Wednesday June 19, 2013
Washington News
Camp Opposes Charitable Deduction Cap
House Ways and Means Committee Chair Dave Camp (R-MI) spoke June 12th at the Federal Policy Groups 2013 Tax, Budget, and Legislative Policy Seminar. At the Washington conference, Camp explained the tax reform process and also responded to questions. When asked about the White House proposal to cap charitable deduction tax benefits at the 28% bracket, Camp replied, "I think it is important not to cap that area."
As part of his address, Camp explained many of the steps that have been taken toward major tax reform this year.
1. January – The financial products tax proposals were introduced.
2. February – Speaker of the House John Boehner (R-OH) reserved H.R. 1 as the bill number for tax reform. This is a symbolic action by the Speaker that shows tax reform to be a high priority for this year.
3. March – The small business and pass-through draft provisions were released. These would change the taxation for partnerships, subchapter S corporations and other small businesses.
4. Hearings – During January through May there were multiple hearings on charitable contribution deductions, the mortgage interest deduction, state and local tax deductions and other similar topics.
5. Working Groups – The members of both parties on the House Ways and Means Committee were assigned to 11 different working groups. Each group is seeking bipartisan input on a specific area of tax reform.
6. May – Senate Finance Committee Chairman Max Baucus (D-MT) and Camp initiated a "Write Rosty" campaign. This is named after Rep. Dan Rostenkowski who was Chair of the House Ways and Means Committee during the 1986 tax reform. The two leaders created taxreform.gov and @simplertaxes. Through the website and Twitter they have received ideas and suggestions from over 9,000 taxpayers.
7. May – Camp met with Republican freshman and Ways and Means Committee Members from both parties to discuss tax reform.
Camp acknowledged that there are major challenges to tax reform. He states that there still is a long path to a completed tax reform bill. He outlined three major problems for specific segments of America that are reasons for tax reform.
1. Public Companies – The tax code is extremely complex and is a major "barrier to success" that may cause American companies to fall behind international competitors.
2. Families – The tax code is "too complex, too costly and too time consuming." For example, there are 15 different provisions that could create education tax savings. There are 90 pages of explanation for these provisions. The typical family with students might quote the brilliant physicist Albert Einstein, who said, "The hardest thing in the world to understand is income taxes."
3. Small Businesses – The "mind-numbing maze of tax rules" require businesses to spend extensively for accounting assistance and live with the threat of an audit.
Camp concluded that the tax code is a "wet blanket on the economy" and in dire need of repair. He stated, "Fixing our broken tax code means it will be more conducive to innovation, investment and sustained job creation. We will see paychecks start to rise again and we will safeguard the American dream for generations to come."
Editor's Note: Camp and Baucus announced this week that they will conduct town hall meetings in Michigan and Montana over the summer. Citizens will have a direct opportunity to discuss their feelings about taxes. The schedule and locations will be announced by their staff.
The Congressional Budget Office (CBO) reports that the nation has now reached the $16.7 trillion federal debt limit. During the first eight months of this fiscal year, the deficit was $626 billion. With the tax savings from increased taxes and budget sequestration, the CBO projects that the September 30 deficit number will be $642 billion. This is down substantially from the $1.09 trillion deficit the prior year.
The budget numbers are improved because revenues are up 15% to $1.8 trillion. These revenues are increased because of higher tax rates and modest economic growth. In addition, due to the sequestration of the budget, federal spending is expected to increase 0.8% this year.
The last budget surplus occurred in fiscal year 2001.
Editor's Note: The government will be able to survive on internal borrowing from pension funds until the end of September. At that time it will be necessary to negotiate an increase in the debt limit. The White House would prefer an increase with no other provisions. However, Speaker of the House Boehner has proposed that the amount of the debt limit increase be equal to additional budget reductions. Given the improving economy and budget picture, it is possible that there will be a budget compromise in late September or early October.
As part of the budget reform process, the Senate Finance Committee staff has prepared a comprehensive report that summarizes the potential changes that have been discussed in Senate hearings. These changes cover charitable deductions, business activities of nonprofits, political activities and general nonprofit issues.
1. Credit – The charitable deduction could be converted from a deduction to a 15% credit. This would make gifts more favorable for lower-income taxpayers.
2. Deduction Cap – The White House has proposed limiting deduction tax benefits to the 28% bracket. Another option for a cap would be a flat deduction limit such as $50,000.
