A flexible spending account (FSA), also known as a "cafeteria" plan, enables individuals to pay for medical or dependent care expenses. There are at least 33 million employees in the U.S. who use their FSA to pay for various medical expenses.
An FSA is sponsored by many employers and allows contributions of pretax funds to the account. In 2021, an individual may contribute a maximum of $2,750. In most years, unused funds over 20% of the contribution limit are not permitted to be carried forward to the following year. This is often called the "use–it–or–lose-it" rule.
However, the Consolidated Appropriations Act of 2021 was passed in December 2020 to provide COVID–19 pandemic relief. This bill permits employers to amend FSA plans and allows an unlimited carryover of funds from 2020 to 2021 and from 2021 to 2022. Individuals are permitted to make plan changes during 2021 and 2022.
The most popular use for FSAs is for the purpose of healthcare expenses. These funds can be used to cover out–of–pocket expenses for doctors, dentists, optometrists or ophthalmologists, pharmacy prescriptions and over–the–counter medications. Many FSA accounts issue an FSA debit card or permit account holders to submit medical statements for reimbursement.
The new option to carry forward an unlimited FSA balance in 2021 and 2022 is a welcome expansion of FSA benefits. Individuals who use these plans will be able to build up larger funds to protect them from potential increased medical expenses. With the increase in hospitalizations due to COVID-19, this benefit will be helpful to many individuals.
House Members Request April 15 Tax Return Extension
Eight Members of the House of Representatives sent a letter to IRS Commissioner Charles Rettig on February 18, 2021. They asked Rettig to consider delaying the normal April 15, 2021 filing date for income taxes.
The Members noted that eight weeks into the filing season in 2020, the IRS delayed both the filing and payment of income taxes from April 15 to July 15.
The Members stated, "One year later, another unique filing season is underway, and many of the same pandemic–related difficulties and challenges persist for taxpayers, practitioners, and the IRS. For starters, health and safety concerns continue to keep taxpayer assistance sites closed and taxpayers homebound. As a result, taxpayers are having a much harder time receiving the crucial assistance they are accustomed to and require. These challenges are especially acute for low–income taxpayers with limited digital or English proficiency."
In addition, the tax season is shortened to approximately two months after it opened on February 12, 2021. This increases the challenges for taxpayers who are not prepared to file their returns. Finally, the IRS still has several million 2019 paper returns that were accumulated during the shutdown and have not been processed.
There was a recent hearing by the House Ways and Means Oversight Subcommittee with the title "Free Tax Preparation Services During the Pandemic." Witnesses at the hearing reported an extraordinary increase in the interest in free tax preparation services, such as the Free File program on IRS.gov
. The increased demand for free tax preparation services is evidence that an extension of the tax return filing season is important.
The IRS has received multiple requests for extending the tax filing season due to pandemic related problems. The American Association of Retired Persons (AARP) provides tax assistance through their Tax–Aide program. However, most AARP sites are attempting to function with no personal interaction due to the COVID–19 pandemic. It is very difficult to provide tax assistance solely through email, phone or other distance education methods.
Charitable Estate Deduction Discount
In Estate of Miriam M. Warne et al. v. Commissioner;
No. 7019-18; No. 7020-18; T.C. Memo. 2021-17, the Tax Court determined the value of five LLCs that owned real estate interests. It assessed the appropriate discounts for lack of control and lack of marketability. There also was a discount applied to an LLC that was given to charity, with 75% transferred to a family foundation and 25% given to a church.
Miriam and Thomas Warne owned multiple California real estate holding entities. The main entity, WRW, operated leased–fee interests in real estate. The other entities owned similar leased–fee interests in residential or agricultural property.
The majority interest in the LLCs was held by Miriam Warne through a family trust. The trust had substantial rights to manage all the properties. Miriam Warne had given minority interests in several LLCs to family members. There was a right of first refusal provision for any family member who wished to sell his or her interest.
In addition to bequests to family members, Warne transferred 75% of her interest in a mobile home park with the title Royal Gardens Estate to the Warne Family Charitable Foundation and 25% to St. John's Lutheran Church.
Following her demise, her estate filed Form 709, United States Gift Tax Return on May 19, 2015 and reported substantial gifts to sons William and Tom and small gifts to her granddaughters. On May 19, 2015, Miriam's estate also filed Form 706, United States Estate Tax Return, and reported the values of all the LLCs. The estate reported the full value of the 75% interest in Royal Garden to the family foundation and the 25% interest to the church. The full reported estate value was deducted as a Section 2055 charitable donation.
The IRS audited the return and assessed both a gift tax and estate tax deficiency. The IRS also reduced the estate charitable contribution deduction from $25,600,000 to $21,405,796. At the Tax Court trial, the issues centered on the fair market values of the properties, the discounts for lack of control and marketability and a minority interest discount for the charitable deduction.
The Tax Court reviewed the various assumptions by taxpayer's appraiser Stephen Roach and IRS appraiser Bradley Lofgren. Based on the various assumptions, the Court generally accepted the valuations and discount rates of Roach. Both the estate and the IRS contested the lack of control and the lack of marketability discounts. The Tax Court generally accepted the discounts of the estate.
Because 100% of Royal Gardens was donated to charity, the estate claimed it was qualified for a 100% charitable deduction. However, the court noted that the charitable deduction was limited to the value received by the charity. The deduction "is subject to the principle that the testator may only be allowed a deduction for estate tax purposes for what is actually received by the charity – a principle required by the purpose of the charitable deduction." Because the estate and the IRS had agreed on discounts for the 25% gift to the church and 75% interest held by the family foundation, the charitable estate deduction was reduced by over $4.2 million.
There were two strategies that would have enabled the estate to receive a 100% charitable deduction. If the family foundation had been funded during life, it would have produced an income tax deduction (based on the cost basis of the appreciated asset). The family foundation could then have distributed 25% to the church, which is a public charity. Alternatively, 100% of Royal Gardens could have been transferred to the family foundation at death and, subsequently, 25% could have been distributed to the church.
Applicable Federal Rate of 0.8% for March -- Rev. Rul. 2021-5; 2021-10 IRB 1 (16 February 2021)
The IRS has announced the Applicable Federal Rate (AFR) for March of 2021. The AFR under Section 7520 for the month of March is 0.8%. The rates for February of 0.6% or January of 0.6% 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 2021, pooled income funds in existence less than three tax years must use a 2.2% deemed rate of return.