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Sunday October 26, 2014

Washington News

Washington Hotline

401K Limit Increased to $18,000 for 2015

Each October the IRS publishes the increased limits for retirement plans for the following year. In IR-2014-99, the Service increased 401(k) and 403(b) contribution limits from $17,500 this year to $18,000 for 2015.

Employees who are age 50 or older may also benefit from an additional “catch-up” contribution. The limit for 2015 has been increased from $5,500 to $6,000. The total employee contribution for those age 50+ could be $24,000 next year.

Because many employers have 401k matching programs, the total contribution could be substantially higher. For example, with a $1 employer match for each $2 of employee contribution, an employee over age 50 may benefit from up to $36,000 of total contribution in 2015.

The regular IRA contribution of $5,500 is unchanged. Similarly, for an IRA the $1,000 “catch-up” amount for persons over age 50 is also the same next year.

Many other retirement fund limits also have increased.

1. IRA Phaseouts – If an employee is covered by a workplace plan, the single person phaseout is from $61,000 to $71,000. The married couple phaseout is from $98,000 to $118,000.

2. Roth IRA Phaseouts – The option to use a Roth IRA phaseout for a single person is at $116,000 to $131,000. The married person Roth phaseout is $183,000 to $193,000.

3. Retirement Savings Tax Credit – The benefit for low and moderate income persons has a single person limit of $30,500 and a married couple limit of $61,000.

Editor’s Note: There are increases in many of the other retirement plan provisions. These include total compensation considered, employee stock option plan limits, SIMPLE retirement plan limits and other various retirement-related amounts.

Will DAFs Have Mandatory Payouts?

House Ways and Means Chairman Dave Camp (R-MI) published a tax reform discussion draft earlier this year. The comprehensive tax reform proposal impacted individuals, corporations, nonprofits and covered nearly 1,000 pages. Many of the extensive provisions had an impact on charitable giving.

At a Washington conference sponsored by the District of Columbia Bar Association, Harold Hancock, Majority Tax Counsel for the House Ways and Means Committee, discussed several of the charitable provisions. One of the Camp proposals was that donor advised funds (DAFs) would be required to distribute contributions and earnings within five years. If the DAF does not make distribution within five years, there would be a 20% excise tax on the undistributed principal and income.

Hancock noted that there was extensive feedback from the philanthropic community on that proposal. He suggested this provided “a lot of good and interesting information about what donor-advised funds look like.” As a result of the massive feedback and concern by the philanthropic community, he indicated that there “will be changes” to these provisions in the 2015 proposed tax legislation.

Hancock also discussed provisions included in the America Gives More Act (H.R. 4719). One of the provisions replaces the current complex 2% and 1% excise tax on private foundation income with a flat 1% tax. It also makes that provision permanent. The bill passed the House with solid bipartisan support and Hancock indicated that he hopes this will be enacted.

Editor’s Note: As the election nears, there are ongoing plans for the lame duck session in November and for potential 2015 tax reform efforts. Chairman Camp stated again this week that he hoped to make 12 tax extender provisions permanent. The House and Senate leadership will be negotiating over the tax extenders in November. IRS Commissioner Koskinen also stated that late passage of the tax extenders will create the “most complex” tax season in IRS history.

Senate Solutions for ID Theft

Sen. Charles Grassley (R-IA) and 14 other senators joined to offer solutions for tax fraud identity theft. Identity theft has been a regular topic at Senate Finance Committee hearings. Sen. Grassley stated, “This is a chronic problem. The IRS should make fixing it a high priority. Identity theft is devastating for victims and when it comes through the IRS, it undermines the integrity of the tax system.”

The 15 senators in a letter to IRS Commissioner John Koskinen outlined four specific solutions.

1. Verify Refunds – The IRS has 45 days after a return is filed before sending a refund. It now is issuing a refund in 9.6 days, in some cases without full information on the identity of the recipient.

2. IRS Single Contact – The National Taxpayer Advocate has recommended that all victims of identity theft be provided with a single contact person at the IRS.

3. Turn Off e-Filing – Most identity theft occurs through electronic filing of tax returns. If identity theft victims are able to turn off the e-Filing and only use paper returns, there would be less risk.

4. Identity Theft PIN – Sen. Grassley suggests that the IRS enable all persons who are potential identity theft victims to obtain a personal identity number to reduce their risk.

In the letter, the Senators asked IRS Commissioner Koskinen to prioritize resources. The letter concludes, “What further action, if any, does the IRS intend to take to combat this problem prior to the next tax filing season?”

Applicable Federal Rate of 2.2% for November -- Rev. Rul. 2014-28: 2014-45 IRB 1 (17 Oct 2014)

The IRS has announced the Applicable Federal Rate (AFR) for November of 2014. The AFR under Section 7520 for the month of November will be 2.2%. The rates for October of 2.2% or September of 2.2% 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 2014, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return. Federal rates are available by clicking here.

Published October 24, 2014
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