In a press release and IRS Notice (Notice 2018-54) issued Wednesday, May 23rd, the IRS warned taxpayers to be wary of state efforts to circumvent new federal limits on deductions for state and local taxes. Under the recent tax overhaul, deductions for state and local taxes (including property taxes) are capped at $10,000. This cap is particularly detrimental for residents of states with high property taxes and/or state and local income taxes (for example, California, Massachusetts, New Jersey, New York and Connecticut).
To mitigate the adverse impact of the new $10,000 cap on state and local taxes, states have been considering alternative methods to raise revenue that would avoid the cap. New Jersey Governor Phil Murphy and New York Governor Andrew Cuomo have both signed legislation permitting local governments to set up charitable organizations that can accept property tax payments as donations (which could be deductible, without limitation, against federal taxable income).
Notice 2018-54 announces that the Department of Treasury and the IRS intend to propose regulations regarding the SALT deduction cap, and signals their view that tax payments in excess of the cap (regardless of how structured) are not deductible. In particular, the Notice highlights the approach taken by New York and New Jersey (structuring tax payments to allow taxpayers to characterize the payments as deductible charitable contributions), and warns that federal law, not state law, controls the proper characterization of payments for federal income tax purposes.
For more information on federal tax reform’s impact on individuals see our earlier Legal Advisory, issued April 17, 2018, titled “Practical Insights on Tax Reform: Impact on Individuals”.
Today President Trump signed into law the most extensive package of reforms to the United States income tax system since the overhaul of the tax code in 1986. The breadth and magnitude of the final version of the tax reform bill, generally referred to as the “Tax Cuts and Jobs Act” (“TCJA”), will impact almost all taxpayers (whether individuals, businesses, trusts or estates).
On this #GivingTuesday, if you are thinking about making a cash gift to one or more of your favorite causes and you intend to claim a charitable contribution deduction on your 2017 income tax return for the gift(s), here are three things you will want to do.
Around this time every year, the IRS looks at whether there has been a year-over-year increase in the Consumer Price Index and announces inflation adjustments to the federal gift and estate tax exclusion amounts for the following calendar year. In the midst of all the talk in Washington D.C. about tax reform and speculation about the fate of the estate tax, the IRS has just announced the gift and estate tax exclusion amounts for 2018. In general, these exclusion amounts tell a U.S. citizen or resident how much he or she can give away without incurring gift and/or estate tax on the transfer. Individuals and couples make use of these amounts, both during lifetime and at death, to transfer wealth to family and friends on a tax-free basis. When the amounts go up, as they are scheduled to do next year, it presents an opportunity to increase the tax-free giving.
Collaborations between charitable organizations and for-profit businesses to simultaneously promote a cause and raise funds for the charity have been demonstrably successful and are occurring with increasing frequency. When embarking on these initiatives, clearly your marketing and development (or advancement) professionals are key team members, but remember to put your legal department or legal advisor on your team to ensure that your good deeds are not punished.
It is not often that you can find inspiration within the Treasury regulations. But if you are a family foundation looking for innovative ways of pursuing your charitable mission, you will come away from reading the nineteen examples in the regulations finalized by the Treasury Department last year with a new enthusiasm for program-related investments, known simply as PRIs. The stories these examples tell of the myriad ways PRIs can achieve positive impact will be compelling to many foundations, especially those that have been reluctant to incorporate PRIs into their grantmaking and investment strategies.
Around this time every year, the IRS looks at whether there has been a year-over-year increase in the Consumer Price Index and announces inflation adjustments to the federal gift and estate tax exclusion amounts for the following calendar year. In general, these exclusion amounts tell a U.S. citizen or resident how much he or she can give away without incurring gift and/or estate tax on the transfer. Individuals and couples make use of these amounts, both during lifetime and at death, to transfer wealth to family and friends on a tax-free basis. When the amounts go up, it presents an opportunity to increase the tax-free giving. Given that inflation has been relatively sluggish, will any of these exclusion amounts be higher in 2017 than they are currently? According to the announcement just released by the IRS, the answer is “yes” for some but not all.
Identity theft happens when your personal information is stolen. Perhaps the thief steals your bank card or credit card, or the thief obtains your social security number and date of birth to open credit card accounts, credit lines or file for an income tax refund. Even the most prudent person can fall victim to identity theft. Sometimes we will never know how or where the thief obtained the victim’s information. If you are a victim of identity theft you should take these three actions.
1. File a police report with your local police department. This is a critical step, as it will allow you to place a seven year security freeze on your credit report. This will also serve to protect you in the future, because it establishes a record of the identity theft.
Traditionally, families have relied on valuation discounts when transferring interests in closely-held family businesses to the next generations. Transfers of minority interests in a closely-held family entity were generally allowed a minority discount when valuing interests for estate and gift and tax purposes, primarily due to the inability of a minority shareholder to compel a liquidation of the entity. These discounts often proved to be a helpful way for the family to avoid the need to sell the family business to pay estate taxes, by reducing the gift and estate tax burden on such transfers. The proposed regulations effectively eliminate any minority discounts and largely any marketability discounts on the valuations for estate and gift tax purposes. If these regulations are finalized, they would impact transfers between family members of interests in family-controlled corporations, partnerships, LLCs and other business entities, regardless of whether the business is active or passive.
Senators John Thune (R-SD) and Ron Wyden (D-Ore) introduced the Charities Helping Americans Regularly Throughout the Year (CHARiTY) Act (S. 2750, summarized here) to “encourage charitable giving and make it easier for foundations and other tax-exempt organizations to conduct their charitable mission.” This legislation, among other things, streamlines operations by changing the private foundation excise tax to a flat one-percent tax, creates a limited exception to the private foundations’ excess business holdings rule, allows the Treasury Department to update the standard mileage rate applicable to personal vehicle use by volunteers (see here for current rate) and, most significantly, expands the IRA charitable rollover to include donations to donor-advised funds. This last measure is viewed as a logical next step that builds upon the Protecting Americans from Tax Hikes Act of 2015 (PATH), which President Obama signed into law last December and was regarded by many as only a partial victory for the charitable sector. While PATH provided certainty for philanthropic planning by making the IRA charitable rollover permanent, as explained here, it did not go as far as extending the reach of the rollover benefit to donor-advised funds.
- Editor in Chief, Co-Chair, Nonprofit and Social Impact practice group
- Chair, Tax Department and Co-Chair, Nonprofit and Social Impact practice group