eGiftLaw Newsletter
January 12, 2009
George O. Pickell
Director of
Planned Giving
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Dear Professional Advisor,
Greetings from University of Northern Colorado
Foundation. I am pleased to share with you the latest news from Washington,
tax law updates, PLRs, Case Studies and timely articles. We provide this
weekly eNewsletter and web site to our professional advisor friends as a
free service. Please feel free to call me at 970-351-1380 if I can run a
proposal or be of assistance to you.
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University of Northern Colorado Foundation
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January
12, 2009
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GiftLaw
Weekly eNewsletter - January 12, 2009
- WASHINGTON HOTLINE
- PLR THIS WEEK
- CASE OF THE WEEK
- ARTICLE OF THE MONTH
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WASHINGTON
HOTLINE
Tax Quote of the Week
"There is no such thing as a good tax."
--
Winston Churchill
Tax Revenue Drops -- Deficit Now $1.2 Trillion
Each year the Congressional Budget Office (CBO)
projects total federal government revenue from income taxes. On the
economic outlook that was published on January 7, 2009, the CBO reviewed
the probable course of the U.S. economy for 2009.
Based on the assumption that the economy will
contract 2.2% in 2009, CBO projects that there will be 7.5% lower tax
revenue. The total taxes collected from individuals are estimated to be
$1.06 trillion.
Normally, the federal government collects total taxes
from all sources equal to approximately 18% of the Gross Domestic Product (GDP).
However, due to the economy, estimated tax collection amount will be 16.5%
of GDP. This is the lowest tax revenue as a percent of the economy since
1959.
With the lower tax receipts and current budgeted
expenditures, the deficit is now projected to be $1.2 trillion. This
deficit will be a peacetime record of 8.3% of GDP.
Congress and President-elect Obama are discussing an
additional stimulus bill of up to $800 billion over two years. When the
final stimulus bill is passed, the deficit is projected be over $1.5
trillion.
Editor's Note: At some point in the future the
USA will need to pay for this deficit. The fight in Washington will be how
to pay for the mounting deficit in future years.
Stimulus Bill Slowdown
With the economy in recession, President-elect Barack
Obama indicated to Congress that he would like to sign a substantial
stimulus bill immediately after his inauguration on January 20, 2009.
Congress initially attempted to pursue passage of a stimulus bill by
January 20, but now recognizes that the timeline will slip.
Majority Leader Steny Hoyer (D-MD) stated to
reporters on January 7, "I think we were somewhat unrealistic, given
the complexity, that we could pass this in these two weeks."
Speaker Nancy Pelosi (D-CA) also recognized that the
legislation is too complicated and too massive to pass in such a short
time. However, she also continued, "We must pass an economic recovery
and jobs package no later than mid-February, in my view."
House Republicans are concerned that the rush to pass
the bill will lead to excessive or unwise government spending. Republican
Leader John Boehner (R-OH) indicated, "We want to put people back to
work, we want to make sure that we maintain the jobs that are there -- but
we also have to be worried about who is going to pay the bill here. Our
kids and grandkids are already buried under a mountain of debt and I do
believe we've got to be very careful in balancing the needs of the economy
today with the amount of debt we are going to leave our kids."
In addition to the expenditures for infrastructure
and other state priorities, the stimulus plan will include a substantial
tax relief section. President-elect Obama has proposed a refundable tax
credit of $500 per person. This is designed to offset the costs of Social
Security and Medicare tax for individuals. Stimulus bill tax provisions may
also include provisions to encourage employment.
In a press release on January 5, 2009, Sen. Charles
Grassley (R-IA) cautioned, "Tax relief can work well to boost the
economy if it is done right. It's tricky to make sure the relief is big
enough to make a dent in our huge economy and done in a way that stimulates
growth. This time, I'll be looking for as many taxpayers as possible to get
tax relief." Sen. Grassley and Senate Finance Chair Max Baucus (D-MT)
will both be very involved in the design of the stimulus bill tax
provisions.
IRS Fact Sheet on 2008 Returns
Each year, the IRS releases a fact sheet that
explains the tax changes affecting tax returns. This FS-2009-1 Treasury
Release explains the major changes that are important for completing a 2008
IRS form 1040.
The major changes for tax year 2008 include the
following:
1. Economic stimulus -- Payments under the economic
stimulus plan ($600 for most persons) are not taxable. Some taxpayers who
did not receive the payment may claim a "Recovery Rebate Credit"
on their return.
