In IR-2024-137 the Internal Revenue Service (IRS) encouraged taxpayers to make updates to their home to qualify for home energy credits. The credits were significantly expanded by the Inflation Reduction Act of 2022.

Most of the credits apply to homeowners, but renters may also be eligible for some credits. The credits are generally in two main categories. There are credits for energy-efficient improvements to your home after January 1, 2023. Other credits apply to improvements such as solar panels, wind turbines or battery storage.

1. Home Energy Improvements — Qualified home improvements made after January 1, 2023, may produce a 30% credit, with a maximum amount of $3,200. These improvements include qualified doors, efficient windows and skylights. Upgraded insulation and efficient water heaters, furnaces and heat pumps may also qualify. The maximum credit per year is $1,200 for home improvements, with a limit of $250 per door (with a maximum of $500) or $600 for windows. The limit for a heat pump, biomass stove or boiler is $2,000 per year. This credit is not refundable and may not be carried forward to future years.
2. Clean Energy Credit — A more comprehensive credit is available for energy improvements for your home. These could include solar panels, wind turbines, geothermal, fuel cells or battery storage. The Residential Clean Energy Credit is 30% of new qualified energy property. This usually includes solar panels, panels connected to a solar water heater, wind turbines, geothermal heat pumps, fuel cells or battery storage technology. The water heater must be certified by the Solar Rating Certification Corporation. A geothermal heat pump must meet Energy Star requirements. New batteries must have a capacity of at least 3 kilowatt hours. The clean energy credit has no dollar limit and may be used for eligible items installed in 2023 through 2032. The credit is not refundable, but unused credit amounts may be carried forward to future years.

The IRS emphasizes that it is important to keep good records. For most individuals, the credit will apply to solar panels and battery storage. For the home credit, you may read IRS Publication 5967, Energy Efficient Home Improvements Credit for more information. If you are installing solar panels, battery storage or other energy improvements, you should review Publication 5968, Residential Clean Energy Credit for details.

Editor's Note: In many states, there has been a substantial increase in the cost of electricity each year. Energy efficient improvements to homes become more valuable each year. The cost for solar panels and batteries is often measured through a payback period of years. With reduced electricity and natural gas costs, homeowners also should consider the increased home value with these energy improvements, which may cover most or all the energy improvement costs.

DAF Hearing — Opposition to Personal Investment Advisor as Donor-Advisor

On May 6, an IRS hearing was held to discuss proposed DAF regulations (REG-142338-07). A popular topic was the proposal to consider most personal investment advisors as donor-advisors.

If the final regulations classify personal investment advisors as donor-advisors, then payment of compensation would be a taxable distribution and subject to a 20% excise tax under Section 4966(a)(1). This would essentially eliminate the opportunity for the donor's investment advisor to manage his or her DAF. The limited exception is a personal investment advisor who manages all DAFs within a public charity. This exception would not apply in most circumstances.

Ron Ransom is a representative of the American Endowment Foundation (AEF). He stated that most of their donor advised funds were managed by personal investment advisors. These funds produced $3.8 billion in charitable grants during the past five years.

Ransom noted, "Without the experience and support of our investment advisors, achieving this growth in charitable dollars would not have been possible."

Ransom expressed concern that the proposed regulation would "chill" charitable giving. He continued, "While acknowledging the importance of regulatory oversight, it is important to ensure that any changes do not inadvertently hinder the vital work of dedicated charitable organizations. Therefore, we ask for removal of this newly proposed classification."

Several representatives of community foundations also expressed serious concerns about the proposed regulation. Deborah Wilkerson is a representative of the Greater Kansas City Community Foundation. She noted this new requirement for personal investment advisors to be treated as donor-advisors would lead to "small, unstaffed private foundations popping up everywhere."

Wilkerson is suggesting that donors who wish to have their personal investment adviser manage their charitable fund would merely create a small private foundation. Another option is that some investment advisers would follow the pattern of the very large fiduciary organizations and create a subsidiary foundation to manage DAFs. Wilkerson noted, "Investment advisors will set up their own DAF entities and advise 100% of the DAF, and most with no expertise on staff."

Rose Bradshaw is a representative of the North Texas Community Foundation (NTCF). She noted that investment advisers "help us multiply charitable dollars for community benefit." The proposed limitations on personal investment advisers would significantly impact many community foundations. These foundations already are subject to national standards on their donor advised funds. The annual DAF grant rate for NTCF is 16% of the fund balance.

Editor's Note: The "personal investment advisor as donor-advisor” proposed regulation has generated many comments. Many community foundations have 30% to 50% of their assets under management (AUM) through DAFs that are managed by the donor's investment advisor. The elimination of this gift management option could chill charitable giving to DAFs.

Final GSTT Extension Regulations

On May 3, Treasury and the IRS published T.D. 9996, the final regulations on extensions of time for GSTT elections and allocations.

Catherine Hughes is a representative of the Treasury Office of Tax Legislative Counsel. At an American Bar Association Section of Taxation meeting on May 3, Hughes commented, "The purpose of this whole project was to tailor the standards for relief to the GST tax, which differs in many significant ways from income taxes."

The final regulations are effective on May 6, 2024. While prior requests for GSTT relief were under Section 9100, requests after that date must transition to Section 2642(g).

A major financial services company noted that the prior 2008 proposed regulations on relief "prohibited relief for a fairly common mistake — when an election out of automatic allocation of GST exemption was inadvertently attached to a gift tax return but the taxpayer had intended for the trust to be exempt from GST tax (or vice versa)."

In general, the IRS will now consider all relevant circumstances in deciding whether or not to grant the extension. The IRS now has authority to grant a "reasonable extension of time" for the various elections.

An extension may apply if the election not to have the automatic allocation was made for a direct skip. The most common example of a direct skip is a gift from the donor to a grandchild. A second exception could be an incorrect election not to have the automatic GST exemption to apply to indirect skip or a trust. Finally, the election to treat the trust as a GST trust may have been incorrect and fail to allow gifts to that trust to all to qualify for automatic GST tax exemption allocations.

The IRS will consider multiple factors. It is helpful in drafting trusts to make clear whether or not there is intent for the trust to be qualified for GST exempt status. The factors are within the discretion of the IRS, but the IRS recognizes that with the complexity of GST exemptions, there may have been many inadvertent mistakes.

While efforts of counsel to obtain an economic benefit through hindsight will be a negative factor, there are many circumstances in which the IRS may allow the extension. There are narrow exceptions that permit relief for an allocation of GST exemption that exceeds a zero amount (with the exception of a charitable lead annuity trust), allocation to a trust that has no GST tax potential or a late allocation or missed allocation that was not eligible for relief prior to enactment of Section 2642(g)(1).

Editor's Note: The GSTT extension requires obtaining a favorable private letter ruling (PLR). The IRS fee and legal costs for obtaining a PLR can exceed $50,000. Therefore, this relief is likely to be requested for substantial GSTT trusts. Because GSTT is quite complex, most planners with clients who have charitable receptivity will strive to achieve a zero GSTT result.

Applicable Federal Rate of 5.4% for May; 2024-19 IRB 1 (16 April 2024)

The IRS has announced the Applicable Federal Rate (AFR) for May of 2024. The AFR under Sec. 7520 for the month of May is 5.4%. The rates for April of 5.2% or March of 5.0% 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.”