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Tuesday September 22, 2020

Washington News

Washington Hotline

National Work and Family Month - Military Family Benefits

In 2003, the U.S. Senate passed a resolution establishing October as National Work and Family Month. In support of military families, the IRS published IR-2019-169 to explain the tax benefits created specifically for military families. Additional information is available in IRS Publication 3, Armed Forces’ Tax Guide.
  • Combat Pay Exclusion – If you are an enlisted member, warrant officer or commissioned warrant officer, you can generally exclude active duty pay while in a combat zone. If you are a commissioned officer, you may exclude part of your combat pay. A combat zone is designated by the President or by Congress. Some active duty military may elect to include nontaxable combat pay as earned income to qualify for the Earned Income Tax Credit.
  • Tax Deadline Extensions – Members of the Armed Forces serving in a combat zone may generally delay both filing and payment of tax until 180 days (plus designated filing day periods) after departing that zone. These deadline extensions may also apply to members serving in a Department of Defense designated contingency area.
  • Overnight Travel Expenses for Reserve or National Guard Duty – Members serving in Reserve or National Guard units who travel over 100 miles for duty and remain overnight may deduct unreimbursed travel expenses.
  • Moving Expenses – While the Tax Cuts and Jobs Act repealed most moving expense deductions, active duty military with permanent change of station orders qualify for an exception. They may deduct unreimbursed moving expenses.
  • Free Tax Assistance – The Volunteer Income Tax Assistance (VITA) program is available on military bases worldwide. Use IRS.gov and the VITA/TCE locator tool to find the best VITA location. Your base's legal office can also direct you to the most convenient location.
Editor’s Note: With thousands of military members serving in Iraq, Afghanistan and other locations over the past decade, Congress has appropriately attempted to create flexible rules for filing and paying taxes. The Armed Forces’ Tax Guide is particularly helpful for members of the military.

SALT Cap Exception Requested for South Carolina Charity

In an October 1 letter to Treasury Secretary Steven T. Mnuchin, Sen. Lindsay Graham (R-SC) requested an exception from the state and local tax (SALT) charitable deduction “quid pro quo” rules for the South Carolina Research Authority (SCRA).

The Tax Cuts and Jobs Act (TCJA) limited SALT deductions to $10,000 for individual taxpayers. Sec. 164(b)(6). Because several states with higher tax rates had many affected taxpayers, a number of states passed new tax credit plans in an attempt to replace the lost SALT deductions. The plans often involved a charitable gift to a state charity.

If the plan worked as intended, the donor would pay the combined total amount due to the state that previously had been paid as state income taxes. In addition, the federal deductions (SALT plus charitable) would equal the former state and local tax deduction amount.

Under the final regulations, a state tax credit is a “quid pro quo” and reduces the federal charitable deduction by the amount of any state or local tax credit received for the donation. Thus, if a state resident gives $20,000 to a state charity and receives a $20,000 state tax credit, the federal charitable deduction is zero. Reg. 1.170A-1(h)(3)(i). An exception applies for a state tax credit that is not more than 15% of the gifted amount. Reg. 1.170A-1(h)(3)(vi).

As noted by Senator Graham, SCRA was founded in 1983. It encourages economic development in South Carolina. Gifts to SCRA qualify for a 100% state tax credit, exceeding the 15% quid pro quo threshold. As a result, the value of a federal charitable deduction is reduced by the state credit.

Graham notes that SCRA has been in existence for over three decades and was not created to avoid or bypass the Tax Cuts and Jobs Act $10,000 SALT deduction limit. He states, “Contributions to SCRA and entities like it should be treated like charitable contributions apart from the SALT cap.”

Editor’s Note: Many long-term nonprofits suggested Treasury should grandfather existing charities and that the “quid pro quo” rules should not apply. However, Treasury determined that it would be difficult to administer a rule that applied to some, but not all nonprofits. When the final regulations were published, Treasury rejected the grandfathering concept.

New Orleans Requests Clear Rule on Conservation Easements

On September 27, the Preservation Resource Center of New Orleans (PRC) wrote a letter to David J. Kautter, the Assistant Secretary of the Treasury for Tax Policy. Nathan Lott, Public Policy Research Director & Advocacy Coordinator of PRC, expressed great concern about IRS audits of conservation easement charitable deductions.

Because a large number of buildings in the older section of New Orleans have historic value, Lott highlighted the importance of conservation easements “to preserve our cultural heritage for public benefit.” The conservation easements protect many New Orleans structures and encourage “rehabilitation and appropriate maintenance.”

However, Lott noted, “Recent protracted and costly IRS audits have resulted in undue financial burdens for donors forced to retain legal counsel in the defense of their charitable contributions. Moreover, accounts of these costly and lengthy audits have a chilling effect on potential easement donors. In effect, these practices work at cross purposes to the goal of Sec. 170(h) of the Internal Revenue Code: preservation of a historically important land area or a certified historic structure.”

To protect and encourage conservation easements, Lott requests greater clarity from the IRS. He notes, “We encourage the IRS, in its necessary and legitimate oversight role, to provide clear guidance for easement donors and discontinue auditing practices that result in unnecessary and costly delays.”

Editor’s Note: The IRS continues to review in detail conservation easement charitable deductions. In the opinion of the IRS, some appraisals substantiating the deductions have been well above fair market value. As a result, many conservation easements are subject to a detailed IRS review.

Applicable Federal Rate of 2.0% for November -- Rev. Rul. 2019-25; 2019-45 IRB 1 (17 October 2018)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2019. The AFR under Section 7520 for the month of November is 2.0%. The rates for October of 1.8% or September of 2.2% 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 2019, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.

Published October 18, 2019

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