3. 2% Floor – Some hearing witnesses have suggested that there could be a 2% floor on charitable deductions. Only the itemized deductions in excess of that amount would be permitted.
4. PEASE Limits – The PEASE limits create a reduced itemized deduction by 3% of the amount over a floor. This can impact philanthropic individuals in states with no state income tax. One option is to exempt charitable gifts from the PEASE limit.
5. April 15 Deadline – Another potential way of increasing charitable gifts is to allow gifts up until April 15 to qualify for the prior year.
6. Noncash Gifts – Gifts of appreciated property are generally deductible at fair market value. A potential change is to require these items to be deductible only at cost basis.
7. Conservation Easements – Several witnesses have suggested that there should be stricter limits on qualified property. In addition, there could be IRS audits of conservation charities to ensure that they are properly enforcing conservation easements.
1. Medical Centers – Proposals have been advanced to create minimum levels of required charity care.
2. Expanded UBIT – The unrelated business income tax definitions for related use and regularly carried on could be made more stringent.
1. Political Actions – Sec. 501(c)(4) organizations could have more stringent limits on their political activity.
2. Disclosure – The amounts and type of expenditures for lobbying and other political purposes could be subject to greater disclosure.
1. Excise Tax – Private foundations presently are subject to a 1% or 2% excise tax on income. This system would be combined into a single tax at 1.4%.
2. Endowment Taxes – If charities did not spend a certain percentage of endowment, there would be an excise tax.
3. Endowments – There would be a minimum 5% expenditure requirement.
4. Donor Advised Funds – There would be a minimum 5% distribution requirement.
5. Executive Compensation – There could be more specific definitions that explain the level of compensation that constitutes an impermissible private benefit.
Editor's Note: The Senate Finance Committee staff has prepared a laundry list of potential changes. Very few of these are likely to be enacted. However, they do show some of the discussion topics for the committee as it prepares for tax reform. The study by the staff also shows the commitment of Sen. Baucus to moving forward with a tax bill this year.
The IRS has announced the Applicable Federal Rate (AFR) for June of 2013. The AFR under Section 7520 for the month of June will be 1.2%. The rates for May of 1.2% or April 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.
As part of his address, Camp explained many of the steps that have been taken toward major tax reform this year.
1. January – The financial products tax proposals were introduced.
2. February – Speaker of the House John Boehner (R-OH) reserved H.R. 1 as the bill number for tax reform. This is a symbolic action by the Speaker that shows tax reform to be a high priority for this year.
3. March – The small business and pass-through draft provisions were released. These would change the taxation for partnerships, subchapter S corporations and other small businesses.
4. Hearings – During January through May there were multiple hearings on charitable contribution deductions, the mortgage interest deduction, state and local tax deductions and other similar topics.
5. Working Groups – The members of both parties on the House Ways and Means Committee were assigned to 11 different working groups. Each group is seeking bipartisan input on a specific area of tax reform.
6. May – Senate Finance Committee Chairman Max Baucus (D-MT) and Camp initiated a "Write Rosty" campaign. This is named after Rep. Dan Rostenkowski who was Chair of the House Ways and Means Committee during the 1986 tax reform. The two leaders created taxreform.gov and @simplertaxes. Through the website and Twitter they have received ideas and suggestions from over 9,000 taxpayers.
7. May – Camp met with Republican freshman and Ways and Means Committee Members from both parties to discuss tax reform.
Camp acknowledged that there are major challenges to tax reform. He states that there still is a long path to a completed tax reform bill. He outlined three major problems for specific segments of America that are reasons for tax reform.
1. Public Companies – The tax code is extremely complex and is a major "barrier to success" that may cause American companies to fall behind international competitors.
2. Families – The tax code is "too complex, too costly and too time consuming." For example, there are 15 different provisions that could create education tax savings. There are 90 pages of explanation for these provisions. The typical family with students might quote the brilliant physicist Albert Einstein, who said, "The hardest thing in the world to understand is income taxes."
3. Small Businesses – The "mind-numbing maze of tax rules" require businesses to spend extensively for accounting assistance and live with the threat of an audit.
Camp concluded that the tax code is a "wet blanket on the economy" and in dire need of repair. He stated, "Fixing our broken tax code means it will be more conducive to innovation, investment and sustained job creation. We will see paychecks start to rise again and we will safeguard the American dream for generations to come."
