Senate tax writers on Capitol Hill continue to discuss bipartisan retirement savings bills as the House gears up for a vote on a related tax measure.

Senate tax writers on Capitol Hill continue to discuss bipartisan retirement savings bills as the House gears up for a vote on a related tax measure.

The Senate Finance Committee (SFC) held a May 14 hearing during which lawmakers on both sides of the aisle highlighted the importance of moving forward with retirement savings-related legislative efforts. While a number of related tax proposals have been introduced recently, SFC lawmakers paid particular focus to the bipartisan Retirement Enhancement Savings Bill, more commonly referred to as “RESA.”

“[T]his committee worked on a bipartisan basis to put together the [RESA],” SFC ranking member Ron Wyden, D-Ore., said during opening statements. “Our bill is all about making it easier for employers -- particularly small businesses -- to offer retirement plans to their employees,” Wyden added. “Giving those small businesses an opportunity to band together and offer a common retirement plan is a simpler and more cost-effective way of helping more people save.”

House Vote Expected on Secure Bill

Notably, the Senate’s RESA bill has many similarities to the House’s Setting Every Community Up for Retirement Enhancement (SECURE) Bill of 2019 (HR 1994). The bipartisan SECURE Bill is expected to reach the House floor for a full chamber vote in the coming days.

“We’re on track to go to the House floor this month,” Kara Getz, chief tax counsel for House Ways and Means Committee Chairman Richard Neal, DMass., has said. Getz, while speaking on May 10 at the American Bar Association (ABA) May Tax Meeting in Washington, D.C., said that the House bill is derived from a true “partnership” between Democrats and Republicans.

To that end, SFC Chairman Chuck Grassley, R-Iowa, alluded during the May 14 hearing that the Senate and House measures could soon be reconciled and enacted. “I’m hoping that the House will send its version of RESA over to us at some point this month,” Grassley said. “And, I’ll continue to work closely with Senator Wyden and other Committee members to reconcile the differences and get this important bill to the President.”

Additionally, Drew Crouch, senior tax counsel for the SFC minority, while speaking on May 10 at the ABA May Meeting, stated that there is a “high probability” the retirement bill(s) will be enacted this year. Crouch further emphasized this position by adding that that there is a “high chance retirement legislation will make it across the finish line,” in this Congress.

Retirement Savings 2.0

Meanwhile, House and Senate lawmakers are already working toward Retirement Savings “2.0,” Getz stated at the ABA May Meeting. House tax writers are “actively working on 2.0,” Getz said, adding that, “we would really like to markup a second retirement bill.”

Likewise, Grassley alluded to the Retirement Savings 2.0 initiative on May 14, noting in his
opening statement that the SFC hearing “marks the start of our work on the next round of retirement savings reforms.”

To that end, SFC members Rob Portman, R Ohio, and Ben Cardin, D-Md., on March 14 introduced
a 132-page bipartisan retirement savings tax bill. The Retirement Savings & Security Bill would
make several sweeping reforms to retirement savings.

President Donald Trump and Democratic congressional leaders have agreed to develop a $2 trillion infrastructure plan, according to Senate Minority Leader Chuck Schumer, D-N.Y.

President Donald Trump and Democratic congressional leaders have agreed to develop a $2 trillion infrastructure plan, according to Senate Minority Leader Chuck Schumer, D-N.Y.

$2 Trillion Infrastructure Plan

"There was goodwill in this meeting…which is a very good thing," Schumer told reporters at the White House on April 30 after meeting with Trump. "We agreed on a number – $2 trillion for infrastructure,"Schumer said. Further, House Speaker Nancy Pelosi, D-Calif., and Schumer both praised Trump after the meeting for his bipartisan cooperation.

The president and Democratic leaders were to meet again to discuss how to pay for the infrastructure plan, Schumer said. At that time, Trump is expected to convey his ideas on funding, Schumer added. "This was a very, very good start…and we hope it will go to a constructive conclusion."

“Pay-Fors”

Additionally, Schumer told reporters at the White House that the infrastructure plan’s "pay-fors"remained undetermined. Notably, Schumer suggested from the Senate floor on April 29 rolling back part of Republicans’ 2017 tax reform law to fund infrastructure costs.

