May, 2006

News Stories

Private Philanthropy Accounts
Sen. Johnny Isakson, R-Ga., has introduced the Personal Philanthropy Account Act of 2006 (S. 2688), which if enacted would amend the Internal Revenue Code to allow a tax deduction (whether or not the taxpayer itemizes deductions) for cash contributions to a personal philanthropy account. The account is defined as a tax-exempt trust created to make distributions for charitable purposes. It would allow an exclusion from the gross income of an employee for contributions made by an employer to the employee's personal philanthropy account.
5/16/06 PGDC
(editor's note - from an initail reading - and noting that there are no co-sponsors - this appears to be a flawed approach that is not needed. Should more information become available we will look further at it)

Agreement Reached on Tax Reconciliation
Senate Finance Committee Chairman Chuck Grassley (R-IA) and House Ways and Means Chairman Bill Thomas (R-CA) have reached a final agreement on pending tax reconciliation legislation (H.R. 4297), which does not include charitable giving incentives or reforms. To see the summary of the final tax reconciliation bill, click here. The Senate and House are both expected to consider and pass final legislation this week. The charitable incentives and reforms were pushed out of the reconciliation bill in part because of revenue limitations in the Senate. NCPG is pleased to report, however, that negotiations continue on a second package of expiring tax provisions and incentives, and there is a good chance that charitable giving incentives and reforms - including a one-year IRA Charitable Rollover - will become part of this package. The likely legislative vehicle for this second package is the pension reform bill (H.R. 2830), which is currently in conference negotiations.
NCPG news 5/11/06

Decimating an IRA
Not long ago, a son who had inherited his father's Individual Retirement Account wisely decided that he wanted to preserve his windfall. He concluded that the best place for this money was in his own IRA, so he rolled the money into a new account. What the son failed to realize was that he couldn't take his dad's IRA and transfer the cash into his own IRA.
The IRS regulations stipulate that only a spouse can perform this sort of rollover. So for doing something that seems imminently reasonable, the son was severely punished: He paid income tax on this inheritance and his IRA was dissolved.
He needed to keep his dad's name on the account and add his own name and Social Security number. Here's how the revised title might appear: (father's name) IRA (deceased April 2, 2006), F/B/O (for the benefit of) (son's name), beneficiary.
To keep your own IRA or inherited IRA from imploding, you need to be especially vigilant during the following IRA milestones:

Once an IRA mistake occurs, it often can't be stuffed back into the box. That's why some advisers call them Internal Revenue Accounts.
Copley News Service By Lynn O'Shaughnessy 5/11/06

House-Senate Nearing Agreement on TRA 2005
For the past month, a House-Senate Conference Committee has been striving mightily to reach agreement on the Tax Relief Act of 2005 (TRA 2005). Sen. Charles Grassley (R-IA) is Chair of the House-Senate conference. To conform with complicated Senate rules, he has divided TRA 2005 into two bills. Under the Senate rules, the total cost of Bill One is limited to $70 billion. As a result, Chairman Grassley moved many of the more popular provisions into a new Bill Two. Bill One can pass with 51 votes in the Senate, while Bill Two will require 60 votes to pass.
TRA 2005 Bill One includes a two-year extension of the 15% capital gain and dividend rate, a two-year extension of the ability of small businesses to expense $108,000 (plus indexed increases) and a one-year AMT relief extension. Without the increase in the AMT exemption, 18.9 million taxpayers would move from the regular tax to the alternative tax in 2006. In that situation, Sen. Grassley promises the other members that their "phones will ring off the hook from angry taxpayers." However, with the proposed increase in the exemption, only 3.6 million taxpayers will pay AMT in 2006.
Bill Two incorporates many provisions that are popular with members of both parties. These include the ability to deduct state and local sales taxes, some business tax cuts and a substantial charitable tax reform and incentive provision. Sen. Grassley sent a proposed version of Bill Two to House members in hopes they will come to agreement early in the week of May 8 on both bills. Sen. Grassley plans to finalize both bills and present them together for final votes in the House and the Senate.
Giftlaw 5/08/06

