Tax Proposals by Sanders and Bush

Presidential candidates Bernie Sanders and Jeb Bush released new tax proposals this week. Vermont Senator Sanders disclosed his strategy for covering the cost of his comprehensive healthcare plan. Former Florida Governor Bush outlined a new education reform plan.

Sanders released his tax plan for a universal healthcare proposal. The release was just before the recent Democratic debate in Charleston, SC. Sanders stated that his healthcare plan will cost $1.38 trillion each year.

There are seven major funding components for Sanders’ healthcare plan.

Bush proposes a significant change in funding for education. He recommends a transition from the current Sec. 529 plans into a new Education Savings Account (ESA). The ESA will be similar to the Sec. 529 plan because it will permit tax-free growth of the fund and distributions for educational purposes.

For children from low-income families, there also will be a charitable deduction for gifts to an ESA. In addition, the current $22 billion per year of federal education dollars will be used to allocate a $2,500 annual scholarship to all ESAs for low-income families.

Editor’s Note: As an educational service to our readers, your editor will cover tax proposals by candidates of both parties. Previous notes have discussed tax proposals by eight major candidates from the two parties.

IRS Identity Theft Fact Sheet

Each January the IRS publishes a fact sheet for identity theft victims. In FS-2016-3 the IRS stated, “The IRS knows identity theft can be frustrating and confusing for victims. When it comes to tax-related identity theft, the Internal Revenue Service wants to resolve cases as quickly as possible. The IRS has worked hard to help victims of identity theft by making improvements and shortening the time it takes to resolve these complex situations.”

There are six recommended steps in the IRS procedures.

1. File—If you are not able to eFile, you must file for the year using a paper tax return.
2. Report—Use IRS Form 14039, Identity Theft Affidavit, and send it in with your paper tax return.
3. IRS Response—The Identity Theft Victim Assistance (IDTVA) section of the IRS will respond with a letter.
4. Scope and Issues—IDTVA will check to see if other years of your returns are suspect. There may be other victims on the fraudulent return filed with your name. IRS will also check to make sure that the returns have accurate names, addresses and Social Security Numbers.
5. Refunds—After the IRS reviews various issues, it will process a refund, if you are so entitled. The IRS goal is to resolve the case within 120 days.
6. Future Returns—You will receive an Identity Protection PIN number in a letter from the IRS. You may use this number on your future tax returns.

If the IRS suspects fraud, it will contact you by letter. The letter may ask you to go to idverify.irs.gov to enter information. There also will be a toll-free number to the IRS Taxpayer Protection Program.

Further information from the Federal Trade Commission is available on www.identitytheft.gov.

Congressional Research Service Explains Charitable Provisions Cost

With major tax legislation, the Congressional Research Service (CRS) publishes a detailed analysis of the cost for each provision. On Jan. 15, 2016, Senior Specialist Jane Gravelle and Coordinator Molly Sherlock provided estimates of the cost for the four major charitable tax extenders that became permanent in the Protecting Americans from Tax Hikes Act of 2015 (PATH Act). Total cost for the four provisions is $12.8 billion.

Conservation Gifts

Donors who are interested in a deduction for benefiting the environment must meet three specific standards. They must donate a qualified real property interest to a qualified charitable organization exclusively for conservation purposes. Approved conservation purposes include preservation of land for outdoor recreation, protection of wildlife habitat, preservation of open space or preservation of a historical important area or structure.

The PATH Act made permanent favorable rules for gifts of qualified conservation property. Instead of the normal appreciated property limit of 30% of adjusted gross income (AGI), conservation gifts may be deducted up to 50% of AGI. The deduction at fair market value will be considered after all other gifts. In addition, rather than the normal 5 year carryforward, a conservation gift qualifies for carryforward for up to 15 years. Sec. 170(b)(1)(E).

Farmers and ranchers who derive a minimum of 50% of their gross income from that activity qualify for a higher limit. They may deduct conservation gifts at the appraised fair market value up to 100% of AGI, with a carryforward for 15 years. Sec. 170(b)(2)(B).

The cost of these conservation gifts deductions will be $1.2 billion over a decade.

IRA Charitable Rollovers

IRA owners who are over age 70½ are required to take a minimum distribution each year. In nearly all cases, this distribution from a traditional IRA produces ordinary income for the recipient.

A “qualified charitable distribution” is now permitted for transfers from the IRA custodian directly to a qualified charity. IRA owners over age 70½ may transfer up to $100,000 per year to a Sec. 170(b)(1)(A) charity. The public charity may not be a supporting organization or a donor advised fund.

The QCD may be used to fulfill the required minimum distribution (RMD) for the year of the transfer. Because the QCD is not included in the taxable income, there is no reported charitable deduction. Sec. 408(d)(8). However, transferring the QCD amount directly to charity rather than taking a distribution and writing a check to charity results in a lower adjusted gross income (AGI). This may save both ordinary tax and alternative minimum tax.

The cost of these IRA Rollover gifts will be $8.8 billion over a decade.

Gifts of Food Inventory

Because under Sec. 170(e)(1)(A) gifts of ordinary income property are not deductible, most gifts of inventory are deductible only at cost basis. An exception exists for C corporation gifts for the care of the ill, needy or infants. These may qualify for an enhanced deduction equal to the lesser of basis plus ½ of the appreciation or two times basis.

Under the PATH Act, all taxpayers with inventory may give “apparently wholesome food” and receive an enhanced deduction. The deduction is the lesser of basis plus ½ of the appreciation or twice the basis. While the deduction was previously limited to 10% of income from the proprietorship, partnership, Subchapter S corporation or C corporation taxable net income, the PATH Act expands this limit to 15%.

For organizations that do not account for inventory under Sec. 471 and are not capitalizing indirect costs under Sec. 263A, there is an election to treat basis as 25% of fair market value. This election will permit a deduction for 50% of fair market value.

In addition, the valuation of inventory will not be determined by the taxpayer’s internal standards, a lack of market or other circumstances. The value will be based on external criteria.

The cost of these food inventory gifts will be $2.2 billion over a decade.

Subchapter S Appreciated Property Gifts

With a Subchapter S Corporation there is a shareholder basis in the stock and a Subchapter S corporate basis in any appreciated assets owned by the entity. Previously, Sec. 1367(a)(2) required a reduction for appreciated property gifts that flowed through to the shareholder in the amount of the fair market value of the property.

The PATH Act makes permanent the rule that a gift by a Subchapter S Corporation of appreciated property to a qualified charity may flow through to the shareholders with the outside shareholder basis reduced by the inside corporate basis, not the full fair market value of the transfer.

The cost of these Subchapter S appreciated property gifts will be $600 million over a decade.

Applicable Federal Rate of 2.2% for February—Rev. Rul. 2016-4; 2016-6 IRB 1 (20 Jan 2016)

The IRS has announced the Applicable Federal Rate (AFR) for February of 2016. The AFR under Section 7520 for the month of February will be 2.2%. The rates for January of 2.2% or December 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 2016, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.