2. Alternative minimum tax exemption -- The exemption
for 2008 is $69,950 married or $46,200 single. The AMT exemptions phase out
with higher incomes.
3. Renewed tax breaks -- The legislation renewing tax
breaks permitted deduction of state and local sales tax, the educators'
supplies deduction, tuition and fees deduction and various energy credits.
4. Standard deductions -- For married couples, the
standard deduction is $10,900. Single persons may deduct $5,450. There are
additional standard deductions for blind persons or seniors. There is also
a new added standard deduction of $500 per person for state or local real
estate taxes.
5. First time homebuyer credit -- An interest-free
loan of $7,500 for a first time homebuyer is deducted in the first year and
then repaid over 15 years.
6. Standard mileage -- For January 1 - June 30, 2008,
business mileage is 50.5 cents per mile and medical mileage is 19 cents per
mile. For July 1 - December 31, 2008, business mileage is 58.5 cents per
mile and medical mileage is 27 cents per mile. The charitable mileage rate
remains 14 cents per mile.
7. Personal exemption -- The exemption for an
individual or for a qualified dependent for 2008 is $3,500.
8. Earned income tax credits -- A refundable credit
for lower income persons will depend upon the number of qualifying
children. Persons with two or more qualifying children receive $4,824; with
one child the EITC is $2,917; the base EITC with no children is $438.
9. No capital gains tax for lower incomes --
Individuals in the 10% or 15% bracket have a capital gains rate that was
reduced from 5% in 2007 to 0% in 2008. This 0% capital gain rate is
available up to taxable incomes of $65,100 for married persons or $32,550
for single persons.
10. Kiddie tax -- A child with investment income over
$1,800 will pay tax at the parents' rate if the child is under age 18 or is
a student under age 24. The kiddie tax does not apply if over half of total
income is earned by the child.
Applicable Federal Rate of 2.4% for January --
Rev. Rul. 2009-1; 2009-2 IRB 1 (18 Dec. 2008)
The IRS has announced the Applicable Federal Rate
(AFR) for January of 2009. The AFR under Sec. 7520 for the month of January
will be 2.4%. The rates for December of 3.4% or November of 3.6% 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 2009, pooled income
funds in existence less than three tax years must use a 4.8% deemed rate of
return. Federal rates are available by clicking
here.
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PLR
THIS WEEK
PLR - 200901023
Transfer to Charitable Trust Qualifies for Gift and Estate Tax Deductions
T created Trust to "manage, conserve and
distribute" her deceased husband's artwork. The trustee of Trust would
make the artwork available for display in public and private institutions
in the United States and Country A. Trust would also make loans and grants
to charitable organizations and individuals to further artistic performance
and other cultural activities. Trust is organized under the laws of Country
B. The articles of incorporation declare that Trust is to operate for
purposes "exclusively charitable in law." Grants are to be made
on a non-discriminatory basis with procedures approved in advance by the
Internal Revenue Service. The articles of incorporation provide that no
earnings will inure to shareholders or individuals. The articles also
prohibit acts of self-dealing under Sec. 4941, retaining excess business
holdings under Sec. 4943 and intervening in political campaigns. T will
fund Trust with $X amount and at her death contribute H's artwork
irrevocably. Trust does not intend to seek tax-exempt status under Sec.
501(c)(3). T requested that the gifts made to Trust qualify for charitable
gift and estate tax deductions under Secs. 2522 and 2055, respectively.
Sec. 508(d)(2) provides that no deduction is allowed
for gifts made to (A) a private foundation or trust described in Sec. 4947
or (B) an organization that is not treated as an organization exempt from
tax under 501(c)(3) by operation of Sec. 508(a). Sec. 508(a) states that an
organization must actively apply for Sec. 501(c)(3) status in order to be
tax-exempt. The Service ruled that Trust was not a trust described in Sec.
508(d)(2)(B). Under § 1.508-2(b)(1)(viii), contributions to a charitable
trust described in § 4947(a)(1) are not subject to this rule. If Trust is a
trust described in § 4947(a)(1), contributions to Trust will be deductible
regardless of when or whether Trust applies for recognition of exemption
under § 501(c)(3). Citing various tax court cases and revenue procedures,
the Service found that Trust is described in § 4947(a)(1) because (a) it is
a trust; (b) Trust will not be exempt from tax under 501(a); (c) all of
Trust's assets will be devoted to charitable purposes; and (d) as discussed
below, a gift tax charitable deduction under § 2522(a) and an estate tax
charitable deduction under § 2055(a) will be allowed for the transfers to
Trust.
