Planned Giving

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Monday November 19, 2018

Washington News

Washington Hotline

Your Social Security and Medicare Value

The Social Security Administration recently announced a 2.8% cost of living increase in Social Security benefits for 2019. The standard Medicare premium will increase by $1.50 to $135.50 next year. Upper-income taxpayers will pay a larger Medicare premium. The Social Security increase is the largest since the 3.6% bump in 2012.

Many Americans who plan to retire in the next few years are interested in knowing the total value of their future Social Security and Medicare benefits. In addition, taxpayers want to know how the value will compare to the amounts paid into Social Security and Medicare taxes during their working years.

Retirement specialists C. Eugene Steuerle and Caleb Quakenbush from the Urban Institute recently published an article with the title, "Social Security and Medicare Lifetime Benefits and Taxes." Their article explains the present value of Social Security and Medicare benefits in current dollars.

Social Security is a pay-as-you-go system. Each year, workers and employers contribute 6.2% of their income for Social Security and 1.45% for Medicare. The Social Security tax base is limited to $128,400 for 2018. All income is subject to Medicare tax.

Steuerle and Quakenbush estimate benefits for single taxpayers and married couples with low, average and high incomes. They assume normal life expectancy and a 2% return on tax payments.

With these assumptions, a single woman (with an average income of $51,900 in 2018) who retires in 2020 would have an annual Social Security benefit of $19,900. Her total Social Security and Medicare lifetime benefit is estimated to be $619,000. Based on the 2% return assumption, she would pay $380,000 in Social Security and Medicare taxes.

A married couple with two average earners has 2018 income of $103,800. If they choose to retire in 2020, they will receive annual Social Security payments of $39,900. Based on this payment and estimated increases for cost of living, their lifetime Social Security value is $669,000. Because the lifetime Medicare value for this couple is $498,000, their total estimated benefit is $1,167,000. During their working years, the two employees would pay $760,000 in Social Security and Medicare taxes.

For both the single woman and married couple with average income, the Social Security benefit is substantially greater than the tax payments.

Editor's Note: The Social Security and Medicare tax payment calculation assumes the worker pays both the employee and the employer amount. Most economists assume that the employer considers these payments as part of the employee compensation package. Your individual results may differ from these two average income examples. Your Social Security and Medicare benefit and tax payments may depend upon your income, longevity and other factors.

Clergy Housing Allowance Appealed


On October 24, the Seventh Circuit Court of Appeals considered oral arguments on the clergy housing allowance under Sec. 107(2).

In Gaylor v. Mnuchin, the U.S. District Court for the Western District of Wisconsin held the clergy housing allowance violates the establishment clause of the First Amendment. The District Court ruled the allowance lacks a secular purpose and endorses religion.

The suit was brought by the Freedom from Religion Foundation (FFRF). Professor Adam Chodorow and attorney Richard Bolton argued on behalf of FFRF. They argued that the clergy housing allowance is unconstitutional because "it singles out ministers for a tax benefit that is unavailable to any other taxpayer."

In their view, a housing allowance is appropriate only when the employee must live on-site to fulfill his or her job duties. For example, a ship captain must live on the ship in order to fulfill job responsibilities. However, clergy may live anywhere in a metro area and still perform their duties.

Several Chicago-area pastors spoke in favor of the clergy housing allowance. Rev. Chris Butler pastors Chicago Embassy Church. He stated, "Today I asked the Court to protect our ability to serve our South Side Chicago Community - our youth, our single mothers, our homeless, our addicted, our lost and all those who seek a church family. I hope the Court will keep letting religious leaders like me not only preach from the pulpit, but live among the people we serve."

Butler's church is not able to pay a salary, but provides a housing allowance to enable him to live near his church members. He noted the potential repeal of the housing allowance may cause smaller churches to close.

Editor's Note: The Seventh Circuit decision will probably be available in three to eight months. The Circuit Court decision is likely to be appealed to the U.S. Supreme Court.

IRS 18% FLP Discount Accepted


In Streightoff, Estate of Frank D. et al. v. Commissioner; No. 4379-15; T.C. Memo. 2018-178 (23 Oct. 2018), the Tax Court held an estate interest in a limited partnership was properly valued with an 18% IRS discount for lack of marketability.

Decedent Frank D. Streightoff passed away on May 6, 2011. He had created Streightoff Investment LP (SILP) as a Texas partnership on October 1, 2008. Streightoff held a 1% general partner interest and 88.99% limited partnership interest in SILP. Eight family members owned the balance of the limited partnership interests.

SILP conducted no meetings and had no votes. Streightoff, as general partner, held the power to approve sales of partnership interests. He also had a right of first refusal with respect to all sales.

SILP held cash, equities, bonds and mutual funds. The SILP agreement described persons who acquired limited partnership interests and were not substituted as limited partners as "assignees."

On October 1, 2008, Streightoff signed a document to create an "assignee" interest in his revocable trust with respect to his 88.99% limited partnership interest.

The estate filed IRS Form 706 on August 9, 2012. It reported the 88.99% limited partnership interest as an "assignee" asset of the revocable trust. The estate claimed a 37.2% lack of marketability interest on this asset. The IRS audited and assessed a $491,750 deficiency.

The estate claimed the 88.99% limited partnership interest was held by the revocable trust as an assignee interest and therefore should be discounted on that basis. The partnership document permitted assignee interest and stated, "A transferee who was not admitted as a substituted limited partner would hold the right to allocations and distributions with respect to the transferred interest, but would have no right to information or accounting or to inspect the books or records of the partnership and would not have any of the rights of a general or limited partner (including the right to vote on partnership matters)."

The Tax Court reviewed the discount factors. Because the limited partnership interest was 88.99% and had the power to remove the general partner, there was no lack of control discount.

The estate argued there could be a holding period until 2075 and, therefore, a 27.5% discount should be permitted for lack of marketability. Because the Tax Court determined that the assignee interest was not materially different from a limited partnership interest, the 18% IRS lack of marketability discount was accepted.

Applicable Federal Rate of 3.6% for November -- Rev. Rul. 2018-28; 2018-45 IRB 1 (18 October 2018)


The IRS has announced the Applicable Federal Rate (AFR) for November of 2018. The AFR under Section 7520 for the month of November is 3.6%. The rates for October of 3.4% or September of 3.4% 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 2018, pooled income funds in existence less than three tax years must use a 1.4% deemed rate of return.


Published October 26, 2018
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