Maximize Use of the 2012 Gift Tax Exemption: A “Defined Value” Formula Clause Approach

For 2012, the cumulative lifetime gift tax exemption is $5.12 million per person ($10.24M for married couples), with a 35% tax rate on gifts over that amount.  Unless Congress takes action, the exemption is scheduled to decline to $1 million next year, with a 55% tax rate on gifts in excess of the exemption.

Most advisors regard the 2012 exemption as a great gifting opportunity that Continue reading »

Need cash? Don’t borrow from the IRS!

Many businesses and individuals are experiencing cash flow difficulties in today’s economy. To ease the cash crunch, it may be tempting to delay payment of taxes in the hope that finances will improve soon. Unlike other creditors, the IRS moves relatively slowly, lulling the taxpayer into complacency. During this time, interest and penalties accrue which, in some situations, can even exceed the original tax due. When the IRS decides to act, they often file liens, levies, and other garnishments that can cause significant and sometimes permanent economic damage. In addition to these civil penalties and collection actions, the IRS can pursue criminal charges. The failure to truthfully account for or turn over taxes is a felony, with the potential of up to five years of jail time. This applies to all taxes under the Internal Revenue Code – income tax, payroll tax, gift tax, and excise tax, to name a few. Continue reading »

IRS halts examination of gift tax on contributions to 501(c)(4) until further investigation

In December of 2010, the IRS indicated it would be paying closer attention to contributions made to politically active 501(c)(4) organizations, with an emphasis on contributions made in excess of exemptions.  This focus is mainly due to large contributions received during the 2010 elections. Back in 1982 the IRS declared theses gifts taxable but has not been enforcing it. The current individual gift tax exemption is $13,000 in a year, $26,000 for couples, and any amount over will be taxed at 35%. The lifetime exemption currently covers up to $5 million in gifts. Earlier this year in an effort to increase gift and estate tax return filings the IRS sent out letters to large donors informing them that investigations had been opened to determine why they had not filed a return. On July 7, 2011 the IRS released a letter halting all current and former investigations until all implications of the issue have been reviewed.

The Committee on Ways and Means believes the IRS is unfairly threatening political speech

The Chairman of the House Ways and Means Committee, Dave Camp, has released his letter to the IRS regarding its recent increased scrutiny of 501(c)(4) organizations. As recently noted in a previous post on this topic, the IRS is considering notifying donors of civic leagues and social welfare organizations that engage in significant political activity that these donations may be retroactively subjected to gift tax. Chairman Camp believes that this sudden interest on behalf of the IRS is selectively targeting certain taxpayers engaged in protected political speech. He goes on to say that the IRS’ involvement threatens its “credibility as an impartial enforcer of the nation’s tax law”.

After decades of silence on the issue of the applicability (or violation) of the gift tax laws, the recent about-face by the agency raises concerns about their intent that the chairman believes the committee has an obligation to pursue. His letter to the agency includes a number of questions and requests that he requires a response to within the month. These include: the names and titles of all individuals involved in the recent decision to investigate 501(c)(4) donors; copies of all internal memoranda regarding the applicability of the gift tax to c4 organizations; the criteria utilized in selecting taxpayers for gift tax examination; all information analyzing the legal or political consequences of gift tax audits of contributions to c4 organizations; and any correspondence between the IRS and the Dept. of the Treasury. Many of the questions seem to suggest possible conflicts of interest although no such statement is directly made.

IRS Hunting for Omitted Gift Taxes

Smart Money is alerting readers that the IRS has a “sweeping effort under way” to search out unreported gifts of real estate. The agency is using land-transfer records for evidence of omitted filings. Any gift of over $13,000 within one year’s time should be reported to the IRS, with lifetime caps currently at $5 million. This includes non-cash gifts between family members. If you haven’t yet disclosed giving such a generous gift, Smart Money cautions “voluntary disclosure typically works out better than having the gap discovered in an IRS audit.”

501(c)(4) Lobbying and Political Activity Puts Donors On the Hook

The IRS is leaping into the political fray by notifying donors that their contributions to 501(c)(4)’s may be retroactively subject to gift tax.

501(c)(4)’s are organizations and civic leagues created to promote social welfare (such as AARP or NAACP). They run in a similar manner to 501(c)(3)’s with a few key distinctions. Both are nonprofit and exempt from federal income tax, but 501(c)(4)’s can engage in an unlimited amount of lobbying.  Donations to 501(c)(4)’s that are public entities may be deductible if they are used for public service but the majority of 501(c)(4) donations are not deductible.

501(c)(3)’s are required to disclose substantial contributors but 501(c)(4)’s are not which has resulted in some controversy. Many donors that wish for their political agendas to remain anonymous may contribute large sums with little to no transparency. New groups were formed once Citizens United v. Federal Election Commission, the Supreme Court ruling that struck down limits on corporate campaign spending, occurred. There seems to be many leaks sprouting in the effort to curtail corruption and the ability to buy influence.

The IRS specifically cautions that “the promotion of social welfare does not include direct or indirect participation or intervention in political campaigns on behalf of or in opposition to any candidate for public office. However, a section 501(c)(4) social welfare organization may engage in some political activities, so long as that is not its primary activity. However, any expenditure it makes for political activities may be subject to tax…” The agency’s 2011 work plan included expanding monitoring of political activity – especially 501(c)(4)’s “founded by party strategists and financed with large individual, corporate and labor union checks” reports politico.com. The effect may be a drop in this type of donation as the reality of the tax implications sets in. The stepped up enforcement serves as “a powerful signal to the outside groups that the regulators will be on duty during the presidential campaign season”, according to Politico.

Give to the Kids and Get a Tax Break Too!

 Although people cannot control the timing of death to take advantage of the new estate tax law changes, they can surely control the timing of making gifts to children and/or grandchildren.  The way the new Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 works makes gifting between now and the end of 2012 both exciting and challenging and may require some creative planning and quick actions before year-end (only three days left!).  Below are a few important features in the new estate and gift tax law:

•  The new law confirms that there is no GST tax on gifts to grandchildren in 2010.  That means unlimited GST exemption in 2010.
• Starting in 2011, the GST tax will come back at a 35% rate and the GST exemption will be at $5 M only.  
• The gift tax exemption in 2010 is still capped at $1 M but it will increase to $5 M in 2011.
• The gift tax rate for 2010, 2011, and 2012 is all the same at 35%.

 As you can see, the tax result would be quite different if you were to make large gifts to children and/or grandchildren in 2010 v. 2011.