The Internal Revenue Service (IRS) was pleased to announce the launch of the Direct File Pilot Program. This new tax software is available in English and Spanish.

The Direct File program is designed to assist taxpayers with simple tax arrangements. It is available in 12 states and is compatible on a desktop computer, laptop, tablet or a smartphone. The Direct File program shows taxpayers the math to make certain the returns are completed accurately. There is also customer service support for Direct File users. The initial test group claimed that Direct File is "simple and straightforward to use."

Direct File has been developed with funds from the Inflation Reduction Act and is designed to make it easier for most Americans to file their taxes. The IRS has estimated there are 19 million potential taxpayers in 12 states who are eligible to use the simplified tax filing tool. This includes 5.2 million taxpayers in California, 3.8 million in Texas, 2.8 million in New York and 2.4 million in Florida.

One example of a taxpayer who may be eligible to use Direct File for this first season would be a parent with W-2 income who may claim the Earned Income Tax Credit or the Child Tax Credit. Another example is a recent college graduate who has W-2 income and pays student loan interest. It is also available for senior citizens with Social Security income.

Deputy Secretary of the Treasury Wally Adeyemo stated, "Direct File ensures taxpayers get their full refund by showing them the numbers and explaining credits they are eligible for. Our priority in launching this new service is to save taxpayers time and money they can spend on themselves and their families."

Another affirmation for the program was given by National Economic Council Advisor Lael Brainard. She noted, "Direct File will offer millions of Americans a free and simple way to file their taxes, with no expensive or unnecessary filing fees and no upselling, putting hundreds of dollars back in the pocket of working families each year."

The IRS notes that the English and Spanish versions of Direct File are intended to be easy to use. There are several steps that are designed to make it accessible for most taxpayers:

1. Check Your Eligibility — The direct file program is available in Arizona, California, Florida, Massachusetts, Nevada, New Hampshire, New York, South Dakota, Tennessee, Texas, Washington and Wyoming.

2. Gather Your Personal Information — You should have your Social Security number or Individual Tax ID Number, your bank account and routing number, the adjusted gross income (AGI) and exact refund amount from your prior tax return, your current address and a self-selected PIN if you e-Filed last year.

3. Organize Your Tax Records — You should gather all your forms which may include Form W-2, Form SSA-1099 for Social Security and Form 1099-INT for income from banks or brokers. Direct File is not available if you have retirement income, self-employment income or business income.

4. Prepare to Claim Credits — Direct File permits you to claim the Earned Income Tax Credit, the Child Tax Credit or the Credit for Other Dependents.

5. Prepare Your Tax Deductions — The Direct File program permits the standard deduction, a deduction for student loan interest and the educator expense deduction. It is not available if you plan to itemize your deductions.

6. Sign in to Direct File — You will need an IRS account with ID.me. If you need to create the account, you can find out more information on IRS.help.id.me.

7. Sign Direct File Electronically — The direct file program requires you to enter your prior-year adjusted gross income or a prior-year self-selected PIN. If you need to find your prior-year AGI, it can be found on line 11 of your Form 1040 or you can use your IRS online account to get your prior year’s tax transcript.

Editor's Note: Direct File is a significant step forward to providing a government filing solution for taxpayers. The initial launch is intentionally limited to specific states, but it will provide information to the government as it continues to build and develop the program. It is likely to be several years before it is fully functional and includes all 50 state returns.

Draft Guidance on Direct Cash Transfers

The Department of Treasury has created a Direct Cash Transfer Guidance Project Team (DCT Team). The use of direct cash transfers has been growing. Since 2018, there are over 140 new direct cash transfer programs throughout the United States. Both governmental organizations and Section 501(c)(3) organizations are involved in these programs.

The DCT Team has submitted a proposed Revenue Procedure to the Department of Treasury that would clarify many of the rules and guidelines for the tax treatment of direct cash transfers.

The direct cash programs have grown in popularity and clear guidance would help sponsoring organizations with administering the programs. The DCT Team notes that many of the programs involve a combination of direct cash transfers and encouragement for individuals to seek counseling or educational programming. The purpose of the proposed Revenue Procedure is not to specifically explain how to create the programs, but to facilitate the understanding of the tax consequences.

Generally, IRC Section 61 requires all gross income to be included in a tax return. Any income, accession to wealth or dominion over property will produce taxable income. However, there is a general welfare exclusion that excludes grants to individuals, families and households from taxation. The IRS has "consistently concluded that payments to individuals by governmental units under legislatively provided social benefit programs for the promotion of the general welfare are not included in a recipient's gross income." See Rev. Rul. 2005-46.

The payments qualify for exclusion under Section 102(a) if they are from "a detached and disinterested generosity… out of affection, respect, admiration, charity or like impulses." This generally applies to the relief of the poor, distressed or underprivileged and the promotion of social welfare by organizations.