Generally, infrastructure is considered a bipartisan priority among lawmakers. However, reaching an agreement on how to pay for the reportedly $2 trillion infrastructure plan that is still in development is expected on Capitol Hill to be an arduous task. Namely, Democrats are expected to propose scaling back certain tax cuts under the Tax Cuts and Jobs Act (TCJA) ( P.L. 115-97) to foot the infrastructure bill, which is not likely to receive GOP support.

"That’s a non-starter" Senate Majority Leader Mitch McConnell, R-Ky., told reporters at the U.S. Capitol on April 30. "This tax bill [TCJA] is what has generated this robust economy; the last thing we want to do is step on all of this growth…by repealing in effect what has generated all of this prosperity and low unemployment," McConnell said.

White House: Meeting Excellent, Productive

Meanwhile, the White House praised the April 30 infrastructure meeting between Trump and top congressional Democrats, calling it "excellent and productive," as noted in a statement released by White House Press Secretary Sarah Huckabee Sanders shortly after the meeting. Notably, however, the statement did not mention the $2 trillion figure allegedly agreed upon by Trump and Democratic congressional leadership.

"We will have another meeting in three weeks to discuss specific proposals and financing methods,"Sanders added. "The president looks forward to working together in a bipartisan way and getting things done for the American people."

Highly anticipated proposed regulations have been issued on the withholding required with respect to the disposition of certain partnership interests. The proposed regulations affect certain foreign persons that recognize gain or loss on the disposition of an interest in a partnership that is engaged in a trade or business in the United States, and persons that acquire those interests. Also affected are partnerships that directly or indirectly have foreign partners.

Highly anticipated proposed regulations have been issued on the withholding required with respect to the disposition of certain partnership interests. The proposed regulations affect certain foreign persons that recognize gain or loss on the disposition of an interest in a partnership that is engaged in a trade or business in the United States, and persons that acquire those interests. Also affected are partnerships that directly or indirectly have foreign partners.

Gain or loss from the disposition of a partnership interest is treated as income effectively connected to a U.S. trade or business, to the extent that there would have been effectively connected income to the foreign partner, if the partnership assets were sold under Code sec. 864(c)(8). The withholding rules of Code Sec. 1446(f) require 10 percent withholding on the amount realized on the disposition, absent certification that the transferor is not a nonresident alien or foreign corporation.

The proposed regulations are a companion to Proposed Reg. 1.864(c)(8)-1 issued in December 2018, on gain or loss by foreign persons on the disposition of a partnership interest.

Reporting, Withholding and Paying Tax

The proposed regulations provide rules for withholding, reporting and paying tax upon the disposition of a partnership interest in a partnership described in Code Sec. 864(c)(8) and Proposed Reg. 1.864(c)(8)-1. The proposed regulations adopt much of the temporary guidance issued in Notice 2018-29, I.R.B. 2018-16, 495, which looked to the rules for withholding on dispositions of U.S. real property interests by foreign persons in Code Sec. 1445.

The proposed regulations also:

• clarify the reporting rules for transfers of partnership interests under Code Sec. 6050(k),
• provide rules for implementing withholding by brokers on transfers of certain interests in publicly traded partnerships,
• make changes to withholding rules for distributions by publicly traded partnerships,
• make changes to reporting rules and procedures for adjusting withholding; and
• provide coordination rules to prevent overwithholding.

A transferee is required to report and pay any tax withheld by the 20th day after the date of the transfer. Form 8288, U.S. Withholding Tax Return for Dispositions by Foreign Persons of U.S. Real Property Interests, and Form 8288-A, Statement of Withholding on Dispositions by Foreign Persons of U.S. Real Property Interests.

The proposed regulations also provide rules that address a partnership’s requirement to withhold if the transferee fails to withhold.

General Rule and Exceptions

A transferee of a partnership interest must withhold a tax equal to 10 percent of the amount realized on any transfer of a partnership interest (other than certain publicly traded partnership interests), if the gain is treated as effectively connected income.

There are six exceptions to withholding under the proposed regulations:

• certification by transferor of non-foreign status,
• certification by transferor that no gain is realized on transfer by transferor,
• certification by partnership that effectively connected gain from the disposition would be less than 10 percent,
• certification by transferor that for prior three tax years its effectively connected taxable income for each year was less than 10 percent of its total distributive share of net partnership income for the year;
• certification by transferor that a nonrecognition provision applies, and
• certification by transferor that a treaty provision applies.

