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Wednesday June 12, 2024

Washington News

Washington Hotline

Deduct Your End of Year Gifts

Many nonprofit supporters make gifts in December. These gifts often may be larger and are an excellent way to benefit a nonprofit. It is important to understand how to make a gift of cash or property and qualify for a deduction this year.

The basic rule is that a gift to a nonprofit is deductible when the property or cash is delivered to a charity. The delivery rules are dependent on the type of property gifted and the timing of the transfer. The delivery is usually complete when the nonprofit receives the property.

There are several rules, however, that apply to gifts of cash, checks or property.

1. Gift of Cash — Cash is deductible when it is transferred to the nonprofit. A gift of cash is different from making a pledge or signing a note to make a gift in the future. With a pledge or note, there is no deduction until there is an actual transfer of cash to charity.

2. Gift by Check — Checks are usually deductible when placed in the mail, even though the final transfers occur when the checks clear the banking institution. For example, if you use the U.S. Mail to send a check by December 31, the gift is completed on the date of the postmark. As long as the check clears the bank, your deduction is honored this tax year.

3. Gift by Credit Card — Credit cards are deductible when the charges are made on the account. Because credit card charges are typically created immediately, the credit card gift is deductible this year. If a gift is made by credit card on December 31 this year and the bill is paid in January, the deduction can be taken for this year. Your credit card statements will show the name of the charity and the transaction date.

4. Gift of Stock — Stock may be transferred by hand delivery, electronic delivery or mail. A stock certificate may be endorsed and hand delivered. The delivery date is the date the representative for the charity receives the stock certificate. You may also obtain a stock power and mail the certificates in one envelope and the witnessed stock power in a second envelope. If U.S. Mail is used for the transfer, the transfer is effective on the date mailed. Stock may be held in a "street account" with your financial services firm. In this case, the nonprofit may create a new account with the same firm and the transfer can occur rapidly by moving stock from your account to the charity account. Be sure to save the financial service institution’s written acknowledgment that the transfer has been accomplished to document the transfer.

5. Gift of a Mutual Fund – Your shares or units in a mutual funds may be transferred to the charity by your custodian. Mutual fund gifts should be planned in advance, because there may be a delay before the actual transfer takes place.

6. Gift of Real Estate — Legal title to real estate passes when you deliver a signed and notarized deed to the nonprofit. However, it is best to have the deed recorded with the county registrar of deeds before December 31.

7. Gifts of Art — The delivery date for a gift of art is the date the nonprofit receives actual possession of the work of art. Title must also be transferred to the charity on that date. A charity must obtain actual physical possession of a gift of art. Special rules apply to a gift of a fractional interest in an artwork.

The nonprofit you make a charitable contribution to will also provide you with a written receipt. This receipt will include the name and address of the nonprofit organization, the date of the contribution, a general description of the property and will state if any goods or services were received.

IRS Mails 20,000 ERC Disallowance Letters

The Internal Revenue Service (IRS) has been engaged in a campaign to reduce dubious Employee Retention Credit (ERC) claims. This week, the IRS sent out more than 20,000 letters to taxpayers notifying them that their ERC claim has been disallowed.

The disallowance is based on an IRS determination that most of these businesses responded to highly misleading marketing campaigns. Many promoters have targeted small businesses and persuaded owners to file questionable claims. The IRS determined that these business owners did not meet even the basic entity and employment requirements for the credit. The IRS sent out Letter 105 C, Claim Disallowed.

IRS Commissioner Danny Werfel noted, "With the aggressive marketing we saw with this credit, it is not surprising that we are seeing claims that clearly fall outside of the legal requirements. The action we are taking today is part of an initial set of steps in our compliance work in this area, and more letters will be going out in the near future, including both disallowance letters and letters seeking the return of funds erroneously claimed and received."

Commissioner Werfel notes there are many business owners with pending ERC claims. He urges them to review their claim with their CPA or a trusted tax professional. If the CPA or tax professional advises that the ERC claim is not accurate, the business owner should withdraw the pending claim.

On September 14, 2023, the IRS announced a moratorium on processing new ERC claims. This was in response to a "tsunami" of claims that were encouraged by promoters.

The ERC is a refundable tax credit. It was passed during COVID-19 to assist businesses that were impacted by the pandemic. The refund of various employment taxes was designed to assist business owners in maintaining employment.

The IRS emphasizes that it is now engaged in a major audit of ERC claims and has initiated over 1,400 criminal investigations. The initial 20,000 letters disallowed claims for two reasons. First, the IRS determined that the businesses were not in existence between March 13, 2020 and December 31, 2021. This was the period for eligibility for the ERC. Second, during the period of eligibility, the business did not have paid employees. The ERC is based on qualified wages paid to employees during that period.

