Monday, December 5, 2016

400 Cigar-Chomping Fat Cats Aren't Enough Anymore

Author F. Scott Fitzgerald, who brought us the Great Gatsby among other well-heeled characters, once said the rich are very different from you and me. To which Fitzgerald's jazz age compatriot Ernest Hemingway sarcastically retorted, "Yes, they have more money." But how much more money do they really have? Nosey parkers want to know!

Every year, the financial snoops at the IRS release a study analyzing the income and the taxes of the top 400 earners in the country. We're not talking ordinary 1%ers here — we're talking card-carrying plutocrats. If you show these people your Hamptons house, they'll raise you their bigger Hamptons house, right on the beach — plus a penthouse in Manhattan plus a ski chalet in Gstaad plus a second beach house in St. Bart's.

Last week, the IRS released their report for 2014, and revealed that the country's 400 fattest cats had gotten 20% fatter. It took $127 million of adjusted gross income to join the top group, up from $100 million in 2013. But that was just the ante — the average income was $318 million, 20% more than the previous year. The 400's total income was $128 billion, which is just a few billion shy of Nevada's Gross Domestic Product.

Where does all that money come gushing in from? It's not salaries and wages (4.47% of the total), interest and dividends (15.13%), or even closely-held businesses (11.6%). You'll have to turn to Schedule D, "Capital Gains and Losses." The average Fortunate 400 filer reported $192 million in gains. This suggests our typical tippy-top earner makes it by selling a business they spent a lifetime growing. As it turns out, 3,262 of the 4,584 Fortunate 400 who have appeared on the list in the last 23 years have made it just once, which reinforces this point.

The numbers going out are just as impressive, too. The group averaged $37 million in charitable contributions (6.9% of the country's total), $22 million in state and local taxes, $5 million in interest, and $11 million in miscellaneous itemized deductions. Sadly, the report doesn't tell us how much they spent on million-dollar watches, diamond-studded dog collars, and other essentials of over-funded lives.

As for taxes, the group's average IRS contribution was $73.5 million, which represents a 23.13% rate. Of course, those are just averages — the study revealed that nine of our super-earners paid less than 10% and 26 more paid less than 15%. (It's probably a good thing their neighbors don't know who they are!)

It's all an early Christmas for data nerds. Now here's the bad news. This year we'll be waving goodbye to our lucky 400 winners. Because of our growing population, the IRS will shift their focus to the country's top 0.001% of taxpayers, or 1,396 returns. "This is a more analytically useful tabulation compared to the top 400 tabulation in that it provides a longitudinally consistent data point relative to the entire percentile distribution," they say. (We told you this was data nerd stuff.)

Here's one last thing the Fortunate 400 have in common. They don't just take a shoebox full of receipts to their accountant on April 14 and say, "What do I owe?" No, these very smart people plan and plan and plan — to ensure they keep every last penny possible. It works for them, and it can work for you. So call us to take advantage of opportunities still remaining in 2016, and let's see what we can do for you!