Publicly Traded Partnership Interests

The proposed regulations provide rules for withholding and reporting on the transfer of an interest in a publicly traded partnership (a PTP interest). The withholding obligation is generally limited to brokers that receive proceeds from the sale and act on behalf of the transferor. Once the proposed regulations are final, the suspension on withholding on a PTP interest in Notice 2018-08, I.R.B. 2018-7, 352, will end.

Notice Requirements

A foreign partner that transfers its partnership interest will need information from the partnership to compute its tax liability based on the deemed sale. Rules are provided that will facilitate the transfer of information between a foreign partner and partnership for purposes of Code Sec. 864(c)(8).

Proposed regulations provide rules on the attribution of ownership of stock or other interests for determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under the foreign base company sales income rules.

Proposed regulations provide rules on the attribution of ownership of stock or other interests for determining whether a person is a related person with respect to a controlled foreign corporation (CFC) under the foreign base company sales income rules.

The proposed regulations also provide rules to determine whether a CFC receives rents in the active conduct of a trade or business, for determining the exception from foreign personal holding company income.

Ownership Attribution

The proposed regulations provide specific rules for applying principles similar to those in the Code Sec. 958(b) constructive ownership rules when determining related person status under the foreign base company sales rules. Determining related person status is relevant for many purposes, including whether certain types of income can be characterized as subpart F foreign base company sales or service income.

A person is a related person with respect to a CFC if the person is:

• an individual who controls the CFC;
• an entity that controls or is controlled by the CFC; or
• an entity that is controlled by the same person that controls the CFC.

Under current Reg. §1.954-1(f), the Code Sec. 318(a)(3) downward attribution rules, which attribute ownership downward from the owner of an entity to an entity, apply by reference to the Code Sec. 958stock ownership rules. These rules are applied regardless of the size of the ownership interest in a partnership, estate or trust, but are applied to corporations based on a 50-percent or more ownership interest.

Based on concern that the downward attribution rules could produce inappropriate results, the proposed regulations provide that the downward attribution rule of Code Sec. 318(a)(3) and Reg. §1.958-2(d) will not apply for purposes of determining related person status under the foreign base company sales income rules.

This change does not preclude a corporation, partnership, trust, or estate from being treated as controlled by the same person or persons that control the CFC under other rules that remain applicable for the related person rules.

Additionally, an anti-abuse rule is provided with respect to the option attribution rule in Code Sec. 318(a)(4). The option attribution rule will not be applied to treat a person with an option as owning the stock or equity interest for purposes of the related person rule if the principal purpose of using the option was to cause a person to be treated as a related person.

The proposed regulations also incorporate a similar rule issued in Notice 2007-9, 2007-1 CB 401. The rule applies if the principal purpose for the use of an option is to qualify dividends, interest, rents or royalties paid by a foreign corporation for the Code Sec. 954(c)(6) CFC look-through exception from foreign personal holding company income. The rule is proposed to apply for tax years of CFCs beginning after December 31, 2006, and ending before the date that final regulation are published in the Federal Register, and for tax year of U.S. shareholders in which or with which such tax years end.

Foreign Personal Holding Company Rules

The proposed regulations modify the foreign personal holding company rules on amounts paid or incurred by a CFC in connection with the CFC’s rental income and the active rents exception. Rents are excluded from foreign personal holding company income if they are:

• received from a person other than a related person; and
• from the active conduct of a trade or business.

If rents are from leasing property as a result of marketing activities, there must be a substantial marketing organization in order to meet the active trade or business test. Under a safe harbor, an organization is substantial if active leasing expenses equal or exceed 25 percent of adjusted leasing profit. If the CFC receives rents from property it does not own, the substantiality of the organization is determined net of those rent payments.

The propose regulations extend the rule to apply to royalties, in addition to rents. As a result, the substantiality of the organization is determined under the safe harbor, net of the rents or royalties paid or incurred by the lessor CFC, for the right to use the property (or a component part of the property) that generated the rental income.

Applicability Date

The proposed regulations are generally proposed to apply to tax years of CFCs ending on or after the date the final regulations are published in the Federal Register, and for tax year of U.S. shareholders in which or with which such tax years end.