The IRS believes that the letters will be helpful to taxpayers. They will enable ineligible taxpayers to avoid audits, penalties and interest. The letters will minimize the incorrect refunds sent to ERC promoters and reduce the number of IRS audits and criminal investigations.

The ERC withdrawal option was created because many small business owners were pressured by ERC promoters into filing the ineligible claims. By withdrawing invalid ERC claims, these business owners should be able to avoid penalties and interest. The IRS continues to receive an increased number of withdrawal requests. The withdrawal program is currently scheduled to lapse on December 31, 2023, but may be extended into year 2024.

Editor's Note: The first 20,000 letters covered obvious fraud. If there were no business entity or no employees during the period of qualification, it was obviously fraudulent to file a claim. Any business owners who are concerned about their qualification for the ERC should contact a CPA or qualified tax professional. The IRS has already obtained 700 indictments of claimants who fraudulently received ERC funds. The IRS emphasizes there are a large number of potential future indictments.

Estate Tax Paid in Eight of 10,000 Estates

In December 2023, the Institute on Taxation and Economic Policy (ITEP) published a summary of the estate tax for the past three decades. The ITEP summary emphasizes the estate tax was created a century ago, "to ensure that families passing massive fortunes down through generations contribute to finance the public investments that made those fortunes possible."

The basic rationale for the estate tax is that the wealth was generated in part through the favorable business environment of U.S. public services, security and education.

During the past two decades, the number of estates filing and paying tax has declined dramatically. The ITEP report notes, "And yet today the estate tax is the weakest it has been in its century-plus history. Policy changes enacted under presidents of both parties have cut down the reach of the estate tax, but the current provisions – part of the Tax Cuts and Jobs Act signed into law in 2017 by President Trump – have weakened the tax more than ever."

The estate tax data for 2019 shows that eight out of every 10,000 decedents had an estate that resulted in payment of tax. This is the lowest share of estates paying tax in history (with the exception of the year 2010, when there was no estate tax).

During the past two decades, over 99% of estates are not taxed. The estate tax exemption was increased from approximately $600,000 in the 1990s to $1 million in 2002, $2 million in 2006, $3 million in 2009, $5.4 million in 2017 and $11.4 million in 2019. If the increased TCJA estate tax exemption is not extended, in 2026 the exemption will be reduced to an estimated $7.14 million.

Year of Death Estate exemption Estates Paying Tax
2001 $675,000 2.14%.
2003 $1 million 1.14%
2006 $2 million 0.65%
2009 $3 million 0.24%
2017 $5.4 million 0.21%
2019 $11.4 million 0.08%
2026 $7.14 million (estimated) 0.2% (estimated)

The IRS information for the most recent year is for 2019. If the estate exemption changes to $7.14 million in 2026, it is probable that the tax will apply to approximately 0.2% of estates. This would be 20 out of every 10,000 estates.

An expansion of the estate tax has been proposed by Senator Bernie Sanders (I–VT) which would reduce the exemption to $3.5 million. This lower amount may increase the taxable number to 50 per 10,000 estates.

The three states with the highest number of taxable estates in 2019 are California, Florida and New York. In California, 0.18% of estates were taxable. For the same year, the Florida taxable estate number was 0.15%. In New York, 0.12% of estates were taxable.

The ITEP report notes the federal estate tax rate is 40%. However, due to deductions and charitable gifts the tax paid was generally 20%. Distributions to family, charity and taxes were generally consistent during the past two decades.

Year Family/Friends Fed. Tax Charity
2007 60.2% 20.5% 16.6%
2016 65.4% 20.7% 11.7%
2019 67.0% 19.7% 10.7%

The 2007 tax applied to 70 estates out of 10,000, the 2016 tax to 20 estates of 10,000 and the 2019 tax to 8 estates of 10,000.

The majority of the tax is paid by very large estates. For 2019, 11% of the tax was collected from estates less than $20 million. Estates between $20 and $50 million paid 89% of the tax. Estates over $50 million in value paid 59% of the tax.

There have been proposals to reduce some of the primary methods used to avoid taxes by estates worth more than $20 million. These include limits on the Grantor Retained Annuity Trust (GRAT) and the Irrevocable Defective Grantor Trust (IDGT). The White House and members of Congress have proposed various limits that would reduce the ability to use these strategies to eliminate estate tax.

Applicable Federal Rate of 5.8% for December — Rev. Rul. 2023-21; 2023-49 IRB 1 (15 November 2023)

The IRS has announced the Applicable Federal Rate (AFR) for December of 2023. The AFR under Sec. 7520 for the month of December is 5.8%. The rates for November of 5.6% or October of 5.4% 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 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”

Published December 8, 2023
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