In IR-2021-18, the Internal Revenue Service (IRS) offered tips for filing 2020 tax returns. With the tax season now moving into high gear, these are helpful reminders and suggestions for all taxpayers.
The tax filing process requires good records. These may be assembled through an electronic system or a paper file. It also is important to understand tax rules that apply during the COVID pandemic. During the past year, millions of taxpayers worked from home, received unemployment insurance and obtained gig economy jobs.
- Assembled Records — Records for preparing taxes will include all Forms W-2, Wage and Tax Statement, Form 1099-MISC, Miscellaneous Income, Form 1099-INT, Interest Income, Form 1099-G, Certain Government Payments, Form 1095, Health Insurance Marketplace Statement and any Forms 1099-R due to annuity or retirement distributions.
- Earned Income Tax Credit (EITC) — The EITC benefits employees with low-to-moderate income. With the COVID-19 shutdowns reducing 2020 income, most individuals will need to use 2019 earned income to calculate EITC. IRS Publication 596, Earned Income Credit will provide more assistance. There is also an EITC Assistant on IRS.gov that helps determine whether you qualify for the EITC.
- Unemployment Compensation — With massive unemployment due to the shutdowns in many states throughout 2020, there are many individuals who received unemployment compensation for the first time. Unemployment compensation is taxable and should be reported on your return. Because most taxpayers do not make estimated tax payments on their unemployment insurance, there may be additional tax payable. IRS Publication 525, Taxable and Nontaxable Income or the IRS.gov Tax Topic, 418, Unemployment Compensation may be helpful.
- Taxable Interest — Taxpayers who received interest payments from a financial institution or from the IRS on a 2019 tax refund, you will receive Form 1099-INT. This will be taxable on the tax return.
- Home Office Deduction — The home office deduction is available to many self-employed taxpayers, independent contractors and individuals who have gig economy positions. However, the Tax Cuts and Jobs Act suspended the business-use-of-home deduction for employees who receive a paycheck or W-2 exclusively from an employer. Because over 100 million employees have been working from home during the COVID-19 pandemic, this provision will impact many individuals.
- Gig Economy Jobs — With massive unemployment during 2020, many workers decided to join the gig economy. Most of these gig-economy workers are not on salary and their employer does not withhold taxes. Because these individuals generally have not made quarterly estimated tax payments, they may be required to pay taxes when they file their returns.
- Charitable Deduction for Nonitemizers — The CARES Act created a limited deduction on 2020 federal tax returns for charitable giving. The $300 per tax return (whether single or joint) deduction for cash contributions is available for individuals who do not itemize deductions. Because over 90% of taxpayers take the standard deduction, this $300 charitable above-the-line deduction will benefit millions of individuals. Information on this deduction is available in Publication 526, Charitable Contributions.
- Direct Deposit — When you file your return, the best and most rapid refund option to choose is direct deposit. With direct deposit, your tax refund will be electronically deposited in your bank or other financial account. Over 80% of taxpayers use direct deposit. This same electronic fund transfer system is used by the federal government for 98% of Social Security and Veterans Affairs benefits.
Defective Conservation Easement Deed Not Saved by State Law
In Kevin A. Sells et al. v. Commissioner;
No. 6267-12; No. 6801-12; No. 6835-12; No. 6836-12; No. 6837-12; No. 6838-12; No. 19246-12; No. 13553-13; T.C. Memo. 2021-12 (2021), the taxpayers were denied a charitable deduction for a gift of a conservation easement due to a defect in the deed. A state law provision did not correct the deed defect.
In 1999, Steven and Janine Moses purchased a 398-acre parcel of land in Calhoun County, Alabama for $2.4 million. However, with the bursting of the tech bubble in 2001, the Moses became insolvent and they decided to sell the land. They were able to sell 161.5 acres of flatland for $1.4 million, but held the debt-encumbered mountainous parcel. In August 2002, they and seven other individuals created Burning Bush Farms, LLC. They sold the mountainous land to Burning Bush for $1.4 million and extinguished the debt. Burning Bush then deeded a 2003 conservation easement to Chattowah Open Land Trust, Inc. (COLT). Appraisers David Roberts and Patti Tennille used a "before and after" method and the charitable deduction amount was determined to be $5.4 million.
The conservation easement deed stated in the extinguishment provision that the value of the easement held by the nonprofit would be "determined by multiplying the fair market value of the property unencumbered by the Conservation Easement (minus any increase in value after the date of this deed attributable to improvements) by the ratio of the value of the Conservation Easement at the time of this Deed to the value of the Property, without deduction for the value of the Conservation Easement, at the time of this deed."