Final regulations have been issued on transactions of U.S. taxpayers that have qualified business units (QBUs) with functional currency other than the U.S. dollar.

Final regulations have been issued on transactions of U.S. taxpayers that have qualified business units (QBUs) with functional currency other than the U.S. dollar. Specifically, the final regulations:

• cover combinations and separations of QBUs subject to Code Sec. 987 (Reg. 1.987-2 and Reg. 1. 987-4),
• cover recognition and deferral of foreign currency gain or loss with respect to a QBU subject to Code Sec. 987 in connection with certain QBU terminations and other transactions involving partnerships (Reg. 1. 987-12), and 
• withdraw Temporary regulations that determine a partner’s share of assets and liabilities of a Code Sec. 987 aggregate partnership (Temporary Reg. 1.987-7T). In general, the regulations prevent the selective recognition of Code Sec. 987 gain or loss.

Applicability Dates

The IRS declined to extend the applicability of these provisions. The final regulations retain the applicability dates of the temporary regulations, as extended by IRS guidance. The final regulations under Reg. 1.987-2 and Reg. 1. 987-4 generally apply to tax years beginning on or after the day that is three years after the first day of the first tax year following December 7, 2016. The final regulations under Reg. 1. 987-12 generally apply to any deferral event or outbound loss event that occurs on or after January 6, 2017.

Medicaid waiver payments were earned income, even though IRS Notice 2014-7 treated them as “difficulty of care” foster care payments that were excluded from gross income. The Tax Court held that excluding the payments from earned income would improperly deny the taxpayers’ earned income credit and the additional child tax credit.

Medicaid waiver payments were earned income, even though IRS Notice 2014-7 treated them as “difficulty of care” foster care payments that were excluded from gross income. The Tax Court held that excluding the payments from earned income would improperly deny the taxpayers’ earned income credit and the additional child tax credit.

IRS Excludes Medicaid Waiver Payments From Gross Income

The taxpayers received payments under a state Medicaid waiver program for proving care to their adult disabled children in the family home. IRC §131 excludes foster care payments from gross income, but it applies only when the foster individuals are placed in the caregiver’s home by the state. Despite the statutory language, however, Notice 2014-7 treats Medicaid waiver payments as excludable “difficulty of care” foster payments. Thus, the taxpayers excluded the payments from their gross income.

Gross Income Vs. Earned Income

However, the taxpayers included the payments in their earned income, which allowed them to claim the earned income credit and the additional child tax credit. The IRS denied the credits, arguing that only gross income can be earned income. The Tax Court sided with the taxpayers.

No Deference For Notice 2014-7

The court concluded that Notice 2014-7 was entitled to little if any deference for two reasons:

1. The taxpayers’ payments did not satisfy the plain statutory definition of excludable foster care payments.
2. The notice reversed the IRS’s long-held position that payments like these were not foster care payments

Although the Medicaid waiver payments were not covered by §131, they absolutely fell within the statutory definition of “earned income.” The IRS could not rely on Notice 2014-7 to deny credits that Congress clearly intended to provide for earned income.

IRS, Not Congress, Provided Double Benefit

Finally, the court recognized that the taxpayers were receiving an unintended double benefit, because they were getting tax credits that were based on tax-free income. However, this was only because the IRS:

1. unilaterally decided to exclude Medicaid waiver
   payments from gross income, and
2. failed to argue that if the Tax Court included the payments in earned income, they should also be included in gross income.

The IRS recently announced that inflation is increasing many dollar amounts in the Tax Code for 2012.  For taxpayers, the inflation adjustments may help reduce their overall tax liability in 2012.

Inflation adjustments

Many provisions in the Tax Code are required to be adjusted annually for inflation. These include various deductions, exemptions and exclusion amounts.  The tax law also requires that the individual income tax brackets be adjusted annually for inflation.  Low inflation in 2009 and 2010 resulted in many of the provisions experiencing no increases for 2010 and 2011.

Next year is different. In October, the IRS announced that inflation is running at just over 3.8 percent. In response, the IRS adjusted a number of amounts in the Tax Code upward for 2012.

Retirement accounts

401(k) plans. For 2012, the maximum amount an individual can contribute tax-free to a 401(k) plan increases $500 from $16,500 to $17,000.  However, some 401(k) plans limit maximum contributions to levels below the ceiling in the Tax Code.

