Key Tax Provisions of “Fiscal Cliff” Legislation

You are probably aware that Congress passed legislation (the “American Taxpayer Relief Act”) early Wednesday morning, which the President is expected to sign into law to avert (or delay, depending on you viewpoint) the so-called “Fiscal Cliff.” While the legislation only delayed by two months widespread automatic spending cuts, it prevents many of the tax increases that were scheduled to take effect in 2013. With the exception of a targeted tax increase to the wealthiest Americans, the Act permanently extends provisions of the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), and the Jobs and Growth Tax Relief Reconciliation Act of 2003, P.L. 108-27 (JGTRRA). It also permanently addresses Congress’ reoccurring task of “patching” the alternative minimum tax (AMT). Further, it temporarily extends many other tax provisions that had lapsed at the end of 2012 and others that had expired a year earlier. Among the tax items not addressed by the Act was the so-called “payroll tax holiday.” Thus, the temporary 4.2% rate for the employees’ portion of the Social Security payroll tax will revert back to 6.2%, effective January 1, 2013.
Below is a summary of the key tax provisions: Continue reading »

Maryland Increases Personal Income Tax Rates

Maryland Governor Martin O’Malley has just signed legislation that, effective for tax years beginning after December 31, 2011, increases personal income tax rates for certain individuals and reduces allowable personal exemption deductions. The salient specifics of the legislation are that: Continue reading »

Burn down your house to get a tax deduction? May not be such a hot idea!

A property owner, wanting his lot cleared of the existing house so a new one could be built, donated the house to the fire department and claimed a charitable deduction.  The fire department burned the house down as a training exercise.

Using a valuation concept that has been around for years, the property owner obtained two appraisals – one valuing the property with the house, and one valuing the property without the house.  The difference between the two is presumably the fair market value of the house itself.  As this is the house that was given to the fire department, a charitable deduction was claimed for that value.

The IRS rejected this burnt offering.  The Tax Court agreed.  So did the 7th Circuit on appeal.  The case hinged on whether the value of the donation was greater than the benefit the taxpayers received.  The Court found that the fair market value of the property had to take into account the conditions the donor placed on the property and the benefit the donor received in return.  Namely, the donor gave the house on the condition that it be burned down and, in return, the house was demolished.

Since there is no market for houses that must be destroyed, the Court instead looked at the salvage value of the house.  It concluded the house was worth almost nothing.  Further, the Court found that the owners received a substantial benefit in that the fire department demolished the house, and this benefit outweighed the nominal value of the house. Although in this case the taxpayer did not receive the charitable deduction as sought, under the right set of facts and circumstances, a taxpayer can still qualify for a charitable deduction.

See here for the Tax Court ruling and fact details: http://www.ustaxcourt.gov/InOpHistoric/rolfsgallagher.TC.WPD.pdf and here for the 7th Circuit ruling: http://www.ca7.uscourts.gov/tmp/FM0R1XBH.pdf

For further information, please contact an Aronson tax professional at 301.231.6200.