Monday, November 28, 2016

Over the River and Through the Woods

Thanksgiving is a time for homecoming, and some of us are fortunate to return to a place where we've spent decades of holidays. Who wouldn't relish celebrating in a cozy farmhouse out of a Norman Rockwell print, with an overstuffed chair in front of a crackling fire and a warm kitchen smelling of pumpkin pie?
But these days, more Americans spend their Thanksgiving in a different setting. Who wants grandma's cramped parlor when they can welcome guests in a two-story foyer with dueling spiral staircases and a faux-crystal chandelier? We're talking, of course, about the design mishmash that critics have dubbed "the McMansion."
A McMansion is more than just a big, new house. It's a special breed of architectural jumble that favors sheer size and showiness over quality. You may not be able to define it, but you sure know it when you see it! Blame them, if you like, on the eager builders who sell them and the feckless zoning boards that green-light them. But there's one more more enabler that makes them possible, and that's our beloved U.S. tax code.
When Congress birthed the income tax back in 1913, they made all interest deductible. But the tax itself hit less than one percent of Americans. And most buyers in that day paid cash for their homes. So there was no specific intent to subsidize mortgage interest for the masses.
Since then, however, mortgages have become indispensable to the home buying economy and the mortgage interest deduction has become central to the tax code. In 1986, Congress eliminated tax breaks for most personal interest, but kept the deduction for interest on up to $1.1 million of mortgage debt. Today's code also lets you exclude up to $500,000 of capital gains from your income when you sell your primary residence.
Given our progressive tax system, these tax breaks tend to favor the wealthy. Mortgage interest is deductible only for the highest-earning third of Americans who itemize deductions. And the capital gains exclusion helps the most in high-cost markets clustered on the east and west coasts. One study found that just five high-cost urban areas snagged 87% of the net tax benefit, with over half going to California alone.
So . . . combine imperfect tax subsidies with the general decline of aesthetic integrity, and what do you get? Crimes against architecture. You can love stately brick courses, homey wood shingles, and even grand stone accents, without mashing them all into a single facade. You can admire the Greeks' taste in columns without slapping stick-on foam imitations on your bathroom wall like a suite at Caesars Palace. You don't need to know what a hipped roof, a gable, and a jerkin-head are to know they don't all belong on the same house.
Making fun of McMansions has even become part of popular culture. There are several web sites dedicated to mocking the form. In House of Cards, Frank Underwood gave home buyers his own brand of home buying advice: "Money is the McMansion in Sarasota that starts falling apart after ten years. Power is the old stone building that stands for centuries."
We don't care if your dream home is a suburban estate, a city loft, or a condo at the beach. Our job is to help you navigate the jumble of tax laws that make even the gaudiest McMansion look balanced and proportional. So call us when you're ready for a blueprint — we'll be here to help you build the tax shelter you need!

Monday, November 14, 2016

All You Need is Love

No matter who we voted for, we can all agree that this has been the nastiest presidential election since Thomas Jefferson called John Adams a hermaphroditic bastard. This week it's finally (finally!) come to an end. Whether you're elated or nauseated by the results, there's probably one emotion you share with most Americans right now: relief that the campaign is over. You've taken a long hot shower, and you got to enjoy your Sunday afternoon football with no political ads.
Now it's time for everyone to make nice. Donald Trump began his victory speech by graciously praising his rival Hillary Clinton: "Hillary has worked very long and very hard over a long period of time, and we owe her a major debt of gratitude for her service to our country." Hillary returned the favor the next day, telling her supporters we owe Trump an open mind and a chance to lead. Outgoing President Barack Obama stated we are all on the same team and we are all rooting for his success.
As the Beatles once sang, it seems that "all you need is love." Unfortunately, not everyone seems to agree. We're talking, of course, about the romantics at the Internal Revenue Service.
Our story this week starts with Joseph L. Jackson and his wife Sylvia. Joseph is the pastor at Triumph Church of God, a tiny Florida congregation with just 25 to 30 regular members. His wife sat on the board of directors. Together, the Jacksons managed the church's checking account and appeared to sign all checks jointly. As you can imagine, this won't be one of those stories involving rich people with billions of dollars or rich corporations with trillions of dollars.
Joseph told the church's board of directors that he didn't want an actual, taxable salary for his work. However, he said, he would be perfectly delighted to receive "love offerings," gifts, or loans from the church. In 2012, the couple signed $4,815 worth of checks payable to Mr. Jackson, with "love offering" or "love gift" marked on the memo line.
At the end of the year, the church issued Jackson a 1099-MISC for the income. Next year, when the Jacksons filed their return, they reported $6,478 in deductible contributions to the church. But they omitted the $4,815 the church had paid to them. Naturally, with 1099 in hand, the IRS objected, and everyone wound up in court.
Last month, Special Judge Daniel Guy issued his opinion in Jackson v. Commissioner. No one objected to the deduction for the Jacksons' gift to the church. But the love gifts were a different matter, and Judge Guy took just four sentences to conclude that Jackson's "subjective characterization of the payments as nontaxable 'love offerings' and 'love gifts' is misguided." (By "misguided," of course, what he really meant was "ridiculous" — you just don't get to say that when you're a Tax Court judge.)
When your kids were little and they got flustered, you might have looked down at them and said "use your words!" The same advice is true here. It's a common misperception that taxes and tax planning are all about numbers. But really, they're about the words we use. Can we legitimately interpret words to characterize money we receive as "nontaxable"? Can we interpret them to characterize money we spend as "deductible"? Merely calling something "nontaxable" or "deductible" isn't enough. Call us if you want to use your words to pay less. We're pretty sure you'll love the results! 

