Author Archives: David

Executor Fees

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For most people who are administering an estate of a deceased parent or friend that owns only tangible personal property, a residence, investments, and retirement accounts, their compensation should not be subject to self employment taxes. Most executors should receive a Form 1099-MISC reporting their nonemployee compensation. Receiving this form does not mean you automatically have to pay self employment taxes (paying the employer and employee share of Social Security and Medicare on the income received). Revenue Ruling 1958-5 states that “The term ‘net earnings from self-employment’ means the gross income derived by an individual from any trade or business carried on…” In order for compensation from executor fees to be subject to self employment taxes, the following conditions must generally exist:

1. Professional fiduciaries will always be treated as being engaged in the trade or business. This applies if you hold yourself out to the public as a professional in the business of being a fiduciary.

2. Nonprofessional fiduciaries are generally treated as being engaged in the trade or business if all of the following conditions exist:

a. There is a trade or business in the estate,
b. The fiduciary actively participates in the operation of the trade or business,
c. The fees the fiduciary receives are related to the operations of the trade or business.

Remember, though, that compensation from providing services as an executor will still be taxable for federal income tax at the ordinary tax rate (i.e. your marginal tax rate) and are generally reported on Line 21 of Form 1040.

The Difference Between Tax Exempt Organizations – An Introduction

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This post is meant to be a brief introduction to the difference between basic tax exempt and nonprofit entities. I’d like to focus on the fact that there are tax exempt entities that receive deductible contributions and those that do not receive deductible contributions.

The most basic of examples I can use is Rotary International. I’m a Rotarian and I think more people should get involved in public service in their communities. Rotary clubs are tax exempt under Internal Revenue Code (IRC) 501(c)(4). This does not mean that donations to Rotary clubs are tax deductible.

Tax deductibility is determined by IRC 170(c). IRC 170(c) does not say that civic leagues can receive tax deductible donations. IRC 170(c) does say that entities “organized and operated exclusively for religious, charitable, scientific, literary, or educational purposes, or to foster national or international amateur sports competition (but only if no part of its activities involve the provision of athletic facilities or equipment), or for the prevention of cruelty to children or animals,” can receive tax deductible donations. This is the standard definition of an entity organized under IRC 501(c)(3).

So what does Rotary International and Rotary clubs do since they cannot receive tax deductible donations? They form 501(c)(3)s of their own in order to fund their many charitable activities. Rotary Foundation is Rotary International’s charitable organization.

There is little incentive to donate to 501(c)(4)s except for pure altruism and belief in the organization. In order to entice Americans to give to charitable organizations, the United States government allows individuals who file Schedule A with their Form 1040 to deduct certain donations. So what you get is incentive to give by lowering your income tax bill at the end of the year.

There are other organizations that can receive tax deductible donations other than 501(c)(3)s so verify with the organization whether donations are deductible.