Friday December 8, 2023
Increased Standard Deduction May Save Taxes
Congress has indexed for inflation approximately 60 different tax provisions. With the high level of inflation this year, the standard deduction, the tax bracket thresholds and many other tax items will be substantially larger in 2023.
The standard deduction for individuals this year is $12,950. In 2023, that amount will increase by $900 to $13,850. For married couples, the increase is $1,800 from $25,900 this year to $27,700 next year.
With these increased standard deductions, many individuals will benefit from lower tax payments next year.
While federal tax rates range from 10% to a top level of 37%, all of the brackets used to calculate tax payment will also increase by approximately 7%. If taxpayers do not have a substantial increase in income in 2023, the larger standard deductions and increased bracket thresholds could produce tax savings.
Howard Gleckman, a Senior Fellow with the Tax Policy Center noted, "The idea here is not that people will pay less tax. The idea is to keep your tax liability relatively stable."
The increased exemptions and bracket amounts are significantly larger because the IRS uses a "Chained Consumer Price Index" to determine the new rates. The annual rate of inflation registered 8.2% in September, which was slightly lower than the 8.3% annual rate in August.
As a result of the high inflation rate, the Social Security Administration (SSA) also is increasing payments starting in January. There will be an 8.7% cost-of-living adjustment for retirement and other payments from SSA.
Conservation Easement Battle of the Appraisers
In Champions Retreat Golf Founders LLC et al. v. Commissioner; No. 4868-15; T.C. Memo. 2022-106 (Champions), the Tax Court on remand determined the value of a conservation easement. The Court assigned a value generally more favorable to the taxpayer. The taxpayer had reported a charitable conservation easement deduction of $10.4 million, and the IRS countered with a claimed value of $20,000. The Tax Court determined that the potential residential development could have been completed and allowed a charitable deduction of $7.8 million.
The Champions case was initially in Tax Court and the deduction was denied. However, the Eleventh Circuit concluded that Champions was qualified for a deduction and remanded the case to the Tax Court to determine the proper value.
Champions was formed in 2001. It developed 95 acres of residential property for Founders Village and built a 27-hole golf course on 365 acres. The three nine-hole courses were designed by Gary Player, Arnold Palmer and Jack Nicklaus. The course is in a master community with Planned Unit Development (PUD) zoning provisions. The golf course is subject to certain declarations and restrictions.
On December 16, 2010, Champions conveyed an easement to the North American Land Trust (NALT) on 348 acres. This included the majority of the three nine-hole golf courses. Champions claimed a $10.4 million charitable contribution on its 2010 partnership return form. The golf course was sold in 2014 for $4.5 million.
Champions presented appraisal opinions by Mr. Claud Clark III and Thomas F. Wingard. The Tax Court recognized both Mr. Clark and Mr. Wingard as experts in conservation easement valuations. The IRS appraiser was David G. Pope, who had expertise in valuations for hotels and golf properties but did not have expertise in conservation easements. Mr. Pope valued the conservation easement at $20,000.
The Tax Court noted that if "there is no established market for similar conservation easements and no record exists of sales of easements, the fair market value of the donated easement is equal to the difference between the fair market value of the property it encumbers before the granting of the restriction and the fair market value of the encumbered property after the granting of the restriction.'" Reg. 1.170A-14(h)(3)(i).
The first determination is the highest and best use of the property. Mr. Clark opined the best use was a residential subdivision with an 18-hole golf course. He claimed the deed restrictions could permit a partial residential development. Mr. Wingard agreed with that analysis. Mr. Pope countered by noting that 50% of the property was in a flood hazard zone and there were restrictions that could delay or eliminate development. His $20,000 valuation was based on the assumption that the highest and best use of the property would be to remain exclusively used as a golf course.
The Tax Court reviewed the analysis and determined that there was sufficient demand for at least a "partial residential development." Because the taxpayer made the case that there could be a residential development, the next determination was the valuation. Mr. Clark used a discounted cash flow method to determine a total potential property value of $16.8 million and a conservation easement value of $10.88 million. Mr. Pope claimed that the property must be used solely for a golf course, concluded that the before value was $4.3 million, the after easement value reached $4.28 million and the conservation easement value was worth $20,000.
The Tax Court determined that the $10.8 million valuation was too high, but rejected the analysis of Mr. Pope because it did not reflect any potential subdivision development. Based on its own analysis, the Tax Court determined that the appropriate deduction was $7.83 million.
Editor's Note: The IRS had previously been winning syndicated partnership conservation easement cases on technical grounds. This is one of the first cases in which the Court had a battle of the appraisers.
2023 Tax Tables, Exemptions and Deductions
In Rev. Proc. 2022-38; 2022-45 IRB 1 (18 Oct 2022), the IRS published tax tables, exemptions and deduction limits for 2023. With the increasing rate of inflation for the mid-2021 to mid-2022 base periods, there are substantial increases in many tax provisions.
The standard deduction will be $27,700 for couples filing jointly and $13,850 for single persons. The head of household standard deduction increases to $20,800. All three standard deductions were nearly doubled for 2018 and later years by the Tax Cuts and Jobs Act (TCJA).
Certain taxpayers must calculate both regular and alternative minimum tax (AMT) amounts. The tax payable is the greater of the two numbers. The 2023 AMT exemptions are $126,500 for married couples and $81,300 for single individuals. The AMT exemption is phased out for married couples with income over $1,156,300 or for single individuals with incomes over $578,150. The AMT tax is 26% at the lower level and 28% over $220,700.
Cafeteria plans are available for medical reimbursement of qualified expenses. The flexible spending account (FSA) plan limit for 2023 is $3,050.
Charities are permitted to transfer token gift premiums to donors who make gifts above a specific level. In 2023, a donor who makes a gift over $62.50 may receive a premium with the logo or other identification of the nonprofit at a value of $12.50 or less. Donors who make larger gifts may receive a premium up to 2% of the value of the gift, with a limit of $125.
The estate tax basic exclusion amount increases from $12.06 million to $12.92 million. A couple in 2023 may have an estate of $25.84 million with no transfer tax.
Special use agricultural land under Sec. 2032A may qualify for $1.31 million of reduced value. If an estate qualifies for installment payment of the estate tax under Sec. 6166, the 2% interest amount is levied on $1,750,000.
Finally, the annual gift exclusion changes to $17,000. This is applicable per donor-per donee exclusion. An individual or couple with a large family may make substantial tax-free transfers each year through the use of annual gift exclusions.
Applicable Federal Rate of 4.8% for November -- Rev. Rul. 2022-20; 2022-45 IRB 1 (17 October 2022)
The IRS has announced the Applicable Federal Rate (AFR) for November of 2022. The AFR under Section 7520 for the month of November is 4.8%. The rates for October of 4.0% or September of 3.6% 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 2022, pooled income funds in existence less than three tax years must use a 1.6% deemed rate of return.