With the sharp decline in home values and an increasing number of foreclosures, Congress created a temporary tax credit for first-time buyers of $8,000 and for other purchasers of new homes of $6,500. In order to qualify for the credit, it was necessary to have a signed contract for purchase by April 30, 2010. The initial deadline for closing contracts signed on or before that date was June 30.

Because many home purchasers could not meet this deadline, the House and Senate have passed the Home Buyer Assistance and Improvement Act of 2010 (H.R. 5623). This bill extends the time for closing from June 30 to September 30.

Chief Economist of the National Association of Realtors Lawrence Yun indicated that this extension of the deadline would be very important. He noted that about “180,000 homebuyers who signed a contract in good faith to receive the tax credit may not be able to finalize by the end of June due to delays in the mortgage process, particularly for short sales.”

These individuals with contracts by April 30 will now be able to close by September 30 and receive their tax credits.

In December of 2009, the House passed an estate tax bill that continued the estate exemption at $3.5 million per person ($7.0 million for a couple). However, the Senate could not agree and the estate tax was repealed on January 1, 2010.

Sen. John Kyl (R-AZ) and Sen. Blanche Lincoln (D-AR) claim they are close to an agreement for an estate tax compromise. Both advocate increasing the exemption to $5 million and reducing the rate to 35%. They believe that they are near the 60 votes needed for a 10-year phased-in plan.

While it has not been publicly released, one version of the proposed Kyl-Lincoln compromise starts with an exemption of $3.5 million and an estate tax rate of 44%. Over a term of 10 years, the amounts are adjusted to a $5 million estate exemption and an estate tax rate of 35%. However, Sen. Max Baucus (D-MT) is not willing to bring the proposed compromise before the Senate Finance Committee for a formal vote.

Sen. Bernard Sanders (I-VT) is an Independent but participates in the Democratic caucus. He has been joined by Sen. Tom Harkin (D-IA) and Sen. Sheldon Whitehouse (D-RI) in introducing a new estate tax bill.

The three senators sent a letter to their colleagues and outlined the reasons for enacting an estate tax increase for Americans with larger estates. Sen. Sanders notes that a wealthy Houston resident named Dan Duncan passed away early in 2010 with an estimated $9 billion estate. If the Senate does not take action, this estate could be transferred to family with a savings of several billion in estate tax.

Total estate tax savings in 2010 for heirs of Duncan and others with large estates are estimated to be $14.8 billion. This amount is lost revenue to the federal government in a time when all possible avenues for raising revenue are being explored.

Sen. Sanders proposes the “Responsible Estate Tax Act of 2010.” This act would tax the first $3.5 million of an estate at 45%. Estates over $10 million would be taxed at 50%, with estates over $50 million paying tax at a rate of 55%.

In addition, there would be a “billionaire” surtax of 10%. Sen. Sanders would “protect family farmers” by allowing a Sec. 2032A reduction in farm land for heirs who are actively farming of up to $3 million, an increase over the current $1 million limit. Finally, for estate conservation easements, the exclusion would be increased to $2 million and the base percentage to 60%.

This proposal would also incorporate the Obama Administration’s recommendation to set a minimum term for the GRAT of 10 years and also to modify the rules to reduce minority and lack of marketability discounts for family limited partnerships.

Sen. Charles Grassley (R-IA) did not support the Sanders bill but suggested that it may have been useful for Sen. Sanders and his supporters to place a plan on the table. He indicated that there are “quiet supporters of the junior senator from Vermont” and they will be influencing the overall result.

Thanks to Jon Rich of Ducks Unlimited for this information.

If so, be sure you clearly document exactly what you donated to substantiate the amount you are deducting on your taxes.

In Edmund Douglas Roberts v. Commissioner; T.C. Summ. Op. 2010-76; Memo. 2716-09S (17 June 2010), the Tax Court determined that clothing and other tangible personal property gifts by the taxpayer did not qualify for a deduction due to inadequate substantiation.

Mr. Roberts filed his 2005 tax return 13 months late in June of 2007. He reported a $200 cash charitable contribution and gifts of 450 items of property valued at $28,655. His tax return included Form 8283, Noncash Charitable Contributions and reported gifts of used clothing, towels, bed sheets, books, costume jewelry, children’s toys and glass lamps. The IRS audited the return and assessed a deficiency of $10,482.

The Tax Court noted that gifts of cash are deductible with a cancelled check, receipt or reliable evidence that shows the donee, the date and the amount of the gift. Reg. 1.170A-13(a)(1). The cash gifts by Mr. Roberts did not include any of that required information and he could not identify the date or the specific charity. Therefore, the cash deduction was not appropriately substantiated.

A noncash deduction is permitted provided there is a receipt with the name of the charity, the date and location of the gift, a reasonably detailed description of the property, the fair market value and an explanation of the valuation method. Reg. 1.170A-13(b)(1).

