With record levels of inflation and gas prices, there is welcome news for families. The Internal Revenue Service (IRS) indicated on March 5 that it has processed substantial tax refunds for 38 million families. This is 5% more refunds than at this time last year. Tax refunds this year average $3,400, up significantly from amounts a year earlier. The average refund for the prior year was $2,815.
There are three primary reasons for this increase in the size of tax refunds. These are the Child and Dependent Care Credit (CDCC), the Child Tax Credit (CTC) and the Earned Income Tax Credit (EITC). All of these credits were enhanced for 2021 in the American Rescue Plan (ARP).
1. Child and Dependent Care Credit — The benefit for families who expend funds to care for minor children increased substantially. The American Rescue Plan increased the amount for one child from $1,050 to $4,000. If a family has two or more eligible children, the amount increased from $2,100 to $8,000. The ARP also raised both income thresholds and the percentage of childcare costs that qualify. About 14% of families with children receive benefits from the CDCC. Taxpayers should know that the 2021 credit is refundable.
2. Child Tax Credit — Another increase that benefits many families is the Child Tax Credit. The ARP increased the credit from $2,000 to $3,600 for children under age 6 and $3,000 for children from ages 6 to 17. In addition, up to one half of the credit was distributed through advance monthly payments during the second half of 2021. Families that receive advance payments are able to benefit from the balance of the credit when they file their 2021 tax returns. If a family has a new infant and other children, it could receive a $1,400 Recovery Rebate for the infant and the balance of the Child Tax Credits. Some families may receive an additional $4,000 or more in their tax refund. The CTC is also refundable.
3. Earned Income Tax Credit — The third increased credit under the ARP is the EITC. In previous years, the EITC was available for moderate-income workers and was 7.65% of $7,030 of income, or about $500. The ARP increased the percentage to 15.3% and changed a number of the age requirements. The maximum 2021 EITC payout is approximately $1,500.
With the increases in the CDCC, the CTC and the EITC, it is reasonable to expect larger refunds this year. About two thirds of tax returns remain to be filed, but it is probable that the refund amounts will remain close to the current $3,400 number.
Senate Finance Committee Supports Charitable Giving
On March 17, 2022, the Senate Finance Committee (SFC) held a hearing on charitable giving. Chairman Ron Wyden (D-OR) scheduled the hearing and strongly supported charitable giving. He noted "charity is one of the key incentives embedded at the heart of our tax code and a top priority for Democrats and Republicans on this Committee. I have always said that the charitable tax deduction is a lifeline, not a loophole."
Sen. Wyden stated the pandemic had a serious impact on his home state of Oregon. A quarter million jobs were eliminated and the unemployment rate jumped by 10 points. He explained, "that economic devastation added to a hunger crisis that had been causing pain among families in America for far too long. According to the Children's Defense Fund, prior to the pandemic, more than 10 million American children were growing up in households where there was not enough to eat."
Wyden was relieved that "in 2020, in Oregon and across the country, Americans stepped up when their neighbors needed help. Charitable giving reached new highs."
The SFC hearing focused on the universal charitable deduction, the Legacy IRA Act, donor advised funds and syndicated conservation easements.
1. Universal Charitable Deduction — Sen. Wyden and Sen. James Lankford (R-OK) both supported the universal charitable deduction. This deduction permitted 2021 nonitemizers to claim a deduction of $300, or married couples filing jointly to claim up to $600. Sen. Lankford noted the deduction "acts as a lifeline to our nonprofit sector who felt the effects of COVID-19, and it also answers the call to service. It is an incentive for people to be able to give." Lankford has introduced the Universal Giving Pandemic Response and Recovery Act, which would allow a deduction of approximately $4,000 for individuals and $8,000 for couples filing jointly. He concluded, "This bill ensures that every American gives, not just those with high incomes and those that itemize on their tax returns." Prof. Una Osili of Indiana University testified and indicated that the nonitemizer deduction would increase the number of middle-class donors who support charity.
2. Legacy IRA Act — The Legacy IRA Act has been introduced in both the House and the Senate. It would allow IRA owners to roll over portions of a traditional IRA into a gift annuity or charitable remainder trust. A limited version of the bill has been included in the Securing a Strong Retirement Act. Dan Cardenali, President and CEO of Independent Sector, supported the Legacy IRA Act. He noted, "Independent Sector was pleased to support a modified version of the Legacy IRA Act that was included in the Securing a Strong Retirement Act (H.R. 2954), and we urge the Committee to include S. 243 in any retirement legislation that you consider."
