Wednesday, March 28, 2018

Where Does Cardi's Money Go?

The rapper Cardi B grew up in the South Bronx's Highbridge neighborhood, where the median family income barely tops $27,000. Cardi, born Belcalis Armanzar, couldn't wait to get out. She spent much of her time at her grandmother's home across the Harlem River in Washington Heights. By age 23 she released her debut video and album. Last year she joined the A-list with her hit "Bodak Yellow," where she raps about being rich and arriving at "the club" in a Rolls-Royce Silver Wraith.

Apparently, Cardi really is stacking some nice paper. On March 22, she recorded an angry rant demanding to know where her tax dollars go. "So you know the government is taking 40% of my taxes. And, Uncle Sam, I want to know whatchyou doing with my [gerund favored by rappers] tax money. Because, you know what I'm saying? When you donate, when you donate to a kid from a foreign country, they give you updates of what they're doing with your donation." She complained about rats infesting New York City's subway, and concluded, like any good auditor, "I want receipts."

Cardi does have a point here. If you give to a group like Save the Children, you'll get letters from the child you're helping. It's too bad Cabinet secretaries don't write taxpayers detailing where their dollars go. ("Dear Taxpayer: I write to tell you that I dropped $31,000 for a dining room table and millions more for private jet rides.")

Fortunately for Cardi, it's easy to find exactly where each federal spending dollar goes. (One caveat: it's not entirely accurate to talk about where "tax dollars" go because the government spends almost $1.20 for every dollar it takes in.)
•The biggest chunk — 23 cents out of every dollar — goes to Social Security. Now, Cardi is just 25, so she's probably not spending much time worrying about retirement, but she can take satisfaction knowing at least some of that will make its way back to her grandmother in Manhattan.

•Medicare and other healthcare services take 13 cents each. In fact, more than two-thirds of every tax dollar goes towards various social insurance programs, which also include unemployment compensation, veterans' benefits, and the like.

•National defense takes 15.3 cents out of every dollar. Interest on the national debt eats up six cents more. And education takes another three cents.

•That leaves just six cents out of every dollar to cover everything else. That total includes all the perennial punching bags that budget hawks love to attack, like foreign aid (one penny per tax dollar), the Corporation for Public Broadcasting (1.2 hundredths of a penny), and the much-maligned National Endowment for the Arts (four thousandths of a penny).


We're willing to bet that no matter where your tax dollars go, you'd like to see less of them going there. So don't just criticize like Cardi B. Call us for a plan, and we'll give you something to dance to!

Thursday, March 22, 2018

Ooops!

Back in 1985, a group of ambitious lawmakers set out to reform the federal income tax code. House Ways & Means Chair Dan Rostenkowski introduced the legislation. (This was before he became inmate #25338-016 at the Oxford Federal Correctional Institution.) Congress held dozens of hearings, cast 29 roll call votes, and debated 111 amendments on philosophical questions like Dan Quayle's proposal "to provide that the period during which an individual is in the United States competing in a charitable sporting event shall not be taken into account in determining whether such individual is a resident alien."

Ten months and 18 days later, President Reagan signed the Tax Reform Act of 1986 into law. Two years after that, Congress passed a "technical corrections" bill to fix hundreds of drafting errors that made it into the final text.

Fast forward to 2017. Technology and the internet have made everything faster, right? That includes legislation, of course. On November 2nd, House Ways & Means Chair Kevin Brady introduced the Tax Cuts and Jobs Act. There were zero hearings, handwritten amendments in the middle of the night, and a quick "never mind" when Senators realized they had accidentally killed the Research & Development credit.

