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Sunday, June 17, 2018

The Good and Bad News on Charitable Deductions under the 2017 Act

The good news first:

a. The 50% of adjusted AGI limitation maximum deduction amounts in any one year is increased to 60% as to cash contributions.

b. The Section 68 3% “Pease limitation” phase-out of itemized deductions is out of the law (through 2015).

These changes can significantly increase available deductions, but mostly for higher income persons and/or persons making significant gifts. Thus, one has to wonder whether the loss of deductions under the “bad news” below for many taxpayers will be offset by these increases.

The bad news:

a. The standard deduction is significantly increased to $12,000 for single people and $24,000 for married taxpayers.

b. Many formerly deductible expenses are no longer deductible,or deductions are limited (e.g., $10,000 limit for state and local taxes).

This means that for taxpayers making smaller gifts, it will be harder for them to have aggregate deductions above the standard deduction threshold. If deductions are not above that threshold, it will make more sense for those taxpayers to not itemize and take the standard deduction. This means that their charitable gifts may not be significant enough to garner a tax deduction. The prediction is that for lower and middle income taxpayers without a lot of deductions, their charitable giving will be reduced without the incentive of an income tax deduction.

There is an obvious planning mechanism for these taxpayers - to aggregate and save up their their charitable gifts and make them in fewer tax years (but to have a higher gifting amount in those years they do gift). The plan would be to take them above the standard deduction limits in their gift years and thus obtain a tax benefit for their gifting. Still, for many taxpayers, even with aggregation (also referred to as “stacking”), their gifts may not be high enough to materially get past the standard deduction thresholds.

Taxpayers who do not want to put large lump sums into the hands of charities but desire a charitable deduction in a current year can avail themselves of existing planning mechanisms that allows a deduction now and money going out to the charity later. These include gifts to private foundations, donor advised funds, and charitable trusts. Note that there are various limitations on deductions and rules on how to operate such vehicles, and some of them are not cost-effective absent large gifts. Before using them, taxpayers should consult with their tax advisors.

GOT HOMESTEAD? - www.rubinonfloridahomestead.com

Tuesday, June 12, 2018

Updated Florida Irrevocable Trust Amendment Mechanisms [Florida]

By Charles (Chuck) Rubin & Jenna Rubin

Florida practitioners will tell you that it is difficult to aggregate and analyze all the potential legal avenues to amending or terminating an irrevocable trust. We have previously created a map/chart that summarizes the principal methods available.

We have recently updated that map/chart, and added another delivery method. The two methods to view the map/chart are now:

a. An HTML file that after you download to your computer should open in a browser to view the information in an expandable/collapsible mindmap format. Click HERE to download the file. You must download it first and save it, and then you can open it. Some computer systems block the file or will not run it, presumably based on security settings. If that is the case for you, see alternative b. below.

b. This is a PDF file that contains all the information from the map/diagram, but in a text document layout, including copies of the relevant statutes. Click HERE to download it.

We have received a lot of favorable feedback from prior versions, so we are keeping this project going and will continue to update these items as the law evolves.

Saturday, June 09, 2018

IRS Warns on State Charitable Deduction Schemes to Allow Property Taxes Deduction

The Tax Cuts and Jobs Act of 2017 limits the Code §164 deduction of individuals for state and local taxes to $10,000 per year ($5,000 for married individuals filing a separate return). Thus, many taxpayers in states with high state taxes have lost a federal income tax subsidy of their state and local taxes.

Several states have adopted or are proposing arrangements to convert tax payments to deductible charitable deductions. These work by allowing taxpayers to make their tax payments to state-established or sanctioned charitable organizationS and then receive a credit against their state taxes for these payments. Voila - a state tax payment (subject to the $10,000 limit) is converted to a deductible charitable payment (not subject to the $10,000 limit).

The IRS has issued Notice 2018-54 warning taxpayers of proposed regulations that will be coming out that will address these payments. The Notice does not explicitly provide that the above charitable deduction arrangement will be ineffective - no such level of detail is provided. It does, however, specifically describe those arrangements and also references the “substance-over-form” doctrine, so it is highly likely that the regulations will disallow the charitable deduction under these arrangements.

Note that in the past, the IRS has provided that such charitable contribution/state tax credit arrangements allowed for a charitable deduction. Such was the conclusion in Office of Chief Counsel Internal Revenue Service Memorandum 201105010. However, that memorandum implies that the taxpayers did not receive a disqualifying quid pro quo in receiving the state tax credit for the charitable deduction, at least in part because a federal income tax deduction was allowable both for charitable deductions and state and local tax payments. Now that the state and local tax deduction is limited, I would expect the IRS to hold that by receiving the state tax credit the taxpayers are receiving a valuable quid pro quo - a federal tax deduction that would not otherwise be available for a direct tax payment. Thus, the charitable deduction would not be available. Alternatively, or also, the IRS may rely on the substance-over-form doctrine it mentions in its Notice to challenge the charitable deduction.

Notice 2018-54, Guidance on Certain Payments Made in Exchange for State and Local Tax Credits

GOT HOMESTEAD? - www.rubinonfloridahomestead.com