Washington Hotline – December 27, 2016


Washington Hotline

Saver’s Tax Credit for Retirement

In IR-2016-171 the IRS encouraged low and middle-income taxpayers to take advantage of the Saver’s Tax Credit. This credit helps workers contribute $2,000 to IRAs or 401(k) plans.

The maximum credit is $1,000 ($2,000 for married couples). In 2015 there were 7.9 million taxpayers who claimed the Saver’s Credit. The total credit value was $1.4 billion.

The Saver’s Credit is claimed on IRS Form 8880. There are various rules and limits. It is available for married couples with 2016 incomes up to $61,500, or single persons with incomes up to $30,750. Form 8880 also considers “filing status, adjusted gross income, tax liability and amount contributed to qualifying retirement programs.” The amount of the Saver’s Credit will be adjusted based on these factors.

Elective contributions to retirement plans under 401(k) or 403(b) must be completed by December 31. However, the Saver’s Credit and contributions to a new or existing IRA will be permitted until the filing date for your 2016 tax return (April 18, 2017).

Syndicated Conservation Easements Now Listed Transactions

In Notice 2017-10; 2017-4 IRB 1 (23 Dec 2016), the IRS classified some syndicated conservation easements as listed transactions.

Sec. 170(f)(3)(B)(iii) of the Code permits a charitable deduction for a qualified conservation gift. To qualify, the gift must be a real property interest or restriction granted in perpetuity to a qualified organization. Sec. 170(h)(2)(C).

Some promoters have created LLC’s or partnerships to acquire land and create conservation easements. The promoters then offer units to investors. The promotional materials promise a charitable deduction of 2 to 2.5 times the initial investment. The claimed deduction is achieved by a very high valuation of the potential use of the real estate and a large conservation easement deduction. The IRS indicates that it will challenge this perceived overvaluation and excessive charitable deduction.

The Notice states, “The IRS intends to challenge the purported tax benefits from this transaction based on the overvaluation of the conservation easement. The IRS may also challenge the purported tax benefits from this transaction based on the partnership anti-abuse rule, economic substance, or other rules or doctrines.”

If a conservation easement deduction arises in a transaction similar to that described in Notice 2017-10 and is after December 31, 2009, disclosure is required unless the applicable period of limitation for tax assessment has expired. The effective date for this expiration must be before December 23, 2016.

If disclosure is required under Sec. 6111 or Sec. 6112, it should be made by May 1, 2017. Advisors are also required under Sec. 6111 to disclose syndicated conservation easements as a listed transaction.

Editor’s Note: If a taxpayer has been involved in a syndicated conservation easement after December 31, 2009, he or she should contact a qualified professional advisor to review the potential for a required disclosure.

Tax Reform on a Fast Track

House Ways and Means Committee staff are very busy working on the 2017 Tax Reform Act. Regular discussions continue between the White House transition staff and Ways and Means Chairman Kevin Brady (R-TX). On December 19, Brady continued to champion a border-adjustable corporate tax. He published a press release with the title, “Ending the Made in America Tax: Three Major Wins for the American People.”

Brady claims changing the “Made in America” tax will increase employment. It could empower job creators and be a “magnet for investment.” Finally, a modern territorial tax system will place America on a level playing field with other industrial nations.

In response to Brady, Senate Finance Committee Democratic staff published a twelve page paper highlighting problems of the Republican “A Better Way” plan.

The Democratic staffers explained several concerns. In their view, the plan is unfair to the poor and middle class. The majority of the tax cuts will benefit the top 20% of income earners. The plan is not consistent because it repeals the state and local tax deductions, while protecting home mortgage and charitable deductions.

Democratic staffers object to the reduction in capital gains tax, and note that there is no plan to close the “carried interest” loophole for hedge fund managers. Finally, on the individual tax provisions, the estate tax is repealed.

A major feature championed by Chairman Brady is the border-adjustable tax. This tax is designed to allow exports to be produced without taxation, while levying taxes on imports. The Democratic staff observes that this may violate the treaties currently in existence under the World Trade Organization (WTO) rules. The WTO may object to this tax and it could result in large penalties. The destination-based tax is also very complex. It will be difficult to ensure both fairness and compliance.

Editor’s Note: The intensity of the public comments by both sides suggests that the plan is rapidly moving forward. Chairman Brady and the White House are now signaling they plan to introduce a tax reform bill in late January. Given the rules in both the House and the Senate and the scale of this effort to produce a 2,000 to 3,000 page tax bill, the final result is still likely to occur in August of 2017.

Applicable Federal Rate of 2.4% for January — Rev. Rul. 2017-2; 2017-3 IRB 1 (19 Dec 2016)

The IRS has announced the Applicable Federal Rate (AFR) for January of 2017. The AFR under Section 7520 for the month of January will be 2.4%. The rates for December of 1.8% or November of 1.6% 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 2016, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.