In IR-2018-217, the IRS reminded taxpayers of the benefit of the increased Child Tax Credit. The Tax Cuts and Jobs Act doubled the Child Tax Credit from $1,000 in 2017 to $2,000 in 2018.
IRS Commissioner Chuck Rettig urged taxpayers to check their eligibility for the tax credit. He stated, "As we approach the 2019 tax-filing season, I want to remind taxpayers to take advantage of this valuable tax credit if they are eligible to claim it. Tax reform changed the tax code significantly and doubling the Child Tax Credit is an example of how the changes impact taxpayers."
The $2,000 tax credit is available for children who are under age 17 on December 31, 2018. The child must be your qualified dependent and have lived with you for at least six months of 2018. He or she must have a valid Social Security Number by the end of this year.
With the increased standard deduction of $24,000 for couples and $12,000 for individuals, many Americans will owe little or no federal income tax this year. If you have little or no federal income tax and a qualifying child, up to $1,400 of the Child Tax Credit is refundable. You may file a tax return and obtain this refund even if you owe no federal income tax.
The Child Tax Credit phases out for couples or individuals with higher incomes. The phaseout starts at $400,000 for married couples filing jointly and $200,000 of modified adjusted gross income (MAGI) for individual taxpayers.
SALT and State Charitable Tax Credits
On November 5, 2018, Scott K. Dinwiddie, IRS Associate Chief Counsel for Income Tax and Accounting, chaired a hearing on the Proposed Regulations, Contributions in Exchange for State or Local Tax Credits. Six IRS and Treasury Department attorneys heard testimony from 28 witnesses.
The witnesses represented a wide range of nonprofit organizations and generally held three different perspectives. They supported the proposed regulations that create a "quid pro quo" benefit for state tax credits over 15%, requested an exception for existing state tax credit programs or opposed the entire $10,000 state and local tax (SALT) limit.
Several witnesses supported the proposed "quid pro quo" regulations. Professor Lawrence Zelenak spoke on his own behalf and was positive toward the regulations. He stated, "Although private charity state tax credit programs predate the $10,000 SALT ceiling, and thus obviously were not created as SALT ceiling workarounds, in the absence of new regulations, they will now serve as SALT ceiling workarounds."
Zelenak urged the IRS to follow the proposed regulations and concluded, "It would be much better, I think, to have a new general rule that all third-party benefits reduce the amount of a charitable deduction subject to only a de minimis exception."
Sasha Pudelski represented the School Superintendents Association. She supported the IRS for "proposing a fair and common sense approach to tax credit programs." Pudelski continued, "We appreciate that the IRS has chosen to treat all tax credit programs that enable an individual to exploit the charitable deduction the same way regardless of whether these are new programs or preexisting ones, and regardless of whether the credits benefit private entities or public ones."
Dr. David Sovine is Superintendent of schools in Frederick County, Virginia. He also supported the proposed regulations because the tax credits could create an excessive benefit if the donor gives appreciated properties. Under previous rules, that donor could receive a charitable contribution deduction, bypass capital gain and receive the state tax credit. Sovine notes, "I believe that a donation made in exchange for a 100% tax credit should be treated as equivalent to a sale at market value and the taxpayer should either owe tax on the portion of that sale that represents that gain, or recognize a loss if appropriate."
Carl Davis represented the Institute on Taxation and Economic Policy (ITEP). Davis explained that "ITEP opposes carve-outs for any charitable credit above the 15% de minimis thresholds, but in my remarks today, I am going to focus largely on tax credits for donations that support private K-12 scholarships, also known as school vouchers."
Several speakers represented charitable organizations with preexisting tax credit programs. These speakers urged the IRS to create exceptions for the preexisting programs.
Andrew Bowman is President of the Land Trust Alliance. He understood that proposed regulations on the SALT limit were "initiated by a desire to prevent state governments from allowing their citizens to avoid the effects of the Internal Revenue Code 164(b)." Bowman continued that the proposed regulations are too sweeping an application "because conservation donations and other true charitable donations are in no way tax avoidance. Stated another way, they are not donations in lieu of a state tax bill that otherwise must be paid. They are entirely voluntary donations."