IRAs. The deduction for taxpayers making contributions to a traditional IRA is phased out for single individuals and heads of households who are covered by a workplace retirement plan and whose modified adjusted gross incomes fall within certain ranges. For 2012, the income phaseout range starts at $58,000 and ends at $68,000, up from $56,000 and $66,000, respectively, for 2011.  For married couples filing jointly, in which the spouse who makes the IRA contribution is covered by a workplace retirement plan, the income phaseout range for 2012 starts at $92,000 and ends at $112,000, up from $90,000 and $110,000, respectively, for 2011.  For an IRA contributor who is not covered by a workplace retirement plan and is married to someone who is covered, the deduction is phased out for 2012 if the couple’s income is between $173,000 and $183,000, up from $169,000 and $179,000, respectively, for 2011.

Roth IRAs are subject to similar rules. The AGI limit for maximum Roth IRA contributions for a married couple filing a joint return for 2012 is $173,000, an increase of $4,000 from 2011. The AGI limitation for all other taxpayers (other than married taxpayers filing separate returns) increases from $107,000 for 2011 to $110,000 for 2012.

Saver’s credit.  The Code Sec. 25B credit rewards eligible individuals with a tax credit for contributing to a retirement plan or an IRA.  For 2012, the AGI limit for the “saver’s credit” increases for single individuals to $28,750, an increase of $500 from 2011. The AGI limit for married couples filing joint returns increases from $56,500 for 2011 to $57,500 for 2012.

Individual income tax brackets

Inflation also impacts the individual income tax rate brackets (which are 10, 15, 25, 28, 33, and 35 percent, respectively, for 2011 and 2012).  Indexing of the income tax rate brackets effectively lowers tax bills by including more of an individual’s income in lower brackets.

More inflation adjustments

Standard deduction. Taxpayers who elect not to itemize deductions use the standard deduction amount. The standard deduction increases by $500 for married couples filing a joint return from $11,400 for 2011 to $11,900 for 2012.   The standard deduction for single individuals increases from $5,700 for 2011 to $5,950 for 2012.

Personal exemption.  Taxpayers may claim a personal exemption deduction (and an exemption deduction for each person they claim as a dependent). The amount of the personal exemption and the dependency exemption increases from $3,700 for 2011 to $3,800 for 2012.  The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (2010 Tax Relief Act) repealed the personal exemption phaseout for higher income taxpayers for 2011 and 2012.

Estate tax.  The 2010 Tax Relief Act provided that the basic exclusion amount for determining the amount of the unified credit against estate tax for estates of decedents dying after December 31, 2009 is $5 million. The $5 million amount is adjusted for inflation for tax years beginning after December 31, 2011. For 2012, the inflation-adjusted amount is $5,120,000.

Gift tax exclusion.  For 2012, you can give up to $13,000 to any person without incurring gift tax. Married couples can gift up to $26,000 tax-free to any person. There is no limit on the number of individuals you can make the $13,000 ($26,000) gift. The $13,000 and $26,000 amounts are unchanged from 2011.

If you have any questions about these or other inflation adjustments, please contact our office.

In light of the IRS’s new Voluntary Worker Classification Settlement Program (VCSP), which it announced this fall, the distinction between independent contractors and employees has become a “hot issue” for many businesses. The IRS has devoted considerable effort to rectifying worker misclassification in the past, and continues the trend with this new program.  It is available to employers that have misclassified employees as independent contractors and wish to voluntarily rectify the situation before the IRS or Department of Labor initiates an examination.

The distinction between independent contractors and employees is significant for employers, especially when they file their federal tax returns. While employers owe only the payment to independent contractors, employers owe employees a series of federal payroll taxes, including Social Security, Medicare, Unemployment, and federal tax withholding. Thus, it is often tempting for employers to avoid these taxes by classifying their workers as independent contractors rather than employees.

If, however, the IRS discovers this misclassification, the consequences might include not only the requirement that the employer pay all owed payroll taxes, but also hefty penalties. It is important that employers be aware of the risk they take by classifying a worker who should or could be an employee as an independent contractor.

