In IR-2023-222, the Internal Revenue Service (IRS) reminded low-income and moderate-income taxpayers they could benefit from a "Saver's Credit" in 2024.

The Saver's Credit allows individuals to contribute up to $2,000 to a retirement plan and receive a credit. The credit is also available to individuals who are a beneficiary of an Achieving a Better Life Experience (ABLE) account.

The maximum credit is $1,000 for a retirement contribution of $2,000. The maximum credit amount is increased to $2,000 for a retirement contribution of $4,000 by a married couple.

Taxpayers who are age 18 or older are eligible for the Saver's Credit if they are not claimed as a dependent on another individual's tax return and not a student. A student is defined as a person who was a full-time student or in a full-time training course for five calendar months during a tax year.

The Saver's Credit is 50% of the initial income level, 20% for the next level and 10% for the 3rd level. The contribution of up to $2,000 may be to a traditional or Roth IRA, a 401(k), 403(b) or a governmental 457(b) plan. It also is possible to qualify for a transfer to a Federal Thrift Savings Plan.

There are limitations on the Saver's Credit. A rollover contribution, such as a transfer from one IRA account to a new IRA account, does not qualify. There also may be some reductions if you have taken a distribution this year from a qualified retirement plan or from an ABLE account.

The married couple limits for the three levels are a 50% credit for incomes up to $43,500, a 20% credit for those with added earnings up to $47,500 and a 10% credit for any additional earnings up to $73,000. The single individual may qualify for the 50% credit amount with earnings up to $21,750, a 20% credit for additional earnings up to $23,750 and a 10% credit for added earnings up to $36,500.

The Saver's Credit timing includes this year or a contribution prior to April 15, 2024. This is similar to the rules that allow an individual to set up an IRA for 2023 until the tax return due date for 2024.

Additional information on the Saver's Credit is available in the instructions for IRS Form 8880, Credit for Qualified Retirement Savings Contributions.

Billionaire "Buy, Borrow, Die" Bill

Senate Finance Committee Chair Ron Wyden (D-OR) has introduced the "Billionaire's Income Tax Act (BITA)." The bill is targeted at the 700 individuals in the nation with annual income over $100 million or assets valued at over $1 billion. The basic goal of the BITA is to tax unrealized gains using mark-to-market strategies.

Commentators have questioned whether a mark-to-market strategy is constitutional. The U.S. Supreme Court is considering exactly that issue in the case Moore v. United States.

Wyden noted there are existing IRC provisions that have been in effect for many years using the mark-to-market principle. These provisions include Sections 475, 877A, 1256 and 1296.

Wyden stated, "I think there's no question, it is constitutional. I do not see how the Court can strike down sections of the federal tax code that we are using as our model that have been on the books a long, long time."

BITA attempts to create provisions that minimize the ability of taxpayers to avoid payment. It includes provisions designed to discourage wealthy individuals from obtaining a divorce and avoiding becoming an applicable taxpayer. It also increases the probability that estates or trusts would be deemed applicable taxpayers under the statute.

If individuals choose to expatriate, they would be an applicable taxpayer for potentially 10 years if they have income of more than $50 million or assets valued at more than $500 million in the preceding five years. The bill also attempts to reduce the ability of taxpayers to transfer assets to family members and avoid the tax. Once taxpayers are deemed to be subject to the tax, they remain subject unless they fall below half the threshold for three consecutive years.

Wyden has frequently criticized the ability of billionaires to avoid taxation. He refers to the strategy as "Buy, Borrow, Die." Wyden noted, "These three little words are allowing billionaires across America to legally get away with paying little or nothing in taxes for years and years on end."

The basic strategy for wealthy individuals is to borrow and use the funds for extravagant lifestyles. Wyden describes the process in this way: "A billionaire buys a business, and then borrows against its growing, untaxed value to fund their extravagant lifestyle. Everything from superyachts, to luxurious vacations, expensive art deals, you name it. It goes up and up in value all while not paying a dime in tax. And when they die, their assets are passed to their kids—often entirely tax-free—and the cycle continues."

Wyden concluded, "I wanted to make sure that people understood exactly what is at stake." The Joint Committee on Taxation estimates that the BITA could produce a $557 billion of tax revenue over a decade.

Editor's Note: A wealth tax is very difficult to implement. While publicly-traded assets may be valued, the wealth tax encourages individuals to avoid owning public assets. It is much more difficult to value privately-held assets. The wealth tax is also designed to reduce the incentive to make gift and estate transfers to family. BITA would require recognition of gain on transfers from applicable individuals to family. Two exceptions would be transfers to a surviving spouse or to a qualified exempt charity. While BITA is not likely to pass in the present form, some of the BITA proposals may eventually be included in tax bills.

Protect Clients from Charity Fraud

In IR-2023-225, the IRS chose Giving Tuesday to publicize the campaign known as Charity Fraud Awareness Week. The Fraud Advisory Panel estimates nonprofits could lose up to 5% of revenue each year from fraud.

Part of the loss is due to fraud and cybercrime that targets existing charities. An additional loss occurs when donors give to entities that claim to be charities but are actually controlled by private individuals.

IRS Director of Exempt Organizations and Government Entities Robert Malone noted, "We thank the Fraud Advisory Panel for the important work that goes into Charity Fraud Awareness Week and for reminding donors to remain vigilant. Unfortunately, charity scammers look for opportunities to take advantage of situations, such as natural disasters, when exempt organizations are making an effort to help. Donors and charitable organizations alike should remain vigilant to protect their assets from fraudsters."

The IRS urges tax advisors to use the Tax Exempt Organization Search (TEOS) tool on IRS.gov to verify the nonprofits. Because many substantial donors have regular contact with advisors, their CPAs and other tax professionals can assist these clients. The donors may be people with good hearts, but are making gifts to fake charities. This is particularly the case after natural disasters. Not all charities will come up in a search on the TEOS tool.

Tax advisors are urged to use the TEOS tool to assist clients in making certain they are transferring gifts to qualified charities. The Fraud Advisory Panel urges all advisors to learn about the risk of fraudulent charities. They should train trustees, staff and volunteers of nonprofits about the risks involved. It is also helpful if the many charitable associations will highlight these risks in publications to their members

Applicable Federal Rate of 5.8% for December -- Rev. Rul. 2023-21; 2023-49 IRB 1 (15 November 2023)

The IRS has announced the Applicable Federal Rate (AFR) for December of 2023. The AFR under Sec. 7520 for the month of December is 5.8%. The rates for November of 5.6% or October of 5.4% 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 2023, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return. Charitable gift receipts should state, "No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property."