Mr. Roberts did have five receipts from Goodwill. However, only one of the receipts had a signature. None of the receipts included the “reasonably detailed” description of the items. Since there were no adequate descriptions of the items or the method used for valuation, the deductions were denied, with the exception of a small number of items that had been accepted by the Service.

A special thank you to John Rich at Ducks Unlimited for supplying this information.

Senate Charles Grassley (R-IA) is the ranking Republican on the Senate Finance Committee. In a conference call with several reporters on June 2, 2010, he discussed the uncertain future of the estate tax.

Sen. Grassley noted that Sen. Jon Kyle (R-AZ) and Sen. Blanche Lincoln (D-AR) have proposed that the Senate Finance Committee pass an estate tax bill with a $5 million per person exemption and a 35% top estate tax rate. However, Grassley expressed the opinion that “the Finance Committee would like to take up consideration of legislation, but we aren’t assured by the majority leader that the bill passed out of committee will be taken up on the floor.”

Under the Senate rules, even if the Finance Committee were to pass the Kyle-Lincoln estate tax compromise, Majority Leader Harry Reid (D-NV) is not obligated to schedule a floor vote and could simply stall the legislation.

In December of 2009, the House passed the Permanent Estate Tax Relief for Families, Farmers and Small Businesses Act of 2009. This makes permanent the 2009 estate exemption of $3.5 million and top estate tax rate of 45%. If the House and Senate are not able to take action on estate taxes by the end of 2010 then on January 1, 2011 the estate tax returns with a 55% top rate and an exemption of $1 million (plus indexed increases). If this were to happen, Sen. Grassley stated that there will be a “tremendous upheaval at the grassroots of America.”

Thanks to Jon Rich of Ducks Unlimited for this article.

Senate Finance Chair Max Baucus (D-MT) has been in intensive negotiations with Sen. Jon Kyl (R-AZ) and Sen. Blanche Lincoln (D-AR) over the estate tax. Sen. Kyl and Sen. Lincoln have proposed increasing the $3.5 million exemption that was applicable in 2009 to $5 million per person. In addition, the previous estate tax rate of 45% would be reduced to 35%.

Negotiations have been ongoing for several weeks. On May 11, 2010, Sen. Kyl reported, “We have an agreement about how we would like to move forward and an agreement on many of the offsets.” He continued by observing that the offsets are still subject to discussion. It is estimated that the offsets will be from $60 billion to $80 billion.

While the details of the proposed compromise have not been released, several aides suggested that it may include an estate tax option in 2010. If the option is enacted, estate planners could choose either the repeal of estate tax and lose part of the step-up in basis under the 2010 rules or select the new compromise estate exemption and estate tax rate.

It may occur that the tax extenders and the estate tax are combined in one legislative bill. Senate Budget Chair Kent Conrad (D-ND) observed this week, “You have got 13 legislative weeks. It seems to me it would be wise to put all the tax measures together.”

The House proposal for the offsets for the tax extenders (including the IRA charitable rollover) is to change the “carried interests” of hedge fund managers from being taxed at capital gain rates to ordinary rates. It now is possible that the change in the law will occur, but it may be phased in over a number of years.

Special thanks to Jon Rich at Ducks Unlimited Gift Planning for this article.

A very special thank you to Natalie Cranford of the American Cancer Society for directing me to this website.  It contains a ton of resources for following the bouncing estate tax ball.

http://trustsandestates.com/tech_center/estate-tax-Internet-resource-guide-0317/

“All governments must have a regard not only for what the people are able to bear, but what they are willing to pay, and the manner in which they are willing to pay without being provoked to a rebellion.”  
- Henry Fox

Deborah Jenkins, from Forbes.com, paints a grim picture of what will likely happen in 2011.  The estate tax is scheduled to return in 2011 and the estate tax exemption rate will be $1 million.  Assets left to a charity or spouse is exempt from taxes.  However, if both spouses pass together or if a widow or widower passes and the assets total more than $1 million, anything above $1 million can be taxed 55%. 

A person’s taxable estate can include equity in the home, all money/retirement accounts, property and life insurance proceeds.  One can see that it does not take long to reach $1 million.  Estate planning techniques to avoid estate taxes are also being shrunk.  It is essential to have a quality estate planning team comprising of a financial advisor, accountant, life insurance agent and estate planning attorney.

 http://www.forbes.com/2010/04/18/estate-tax-sharp-bite-2011-personal-finance-grats-flps.html

Q. I understand that Congress is considering a so-called “flat” tax system. How would this work?
A. If Congress were to pass a “flat” tax, you’d simply pay a fixed percentage of your income, and you wouldn’t have to fill out any complicated forms, and there would be no loopholes for politically connected groups, and normal people would actually understand the tax laws, and giant talking broccoli stalks would come around and mow your lawn for free, because Congress is NOT going to pass a flat tax.
—Dave Barry