Heroes Act Allows Rollover of Military Death Payments to Roth IRAs and Coverdell Savings Accounts

Last month, the President signed into law the Heroes Earnings Assistance and Relief Tax Act of 2008 (HEART Act), PL 110-245, June 17, 2008, 122 Stat 1624. The HEART Act allows individuals who receive a military death gratuity or payment from the Servicemember's Group Life Insurance (SGLI) to roll the amount over to a Roth IRA or Coverdell education savings account within one year of the date the payment is received. These provisions, outlined in Section 109 of the Act, apply with respect to deaths from injuries occurring on or after June 17, 2008, the date of the enactment of the Act. Contributions made with respect to payments received on account of death from injury occurring on or after Oct. 7, 2001, and before June 17, 2008, are grandfathered in, if the contribution is made no later than one year after the June 17, 2008 date.

Other provisions of the Act relating to pension, disability and death benefits for military personnel include:

• Section 104 allows employees who leave their jobs for active military duty to keep their death and disability benefits under tax-qualified pension plans provided by the employer. To ensure that the employee is covered by the plan in the event of death or disability during his or her term of military service, employers are required to treat the employee as if he or she were rehired the day before they died or became disabled. This provision applies to deaths and disabilities occurring on or after January 1, 2007.
• Section 105 treats the difference between military pay and what the service member would earn at his or her regular place of employment, if paid by the employer, as regular taxable income. This "differential wage payment" counts as compensation for income tax and retirement plan purposes, thus allowing employees to continue earning pension benefits while serving on active military duty. This section is effective for years beginning after December 31, 2008
• The exemption allowing individuals called or ordered to active duty on or after December 31, 2007 to take distributions from their retirement savings account without the usual 10 percent penalty on early withdrawals is made permanent by Section 107 of the Act.

Source:
Westlaw: Heroes Earnings Assistance and Relief Tax Act of 2008, PL 110-245, June 17, 2008, 122 Stat 1624; U.S. Government Printing Office: Heroes Earnings Assistance and Relief Tax Act of 2008, Pub.L. 110-245, June 17, 2008 (Pdf version)

The Internal Revenue Service finalized regs providing guidance under I.R.C. § 664 pertaining to the tax effect of unrelated business taxable income (UBTI) on charitable remainder trusts. The final regs were issued without making substantive changes to the proposed rules (REG-127391-07) that were issued in March of this year. The regs incorporate changes made to I.R.C. § 664 (c) by section 424(a) and (b) of the Tax Relief and Health Care Act of 2006 (the Act) (P. L. 109-432) and affect charitable remainder annuity trusts (CRATs) and charitable remainder unitrusts (CRUTs) that have UBTI in tax years beginning January 1, 2007 or after.

As outlined in the proposed regs, the final regs confirm that any unrelated business taxable income is considered income of the charitable remainder trust (CRT) for purposes of determining the character of the distribution made to the beneficiary, with income allocated among the trust income categories outlined in Treas. Reg. § 1.664-1(d)(1) without regard to whether any part of that income is unrelated business taxable income.

Under the old rules, charitable remainder trusts could lose their income tax exemption in years they had UBTI. However, the final regs provide that charitable remainder trusts with unrelated business taxable income are exempt from federal income tax but are subject to a 100 percent excise tax on their UBTI, with the excise tax imposed treated as paid from corpus. This treatment remains consistent with Treas. Reg. § 1.664-1(d)(2). Examples illustrating the tax effects of unrelated business taxable income on a CRT for tax years beginning after December 31, 2006 are also provided.

Source: Westlaw: Guidance Under Section 664 Regarding the Effect of Unrelated Business Taxable Income on Charitable Remainder Trusts, [TD 9403], 73 FR 35583-01, 2008 WL 2490175 (F.R.); Department of the Treasury: Guidance Under Section 664 Regarding the Effect of Unrelated Business Taxable Income on Charitable Remainder Trusts, [TD 9403], 73 FR 35583-01.

On June 23, the Internal Revenue Service issued news release IR- 2008-82 and accompanying Announcement 2008-63, providing increased optional standard mileage rates for business, medical, and moving purposes. The new rates are effective beginning July 1 through the remainder of the 2008 calendar year. Since the rate for miles driven when providing services to charitable organizations is set by statute rather than the IRS, the optional charitable mileage rate remains the same for the year.

Taxpayers may use the following optional standard rates to calculate their deductible costs of operating an automobile for business, medical, moving, or charitable purposes in lieu of deducting the actual costs of using their vehicle.

Generally, these rates are updated once a year in the fall for the following calendar year. However, IRS Commissioner Doug Shulman noted that "Rising gas prices are having a major impact on individual Americans. Given the increase in prices, the IRS is adjusting the standard mileage rates to better reflect the real cost of operating an automobile. We want the reimbursement rate to be fair to taxpayers."

Source:
Westlaw: IRS Increases Mileage Rates Through Dec. 31, 2008, IR- 2008-82, 2008 WL 2486479 (2008); Optional Standard Mileage Rates. Announcement 2008-63, 2008 WL 2486517 (2008); Internal Revenue Service: IRS Increases Mileage Rates through Dec. 31, 2008, IR-2008-82, June 23, 2008; Optional Standard Mileage Rates, Announcement 2008-63, June 24, 2008.

Last month, the Internal Revenue Service released proposed guidance (REG-101258-08) under I.R.C. § 642(c) addressing the federal tax consequences of a provision in a will or trust, or under local law, that attempts to determine the tax character of amounts paid to a charitable beneficiary of the estate or trust by specifying the source from which the amounts are to be paid or permanently set aside. The proposed regs affect estates, charitable lead trusts (CLTs) and other trusts from which amounts are paid or permanently setting aside for a charitable purpose.

I.R.C. § 642(c) allows an estate or complex trust a deduction in computing its taxable income of any amount of income, without limitation, which is paid for the purpose of making a charitable contribution. Treas. Reg. §1.642(c)-3 provides guidance concerning adjustments and other special rules for computing the charitable contributions deduction, and Treas. Reg. §1.643(a)-5 addresses computing the amount of tax-exempt income included in distributable net income. In determining the respective amounts provided for under each Treas. Reg., both regs provide that provisions in the governing instrument will control if they specifically provide the source out of which amounts are to be paid to the charitable beneficiary.

The proposed regs, however, clarify the effect of these "specific-source" provisions stating that "the IRS and the Treasury Department believe that the current regulations under §§1.642(c)-3(b) and 1.643(a)-5(b) require that such a specific provision in a governing instrument or in local law that identifies the source(s) of the amounts to be paid, permanently set aside or used for a purpose specified in section 642(c) must have economic effect independent of income tax consequences in order for the specific provision in the governing instrument or in local law to be respected for Federal tax purposes." As a result, the proposed regs amend the regulations under I.R.C. § 642(c) to confirm that a will, trust or local law provision that specifically provides the source of these charitable contributions must have economic effect independent of income tax consequences in order to be respected for federal tax purposes. If the provision does not meet this test, the income distributed or permanently set aside for each charitable beneficiary will consist of the same proportion of each class of items of income of the estate or trust as the total of each class bears to the total of all classes.

The proposed regs also contain a notice of a public hearing, which is scheduled for October 8, 2008.

Source:
Westlaw: Guidance Under Sections 642 and 643 (Income Ordering Rules), [REG-101258-08], 73 FR 34670-01, 2008 WL 2433426 (F.R.); Department of the Treasury: Guidance Under Sections 642 and 643 (Income Ordering Rules), [REG-101258-08], 73 FR 34670-01.