“All the facts and circumstances”

The IRS considers all the facts and circumstances of the parties in determining whether a worker is an employee or an independent contractor. These are numerous and sometimes confusing, but in short summary, the IRS traditionally considers 20 factors, which can be categorized according to three aspects: (1) behavioral control; (2) financial control; (3) and the relationship of the parties.

Examples of behavioral and financial factors that tend to indicate a worker is an employee include:

• The worker is required to comply with instructions about when, where, and how to work;
• The worker is trained by an experienced employee, indicating the employer wants services performed in a particular manner;
• The worker’s hours are set by the employer;
• The worker must submit regular oral or written reports to the employer;
• The worker is paid by the hour, week, or month;
• The worker receives payment or reimbursement from the employer for his or her business and traveling expenses; and
• The worker has the right to end the employment relationship at any time without incurring liability.

In other words, any existing facts or circumstances that point to an employer’s having more behavioral and/or financial control over the worker tip the balance towards classifying that worker as an employee rather than a contractor. The IRS’s factors do not always apply, however; and if one or several factors indicate independent contractor status, but more indicate the worker is an employee, the IRS may still determine the worker is an employee.

Finally, in examining the relationship of the parties, benefits, permanency of the employment term, and issuance of a Form W-2 rather than a Form 1099 are some indicators that the relationship is that of an employer–employee.

Conclusion

Worker classification is fact-sensitive, and the IRS may see a worker you may label an independent contractor in a very different light. One key point to remember is that the IRS generally frowns on independent contractors and actively looks for factors that indicate employee status.

Please do not hesitate to call our offices if you would like a reassessment of how you are currently classifying workers in your business, as well as an evaluation of whether IRS’s new Voluntary Classification Program may be worth investigating.

Charitable contributions traditionally peak at the end of the year-end. While tax savings may not be your prime motivator for making a gift to charity, your donation could help your tax bottom-line for 2015. As with many tax incentives, the rules for tax-deductible charitable contributions are complex, especially the rules for substantiating your donation. Also important to keep in mind are some enhanced charitable giving incentives scheduled to expire at the end of 2015.

Year-end charitable giving can benefit your 2015 tax bottom-line

Charitable contributions traditionally peak at the end of the year-end. While tax savings may not be your prime motivator for making a gift to charity, your donation could help your tax bottom-line for 2015. As with many tax incentives, the rules for tax-deductible charitable contributions are complex, especially the rules for substantiating your donation. Also important to keep in mind are some enhanced charitable giving incentives scheduled to expire at the end of 2015.

Tips

The IRS has posted tips for deducting charitable contributions on its website. The tips are a good refresher of the fundamental rules for deducting charitable contributions:

• To be tax-deductible, a contribution must be made to a qualified organization.
• To deduct a charitable contribution, you must file Form 1040 and itemize deductions on Schedule A.
• If you receive a benefit because of your contribution such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.
• Donations of clothing and household items must generally be in good used condition or better to be tax-deductible.
• Special rules apply to donations of motor vehicles.
• Many donations must be substantiated; the substantiation rules vary for different donations.

Qualified organizations

Some individuals are surprised to learn that their donation is not tax-deductible because the recipient is not a qualified charitable organization. Generally, churches, temples, synagogues, mosques, and other religious organizations are qualified charitable organizations. Nonprofit community service, educational, and health organizations are also generally qualified charitable organizations. Special rules apply to foreign charities. If you have any questions whether the organization is a qualified charitable organization, please contact our office.

Substantiation rules

Unless a charitable contribution is properly substantiated, the IRS may deny your deduction.

Regardless of the amount, to deduct a contribution of cash, check, or other monetary gift, you must maintain a bank record, payroll deduction records or a written communication from the organization containing the name of the organization, the date of the contribution and amount of the contribution. Remember, this rule applies to all cash contributions, even contributions of small monetary amounts. The IRS will not accept certain personal records. For example, you cannot substantiate a contribution by reference to a diary or notes made at the time of the donation.

In recent years, text message donations have grown in popularity. For text message donations, a telephone bill will meet the record-keeping requirement if it shows the name of the receiving organization, the date of the contribution, and the amount given.

To claim a deduction for contributions of cash or property equaling $250 or more you must have a bank record, payroll deduction records or a written acknowledgment from the qualified organization showing the amount of the cash and a description of any property contributed, and whether the organization provided any goods or services in exchange for the gift.