Wednesday, November 9, 2016

No, They Don't Want Justin Bieber Back

Given how long the 2016 presidential election season was, you're probably in one of two camps right now: ready to move to Canada, or relieved you don't have to. Either way, it's likely more Americans have actually thought about Canada in the last year than in the entire last century. So let's take a look at how Canada's tax system works, eh? Here's what you're in for (or what you're missing) from a country that calls its money the "loonie."
At first glance, Canada's tax system looks a lot like ours. The Canada Revenue Agency is the Great White Northern equivalent of our IRS, and it collects income and payroll taxes. "Revenue Canada" also collects the Goods and Services Tax (a 5% value-added tax) and Harmonized Sales Tax, a combined federal/provincial sales tax that replaces the GST in five eastern provinces. Tempted to cheat? Just remember they've got the Mounties on their side!
Canada's federal income tax looks a lot like ours, too, only nicer. Rates start at 15% and top out at 33% on incomes over $200,000. (Right now, one dollar equals about 1.34 loonies.) Capital gains are taxable; however, you'll only include 50% of them in your income. You can defer up to 18% of your previous year's income, up to about $25,000, into a Registered Retirement Savings Account that resembles our 401(k)s. You can also put up to $5,500 per year into a Tax-Free Savings Account that resembles our Roth IRAs.
The big difference comes in the provinces and territories. Here in the US, state tax rates rarely climb above 8%. California has the top rate at 13.3% and it doesn't apply until $1 million. Canada's provincial rates generally start around 8% and climb quickly from there. Quebec has the top rate at 25.75%, and it kicks in at just $103,151. (But it sounds so much better because it's in French!)
Of course, Canadians get something for their provincial tax dollars that we don't get from our states: Canada's legendary healthcare system. Canucks love their healthcare almost as much as they love maple syrup. Doctors handle billing directly with the government for everything but prescription drugs, long-term care, eyeglasses, and dental care. It's hardly perfect, of course — critics point to long wait times for specialists and Canadians traveling to the U.S. for elective surgeries. But in the end, Canadians drop just 9% of their GNP on healthcare, versus 17% here.
And Canada has the usual collection of oddball tax rules you'd expect in any democracy. Blank CDs carry a special "private copying levy" because the government assumes you're using them to violate somebody's copyright. Geese, ducks, and turkeys are tax-free if you're going to breed them, but taxable if they're on the menu. And just this year, Alberta boosted taxes on small breweries from 10 cents to $1.25 per liter, which drinkers are finding hard to swallow.
Canadians will roll out the welcome mat if you decide to pack up your skates and take off. If you're single, visit, a dating site to match fleeing Americans with lovelorn Canadians. (Check the boxes for "bacon" and "hockey" to up your odds.) And don't forget that Canada's most recent election lasted just 78 days.
The new administration is sure to bring to change to Washington, and that probably includes changing tax laws. We'll stay on top of it all to help you pay less. Maybe you'll use some of the savings for a city weekend in Montreal, or a ski trip to Whistler? Bring us back some souvenirs, hoser! 