On December 22 — just 50 days later — the President signed the bill into law. That's less time than it usually takes to rename a post office after a local school board member. Now those lawmakers may be rediscovering something their grandmothers told them back when they were little: namely, "marry in haste, repent in leisure." It turns out Congress may have skipped ahead to the bottom of their homework a little too quick, and made a teensy-weensy boo-boo or two along the way.
•The cut in the top corporate tax rate, from 35% to 21%, happened to give big grain producers like Archer Daniels Midland a big advantage over smaller farmers. So a couple of agriculture-state senators tried to level the playing field by giving producers who sell to co-ops the same 20% "qualified business income" deduction as other pass-through businesses. Unfortunately, they let those farmers deduct 20% of their gross sales when they wanted to let them deduct 20% of their taxable income. Big difference. Can Congress pass a fix?
•Lawmakers wanted to give restaurant owners and retailers a tasty break for renovation expenses by letting them deduct so-called "leasehold improvements" over 15 years. Instead, they made it 39 years. Restaurant lobbyists understand this was an honest mistake, like overcooking a steak. But, same as you can't UN-cook an overdone slab of beef, there's no easy "do-over" to fix the problem short of amending the actual law.
•Even the giant multinational corporations you would expect to applaud the new lower rates are howling over "base erosion" rules, intended to stop them from playing games by shifting profits offshore to avoid taxes here. (Trust us, you don't want to know the details.) It's hyper-technical stuff, but there are big dollars at stake. Can you even imagine how many lawyers will buy new Jaguars with the money they bill for "taxsplaining" what Congress really meant in court?


Drafting errors and "technical" corrections certainly make tax planning harder. But they don't make it any less important. We can't let the perfect be the enemy of the good. So call us when you're tired of wasting money on taxes you don't have to pay, and let's see if we can show Congress how to do it right.

Wednesday, March 14, 2018

IRS Investigates Pot of Gold at End of Rainbow

St. Patrick's Day is here, and every "Irish for a day" tippler in your social circle will take advantage of this convenient excuse to haul grandma out of the house for a little day-drinking. (It seems unnecessary on a Saturday, but whatever.) Faux-Irish saloons across America are tapping kegs of Guinness, pouring shots of Jameson, and covering their walls and ceilings in every Celtic cliche they can find: the shamrocks, the hats, the green beads, and of course, the leprechaun jealously guarding his pot of gold at the end of the rainbow.

Now, leprechauns are usually pretty happy little fellas. Wouldn't you be happy if you found a pot of gold in some misty bog? But this isn't always true, as you'll see if you look at the University of Notre Dame "Fighting Irish" mascot. Have you ever wondered why that little guy is so hostile? Maybe it's because he just discovered the IRS wants a share of his stash!

Unfortunately for our diminutive Hibernian friend, the tax code has all sorts of special rules to help the IRS dig their hands deeper into his treasure:
•Code Section 61 defines gross income as "all income from whatever source derived." The code does go on to carve out all sorts of exclusions from this broad definition. For example, Section 101 excludes life insurance death benefits and Section 105(b) excludes employer-provided health benefits. Unfortunately, there's no exclusion for pots of gold at the end of the rainbow. (Sounds like the National Organization of Leprechauns needs to hire some better lobbyists!)

•Income received in the form of property is taxed under the rules of Code Section 83(b). Generally, the finder owes tax on the fair market value of property as of the date it's found. In the case of gold, where there's a public market to establish value, our leprechaun takes the average of the highest and lowest quoted trading prices for the yellow metal on the day he finds his treasure. If he finds it on a weekend, he'll need to take the average price for the Friday and Monday bookending the day he finds it.
•Gold is considered a capital asset. This might seem like good news, as gains are generally taxed at preferential rates capped at 20%. However, precious metals are classified as "collectibles," making them subject to special higher rates of up to 28%. Gains on gold are also subject to the 3.8% "net investment income tax" for leprechauns with adjusted gross income above $200,000 (single filers) or $250,000 (if filing jointly with Mrs. Leprechaun).
•Finally, there's a special prohibition against holding gold coins in IRAs or other retirement accounts. This may not sound like a big deal at first. However, Irish folklore holds that leprechauns live for 300 years, which makes saving for retirement especially crucial.
Now, don't go feeling too sorry for your pint-sized prospector. After-tax gold isn't as much fun as pre-tax gold. But it's still better than no gold at all. And with gold currently trading at $1,300 per ounce, there's plenty in the pot to pay for good tax-planning help. Conveniently, that's where we come in. So call us when you're ready to pay less. Don't count on finding a four-leaf clover when you can follow the rainbow to a plan!