To encourage further growth of these programs, the DCT Team indicates that most payments to individuals by a Section 501(c)(3) organization are nontaxable. Many of these payments include assistance with medical care, temporary housing or transportation expenses incurred as a result of flooding. Payments are not subject to gift tax because the gift tax does not apply to distributions by organizations.

The proposed ruling will define a "Qualified Direct Cash Transfer Program." It notes that the program must qualify under Section 102(a)’s exclusion. Many of the programs will involve joint participation between a governmental entity and a qualified nonprofit. Below are examples that detail Qualified Direct Cash Transfer programs.

1. Homeless Individuals — A local government agency creates a direct transfer program to address homelessness. Payments are made for 60 months and the recipients are encouraged to participate in counseling. The governmental entity also encourages Section 501(c)(3) organizations to participate in the program.

2. Low-Income Pregnant Women — A governmental entity contracts with a third party to administer monthly payments to low-income pregnant women. This would be a Qualified Direct Cash Transfer Program. Additionally, the governmental entity encourages private funding from individuals and nonprofit organizations. The joint program is designed to enhance the economic security of these low-income individuals.

3. Generational Poverty — A Section 501(c)(3) organization creates different programs for addressing generational poverty. One group of individuals receives a one-time payment of $24,000. Another group is provided a monthly payment of $1,000 for two years. Finally, there is a joint program between a governmental entity and several Section 501(c)(3) organizations that combines 36 monthly payments of $1,000 with training in financial literacy, job skills and career counseling provided by the nonprofit organization. A similar program provides a single grant of $20,000 at the end of eight years. During the eight years, the eligible participants must take financial literacy training, career counseling and pursue post-secondary school education programs. After completing the eight-year program, the individuals receive a transfer of $20,000.

Editor's Note: There are an increasing number of direct cash transfer programs for people who are in financial need. These IRS guidelines explain the requirements for a nontaxable transfer and encourage more cash transfers to benefit the homeless, low-income individuals, single mothers and students.

White House Proposes Tax Increases

The White House has released a proposed budget with expenditures of over $7 trillion in the next fiscal year. The budget plan also includes proposals that are intended to raise approximately $5 trillion over a decade from high-income individuals and corporations.

While the proposed tax increases are diverse, there are major changes in corporate taxes, the Medicare tax, capital gains tax, personal income tax, the estate tax and retirement plan accumulations.

1. Corporate Taxes — The corporate tax rate would change from 21% to 28%. This is the largest revenue producer and is estimated to raise approximately $1.4 trillion. The corporate minimum tax of 15% would be raised to 21%. This could raise $137 billion over a decade.

2. Medicare Taxes — There is a pressing need to provide additional funding for Medicare. A 3.8% surtax on certain unearned income has supported the Medicare system. The White House proposes to increase the 3.8% top rate to 5% for individuals with over $400,000 of income.

3. Capital Gains Tax — Some individuals have a substantial net worth of $100 million or more. These individuals would be required to pay a minimum tax of 25% of income, including unrealized capital gains. This proposed change could raise approximately $503 billion over a decade. There also is a proposal for upper-income persons to require recognition of unrealized gains as taxable income in their final year of life. Up to $5 million of unrealized gains per individual or $10 million per couple is exempt, but the excess would be subject to capital gains tax.

4. Income Tax Top Rate — The top rate for income taxes for single persons with incomes over $400,000 and married couples with incomes over $450,000 would be increased from 37% to 39.6%.

5. Estate Tax — A planning strategy used by individuals with substantial net worth is a grantor retained annuity trust (GRAT). The GRAT may be created for a two-year term. Through a series of zeroed-out two-year GRATs, wealthy individuals may be able to move millions of dollars through to family members with no transfer tax. The White House budget requires GRATs to have a duration of at least 10 years.

6. Retirement Plan Balances — There are taxpayers with very large plan balances in their traditional IRA or Roth IRA plan. These individuals would be required to distribute the excess amounts from these plans. There would be a requirement to distribute half of the excess amount for individuals with over $10 million in an IRA. There would be an additional requirement for substantial distributions for individuals who have over $20 million total in IRAs.

Editor's Note: Your editor does not take a specific position on these tax proposals. This information is offered as a service to our readers. With the national debt now over $34 trillion, Congress will be examining all of these concepts in the future years.

Applicable Federal Rate of 5.2% for April — Rev. Rul. 2024-7; 2024-14 IRB 1 (15 March 2024)

The IRS has announced the Applicable Federal Rate (AFR) for April of 2024. The AFR under Sec. 7520 for the month of April is 5.2%. The rates for March of 5.0% or February of 4.8% 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 2024, pooled income funds in existence less than three tax years must use a 3.8% deemed rate of return. Charitable gift receipts should state, “No goods or services were provided in exchange for this gift and the nonprofit has exclusive legal control over the gift property.”