Allen Fagin represented the Union of Orthodox Jewish Congregations of America. He suggests that the regulations should "apply solely to contributions made to a state under Section 170(c)(1) for public purposes only. In this way, the new regulations would not apply to contributions made to other charities, legitimate charities, including scholarship granting organizations." His proposed exception would permit tax credit programs to benefit Jewish and other private schools.
Rex Linville represented the Piedmont Environmental Council and the Virginia United Land Trust. He had "grave concerns with the proposed regulatory change to treat a state income tax credit as a quid pro quo for land conservation donations. As drafted, this is an overly broad proposal that uses a sledge hammer to fix the problem where a scalpel would be more appropriate."
Former Indiana Senate Majority Leader Brandt Hershman spoke in favor of creating an exception. He noted that when the state of Indiana created a tax credit, "we were fully aware that the effectiveness of such credits was leveraged by the deductibility of the donation at the federal level, and created our system with that synergy in mind." Hershman urged the IRS to create an exception for donations benefiting private schools.
Rabbi Aba Cohen of Agudath Israel of America also supported the concept of the exception. He stated, "We do agree with those who believe that the proposed regulations are overbroad; they were intended to target a specific problem dealing with a specific workaround, SALT workarounds, and yet those go much broader than that specific problem." Cohen urged the discussion to avoid the term "tax shelter" and not to consider this a test of the merits of school choice.
Steven Bellone, County Executive for Suffolk County, New York, defended the New York statute that creates a substantial tax credit. Bellone opposed both the regulations and the concept of the $10,000 SALT limitation. He stated, "It is not fair; it is not rational; and it is not tenable; and I believe it is not legal." In his view, the New York statute is a "perfectly and accepted mechanism to achieve tax benefits." The IRS proposed regulations and the entire SALT limitation are "an arbitrary and capricious use of regulations."
The proposed regulations had an effective date of August 27, 2018. While there is clearly a wide range of opinions on the "quid pro quo" rule and the 15% de minimis exception, the IRS may choose to make the final rules effective as of August 27, 2018. Until the IRS publishes final regulations and the potential exceptions are clarified, many tax professionals will urge donors to exercise caution by following the proposed regulations and effective date.
Excise Tax Payments for Exempt Organizations
In Reg-107163-18; 83 F.R. 55653-55656 (7 Nov. 2018), the IRS published proposed regulations that explain the filing requirements for different types of excise taxes payable by exempt organizations.
Exempt organizations must file IRS Form 990 each year. If the exempt organization is subject to excise tax, it also must file IRS Form 4720 by the 15th day of the fifth month at the end of the tax year. The proposed regulations cover the principal IRS code sections that may require a nonprofit to pay excise tax.
- Taxable Distributions Section 4966(a)(1) levies a 20% tax on distributions from a donor advised fund that are not for a Section 170(c)(2)(B) charitable purpose.
- DAF More Than Incidental Benefit Under Section 4967(a)(1), a payment to a donor that is more than incidental is a prohibited benefit that could require a tax equal to 125% of the amount distributed. Section 4967(a)(2) may require a fund manager to pay a 10% tax on the amount of the prohibited benefit.
- Excess Parachute Payments Section 4960 and Section 4968 require payment of a 21% excise tax on most nonprofits with executive compensation over $1 million. The compensation limits exclude various payments and some types of employment.
- Net Investment Income Institutions with over 500 students and endowments over specific levels may be subject to an excise tax on net investment income under Section 4968.
For institutions that file based upon a calendar year, IRS Form 4720 and any applicable tax is due by May 15, 2019. The proposed regulations will apply on the date the final rule is published in the Federal Register.
Applicable Federal Rate of 3.6% for November -- Rev. Rul. 2018-28; 2018-45 IRB 1 (18 October 2018)
The IRS has announced the Applicable Federal Rate (AFR) for November of 2018. The AFR under Section 7520 for the month of November is 3.6%. The rates for October of 3.4% or September of 3.4% 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 2018, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return.