Editor's Note: Camp and Baucus announced this week that they will conduct town hall meetings in Michigan and Montana over the summer. Citizens will have a direct opportunity to discuss their feelings about taxes. The schedule and locations will be announced by their staff.
Debt Limit Reached
The Congressional Budget Office (CBO) reports that the nation has now reached the $16.7 trillion federal debt limit. During the first eight months of this fiscal year, the deficit was $626 billion. With the tax savings from increased taxes and budget sequestration, the CBO projects that the September 30 deficit number will be $642 billion. This is down substantially from the $1.09 trillion deficit the prior year.
The budget numbers are improved because revenues are up 15% to $1.8 trillion. These revenues are increased because of higher tax rates and modest economic growth. In addition, due to the sequestration of the budget, federal spending is expected to increase 0.8% this year.
The last budget surplus occurred in fiscal year 2001.
Editor's Note: The government will be able to survive on internal borrowing from pension funds until the end of September. At that time it will be necessary to negotiate an increase in the debt limit. The White House would prefer an increase with no other provisions. However, Speaker of the House Boehner has proposed that the amount of the debt limit increase be equal to additional budget reductions. Given the improving economy and budget picture, it is possible that there will be a budget compromise in late September or early October.
Senate Finance Committee Charitable Reform Options
As part of the budget reform process, the Senate Finance Committee staff has prepared a comprehensive report that summarizes the potential changes that have been discussed in Senate hearings. These changes cover charitable deductions, business activities of nonprofits, political activities and general nonprofit issues.
Charitable Deductions
1. Credit – The charitable deduction could be converted from a deduction to a 15% credit. This would make gifts more favorable for lower-income taxpayers.
2. Deduction Cap – The White House has proposed limiting deduction tax benefits to the 28% bracket. Another option for a cap would be a flat deduction limit such as $50,000.
3. 2% Floor – Some hearing witnesses have suggested that there could be a 2% floor on charitable deductions. Only the itemized deductions in excess of that amount would be permitted.
4. PEASE Limits – The PEASE limits create a reduced itemized deduction by 3% of the amount over a floor. This can impact philanthropic individuals in states with no state income tax. One option is to exempt charitable gifts from the PEASE limit.
5. April 15 Deadline – Another potential way of increasing charitable gifts is to allow gifts up until April 15 to qualify for the prior year.
6. Noncash Gifts – Gifts of appreciated property are generally deductible at fair market value. A potential change is to require these items to be deductible only at cost basis.
7. Conservation Easements – Several witnesses have suggested that there should be stricter limits on qualified property. In addition, there could be IRS audits of conservation charities to ensure that they are properly enforcing conservation easements.
Business Activities of Nonprofits
1. Medical Centers – Proposals have been advanced to create minimum levels of required charity care.
2. Expanded UBIT – The unrelated business income tax definitions for related use and regularly carried on could be made more stringent.
Political Activity
1. Political Actions – Sec. 501(c)(4) organizations could have more stringent limits on their political activity.
2. Disclosure – The amounts and type of expenditures for lobbying and other political purposes could be subject to greater disclosure.
General Nonprofit
1. Excise Tax – Private foundations presently are subject to a 1% or 2% excise tax on income. This system would be combined into a single tax at 1.4%.
2. Endowment Taxes – If charities did not spend a certain percentage of endowment, there would be an excise tax.
3. Endowments – There would be a minimum 5% expenditure requirement.
4. Donor Advised Funds – There would be a minimum 5% distribution requirement.
5. Executive Compensation – There could be more specific definitions that explain the level of compensation that constitutes an impermissible private benefit.
Editor's Note: The Senate Finance Committee staff has prepared a laundry list of potential changes. Very few of these are likely to be enacted. However, they do show some of the discussion topics for the committee as it prepares for tax reform. The study by the staff also shows the commitment of Sen. Baucus to moving forward with a tax bill this year.
Applicable Federal Rate of 1.2% for June -- Rev. Rul. 2013-12; 2013-23 IRB 1 (16 May 2013)
The IRS has announced the Applicable Federal Rate (AFR) for June of 2013. The AFR under Section 7520 for the month of June will be 1.2%. The rates for May of 1.2% or April 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.
Published June 14, 2013
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