The estate tax (expires in 2010) is undergoing yet another diagnostic by Congress. Many are predicting it will live.
In his first term in office, President Bush backed legislation that phased out by 2010 the estate tax, often referred to as the "death tax" by Republicans. Problematically, the legislation has no pick-up provision so the full tax -- at a rate of 55% -- will return in 2011 unless legislators repeal it permanently.
| Senate Majority Leader Bill Frist, R-Tenn., said he will introduce legislation as early as next week to make permanent the repeal of the estate tax. But congressional observers note he will likely fall short of the 60 votes needed to for passage. Meanwhile, Sen. Jon Kyl, R-Ariz., has reportedly come up with a compromise that would exempt $3 million to $6 million per spouse, and lower the tax rate from the current 46% to 15%.
Some Democrats are pushing for a big stall on the estate-tax issue until after the November elections, after which they may win back control of Congress or at least cut the Republican majority. To be sure, Democrats have mixed views on the tax: Some support a full repeal while others would raise the exemption so that the tax hit only the wealthiest estates.
In any event, financial professionals are in a conundrum. They say they are having difficulty devising and planning for clients without proper guidelines.
An estate-planning specialist who spoke on a panel but who did not want to be identified by name, said he believes the estate tax issue will be left on the table this year -- untouched. "That is what our lobbyists in Washington are saying," he informed several inquirers.
MarketWatch 5/2/06

A CRT Can Help Heirs of Employees at Companies That Liquidate Retirement Accounts at Death
Most companies require the remaining assets in a 401(k) plan of a deceased employee to be distributed within one year of death. This commonly results in a significant income tax liability and a burden for the heirs of an unmarried plan participant, because only a surviving spouse is allowed to roll a distribution from an inherited retirement account into an IRA and avoid the immediate tax burden. However, as discussed in an article by University of Missouri Kansas City law professor Christopher R. Hoyt, using a charitable remainder trust as the beneficiary of an unmarried employee's retirement account comes close to a post-death rollover.

"The income tax advantage is that a CRT, like an individual retirement account (IRA), is exempt from the income tax. A lump sum distribution from a deceased employee's retirement account to a CRT triggers neither an income tax liability nor the 20 percent withholding requirement that can apply to other retirement plan distributions. Because the CRT is tax-exempt, it can reinvest the entire distribution and provide an income stream to an individual [the heir of the unmarried employee] that will last a lifetime."
February 2006 issue of Trusts & Estates - By Christopher R. Hoyt - taken from PGDC 4/26/06

West Virginia Changes Law on Gift Annuities
West Virginia recently passed legislation that breaks its longstanding silence regarding gift annuities (HB 4679, approved by the Governor on March 30, 2006). The new law is effective June 9, 2006, and will require a charity wishing to issue gift annuities in West Virginia first to notify the state's Insurance Commission. Charities that have already issued annuities in West Virginia have until September 30, 2006 to submit their notification. Other requirements of the new law include the insertion of specific disclosure language in all West Virginia annuity agreements (we will make an update of PGM's annuity agreements available prior to June 9th). Issuing charities must have been in existence for at least 3 years and have available assets of $300,000 or more.
4/19/06 PGCalc

Now it's an Email Tax Fraud Scam - 3/24/06 MarketWatch
Fraudsters are sending out fake emails informing taxpayers that they're being audited, or that they're eligible for a refund. Of course, you're directed to click to a Web site and provide sensitive personal data, such as your Social Security and bank account numbers. The scary thing is, those who create these types of emails are getting better at their trade. It can be difficult to discern that these messages and Web sites aren't authentic. If you haven't initiated the telephone call or typed in the Web site address yourself, avoid divulging personal account information.

• Penalizing participation in tax shelters;
• Requiring unrelated business income tax returns to be certified by an outside auditor or counsel;
• Prohibiting charitable deductions for contributions to donor-advised funds held by Type III supporting organizations;
• Prohibiting donor-advised funds and supporting organizations from making payments and distributions to donors and related parties;
• Requiring organizations that don't have to file annual information returns to notify the IRS each year; and
• Allowing the IRS to give state officials information pertaining to proposed actions regarding exempt organizations.