Tuesday, March 6, 2018

Area Man Treats Colleague to Dinner, Drinks

The three-martini lunch has a long and mostly honorable history as a deductible business expense. As former President Gerald Ford once said, "Where else can you get an earful, a bellyful, and snootful at the same time?" Ford's successor, famed buzzkill Jimmy Carter, tried (and failed) to cut the deduction from 100% to 50%. The Tax Reform Act of 1986 succeeded in that goal, and today's business diner has probably switched from martinis to white wine. But old habits die hard — check any happening lunch spot and you'll find happy diners eating partly on Uncle Sam's dime.

The rapper-turned-mogul Jay-Z may have 99 problems, but reaching for the check isn't one. Last month, he treated the president of his Roc Nation Sports talent agency, Juan "OG" Perez, to an epic birthday night in Manhattan. The posse started with dinner at Zuma in midtown, where he dropped $13,000. After dinner, he took them uptown to Made in Mexico for $9,000 worth of drinks. And a group of six stragglers finished off the night at Playroom, where the real fun started.

Apparently, Jay-Z and his friends were very thirsty, very generous, or both. The group's bar tab — ticket #48 — included 20 bottles of Ace of Spades brand "gold" champagne at $1,200. Each. Plus 20 bottles of "rose" champagne at $2,500. Each. Plus $6,035 in sales tax (of course). Plus an $11,100 tip. Grand total, $91,135.00. Hear it for New York!

So . . . Jay-Z takes his employee out to dinner. Surely they talked business while they were painting the town. Should Jay-Z stuff his receipt in a shoebox to save for this year's tax return?

For starters, there's a debate brewing over whether business meals are now deductible at all. For 31 years, there was no debate that you could deduct 50% of meals where there was a substantial, bona fide business discussion. The Tax Cuts and Jobs Act clearly eliminates deductions for "associated entertainment" expenses, like golf or a ball game taking place before or after that business discussion. However, some tax professionals read the new law as eliminating the deduction for meals, too.

But even assuming the deduction survives the new law, there's another hurdle to overcome. Code Section 274(k) prohibits deductions "for the expense of any food or beverages unless such expense is not lavish or extravagant under the circumstances." Now, you can argue that if you're Jay-Z, you're expected to make it rain with $74,000 worth of champagne. And if you're talking a glass or two to celebrate signing a big deal, you might even be right. But we can probably assume that even Jay-Z's fans at the IRS would draw the line somewhere well before the 40th bottle.

As for that $11,100 tip . . . sure, it sounds like a baller move. But it's actually just 15% of the pre-tax tab, and pretty stingy for New York! Plenty of celebrities are known for being better tippers. Shaquille O'Neill asks servers to tell him how much they want. And George Clooney routinely leaves servers a 150% surprise. Walter White, of Breaking Bad fame, left a $100 tip for breakfast on his 52nd birthday, although it did turn out to be his last meal.

When was the last time you went out for a really special meal? Was it a birthday, an anniversary, or some other celebration? It probably wasn't deductible. But careful tax planning might keep enough in your pocket to cover your own epic night out. So call us when you're ready to save, and let's see if you can raise a glass of bubbly to the results!

Tuesday, February 27, 2018

This Will Make You Love the Income Tax . . .

We Americans have fought with our internal revenue code since 1913. But slicing and dicing income, deductions, and a dizzying array of business and personal credits is hardly the only way that Uncle Sam could raise the money he needs to pay for guns and butter. State and local governments also use sales taxes, payroll taxes, property taxes, excise taxes, and "gross receipts" taxes to fill their hungry coffers, too.