3. Donor Advised Funds — Sen. Chuck Grassley (R-IA) has introduced the Accelerating Charitable Efforts Act (S.1981). The bill is designed to ensure "that tax-deductible contributions to a foundation or a DAF have reached their ultimate charitable destination within a reasonable period of time." There is an estimated $160 billion in donor advised funds. A recent letter by 11 members of the House Ways and Means Committee expressed their hope that any legislation should not restrict the use of donor advised funds.
4. Syndicated Conservation Easements — Several Senators have expressed concern about abuse of charitable deductions through syndicated conservation easements. Sen. Steve Daines (R-MT) and Sen. Debbie Stabenow (D-MI) introduced the Charitable Conservation Easement Program Integrity Act (S. 2256). The bill has been supported by Chairman Wyden, Sen. Grassley and other Members of the Senate Finance Committee. The bill would limit deductions to 2.5 times the amount invested by a limited partner. Sen. Daines stated, "I am very much pro-conservation easements. It is the abuse of these syndicates that is the issue."
This hearing is quite significant for philanthropy. SFC hearings are generally a prelude to inclusion of charitable provisions in other legislation. Many of the provisions supported by Senators could be included in a larger tax bill or may become part of the retirement legislation this year. The Secure 2.0 Act is scheduled for a vote in the House in the next few weeks. The major 2006 charitable reform provisions (including the initial charitable IRA rollover) were attached to the Pension Protection Act, so inclusion of charitable provisions in a retirement bill is entirely possible.
Easement Proceeds Regulation Upheld
In Oakbrook Land Holdings LLC et al. v. Commissioner;
No. 20-2117, the Sixth Circuit upheld the regulation that requires a conservation easement deed to have a judicial extinguishment provision with a proportionate allocation of the proceeds to the nonprofit. This decision conflicts with the Eleventh Circuit case Hewitt v. Commissioner, No. 20-13700 (11th Cir. 2021).
The Sixth Circuit noted that under Section 170(h)(5)(A) charitable deductions for a conservation easement are subject to Reg 1.170A-14(g)(6) judicial extinguishment provisions. Taxpayer Oakbrook claimed that this regulation was void because it violated the Administrative Procedure Act (APA).
A key requirement under Section 170(h) is that the easement is "protected in perpetuity." Reg. 1.170A-14(g)(6) states that the judicial extinguishment proceeds must provide the nonprofit with "a fair market value that is at least equal to the proportionate value that the perpetual conservation restriction at the time of the gift bears to the value of the property as a whole at that time." In essence, the deed must make certain that the charity receives a proportionate amount of the extinguishment proceeds.
Under the APA, the Treasury must respond to substantive comments. Treasury issued a notice of proposed rulemaking in 1983 and issued final Reg 1.170A-14(g)(6)(ii) "after consideration of all comments regarding the proposed amendments."
In 2007 the Oakbrook partnership purchased 143 acres in Tennessee for $1,700,000. In 2008 the partnership transferred a conservation easement on 106 acres to the Southeast Regional Land Conservancy (SRLC). The initial appraisal of the easement was $19,500,000, but after the tax matters partner expressed concern about the size of the deduction, the appraiser reduced the deduction amount to $9,545,000. The IRS audited the return and denied the deduction. The Tax Court determined that the deed failed the proceeds regulation because it created a fixed rather than proportionate value, and it subtracted the subsequent improvements made by Oakbrook from the nonprofit value.
The key issue with respect to the validity of the regulation is whether the Treasury complied with the APA. While Treasury did review comments, the taxpayer claimed that Treasury failed to fulfill the requirement to respond to comments that "challenge a fundamental premise" of the regulation.
The Sixth Circuit determined that comments by the New York Landmarks Conservancy, the Landmarks Preservation Council of Illinois, the Land Trust Exchange and the Trust for Public Land raised issues, but none of the issues were sufficiently substantive that they required a specific response from Treasury. The Sixth Circuit rejected the rationale of the Eleventh Circuit and stated, "We find that the decision and reasoning to be unpersuasive."
Because the regulation was not deemed arbitrary or capricious, the decision of the Tax Court to uphold the regulation was affirmed.
There is now a classic split in the Circuits. Eventually, the Supreme Court will need to rule on the validity of the judicial extinguishment proceeds regulation.
Applicable Federal Rate of 2.2% for April ? Rev. Rul. 2022-8; 2022-14 IRB 1 (16 Mar 2022)
The IRS has announced the Applicable Federal Rate (AFR) for April of 2022. The AFR under Section 7520 for the month of April is 2.2%. The rates for March of 2.0% or February of 1.6% 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 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.