The partners claimed deductions for both the conservation easement and the standing timber, which was appraised at $275,340. The eight partners each claimed a charitable deduction of $674,375 for the conservation easement gift and $34,417 for the timber gift. The IRS denied all deductions and assessed penalties.
The Tax Court noted that a conservation easement is deductible under Section 170(f)(3)(B)(iii). The property must be a qualified real property interest, gifted to a qualified nonprofit and used exclusively for conservation purposes. The key requirement at issue is "exclusively for conservation purposes" under Section 170(h)(1)(C). In order to be used exclusively for conservation purposes, the property must be protected in perpetuity.
Because the conservation deed subtracts the value of improvements from a condemnation award, the nonprofit does not provide proportionate value and the deed therefore fails to comply with Reg. 1.170A-14(g)(6)(i). The taxpayer claimed that the provisions of Reg. 1.170A-14(g)(6)(i) created an exception. It stated that the value must be the "proportionate value of the perpetual conservation restriction, unless state law provides that the donor is entitled to the full proceeds from the conversion without regard to the terms of the prior perpetual conservation restriction." The taxpayer referred to Burma Hills Dev. Co. v. Marr
, 229 So.2d 776, 782 (Ala. 1969) and claimed that Alabama state law did not require payment of the full amount to the conservation easement holder and therefore the deed restriction was permitted.
The Court noted that the Alabama decision was intended to apply to homeowners who held mutual easements and that the state law would still require compensation for the "holder of an enforceable contract right against a property owner." The easement was an interest in property whose holder "must be compensated for its condemnation or destruction or other conversion." Therefore, the extinguishment provision was defective and the conservation easement deduction is disallowed.
The claimed gift of the timber fails on two grounds. The standing timber is not permitted to be harvested under the conservation easement deed and therefore does not belong to the nonprofit. In addition, a gift of the standing timber would violate the partial interest charitable deduction rules under Section 170(a)(3).
Because the IRS did not comply with the administrative requirements for the penalties, there was one minor penalty assessed and all other penalties were rejected.
Accelerate or Limit Giving?
A new coalition named the "Initiative to Accelerate Charitable Giving" recently offered multiple proposals with respect to donor advised funds and private foundations. At present, private foundations have assets of $1 trillion, while donor advised funds hold property valued at $120 billion. The Accelerate coalition suggests that there should be greater distributions from these funds. It noted, "Today's tax laws do not sufficiently incentivize these philanthropic vehicles to distribute their funds to charities in a timely fashion, even though donors receive tax benefits upfront meaning the government is deprived of tax revenue without seeing a return benefit to society."
The Accelerate coalition offers multiple specific provisions. They suggest that the deduction for gifts of property (such as closely held stock) should be limited to the amount of the sale proceeds, rather than the appraised value. Donor advised funds should be required to distribute all of their funds within 15 years. If a donor chooses to defer distribution past 15 years, the charitable deduction would be deferred until that later distribution date.
Private foundations would be subject to new limitations. Private foundations would not be permitted to count the salaries or travel expenses of family members as part of their payout obligations and could no longer count distributions to a donor advised fund for that same purpose. If the foundation wanted to avoid the excise tax on income, it could do so by increasing payouts to 7% or distributing all assets within 25 years of foundation funding.
Members of the coalition spoke in favor of the concept. Hewlett Foundation President Larry Kramer stated, "The Initiative to Accelerate Charitable Giving has developed a thoughtful proposal to update the nation's tax laws and align incentives so that the whole philanthropic sector can meet its dual purpose of providing aid for dire, immediate needs such as COVID relief and building and sustaining the ideas, institutions, and movements to address society's most pressing and complex long-term problems, from racism to climate change."
The Philanthropy Roundtable responded and opposed the recommendations of the Accelerate coalition. In a letter to members of Congress, the Philanthropy Roundtable stated, "The core of the Initiative is a series of unnecessary and arbitrary regulations on donor advised funds, which are an increasingly popular vehicle for charitable giving. Donor advised funds allow individuals to donate as much as they can in a given year; they facilitate both immediate and long-term giving for a specific cause or local community. Beyond donor advised funds, the Initiative also takes aim at a family's ability to serve its own foundation, which would unfairly target smaller and less-wealthy institutions."
This debate on charitable giving will be continued by members of Congress. Your editor and this organization take no specific position on these recommendations. This information is offered to our readers as an educational service.
Applicable Federal Rate of 0.6% for February Rev. Rul. 2021-4; 2021-6 IRB 1 (19 January 2021)
The IRS has announced the Applicable Federal Rate (AFR) for February of 2021. The AFR under Section 7520 for the month of February is 0.6%. The rates for January of 0.6% or December of 0.6% 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 2021, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.