And then there are the more exotic taxes, the kind that sometimes live only in philosophers' heads. The nineteenth-century economist Henry George argued that a land-value tax would raise wages, improve land use, and eliminate taxes on economic activity. More recently, economists and politicians have proposed carbon taxes, consumption taxes, and European-style value-added tax alternatives.

Here's one you probably never considered. Earlier this month, a Duke University philosophy PhD candidate named Erick Sam took a microscope to the concept of an "endowment tax." This is a vaguely Marxist tax on "a person's potential earnings, which can provisionally be thought of as the maximum income a person could earn or could have earned over a given time period." (Yikes!)

Sam opens his paper by asking how we determine a person's "ability" in the first place. He acknowledges that we don't "inhabit a reality where endowment is readily apparent," then goes on to consider standardized test scores, genetic capabilities, and educational achievement as proxies for ability. He even mentions one proposal to impose a "privilege tax" based on the income your parents earned during your childhood!

Now the fun starts. Sam walks us through the utilitarian considerations of an endowment tax, and how it counters the "substitution effect" that income taxes impose on the desire to work. "Distributive considerations are only instrumentally relevant to this calculus, since different distributions will tend to be correlated with distinct aggregate utilities." (Well, duh???) He goes on to address the Kaplowvian argument for endowment taxation as the ideal Haigs-Simon income tax, where "income" equals consumption plus all accretions to wealth over a given period of time. (Huh?)

Next, he drags us kicking and screaming through a dense swamp of non-utilitarian considerations. These include Shaviro's deontological argument for endowment taxation rooted in the theory of luck egalitarianism, Stark's libertarian challenge to Rawlsian arguments favoring the priority of liberty, Markovits' algorithm for balancing endowment taxation with talent slavery, and Dworkin's auction and insurance scheme for eliminating inequality. (It's ok, we're just as lost as you are.)

After 69 pages, Sam thankfully suggests leaving the whole idea in one of the counter factual worlds where it might actually work. Here on Earth, though, endowment tax fans face three unpleasant choices: 1) make peace with how it does violence towards liberty, 2) acknowledge that it's both inefficient and unattractive on its own terms, or 3) accept its problems of "talent slavery, counter factual talent slavery, and servitude to objective standards of rationality." It's enough to make our current tax code sound pretty dreamy!

So . . . we've established that our current tax code may not be the worst way to raise government revenue. But that doesn't mean you have to like how much you pay! So call us when you're ready for some real-world savings, and we promise to explain them in actual English!

Wednesday, February 14, 2018

Romantic Tax Collectors Love Valentine's Day, Too

It's February, and love is in the air. Restaurants are advertising intimate specials for two. Florists are rolling out the red carpet. And in the greeting card racks across the country, Hallmark's most accomplished poets are debuting their new verse.

We're talking about Valentine's Day, of course. 62% of Americans say they'll celebrate the occasion. (Of course, that means the rest of us will just try to keep our heads down and pretend it's just another blah February day.) But with all those Cupid's arrows flying around, shouldn't the tax man get a little love, too?

The National Retail Federation estimates that Americans will spend $19.6 billion this Valentine's Day. That includes $4.7 billion on jewelry (for the truly lucky ones), $3.7 on going out, $2 billion on flowers (including, naturally, 250 million roses), $1.7 billion on chocolate and candy, $894 million on greeting cards, and $751 million on pets. That's all before we get to the lingerie, champagne, and candles. (Guys, we know you don't care for scented candles. Just think of them as proof that your Valentine trusts you with fire.)

Naturally, all that spending means taxes. The average sales tax rate here in the U.S. is 8.454%, which suggests that state and local governments will collect over $1.5 billion. Of course calculating that tax isn't always as easy as multiplying your purchase amount by the local rate. Some states define candy as "groceries" or "unprepared foods" and tax them at lower rates or exempt them completely. (True love may be pure and simple. Taxes, not so much.)

