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Tax IRS Courts Congress WASHINGTON TAX UPDATE JUNE 13, 2012 Look Inside What’s New from the IRS Tax Planning Tip of the Week What’s New from the Courts It Bears Repeating Tax Laughs Welcome to Washington Tax Update , where you will find useful information about taxes, including current events in our nation’s capital, as well as informed opinions and predictions about what is expected to happen.

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TTf604F.tmp.wtu061312.pdfLook Inside
It Bears Repeating
Tax Laughs
Welcome to Washington Tax Update, where you will find useful information about taxes, including current events in our nation’s capital, as well as informed opinions and predictions about what is expected to happen.
what’s new from the IRS
Annual limit comes to flexible spending arrangements For plan years beginning after Dec. 31, 2012, salary reduction contributions to health
flexible spending arrangements will have a statutory annual limit of $2,500.
Prior to the Pension Protection Act of 2006, no statutory limit existed for the amount of
salary reduction contributions that employees could elect to contribute to their health
FSAs, other than the limit imposed by the plan sponsor.
The IRS has issued guidance in Notice 2012-40 with the following provisions:
The $2,500 limit does not apply for plan years that begin before 2013.
The term “taxable year” refers to the plan year of the cafeteria plan – the period for
which salary-reduction elections are made.
Plans may adopt the required amendments to reflect the $2,500 limit at any time
through the end of calendar year 2014.
In the case of a plan
providing a grace period
months and 15 days),
the subsequent plan year.
The new guidance also
provides relief for certain
exceed the $2,500 limit but
are corrected in a timely manner. Relief is available if the excess is due to a reasonable
mistake, not willful neglect, and the employer corrects the mistake.
what’s new from the IRS
tax planning tip of the week
The Roth option: Pay now, save later You may be familiar with Roth IRAs, but do you know that some employer-sponsored
retirement savings accounts, like 401(k) plans, also offer a Roth alternative?
Few people choose that option because they have to pay tax currently on the amount that
goes into the Roth account. Paying more taxes now doesn’t sound like a good idea.
But Roth accounts offer longer-term tax advantages:
Traditional retirement accounts present you with taxable income when you receive
retirement distributions. Of course, many people expect to be in a lower tax bracket
when they retire. Distributions from Roth accounts are entirely tax-free once you have
established a five-year history of using a Roth account.
A traditional retirement account requires you to begin taking distributions when you
reach age 70½. Roth accounts have no required minimum distribution.
Taxable retirement distributions can have other adverse income tax consequences:
The higher your income, the greater the portion of your Social Security benefits
subject to income tax.
Beginning in 2013, a 3.8 percent tax on investment income will apply to married
couples with income above $250,000 and singles with income over $200,000.
Taxable retirement distributions may push you over these thresholds.
For those on Medicare, the monthly premiums for some benefits are higher, depending
on the person’s income. Roth distributions are not counted as income for purposes of the
taxation of Social Security benefits, the 3.8 percent tax on investment income or
Medicare premium determinations.
You can transfer funds from your traditional retirement account to a Roth account, but you
must pay tax on the rollover amount. However, you cannot go the other way: Funds in a
Roth account may not be transferred to a traditional account.
tax planning tip of the week
what’s new from the courts
Nice gift if you can get it In a recent case, the Tax Court allowed a gift tax annual exclusion for gifts of
interests in a family limited partnership.
The gift tax annual exclusion is available only for gifts of present interest, not for
gifts of future interest. A present interest is an unrestricted right to immediate use,
possession or enjoyment of property or the income from property.
With many family limited partnerships (FLPs), including the FLP in this case,
restrictions are imposed on the ability of a partner to transfer an interest in the
partnership (Estate of George Wimmer et al. v. Commissioner, TC Memo
2012-157, June 4, 2012). In the Wimmer case, partners could transfer
partnership interests to existing partners or their relatives.
However, before an interest could be transferred to an outsider, the other
partners had to approve the transfer. Since the donees did not have an
unrestricted right to transfer their partnership interest to others, the court
determined that the gifts of partnership interests were not gifts of a present
interest in the equity of the FLP.