One document may satisfy both the written communication requirement for monetary gifts and the written acknowledgement requirement for all contributions of $250 or more. If your total deduction for all noncash contributions for the year is over $500, you must complete and attach IRS Form 8283, Noncash Charitable Contributions, to your return.

Additional rules apply for donations valued at more than $5,000. These donations generally require an appraisal and you must advise the IRS of that appraisal by filing a special form.

Expiring provisions

Under current law, certain IRA owners can directly transfer tax-free, up to $100,000 annually from the IRA to a qualified charitable organization. The benefit is limited. The IRA owner must be age 70 ½ or older. Additionally, the contribution does not qualify for the deduction for charitable donations. To qualify, the IRA funds must be contributed directly by the IRA trustee to the qualified charitable organization. You can also take advantage of this tax incentive if you itemize or do not itemize deductions.

Unless extended, this incentive will have officially expired after December 31, 2014. It is unclear if Congress will extend the incentive retroactively for 2015 or beyond. If you are considering a charitable contribution from your IRA, please contact our office so we can review the rules in detail.

Several other enhanced charitable giving incentives will no longer be available for the 2015 tax year and beyond. They include special rules for contributions of food inventory.

Clothing and household items

Cleaning out your closet can help generate year-end tax savings. However, not all charitable contributions of clothing and household items are deductible. Generally, clothing and household items donated to a charitable organization must be in good used or better condition. Other rules also apply to donations of clothing and household items. Properly valuing the items to withstand any IRS examination is also important.

Motor vehicles and other types of donations

The tax deduction for a motor vehicle, boat or airplane donated to charity is fraught with complexity. The substantiation requirements depend on the amount of your claimed deduction. If you are considering donating a motor vehicle, boat or airplane to charity, please contact our office so we can help you navigate the substantiation rules to maximize your tax benefits.

The rules for donations of conservation easements, intellectual property and other items likewise require expert planning. Otherwise, you could miss the tax benefit.

Limitations

The Tax Code includes a number of provisions limiting tax-deductible contributions. Limitations may be based on the individual’s income, the type of donation and the nature of the recipient organization. Our office can describe how these limitations may impact you.

As in past years, a provision known as the limitation on itemized deductions applied to higher-income individuals. This provision reduces the total amount of a higher-income individual's allowable deductions; however, some deductions are not impacted. For purposes of the limitation on itemized deduction, a taxpayer's total, itemized deductions do not include deductions for medical expenses, investment interest expenses, casualty or theft losses, and allowable wagering losses; charitable deductions do count, however.

If you have any questions about the mechanics of tax-deductible charitable contributions, please contact our office.

Under a flexible spending arrangement (FSA), an amount is credited to an account that is used to reimburse an employee, generally, for health care or dependent care expenses. The employer must maintain the FSA. Amounts may be contributed to the account under an employee salary reduction agreement or through employer contributions.

Use-it or lose-it

The general rule is that no contribution or benefit from an FSA may be carried over to a subsequent plan year. Unused benefits or contributions remaining at the end of the plan year (or at the end of a grace period) are forfeited. This is known as the “use it or lose it” rule. The plan cannot pay the unused benefits back to the employee, and cannot carry over the unused benefits to the following calendar year.

Example. An employer maintains a cafeteria plan with a health FSA. The plan does not have a grace period. Arthur, an employee, contributes $250 a month to the FSA, or a total of $3,000 for the calendar year. At the end of the year (December 31), Arthur has incurred medical expenses of only $1,200 and makes claims for those expenses. He has $1,800 of unused benefits. Under the “use it or lose it” rule, Arthur forfeits the $1,800. 

Grace period

Because the “use it or lose it” rule seemed harsh, the IRS gave employers the option to provide a grace period at the end of the calendar year. The grace period may extend for 2½ months, but must not extend beyond the 15^th day of the third month following the end of the plan year. Medical expenses incurred during the grace period may be reimbursed using contributions from the previous year.

Example. Beulah contributes $3,000 to her health FSA for 2010. The FSA is on January 1 through December 31 calendar year.  On December 31, 2010, Beulah has $1,800 of unused contributions. Her employer provides a grace period through March 15, 2011. On January 20, 2011, Beulah incurs $1,500 of additional medical expenses. Because these expenses were incurred during the grace period, Beulah can be reimbursed the $1,500 from her 2010 contributions. On March 15, 2011, she has $300 of unused benefits from 2010 and forfeits this amount.