To view the full PLR Click
Here.
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CASE
OF THE WEEK
Living on the Edge,
Part 5
Rhea Jones, 75, lives in a beautiful coastal town in
northern California. Rhea's home occupies three magnificent acres of bluff
property that overlooks the crashing waves of the Pacific. Since her home
sits just steps away from the dramatic cliffs, Rhea frequently jokes to her
friends about her "living on the edge" lifestyle.
John, Rhea's husband of 50 years, built the custom
home 10 years ago. It was truly the realization of a lifelong dream of John
and Rhea. Unfortunately, John passed away unexpectedly five years ago. Now,
Rhea lives alone in the large home. Nevertheless, Rhea is looking forward
to spending her remaining days in this lovely home. Not surprisingly, she
frequently plays host to her children, grandchildren and friends.
Rhea is an active philanthropist. In fact, she spends
three days a week volunteering with local charities. While very wealthy and
philanthropic, Rhea makes only modest yearly gifts. However, she intends to
make a substantial bequest upon her death. Specifically, Rhea plans on
distributing her entire estate to her children and grandchildren, except
for her cliff-side home. Rhea's will provides that the home passes to John
and Rhea's favorite charity upon her death. The home is worth $3 million.
However, at a recent estate planning presentation,
Rhea discovered the benefits of a gift of a remainder interest in a
personal residence. In particular, she liked the potential significant tax
savings and the home's avoidance of the probate process. Also, because the
gift is irrevocable, the local charity would recognize and honor Rhea for
her generous gift at the annual fund raising gala. Of course, Rhea would
retain the right to live in her home for the rest of her life, which is an
absolute requirement to any potential gift arrangement.
Rhea is very excited about this gift arrangement, but
she has many questions. Before she commits to the gift plan, she wants to
address several issues. In order to compute the charitable income tax
deduction, Rhea is required to determine the estimated useful life of her
home. How does she do this? Are there some rules regarding this
determination? What are the four basic options to make this determination?
To view the solution to this Case of the Week Click
Here.
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ARTICLE
OF THE MONTH
Increasing Payment
Lead Trust
A charitable lead annuity trust (CLAT) may have
increasing payments. In Rev. Proc. 2007-45, IRB 2007-29 (16 Jul 2007), the
Service approved the concept. Under 02 Annotations for Paragraph 2, Payment
of Annuity Amount, the IRS stated in Section 4, "Alternatively, the
governing instrument of a CLAT may provide for an annuity amount that is
initially stated as a fixed dollar or fixed percentage amount but increases
during the annuity period, provided that the value of the annuity amount is
ascertainable at the time the trust is funded."
With increased volatility in stock markets, there are
persuasive economic reasons for a CLAT with increasing annuity payouts.
Annuity trust remainder recipients benefit from the difference between the
applicable federal rate and the actual economic return. If the applicable
federal rate is fairly low at 4% or 5%, and the trust assets are able to
produce total return of 8% or 9%, then the family benefit is increasing by
4% or 5% each year.
This benefit is particularly helpful if there is an
economic downturn in the early years of the trust. The favorable benefit
for family with a fixed annuity is that growth can compound and significantly
increase the distribution to family. However, if there is a fixed annuity
payout and an economic downturn in the early years of the trust, then most,
and in some cases all, of the principal of the trust is used to make the
annuity payment.
To view the full Article of the Month Click
Here.
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Note: Case studies, articles, commentary and other materials in the GiftLaw
system are included solely as educational information. Articles and
editorial comments are offered as an educational service to friends of this
organization, and may not always reflect our official position on any
issue. Since case studies or articles may not always reflect the current
AFR or tax law, it may be necessary to run any illustration with a current
version of Crescendo to obtain updated information. If professional
services are required, all persons shall consult with their qualified
professional advisors. Tax Quotes are courtesy of Jeffery L. Yablon,
Washington, D.C.
©
Copyright 1999-2009 Crescendo Interactive, Inc.
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University of Northern Colorado Foundation
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January
12, 2009
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Thank you for your interest in gift planning. To
access any of this updated GiftLaw information, please select our web page
by clicking here.
Cordially yours,
George O. Pickell
Director of Planned Giving
E-mail: George.pickell@unco.edu
Phone: 970-351-1380
University of Northern Colorado Foundation
http://www.uncalumni.org/Foundation
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