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Thursday April 24, 2014

Washington News

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Obama and Biden 2013 Tax Returns

Each year President Barack Obama and Vice-President Joe Biden release their tax returns. Both have done so for year 2013.

In 2013 President Barack and Michelle Obama had adjusted gross income of $481,098. This was lower by approximately 20% from the prior year due to reduced royalties from the sale of books written by the President. Most of their income came from his $394,796 salary as President.

The Obamas filed as a married couple with two added exemptions for daughters Malia and Natasha. Because the book income qualifies as self-employment earnings, the President was able to reduce taxes by funding a Simplified Employee Pension (SEP) with $20,681.

The Obamas itemized deductions were $147,769. The largest itemized deduction was for charitable gifts of $59,251. The major gifts by President and Mrs. Obama were to the Fisher House Foundation, the American Red Cross, One Fund Boston and CARE. Other gifts were made to 28 additional charities.

After taking their itemized deductions, the Obamas had taxable income of $333,329 and paid tax of $98,169. Their effective tax rate was 20.4% of their total income.

Vice-President Joe Biden and his spouse Jill Biden had an adjusted gross income of $409,009. This was primarily from his salary as Vice-President and her salary as a professor at Northern Virginia Community College. They paid tax of $96,378. This was an effective rate of 23.7%.

The Biden’s made charitable gifts of $20,523. The largest gifts were to the USO and the Annual Catholic Appeal of the Diocese of Wilmington, Delaware.

Both the President and Vice-President participated in a new experience for many upper-income taxpayers. Starting in 2013, the 3.8% Net Investment Income Tax (NIIT) under the Affordable Care Act (ACA) is applicable. Because both couples were over the $250,000 threshold for the tax, the Obamas paid NIIT of $2,310 and the Biden’s paid $933 of additional tax.

IRS Tax Filings Cost $170 Billion


By April 15 over 150 million American taxpayers had filed tax returns for 2013. The IRS viewed this as a very successful filing season. It published a statement explaining that belief.

“The IRS had delivered a strong, successful filing season for the nation’s taxpayers. As of April 11, 2014, the IRS had received almost 113 million tax returns, processing almost $235 billion in refunds. We anticipate that an additional 12 million estimated taxpayers requested an extension by the filing deadline giving them an extra 6 months to file.”

The American Action Forum reviewed the time and cost involved for Americans to comply with the IRS requirements. Due to a very complex Internal Revenue Code, the number of hours required were 7.7 billion. The average time per return was 12.2 hours.

Based on an assumed average rate for a civilian employee of $31.57 per hour, the American Action Forum estimates the annual cost of complying with IRS requirements to be $170.4 billion.

Part of the tax filing challenge is the great diversity of required forms. The personal IRS Form 1040 could include up to 198 other attached forms. Estate and Generation Skipping Transfer taxes require either an IRS Form 709 Gift Tax Return or IRS Form 706 Estate Tax Return. There can be 23 attached forms. Additional tax forms are IRS Form 990 for Charitable Organizations and IRS Form 1041 for Trusts and Estates. Subchapter S corporations, partnerships and corporations all have their own individual forms.

Editor’s Note: The complexity of the required paperwork for compliance with the IRS filing requirements is reflected in the increase in the estimated number of hours for preparation during the past four years. The total number of hours to comply with IRS requirements has increased from 6.2 billion hours in 2010 to 6.8 billion hours in 2011 and 7.7 billion hours in 2012 and 2013. The IRS Taxpayer Advocate Service is a watchdog agency within the government. It has noted that the single greatest problem with the tax code is the sheer complexity. It appears that this year there now are 7.7 billion reasons for major tax reform.

Invalid Installment Payment Election


In Estate of Wallace R. Woodbury et al. v. Commissioner; T.C. Memo. 2014-66; No. 19901-12 (13 Apr 2014), the Tax Court determined that a late IRS Form 706 Estate Tax Return precluded election of installment payment of tax on business interests.

Decedent Wallace R. Woodbury was a Nevada resident who passed away on September 27, 2006. His son Wallace Richards Woodbury, Jr. was appointed executor. IRS Form 706 was due June 27, 2007. The estate filed IRS Form 4768 and obtained an extension to December 27, 2007. On June 18, 2007, the Estate sent a letter with Form 4768 and stated, “The primary purpose of this letter is to inform you that the Estate intends to make the election to pay the Federal Estate Tax attributable to decedent’s interest in the closely held businesses pursuant to Section 6166 when the Form 706 Estate Tax Return is filed.” The estate paid $9,500,000 on the balance of the estate and estimated the assets that would qualify for Sec. 6166 installment payment of tax would produce a total bill of approximately $10 million.

On 12/31/2007 the estate filed an additional request for another 6 month extension and again gave notice of its intention to make the Sec. 6166 election. On June 1, 2010 the estate filed IRS Form 706. It disclosed the specific real estate assets that qualified under Reg. 20.6166-1(b) for the installment payment of tax. The estate also paid the estimated interest due.

The IRS denied the Sec. 6166 election and noted that the failure to file a timely return precluded making the election. The balance of the estate tax was due and payable.

The court noted under Sec. 6166(d) the election “shall be made not later than the time prescribed by Section 6075(a) for filing the return of tax imposed by Section 2001 (including extensions thereof).” Reg. 20.6166-1(b) states that the election “under Section 6166(a) is made by attaching to a timely filed estate tax return a notice of election.”

The estate claimed that there was substantial compliance sufficient to qualify for the election because it had clearly indicated an intent to make the Sec. 6166 election on letters filed with requested extensions to the tax return.

However, the court noted that Reg. 20.6166-1(b) requires six specific items. A Sec. 6166 election must include the decedent’s name and taxpayer number, the amount of tax, the date selected for first payment, the number of annual installments, the properties that are qualified business interests and the basis for the conclusion that the estate qualifies for the election. The estate letter failed to comply with these six requirements. Specifically, there was no means for the IRS to determine whether the applicable business interests did comprise the required 35% of the gross estate.

Therefore, there was no substantial compliance because the estate failed to file a timely return on December 27, 2007 and finally did file a return over two years later on June 1, 2010. There was no valid Sec. 6166 election.

Applicable Federal Rate of 2.2% for April -- Rev. Rul. 2014-12: 2014-15 IRB 1 (19 Mar 2014)


The IRS has announced the Applicable Federal Rate (AFR) for April of 2014. The AFR under Section 7520 for the month of April will be 2.2%. The rates for March of 2.2% or February of 2.4% 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 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 April 18, 2014

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