Tax Extenders Negotiations Continue

While most Senators and Representatives are back in their home states or districts for the Thanksgiving holiday, negotiations continue on a tax extenders bill. Staff from the House, Senate and White House are all working on a potential compromise. The negotiators hope to add an extenders provision to the major appropriations bill set for a vote on December 11, 2015.

There continue to be three major sections of a potential compromise. First, the House has passed permanent business extenders for the research and development credit, Sec. 179 expensing and bonus depreciation. The second section includes three charitable provisions – the IRA Rollover for persons age 70½ or older, enhanced deductions for gifts of food inventory and greater benefits for conservation easement gifts.

In the third section are the personal tax extenders, particularly the Earned Income Tax Credit (EITC) and the Child Tax Credit (CTC).

In September, there were extensive tax extender negotiations between Rep. Paul Ryan (R-WI) and Sen. Chuck Schumer (D-NY). While these negotiations were not able to resolve all the issues, the current tax extenders negotiation builds upon the efforts of these key House and Senate leaders.

The current discussion is focused on Republican requests for “integrity provisions” on EITC and CTC. The integrity provisions are designed to ensure that those persons who benefit from these credits are appropriately qualified.

Editor’s Note: The time is growing very short. When Congress returns to Washington next week, they will need to move promptly to craft a compromise. It will be very important for the basic framework of the compromise to be in place by Friday, December 4 in order to meet the December 11 deadline. If the compromise does not come together, then it is probable that the tax extenders will pass for a two-year period with provisions retroactive to January 1, 2015.

Caregiving Tax Benefit

This week, presidential candidate Hillary Clinton proposed a new benefit for caregivers. The new benefit is a 20% tax credit for expenditures up to $6,000 per year. The maximum potential tax credit each year would be $1,200.

The Clinton campaign published a press release and stated, “Providing informal caregiving can strain family finances, with caregivers suffering lost wages, health insurance or Social Security benefits. Informal caregiving has a real effect on our economy, as well; in 2013 alone, the full economic value of unpaid informal caregiving was estimated at $470 billion.”

Editor’s Note: Former Secretary of State Clinton did not specify how she proposes to pay for this benefit. Previously, Clinton has recommended raising income tax rates for upper-income persons. There is no indication how much tax increase will be needed to pay for the caregiver benefit. As a service to our readers, your editor will continue to cover tax proposals by candidates from both parties.

Estate Includes Potential Income Tax Refunds

In Estate of Russell Badgett Jr. v. Commissioner; T.C. Memo. 2015-226; No. 3503-15 (24 Nov 2015), the Tax Court held that pending income tax refunds were included in the taxable estate.

Russell Badgett passed away on March 8, 2012. His domicile was the state of Kentucky. The estate filed IRS Form 706 on December 13, 2012 and did not include a $404,315 IRS refund for tax year 2011 or a $14,126 refund for year 2012. The IRS issued a deficiency for $146,454 on Jan. 6, 2015 based upon the inclusion in the estate of the two income tax refunds.

The estate maintained that under Kentucky law, a “mere possibility or expectancy” was not an estate asset. The IRS overpayment created a potential right, but because the IRS may choose to apply those funds to other obligations, it did not create an includable estate asset.

Under Sec. 6402(a) the IRS has discretion to credit a tax overpayment against other obligations of that taxpayer. However, if the decedent has no unpaid tax obligations, the IRS “shall” issue a refund. While the estate noted that it may need to file an action against the IRS to obtain that refund, the Tax Court held that the obligation was clear. Therefore, the two income tax refunds are not a “mere expectancy” and must be included in the taxable estate.

Applicable Federal Rate of 2.0% for December—Rev. Rul. 2015-25; 2015-49 IRB 1 (20 Nov 2015)

The IRS has announced the Applicable Federal Rate (AFR) for December of 2015. The AFR under Section 7520 for the month of December will be 2.0%. The rates for November of 2.0% or October 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 2015, 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.