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Recent Commentary

Consensus on Tax Reform Reached, Details Lacking

Thursday, December 14, 2017
Legislative

Congressional Republicans have reached an agreement in principle on tax reform, according to Senator John Cornyn (R-TX), but details on many issues are still missing.

Using a PIF to Offset Taxes on IRA Conversion

Thursday, April 21, 2016

One popular technique in financial planning circles is to convert an IRA to a Roth IRA, so that the beneficiary will not have to pay income taxes on distributions from the Roth IRA in later years. However, the beneficiary of the IRA must typically pay substantial income taxes, since the IRA distribution (before it goes into the Roth) is taxable at ordinary income tax rates. One option is to offset taxes due on the conversion by simultaneously making a gift to a pooled income fund ("PIF"). Not only does this reduce taxes, but it provides cash flow for life to the income beneficiaries of the PIF, while (very importantly) benefiting charity.

Visual Planned Giving - Chapter 5 - Valuing Charitable Gifts of Property

Wednesday, December 13, 2017

In the fifth chapter of Visual Planning Giving: An Introduction to the Law & Taxation of Charitable Gift Planning, Russell James emphasizes the distinction between cash and noncash gift of property. Cash gifts are simple to make and value, compared to noncash gifts of property. Charitable gifts of property can be valued at their cost (or adjusted basis), their fair market value, or nothing. Some of these complex rules are reactions to real or perceived abuses, making them more of a mix, and less of a coherent set. Advisors must understand these rules to avoid damaging the expectations of donors who expect to receive a deduction for the property's fair market value.

One common method for valuing donated property is to use the cost basis, which is usually the amount the donor paid for the asset. Cost basis is not used to value property if the property's basis exceeds its fair market value; the donor must use the lower of basis or FMV. Cost basis is reduced by depreciation deductions (creating a so-called "adjusted basis"), and this fact makes calculating a property's basis more difficult. If a donor makes a gift of depreciated property, the charitable deduction may be reduced by any depreciation deductions taken. For example, when a sale of the property donated to charity would have been ordinary income if the donor had sold it, rather than making a gift, the donor can only deduct the cost basis (adjusted for depreciation taken). The cost basis valuation also applies to any property held for one year or less. If this property was sold for a profit, it would be short-term capital gain. The only type of noncash property which can be deducted at fair market value is long-term capital gain property. Still, several circumstances exist where long-term capital gain will be valued at cost basis. Gifts of appreciated property to private foundations, unless they are "qualified stock," are valued at cost basis. In addition, gifts of tangible personal property, receive cost basis treatment, unless the charity will use the property for its exempt purposes. A gift of artwork, for example, will be valued at cost basis, unless the recipient charity is an art museum or otherwise displays the art (rather than selling and liquidating it).

Due to abuses, Congress has, from time to time, changed these rules for certain types of property. Gifts of clothing and household items can only be deducted if they are in good condition or better. If a donor gifts a vehicle, including a boat or plane, he or she cannot deduct more than the charity's sale price (unless of course the car is used in furtherance of the charity's exempt purposes). The Code limits deductions of taxidermy property to the costs of stuffing the animal. Congress allows taxpayers to deduct their cost basis in gifts of intellectual property, plus a share of the income over the next twelve years. Thus, the donor receives an immediate deduction, and then a deduction equal to a share of the income going to charity for the next twelve years.

The Code imposes severe penalties for taxpayer who overstate the value of charitable gifts of property. A 20% penalty applies for property valued 50% higher than its true value. This escalates to 40% for property valued more than twice as high as the true value, and 75% when there is a gross misstatement resulting from fraud. If the valuation was based on a qualified appraisal, the donor made a good-faith investigation, and the over-valuation was not more than twice the value, there is no taxpayer penalty. Appraisers also face penalties for overvaluing charitable gifts. If the valuation was more than 50% greater than the true value, the appraiser's penalty will be the greater of $1,000, or 10% of the tax underpayment, but no more than 125% of the appraisal fee.

Mr. James has created a set of 65 videos for his "Complete Charitable Planning Training Series," to help his readers understand Chapter 5 and the entire book.

Senate Names Conferees

Monday, December 11, 2017
Legislative

Following Senate approval of a motion to go to conference, Senate Majority Leader Mitch McConnell (R-KY) announced 8 Republican conferees, and Senate Democratic Leader Chuck Schumer (D-NY) announced 7 Democratic conferees, to join with the House conferees to reconcile the House and Senate tax reform bills.