Allow me to begin and end this month's newsletter on a somber note. We, at Garden State Trust Company, are all saddened by the senseless taking of lives in Las Vegas by a madman earlier this month. Our thoughts and prayers are with those who died and their family and friends.

I read "Here are the victims of the Las Vegas shooting" and can only wonder why?

  Ira J. Brower, Founder
Two law professors at Washington State University have warned that the IRS has turned to data mining of social media in their enforcement efforts [Houser and Sanders, "The Use of Big Data Analytics by the IRS: Efficient Solutions or the End of Privacy as We Know It?", 19 Vand. J. Ent. & Tech. L. 817 (2017), ]. The demise of the Taxpayer Compliance Measurement Program left a data gap that needs to be filled, and social media may provide part of the solution.

The professors warn of the dangers of abuse of secret data collection systems. Taxpayers may have an expectation of privacy when they are online, but this is an error. Anything that may be seen by the public may be seen by the IRS. The Service then pairs this information with its own databases in a process of data analytics. "For the IRS, data analytics is not trying to predict the future behavior of taxpayers, but predicting data that it does not have; that is, predicting whether tax returns are compliant with the tax law." Given the data breaches that the IRS itself has experienced, as well as questionable IRS targeting practices of recent years, the concerns raised by the professors seem warranted.

Don't publish anything on social media that would make you uncomfortable if you saw it on the front page of The New York Times .

(October 2017)
© 2017 M.A. Co. All rights reserved.
On September 27 President Trump released a nine-page "framework" for new tax legislation. The framework adds some detail to the one-page outlines that had been released earlier by the administration. The new target for the corporate tax is 20% instead of 15%. The "border-adjustable tax" is history. Passthrough entities (used by most small business owners) would be taxed at 25%, but safeguards are promised to avoid abuses, such as characterizing personal service income as business income.

Although the nominal top bracket rate drops from 39.6% to 35%, the framework leaves open the possibility of an additional tax bracket for the highest income earners. The framework is silent on the surtaxes from the Affordable Care Act. There is also no mention of any change to taxes on capital gains.

Most itemized deductions would be repealed under the framework. "Tax incentives" would be retained for home mortgage interest and charitable contributions. The use of that phrase in the framework, instead of simply retaining the deductions, suggests that caps or other limits may be forthcoming on those items. For example, the Obama administration proposed limiting the benefit of itemized deductions to 28%, instead of whatever the taxpayers highest marginal rate might be.

Democrats purport to want higher taxes on "the rich," and the biggest tax increase on the rich in the framework comes from the elimination of the deduction for state and local taxes. But the state and local tax deduction is claimed disproportionately in the "blue" states, so Democratic support for this idea is not assured. With the doubling of the standard deduction in the framework, the vast majority of taxpayers would have no need for that deduction anyway.

However, there is less to that doubling than meets the eye. The personal exemption would be eliminated. For a single taxpayer, the "zero bracket" would therefore be increased by just 20%, not 100%. Married couples with children might be even more adversely affected—but that could be offset by unspecified increases in the child tax credit. A $1,000 tax credit is equivalent to a $4,000 personal exemption for a taxpayer in the 25% tax bracket.

The framework calls for elimination of the AMT, because it no longer serves its intended purpose and is a source of complexity. The death tax (actually, the federal estate tax) and generation-skipping transfer tax would be repealed—no rationale is provided by the framework.

Moving tax legislation through Congress before the end of the year seems unlikely, especially given how many months it took just to write this nine-page summary. Some observers believe that early in 2018 is a realistic goal. If a tax cut on wages is enacted in January, it could be made retroactive to the beginning of the year, and withholding tables could be adjusted fairly quickly. Thus, most taxpayers might be seeing more in their paycheck as the 2018 election approaches.

(October 2017)
© 2017 M.A. Co. All rights reserved.
The advent of a higher amount exempt from the federal estate tax ($5.49 million in 2017) has reduced the need for tax-aware estate planning, but it has not eliminated it altogether. Estates of any size will be subject to income taxes, as will their beneficiaries. Planning may permit this burden to be reduced.

Take charitable bequests, for example. Past practice generally has been to provide for charity from the principal of an estate, according to law professor Christopher Hoyt ["Tax Savings with Income-Based Charitable Bequests", Probate & Property , September/October 2017]. The better approach from a tax perspective would be to direct the executor to make a payment to charity from the estate's income. Instead of a will clause providing $50,000 to a selected charity, the will could direct the first $50,000 of income collected by the estate to be used for that purpose. That would garner an income tax deduction for the estate, leaving more money for the other heirs.

Income in respect of a decedent

Most assets acquired from an estate receive a basis step-up to their fair market value at death. With a basis step-up, there will be little or no tax due upon the capital gain if the asset is sold soon. Some assets do not receive any basis step-up, however, such as Series EE savings bonds and employee stock options. Because these would have been subject to income tax in the hands of the decedent, they are "income in respect of a decedent" (IRD) and remain subject to the income tax, as well as the estate tax. The most prevalent source of IRD is an interest in an inherited retirement plan account. 

One approach to limiting the income tax exposure with IRD is to use it to fund charitable bequests. The IRD may be paid directly to a charity, so that it never will need to be recognized by the estate. If the IRD will be distributed to the estate, the will should instruct the executor to pay charitable bequests to the extent possible from the IRD, which will generate an offsetting charitable deduction.

With retirement accounts, the beneficiary designation form is key, as the assets may pass outside of probate. A charity may be named as the beneficiary of some or all of the retirement account. To the extent that assets pass directly to the charity, the estate will not have to recognize IRD. 

What about a forgotten retirement account for which no beneficiary was named? The asset will pass to the probate estate by default. It may be possible for the executor simply to distribute the retirement account directly to a charity. Alternatively, instructions to the executor to pay charitable bequests from IRD when it is available may cure the tax problem.

Charitable giving grows

According to the annual report of Giving USA, total charitable gifts rose by 2.7% in 2016, reaching $390.05 billion. Giving by individuals was up 3.9%, by foundations 3.5%, and by corporations 3.5%. 

Charitable bequests were estimated to have declined by 9.0%, perhaps attributable to the elimination of federal estate taxes for the vast majority of estates. However, bequests only account for 8% of all contributions, while individuals provide 72% of the total charitable support.

Total charitable giving was roughly 1.7% of the country’s gross domestic product through the 1980s. By this measure, giving grew in the 1990s, reaching 2.2% of GDP in 2001. It fell to 1.9% of GDP during the great recession, but has since climbed back to 2.1% of GDP.

(October 2017)
© 2017 M.A. Co. All rights reserved.
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Because of the rapidly changing nature of tax, legal or accounting rules and our reliance on outside sources, Garden State Trust Company makes no warranty or guarantee of the accuracy or reliability of information contained herein nor do we take responsibility for any decision made or action taken by you in reliance upon information provided here or at other sites to which we link. ©2017. All rights reserved.