At the PPGC meeting on Tuesday January 8, 2019, I reported on several updates from the end of 2018 as well as some lessons learned in recent year-end tax planning. This news applies to taxpayer-donors as well as tax-exempt organizations. The five items I reported on are as follows:
1. Bunching. We previously discussed the tax strategy of accelerating deductions into a tax year in order to exceed the recently-increased standard deduction ($12,000 for single, $24,000 for married filing joint). In the midst of year-end tax planning, it became readily apparent that many old ways of bunching itemized deductions, particularly the state and local income tax deduction (“SALT”), were no longer viable in light of the Tax Cuts and Jobs Act (“TCJA”).
In previous years, taxpayers often accelerated SALT payments in order to receive increased itemized tax deductions. However, in light of the new $10,000 limit on SALT deductions, it generally does not make sense to accelerate SALT deductions once the $10,000 limit has been reached.
What does this mean for charitable deductions? Basically, since the SALT deduction does not help with bunching, and it normally is not possible to accelerate medical expenses, mortgage interest (except for a month) or other itemized deductions, the itemized deduction that typically helps with bunching is the charitable deduction.
Since bunching is viable for the charitable deduction, donors should be encouraged to look at donor advised funds, private foundations, and charitable trusts in order to receive larger, current year deductions, thus exceeding the standard deduction.
2. IRA Charitable Rollovers (also called Qualified Charitable Distributions, or “QCDs”). As I have previously reported, for any donor age 70 ½ or older that has an IRA, the IRA Charitable Rollover is the way, truth and life. There is almost no reason why required minimum distributions for those age 70 ½ and older (i.e. “RMDs”) should not be made as IRA Charitable Rollovers if the donor has any charitable intent and intends to make a charitable contribution.
Despite the “wonder” of the IRA Charitable Rollover, a trap has been discovered due to developments in the IRA industry. Many IRA providers are now providing IRA checkbooks to the IRA owner, where the owner can write a check directly out of the IRA. The issue, however, with an IRA Charitable Rollover is that the rollover must come directly from the IRA custodian, and cannot be paid to the IRA owner.
Accordingly, an IRA owner who writes a check from his or her IRA at year end, expecting that such amount will qualify as a QCD and meets the RMD requirements, could be surprised if IRS enforces the rule that the QCD must come directly from the IRA custodian. Thus, if the IRA owner writes the check, it has not come directly from the IRA custodian, may not qualify as a QCD, and the RMD may not be not effective for the tax year. If an RMD is not made as required by law, the shortfall incurs a 50% tax penalty.
This is a definite trap for IRA owners attempting to write IRA Charitable Rollovers from an IRA checkbook. It is probably not a good idea at all to write such checks; however, if an IRA owner does write such a check, it is critical for the charity to receive the check before year end and deposit such check in their bank, thus in effect asking the IRA custodian to transfer the funds electronically and having a good argument that the QCD has been made directly from the IRA custodian to charity. If the check is held and not deposited until the following year, IRS has a very good position for imposing the 50% excise tax on the failed RMD, and the IRA Charitable Rollover would be effective for the following tax year.
3. IRS Notice 2019-09. This Notice was issued on December 31, 2018, and provides interim guidance under Section 4960 of the Internal Revenue Code of 1986, as amended (“Code”), covering compensation paid to tax-exempt executives in excess of $1M and excess parachute payments. The Notice is 92 pages in length.
Given the recent TCJA changes affecting tax-exempt organizations, one can expect that IRS will being issuing proposed regulations which help to clarify and interpret certain provisions of the new law. In this case, however, IRS has not issued proposed regulations but instead has issued a lengthy Notice providing initial guidance to tax-exempt organizations.
4. IRS Notice 2018-99. This Notice 2018-99 was also issued toward the end of the year and covers the Code Section 512(a)(7) rules providing an increase in unrelated business taxable income (“UBTI”) due to the nondeductible parking fringe benefit rules. Notice 2018-100 also contains estimated tax penalty relief for tax-exempt organizations on the new UBTI rules. The parking fringe benefit rules are a highly controversial issue affecting tax-exempt organizations with much lobbying going on to attempt to repeal this new inclusion in UBTI.
5. Gift Acceptance Policies. In working with several charities at year end, I again discovered the need for charities to have effective gift acceptance policies. In one situation, a residential home developer wished to gift an unused lot to a charity. The charity was ready to accept such lot, and was almost ready to sign the deed, until a title company report was issued showing severe restrictions on title. The charity came to the conclusion that given numerous environmental restrictions on the lot, the lot would not be usable by the charity, nor could the charity readily sell it, and the charity would thus be forced to pay local real estate taxes on the lot for as long as the charity owned the property. The charity concluded that given the title restrictions, it would be very difficult, if not impossible, to sell such lot. While the charity did not have a gift acceptance policy, the charity’s governing board reviewed the potential gift and politely declined acceptance of the deed.
With the TCJA changes in the tax law, it is important for tax-exempt organizations and taxpayers alike to keep abreast of IRS guidance being issued in 2019 which helps to explain the new changes. More IRS guidance on the TCJA changes will likely be issued in 2019. Please do not hesitate to our office if you have any questions on these topics.
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Note: This provides general information regarding matters of interest to tax-exempt organizations. Such information is neither legal advice nor legal opinion concerning particular situations. If legal advice or opinion is required, legal counsel should be consulted.
We would be pleased to address any questions you may have regarding the foregoing or any other tax-exempt issues. For further information, please contact Jim Conley (412-765-0535), [email protected]; Susan Ott (412-745-9900), [email protected]; or Jack Owen (412-765-1020), [email protected].