” article under the applicable limit to the donor with no tax impact.

For individuals who make larger gifts, the premium may be up to 2% of the gift, but may not exceed $99.00.

Pension Limits Indexed for 2012

In Ir-2011-103 (20 Oct 2011), the IRS published the enhanced pension limits for 2012.

Elective contributions to a 401(k) or 403(b) are increased from $16,500 to $17,000.  Individuals who are age 50 and above will continue to be permitted to contribute an additional $5,500.

The IRA contribution limit is unchanged at $5,000.  For individuals who are making a contribution to a traditional IRA and are covered by a workplace plan, the phase-out limits for single persons will be $58,000 to $68,000.  Married couples filing jointly who are covered by qualified retirement plans have a phase-out range of $92,000 to $112,000.  For a married couple where one spouse is not covered, the phase-out limits are $173,000 to $183,000.

Roth IRA phase-outs will also increase.  These limits will be $173,000 to $183,000 for married couples filing jointly, or $110,000 to $125,000 for singles and heads of households.

For defined benefit plans under Sec. 415(b)(1)(A), the annual benefit limitation increases from $195,000 to $200,000.

The contribution limit for Sec. 415(c)(1)(A) plans is increased from $49,000 to $50,000.  Finally, the annual compensation limit for qualified contribution to several plans is increased from $245,000 to $250,000.

Applicable Federal Rate of 1.4% for November – Rev. Rul. 2011-25; 2011-45 IRB 1 (18 Oct. 2011)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2011.  The AFR under Sec. 7520 for the month of November will be 1.4%.  The rates for October of 1.4% or September of 2.0% 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.

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