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Sunday March 18, 2018

Washington News

Washington Hotline

IRS Tax Time Tip -- 2016 IRA Contributions

In IR-2017-60 the IRS reminded taxpayers they can still fund an IRA for the 2016 tax year.

Traditional IRA contributions are tax deductible and the IRA fund grows tax-free. Distributions are usually made after age 59½ and are generally taxable. Starting on April 1 after the IRA owner turns 70½, there is a required minimum distribution (RMD). Each year after that age, a distribution must be taken based on the IRA value on December 31 of the prior year.

Roth IRA contributions are different in that they are made from after-tax income. A Roth IRA also may grow tax-free and future distributions will be tax-free. Roth IRA withdrawals of any amount may be made after the fund has been in existence for five years and the IRA owner is over age 59½. There is no required minimum distribution for a Roth IRA.

Contributions for the 2016 tax year may be made until April 18, 2017. Some low and middle-income persons may also qualify for the Savers Credit. Traditional IRA contributions are permitted for those who are under age 70½ on December 31, 2016. Roth IRA contributions are permitted at any age.

There are phaseouts of the IRA contribution amounts for some persons. The general contribution limit is $5,500 for 2016. For any person who reached age 50 by the end of 2016, the limit is increased to $6,500.

However, these contribution amounts will be phased out for some taxpayers. Based on a modified adjusted gross income (MAGI) of $61,000 to $71,000 for a single person or head of household, the traditional IRA contributions are phased out. Married persons who filed jointly face a phaseout with MAGI of $98,000 to $118,000. If you are not covered by a workplace plan but are married and your spouse is covered, the phaseout is from $184,000 to $194,000.

There are slightly different rules for Roth IRAs. A married couple filing jointly has a phaseout with MAGI of $184,000 to $194,000. Single persons and heads of household have a Roth phaseout with incomes of $117,000, to $132,000.

All of the contribution specifics for traditional IRAs and Roth IRAs are available at www.irs.gov by searching for Pub. 590-A.

American Health Care Act Moves Toward House Vote

On March 16, the American Health Care Act (AHCA) was approved by the House Budget Committee by a vote of 19 to 17. Three Republican members and all of the Democratic representatives voted against the bill.

Budget Committee Chair Diane Black (R-TN) supported the bill. AHCA has age-adjusted healthcare credits to purchase insurance, repeals insurances mandates and removes some taxes on passive income, medical devices and health insurance companies.

The Congressional Budget Office (CBO) also reported an analysis of AHCA. The CBO analysis found that, if the AHCA passes, there will be a substantial reduction in the deficit and reduced tax revenue. However, there also will be more Americans without health insurance than under current law.

Speaker of the House Paul Ryan (R-WI) indicates AHCA supports his effort to reduce the deficit and reform entitlement spending. Referring to the CBO analysis, he stated, "These are things we are achieving in just the first of a three-pronged approach. It is important to note that this report does not take into consideration additional steps Congress and the Trump Administration are taking that will further lower costs and increase choices."

Congressional Democrats pointed out that the CBO report highlights the reduced level of insurance coverage, particularly for lower-income persons. A joint statement by House Ways and Means Committee Ranking Member Richard Neal (D-MA) and House Energy and Commerce Committee Ranking Member Frank Pallone Jr. (D-NJ) noted, "This report also reaffirms that the Republican plan does absolutely nothing to control costs or protect consumers. Instead, it cuts Medicaid, raises costs on older Americans, and pulls billions of dollars from Medicare, all in order to pay for tax cuts for the rich."

The AHCA has been previously approved by the House Ways and Means Committee. Chairman Kevin Brady (R-TX) noted, "Our solution includes reforms long championed by conservatives, including tax credits, expanded health savings accounts and by doing this, returning control to the states so they can design healthcare right for their communities."

The AHCA bill now moves to the House Rules Committee. Action is expected the week of March 20. There may be a House vote on AHCA by the end of March.

Editor's Note: This factual update on AHCA is offered as a service to our readers. If the AHCA passes the House by the end of March, Senate action is still uncertain. Several Senators have expressed a hope that there will be increased tax credits available for low-income seniors. There are likely to be amendments in the Senate that will require sending the bill back to the House.

$18,000 Clothing Deduction Denied

In Doris Gaines et vir vt. Commissioner; T.C. Summ. Op. 2017-15; No. 6421-155 (15 Mar 2017) the Tax Court denied an unsubstantiated $18,000 charitable deduction for gifts of clothing.

During part of 2011, Doris Gaines worked as an independent contractor for Life Line Foster Care Agency. She filed Schedule C on a joint tax return for 2011, 2012 and 2013. The Schedule C business was named Hope Consultants.

Gaines reported income of $13,000 in 2011, no income in 2012 and no income in 2013. She claimed multiple business deductions. Her losses for the three years totaled $82,964.

She also claimed an $18,000 charitable deduction for gifts of clothing to "Goodwill." At trial, Gaines indicated that the clothing had been given to a church, but she was not certain whether the church was still in existence.

The IRS disallowed the business deductions and the $18,000 charitable deduction. It assessed taxes and penalties of $26,900.

The Tax Court reviewed the required provisions to qualify for a charitable deduction.

1. Receipt – A contemporaneous written acknowledgement from the charity is required for gifts of $250 or more. See Reg. 1.170A-13(f)(1).

2. Reliable Records – All gifts over $500 in value must be substantiated by reliable written records. For a noncash contribution, the taxpayer should record when the asset was acquired, a reasonably complete description of the property, the cost basis of the property, the fair market value on date of gift and the method used to determine that value.

3. Appraisal Required – If the noncash contribution is $5,000 or more, it must be supported by a qualified appraisal. The nonprofit and the appraiser sign IRS Form 8283. Sec. 170(f)(11)(C).

In this case, Gaines had no receipt for the claimed $18,000 gift of clothing. There were no details as to the specific items gifted, no written substantiation and no method for determining the value. Therefore, there was no charitable deduction.

Sec. 6662(a) penalties are applicable unless there is a reasonable cause defense. Because Gaines did not demonstrate a reasonable effort to substantiate the deductions, the penalties were applicable.

Editor's Note: Gifts of clothing and household items are deductible if the substantiation rules are followed. It is important to obtain a receipt and to have a reasonably accurate description of the various items. It may be helpful to take photos of the gifted items. If the gift is a "substantially similar collection of items" that is $5,000 or more in value, nonprofits with thrift shops may be able to refer the donor to an appropriate and qualified appraiser.

Applicable Federal Rate of 2.6% for April -- Rev. Rul. 2017-8; 2017-14 IRB 1 (16 Mar 2017)

The IRS has announced the Applicable Federal Rate (AFR) for April of 2017. The AFR under Section 7520 for the month of April will be 2.6%. The rates for March of 2.4% or February of 2.6% 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 2017, pooled income funds in existence less than three tax years must use a 1.2% deemed rate of return. Federal rates are available by clicking here.

Published March 17, 2017

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