Washington Hotline – May 14, 2013

TaxReform.Gov Seeks Your Opinion

Senate Finance Committee Chairman Max Baucus (D-MT) and House Ways and Means Chairman Dave Camp (R-MI) have conducted over 50 hearings in preparation for major tax reform. Both are committed to moving forward a significant tax reform bill during the next two years.

As part of that effort, the two legislative leaders have created a website, TaxReform.Gov, in order to ask Americans for opinions on taxes.

Baucus stated, “Now it’s time to hear from the most important stakeholders – the American people. Through the website TaxReform.Gov and Twitter all Americans will be able to weigh in and participate directly in the debate. We want to know what people think the nation’s tax system should look like and how we can make families lives easier.”

Chairman Camp continued, “The tax code is littered with special interest provisions that Washington has put in over the last 27 years. It is time to go line-by-line through the tax code and clean it up. There is no reason Americans should have to spend over six billion hours and over $160 billion every year just trying to comply with the tax code.”

Camp indicated that he also hopes Americans will “share your story and your ideas about how our tax code should work.”

TaxReform.Gov is a very straightforward website. It allows you as a taxpayer to provide a short story on taxes or suggest changes in the tax code. You also may follow @simplertaxes on Twitter.

The site received over 1,000 comments and suggestions on the tax code within the first 12 hours. It is expected that tens of thousands of Americans will offer their opinion on the tax system through TaxReform.Gov.

Editor’s Note: This is a great opportunity for all friends of philanthropy. It is most important that everyone supports the full charitable deduction. A frequently proposed method of modifying the tax code is to create a cap on itemized deductions. Friends of philanthropy should emphasize that charitable gifts are the only itemized deductions that help other people. For this reason, charitable giving should be excluded from any cap on itemized deductions. The current charitable deduction should be retained. Your editor and this organization urge all friends of philanthropy to go to TaxReform.Gov and support charitable giving.

Tax Policy Center Analyzes White House Budget

The Tax Policy Center (TPC) is a nonpartisan organization that comments on tax and other public policy issues. On May 8 it published a review and commentary on the White House fiscal year 2014 budget proposals.

1. 28% Tax Benefit Limit – President Obama’s budget proposes a limit on tax savings to the 28% bracket. Individuals in the higher brackets (such as the 39.6% bracket) who make charitable gifts and have other itemized deductions will lose part of their tax savings. This provision is designed to raise $529 billion over a decade. The report notes, “The 28% limit would reduce, but not eliminate, incentives for high-bracket taxpayers to engage in certain behaviors, such as giving to charity or taking out a bigger mortgage.”

2. Retirement Plan Limits – The White House proposed budget would create maximum levels for contributions to qualified plans. While plan balances could continue to grow, individuals who have qualified retirement plans such as IRAs, 401(k)’s and 403(b)’s that reach a certain limit would no longer be able to make deductible contributions to those plans. The plan limits would vary depending upon IRS interest rates, but could be approximately $1 million at age 40 and $3.4 million at age 62. The study notes, “The limit applies to the combined sum of all tax-preferred retirement assets, including defined-benefit pensions and Roth accounts, in addition to IRAs and 401(k)-type accounts.”

This proposed plan would raise very minimal revenue. TPC estimates it “will raise just $9.3 billion over 10 years and would affect only a very small proportion of account holders.” The negative aspect of the proposal is that it does not raise significant federal revenue and will create a “substantial compliance burden for plan administrators and taxpayers.” The administrators of defined benefit plans would need to value the plan and taxpayers would need to determine the total value of their retirement plans each year.

3. Fair Share Tax – This is also known as the “Buffett Tax.” The basic plan is to create a 30% minimum tax on upper-income persons. Initially, these individuals would receive a credit for charitable gifts. However, the credit would be limited to the tax savings from the 28% bracket and the 3% floor under the “Pease” limits would apply. After determining the charitable credit, the 30% minimum tax is phased in between $1 million and $2 million. TPC notes that “the FST would mostly affect high-income taxpayers with substantial amounts of capital gains and qualified dividends.”

4. Chained CPI – The current CPI-U that is used to adjust both entitlement payments and tax brackets “generally overstates the effect of inflation on living costs because it does not fully account for changes in consumption that households make in response to changing prices.” In the view of TPC, as some items become more expensive, consumers will shift to other items. For example, if the price of beef increases, many consumers will change their consumption to chicken.

The chained CPI reflects the decision of consumers to move from more expensive items to less expensive substitutes. It generally will result in smaller increases in entitlement benefits and federal salaries.

However, it also will increase tax revenue through lower adjustments in the federal tax brackets. TPC notes, “Because the C-CPI grows more slowly than the CPI-U, using it instead of the CPI-U to index tax parameters would reduce the growth rate of standard deductions and personal exemptions, bracket levels for determining higher tax rates, and income levels at which provisions phase in and phase out. All of those factors would raise tax revenue.”

Unrelated Business Taxable Income of Colleges and Universities

At a hearing on May 8 to discuss the recent IRS report on colleges and unrelated taxable income (UBTI), Lois G. Lerner, Director of the Exempt Organizations Division of the Internal Revenue Service, explained the IRS effort.

The IRS sent questionnaires to 400 colleges and universities in an attempt to determine whether they were correctly calculating UBTI. The report and analysis discovered significant errors in the calculation of UBTI. The IRS made adjustments for a total tax increase of approximately $90 million for the 400 colleges and universities. Most of the adjustments were related to fitness, recreation centers and sport camps, advertising, facility rentals, arenas and golf courses.

The Chairman of the House Ways and Means Committee Subcommittee on Oversight of Tax-Exempt Organizations is Rep. Charles Boustany (R-LA). He noted that colleges are only 0.5% of the charitable sector but have 11% of the revenue with approximately $160 billion received annually. Colleges also have $150 billion in endowments and other assets, which represents 21% of total charitable sector property.

Boustany noted, “The IRS found almost universal noncompliance by some of the most sophisticated organizations in the tax-exempt sector. Noncompliance included widespread calculation errors and misreporting. Ninety percent of the 34 institutions had their UBIT calculations adjusted upward for a total increase of around $90 million.”

The Ranking Member of the committee is Rep. John Lewis (D-GA). He expressed support for colleges and universities. Lewis stated, “I am honored to have many colleges and universities in my district. We have wonderful institutions in metro Atlanta – Spelman, Morehouse, Georgia State, Clark Atlanta, Georgia Tech and Emory to name just a few. They are training the next generation of scientists, doctors and engineers. They also provide many positive benefits to their local communities.”

Applicable Federal Rate of 1.2% for May — Rev. Rul. 2013-11; 2013-20 IRB 1 (18 Apr 2013)

The IRS has announced the Applicable Federal Rate (AFR) for May of 2013. The AFR under Section 7520 for the month of May will be 1.2%. The rates for April of 1.4% or March of 1.4% 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 2013, 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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