Exceptions

There are other exceptions to the prohibition against deferred compensation within the operation of an FSA. A cafeteria plan is permitted, but not required, to reimburse employees for orthodontia services before the services are provided, even if the services will be provided over a period of two years or longer. The employee must be required to pay in advance to receive the services. 

Another exception is provided for durable medical equipment that has a useful life extending beyond the health FSA’s period of coverage (the calendar year, plus any grace period). For example, a health FSA is permitted to reimburse the cost of a wheelchair for an employee.

If you have any questions on setting up an FSA, whether as an employer or an employee, and which benefits must be covered and which are optional, please do not hesitate to call this office.

When an individual dies, certain family members may be eligible for Social Security benefits. In certain cases, the recipient of Social Security survivor benefits may incur a tax liability.

Family members

Family members who can collect benefits include children if they are unmarried and are younger than 18 years old; or between 18 and 19 years old, but in an elementary or secondary school as full-time students; or age 18 or older and severely disabled (the disability must have started before age 22).  If the individual has enough credits, Social Security pays a one-time death benefit of $255 to the decedent’s spouse or minor children if they meet certain requirements.

Benefit amount

The benefit amount is based on the earnings of the decedent.  The more the decedent paid into Social Security, the larger the benefit amount. Social Security uses the decedent’s basic benefit amount and calculates what percentage survivors may receive. That percentage depends on the age of the survivors and their relationship to the decedent. Children, for example, receive 75 percent of the decedent’s benefit amount. 

Taxation

The person who has the legal right to receive Social Security benefits must determine whether the benefits are taxable. For example, if a taxpayer receives checks that include benefits paid to the taxpayer and the taxpayer's child, the child's benefits are not considered in determining whether the taxpayer's benefits are taxable. Instead, one half of the portion of the benefits that belongs to the child must be added to the child's other income to see whether any of those benefits are taxable to the child.

Social security benefits are included in gross income only if the recipient's "provisional income" exceeds a specified amount, called the "base amount" or "adjusted base amount."  There are two tiers of benefit inclusion. A 50-percent rate is used to figure the taxable part of income that exceeds the base amount but does not exceed the higher adjusted base amount. An 85-percent rate is used to figure the taxable part of income that exceeds the adjusted base amount.

Up to 50 percent of Social Security benefits could be included in taxable income if a recipient's provisional income is more than the following base amounts:

--$25,000 for single individuals, qualifying surviving spouses, heads of household, and married individuals who live apart from their spouse for the entire tax year and file a separate return; and

--$32,000 for married individuals filing a joint return;

--zero for married individuals who do not file a joint return and do not live apart from their spouse during the entire tax year

Up to 85 percent of benefits could be included in taxable income if a recipient's provisional income is more than the following adjusted base amounts:

--$34,000 for single individuals, qualifying surviving spouses, heads of household, and married individuals who live apart from their spouse for the entire tax year and file a separate return; and

--$44,000 for married individuals filing a joint return;

--zero for married individuals who do not file a joint return and do not live apart from their spouse during the entire tax year.

If the taxpayer's provisional income does not exceed the base amount, no part of Social Security benefits will be taxed. For taxpayers whose income exceeds the base amount, but not the higher adjusted base amount, the amount of benefits that must be included in income is the lesser of:

--One-half of the annual benefits received; or

--One-half of the amount that remains after subtracting the appropriate base amount from the taxpayer's provisional income.

Taxpayers whose provisional income exceeds the adjusted base amount must include in income the lesser of:

--85 percent of the annual benefits received; or

--85 percent of the excess of the taxpayer's provisional income over the applicable adjusted base amount plus the smaller of: (a) the amount calculated under the 50-percent rules above, or (b) one-half of the difference between the taxpayer's applicable adjusted base amount and the applicable base amount. One-half of the difference between the base amount and the adjusted base amount is $6,000 for married taxpayers filing jointly and $4,500 for other taxpayers. For taxpayers who are married, not living apart from their spouse, and filing separately, the amount will always be zero.

If you have any questions about the taxation of Social Security benefits, please contact our office.