Monday, October 31, 2016

Hut, Hut, Hike! (Your Tax Bill)

The 2016 NFL season is in full swing, and fans are spending billions of dollars to show their loyalty to their teams. The average ticket costs $92.98. The average beer runs $7.38. Even parking can cost as much as $75 to see the Cowboys at AT&T Stadium. And fans spend billions more on licensed hats, jerseys, jackets, and other apparel.
But teams don't always return that loyalty. In recent years, the Cleveland Browns became the Baltimore Ravens, the Houston Oilers became the Tennessee Titans, and the St. Louis Rams, who had previously been the Los Angeles Rams, scampered back to LA. In most cases, teams make lateral moves to new hometowns to find better stadium deals. These days, a 10-year-old stadium is about as exciting as a quarterback with a torn hamstring.
Now the Oakland Raiders — who started out in Oakland before moving to Los Angeles before moving back to Oakland — are hoping to move again, this time to Las Vegas. Once again, a new stadium is the big incentive. So let's take a look at the role taxes will play in the move.
A top-notch quarterback can cost north of $20 million per year. But a top-notch stadium costs closer to two billion. That's a lot for an NFL owner to swallow, even with the average team worth $2.43 billion. So it's customary for owners to approach their civic hosts with tin cups outstretched, looking for help to foot the bill. And taxpayers are usually happy to help — over the last 20 years, state and local governments have ponied up nearly half the cost of building or renovating stadiums for the league's 32 teams.
Here's what's happening in Vegas. Raiders owner Mark Davis says he's willing to throw $500 million towards a proposed $1.9 billion, 65,000-seat domed stadium. Casino owner Sheldon Adelson is willing to to hand off $650 million more. Nevada Governor Brian Sandoval has signed a bill hiking hotel taxes by 0.88% to cover the remaining $750 million. The plan also involves accelerating $899 million in transportation improvements already on the drawing board. Will all that spending turn out to be a smart bet?
At least the Las Vegas plan involves tackling visitors for the tax money. (Hotel taxes are especially popular sources for stadium revenue.) But sometimes public financing leads to a complete fumble. St. Louis dropped $259 million on the Edward Jones Dome to lure the Rams from LA, financing it with 30-year bonds. The team stayed for 21 years before sacking St. Louis to return to California. Now St. Louis taxpayers are stuck paying $12 million per year for a football stadium with no football team in it. It's going to take a lot of tractor pulls to cover that bill.
Team owners and their lobbyists argue that shiny new stadiums pay for themselves in the form of jobs, spending, and sales taxes. But study after study shows that's rarely true. Ultimately, it comes down to supply and demand. There are only 32 teams in the league, but there are far more cities that want one. Politicians can promise until they're blue in the face that they won't raise taxes. But what elected official wants to face his voters after letting a greedy owner strip their team from their town?
We realize that your game plan probably doesn't involve paying more tax to finance a stadium. In fact, it probably involves paying less. That's where we come in. So hand us the ball and let us take it up the field for you. We're confident you'll cheer for the savings. And remember, we're here for all your teammates, too! 

Monday, October 24, 2016

Warren Buffett's Real Superpower

Spend an afternoon at any area theater, and you'll see heroes with superpowers wreaking havoc wherever they go. Superman is faster than a speeding bullet (and leaps tall buildings in a single bound). Superheroes band together to save the world and debate whether they can ignore civilian authorities while they do it. Sometimes they even get married — just witness the Incredibles, an entire family of "Supers" dedicated to battling evil on a daily basis.

Every so often, mere mortals reveal they have superpowers, too. Take Warren Buffett, the "Oracle of Omaha." The longtime chairman of Berkshire Hathaway has grown his company's book value by 19.7% per year for the last 49 years, making him the third-richest man in the world. Most observers would say Buffett's superpower is his talent for spotting undervalued companies to buy. But is stock picking really the ace up his sleeve? Or could his true superpower be tax planning?

Here's what's going on. Most public companies start out by plowing their profits back into their own growth. At some point they become confident enough to reward investors with cash dividends. The typical S&P 500 company pays out about 30% of its earnings to shareholders for a 2% dividend yield. Those dividends encourage more investors to buy in. But they're taxable as soon as paid, and slow a company's growth, too.

Buffett plays a little tighter. He looks for undervalued targets with rich cash flows and solid dividend histories. He buys them, then kills their dividends to redeploy that cash for future acquisitions. Buffett's own company hasn't paid a dividend since Lyndon Johnson was president!