The real action comes once you and your Valentine get married. For years, the so-called "marriage penalty" has taxed married couples at a higher rate than single filers earning the same combined income. The Tax Cuts and Jobs Act eliminates that penalty for couples earning up to $400,000. But above that amount, it bites hard. Singles don't hit the 37% top tax bracket until $500,000 of taxable income, while joint filers hit it at just $600,000. For a couple earning $500,000 each, that's a difference of $8,000 in total tax — enough to buy a lot of roses!

Of course, there are tax advantages to tying the knot, too. You can make unlimited cash gifts to your spouse. Your estate tax unified credit doubles, to $11.2 million. (Maybe that's why rich old geezers marry younger women . . . yeah, they do it for the tax planning!) You can make twice as much tax-free profit selling your home than if you're single. What's not to love about that?

And if your marriage doesn't go as planned? You can still console yourself with tax-advantaged alimony payments — at least, for agreements finalized before the end of 2018. (You know why divorce is so expensive? Because it's worth it!) You might also get a tax deduction if you donate all the stuff your ex gave you to charity! No sense cluttering up your house with painful memories, right?

Here's something we know you'll love, no matter what your relationship status: keeping more for your sweetheart this holiday. The key to making it work, of course, is planning. So call us when you're ready to pay less tax every day!

Tuesday, February 6, 2018

Country Crooners Sing the Blues

Country music embraces a long tradition of songs about sadness and ruin, heartbreak and pain. It just makes sense, then, that country sometimes runs afoul of the tax system. Most famously, Willie Nelson found himself on the wrong side of a $16.7 million tax bill. And outlaw country icon David Allen Coe, who penned Take This Job and Shove It, drew three years probation and $980,000 in restitution for failing to report his income, which he insisted on taking in cash to hide from the IRS.

Joy Ford probably never expected she would become a part of that particular tradition. She got her start as a carnival dancer performing at state fairs. Her co-star Loretta Lynn inspired her to start singing, and she had several minor hits in the 1980s. She went on to operate the Bell Cove Club outside Nashville, where she showcased up-and-coming acts. But her eye for talent turned out to be far better than her eye for business.

Ford met with a producer to talk about a TV show, and met with a consultant who suggested converting the club into a seafood restaurant. But the show went nowhere and the consultant's advice went in one ear and out the other. She claimed losses of $210,298 for the years 2012-2014, and deducted them against income from trusts and a brokerage account. Business losses are deductible against outside income, of course, if you can show you're really trying to make money. But the IRS decided her business was just an expensive hobby, disallowed the losses, and case ended up in court.

Judge Foley took just two pages to find that Ford wasn't really trying to make a profit. "She had no expertise in club ownership, maintained inadequate records, disregarded expert business advice, nonchalantly accepted Bell Cove's perpetual losses, and made no attempt to reduce expenses, increase revenue, or improve Bell Cove's overall performance." Not much to sing about, there!

Not all country musicians who take on the IRS wind up on the sad side. Remember Conway Twitty? (Who could forget a name like that? It sure beat Harold Lloyd Jenkins, the one he was born with!) In 1968, he rounded up 75 friends and associates to invest in a side venture called Twitty Burgers. Apparently, his fans found his vocal licks tastier than his burgers, and by 1971, all but one of the restaurants were shuttered. Twitty worried that the failure would hurt his reputation, so he repaid his investors out of his music income. Naturally, he deducted those repayments, totaling $96,492.

The critics at the IRS disallowed Twitty's repayments because they were related to the burger business, not the music business. So Twitty took the IRS to court, and the Tax Court ruled in his favor. Judge Irwin found that repaying the investors was an "ordinary and necessary" expense for "furthering his business as a country music artist and protecting his business reputation for integrity." (We're not sure how Twitty would have translated those happy results into a country song!)

Are you looking for happier music where your taxes are concerned? You'll need to do a little planning, and probably a little homework. But we can help you with that effort, and we promise you'll whistle a happy tune if you do. So call us when you're ready to save, and remember, we're here for your bandmates, too!