The court then went on to determine whether partners who received the gifts
had a present interest in the income from the partnership. The court determined
that a present right to income exists if:
1. The FLP will generate income;
2. Some portion of that income would flow steadily to the recipients of the gifts;
3. That portion of the income could be readily ascertained.
Since the FLP assets consisted of publicly traded, dividend-paying stocks, the
court determined that the first test was met. With respect to the second test, the
court concluded that the general partner had a fiduciary responsibility to
distribute income to the limited partners and, in fact, made such distributions.
Finally, the third test was met because the partners could estimate their share of
the income by looking at the dividend history of the securities held
by the FLP.
Not all gifts of interest in FLPs will qualify for the gift tax annual
exclusion, which is currently $13,000 per year per donee, or
recipient. But this case demonstrates one set of circumstances in
which the gift tax annual exclusion was available.
it bears repeating
The Tax Court sympathizes – but rules are rules In a case that trounces any semblance of fairness, the Tax Court has
denied more than $4 million in charitable contribution deductions
claimed by a couple who had
undervalued the contribution.
successful entrepreneur. In 1998, he and
his wife Shirley formed a charitable
remainder unitrust, or CRUT.
allows someone to claim an immediate
deduction for a portion of the value of
property transferred to the trust. The
income from the trust goes to the donor for
life or for a term not to exceed 20 years,
with the remainder going to charity.
The Mohameds contributed a number of
real estate properties to the trust. Joseph
prepared his own tax returns and listed
the gross value of the properties at about $18.5 million and the
charities’ share at more than $4 million.
After their returns were examined by the IRS, the Mohameds hired
appraisers, who valued the properties at more than $20 million.
The problem was that no appraisal was attached to the original
returns filed by the Mohameds.
Although Joseph was a certified real estate appraiser, he was not a
“qualified appraiser” as defined by the IRS. A qualified appraiser
cannot be the donor or the donee. As a result, the court somewhat
reluctantly concluded that the Mohameds did not comply with the
Treasury Regulations governing charitable contribution deductions.
The court stated:
We recognize that this result is harsh – a complete denial of
charitable deductions to a couple that did not overvalue, and
may well have undervalued, their contributions – all reported
on forms that even to the Court’s eyes seemed likely to mislead
someone who didn’t read the instructions. But the problems of
misvalued property are so great that Congress was quite
specific about what the charitably inclined have to do to
defend their deductions, and we cannot in a single
sympathetic case undermine those rules.
The moral of this story: Joseph should not have tried to prepare his
own return (Joseph Mohamed, Sr., et ux. v. Commissioner, TC Memo
2012-152, May 29, 2012).
tax laughs
What’s next? Gargle, spit and pay the rinse tax? Your parents always told you there is no such thing as a free lunch. In Vermont,
the tax collectors apparently decided there was no such thing as a free
toothbrush either.
As reported by WPTZ News in Burlington, Vt., the state legislature had to rein
in aggressive tax collectors who decided that dentists should be charging
Vermont sales tax on the toothbrushes they gave to their patients at the end of
an office visit.
Undoubtedly, the tax collectors reasoned that the toothbrushes were not “free.”
Rather the cost of the brush was built into the dentist’s pricing arrangement.
And if people had to pay sales tax on toothbrushes they bought at a store,
they should also pay tax on similar items “bought” from their dentist.
Apparently, the Vermont legislators thought this tactic was
going a bit too far. So they reacted by placing a moratorium
on this practice – as well as the tax collectors’ efforts to
collect sales tax on meals served at senior citizen homes.
“Treat your password like your toothbrush. Don’t let anybody else use it,
and get a new one every six months.”
– Clifford Stoll, Ph.D., U.S. astronomer and author
The technical information in this newsletter is necessarily brief. No
final conclusion on these topics should be drawn without further
review and consultation. Please be advised that, based on current
IRS rules and standards, the information contained herein is not
intended to be used, nor can it be used, for the avoidance of any
tax penalty assessed by the IRS.
© 2012 CPAmerica International