Buffett owns $65 billion worth of his company's stock. If he paid a 2% dividend like the typical S&P 500 company, he would have taken $1.2 billion last year, meaning a $280 million tax bill. Plowing those millions in tax savings back into his company's growth adds even more to Buffett's net worth! (What would Buffett do with all that income, anyway? He's famously modest, still living in the same Omaha house he bought for $31,500 back in 1958. And when he bought a private jet, he had the self-awareness to name it "the Indefensible.")

But wait . . . there's more! Buffett isn't just avoiding tax on dividends. By locking up all his income inside the business and rewarding investors in the form of higher share prices, he's converting ordinary income into capital gains. That means that shareholders who hold their stock until death will qualify for "stepped-up basis" treatment and escape tax on their gains entirely.

Of course, all those billions are still subject to estate tax. But Buffett has a plan for that, too. He's a legendarily generous philanthropist who's pledged to donate 99% of what's left at his death to his friend Bill Gates's (tax-free) foundation. So the untaxed billions he's squirreled away will escape the IRS forever. Now that's a superpower! Buffet's planning has worked so well that Hillary Clinton has even named a campaign proposal after him: the "Buffett Rule," which would set a minimum tax rate of 30% on anyone earning over $1 million per year.

We can't promise that saving taxes will compound your dividends into billions. But it's just common sense that keeping more for yourself contributes to your bottom line. So call us if you want to borrow a little of Buffett's superpower for yourself!

Tuesday, October 18, 2016

We're Number One!

Americans love awards shows — the Oscars, the Grammys, the Emmys, and the Tonys. So we all watched eagerly as the nonpartisan Tax Foundation rolled out the red carpet and released "International Tax Competitiveness Index 2016." The ranking rewards countries with low marginal rates to discourage businesses from fleeing abroad and simple systems to raise the most revenue with the fewest "economic distortions."
Which of the 35 member states of the Organisation for Economic Co-operation and Development (OECD) took home the gold? Was it our own United States? Maybe some sunny Caribbean tax haven where international gangsters travel to sip Pina Coladas and light cigars with their money? Perhaps one of those dinky European "Grand Duchies" tucked away in the Alps with strict bank secrecy laws?
No, no, and no. The winner, for a third year in a row, is the polka-dancing, wife-carrying, ice-yachting land of — Estonia! That's right, the Baltic country of just 1.3 million people, that most Americans couldn't find on a map, has the most competitive tax system in the world. Surprised?
What makes tiny Estonia's tax code so mighty? Try a 20% flat tax on earned income — the lowest top rate in the world. A 20% corporate rate with no tax on reinvested profits or double taxation of dividends. Property taxes based solely on land values, not buildings or improvements. A 20% value-added tax. And no taxes on foreign earned income, estates, or financial transactions.
Beyond Estonia, who are the top scorers? According to the ITCI:
  • Silver medalist New Zealand has "a relatively flat, low-rate income tax that also exempts capital gains (with a combined top rate of 33%), a well-structured property tax, and a broad-based value-added tax."
  • Estonia's neighbor Latvia, at #3, "has a relatively low corporate tax rate of 15%, speedy cost recovery, and a flat individual income tax."
  • Fourth-ranked Switzerland has "a relatively low corporate tax rate (21.1%), a broad-based consumption tax, and a relatively flat income tax that exempts capital gains."
  • Even socialist punching bag Sweden, which rounds out the top five, has "a lower than average corporate income tax rate of 22%, no estate or wealth taxes, and a well-structured value-added tax and individual income tax." Where does our internal revenue code fall on this international ranking? Well, it turns out, "we're number 31!" (What kind of medal do you get for 31st place, anyway, Styrofoam?) Among other demerits, we have the highest marginal corporate tax rate and some of the most complicated taxes out of the entire OECD.
    Our tax code may not impress our fellow nations, but that doesn't mean all hope is lost. It just means you have to plan a little harder to avoid paying more than your fair share. That's where we come in. So call us for help, and start thinking where in the world you want to take your savings!