Thursday, January 4, 2018

He's Mister Tax Miser

Welcome to 2018! New Years' always brings changes to taxes. Key numbers, like tax brackets, standard deductions, personal exemptions, and qualified plan contribution limits, all roll over on January 1. But this year brings more change than any year since 1987. Washington has just passed a sweeping overhaul of the entire tax code, from working individuals all the way to multinational corporations. Tax planners across the country are scrambling to ferret out the opportunities hiding in its 503 pages of typically dense, impenetrable text. (There's a reason tax lawyers drive Jaguars.)

This year's tax bill avoids one particularly awkward tax transition we faced in 2010 — one that became, for some families, literally a matter of life or death. Remember the old children's Christmas special, Year Without a Santa Claus, with the dueling Heat Miser and Snow Miser? Those guys had nothing on 2010 . . . the Year Without an Estate Tax!

Estate taxes date back as far as 700 B.C. in ancient Egypt. (Of course, the Egyptians also buried their pharaohs with food, clothing, and jewelry for the afterlife.) Here in the United States, they began with the Revenue Act of 1862, which included gift and estate taxes ranging up to 6%, including bequests to charities. The Revenue Act of 1916 created the modern transfer tax system, with rates up to 10%. But those rates quickly climbed — when America's first billionaire John D. Rockefeller died in 1937, his estate paid 70%.

In 2001, the Bush tax cuts began raising the threshold for paying the tax from $675,000 to $3.5 million over a series of years through 2009. In 2010, the tax disappeared entirely. But then, due to Senate budget rules, it reset in 2011 at 55% on estates over $1 million. Of course, Congress had planned to do something to plug that one-year hole, but . . . you know how Congress sometimes doesn't get around to doing everything they're supposed to, and we rang in 2010 with no estate tax at all. Finally, in December 2010, Washington reinstated the tax beginning on January 1, 2011.

This presented a pretty straightforward challenge as 2009 drew to a close. Keep Grandpa alive past midnight! But December, 2010 posed a very different challenge. How much will Grandpa cost his heirs if he lives long enough to raise one final toast to auld lang syne? Here's how the Wall Street Journal reported one case:


"In New York the lapsing tax spawned a major family conflict, according to one attorney. As a wealthy patriarch lay dying at the end of the year, it became clear that under the terms of the will his children would receive more if he died in 2010, while his wife (not the children's mother) stood to benefit if he died in 2009. The wife then filed a "do not resuscitate" order and the children challenged it. The patriarch lived a few days into 2010, but his estate . . . remains unsettled given the legislative uncertainty."

What, if anything, happens to estate taxes in the newest law? Good news . . . the amount you can leave to your heirs without paying actually doubles, to $11.2 million! Even better, there's no provision for the rules to change again any time soon, which makes planning so much easier. So raise a toast to 2018 . . . and remember that, at least where taxes are concerned, saving money won't require you to pay the ultimate price. We'll be here for you this New Years' and beyond, with all the strategies you need to pay the least amount allowed!

Tuesday, December 26, 2017

We Now Interrupt This Broadcast . . .

On Sunday, October 30, 1938, Mercury Radio Theatre fans, who were listening to Ramon Racquello and His Orchestra, were interrupted by a news broadcast reporting an odd explosion on the planet Mars. Soon after, they learned that a cylindrical object had fallen on a farm in Grovers Mills, New Jersey. The radio audience listened in horror as a pulsating Martian emerged from the cylinder and obliterated the crowd with heat rays. Soon, an entire army of Martians had invaded New York, and very real panic had spread across the country.

Last week, something a bit similar happened in the tax world. (Well, except for the Martians, heat rays, and destruction of Gotham.) After just six weeks of consideration, the House and Senate passed the Tax Cuts and Jobs Act of 2017, the biggest restructuring of the tax code in 31 years.

We don't usually use these emails to discuss "hard news" like the new tax bill. It's much more fun to walk through the "Twelve days of Taxmas," or how celebrities use offshore tax havens, or harken back to taxes in the 1980s as we enjoy Season Two of Netflix's Stranger Things. But this new tax bill is simply too big to ignore. And so we interrupt our usual broadcast of fun tax stories for something a bit more serious.

We shouldn't need to tell you much about the nuts and bolts of the new law — the lower tax rates, lower deductions, and new "qualified business income" rules for pass-through businesses. The news is already full of those discussions. Over the coming days and weeks, we'll be putting together material explaining how the new bill could affect you.

But we're going to do things a little different from everybody else. Most of those news outlets will be writing about how much you're going to owe under the new law. And that's important. But we're going to focus our effort on how you can pay less. And in the end, that service is even more important. Most tax professionals do a perfectly good job of putting the "right" numbers in the "right" boxes on the "right" forms. But then they call it a day. Our real value comes from delivering the proactive concepts and strategies that most tax and financial advisors simply overlook.

Of course, we'll also be highlighting some of the more absurd aspects of the new law. For example . .  under the old law, you could exclude a whopping $20 of income per month for expenses related to riding your bike to work, so long as you weren't getting other pretax transit benefits. The new law lets the air out of that benefit. And how much will putting a nail in that benefit save the Treasury? Austin Powers fans, channel your best Dr Evil voice and say it with me . . . "one . . . million . . . dollars." A rounding error, at best.

Here's another one you might like a little more. Under the old law, Code Section 162 said that members of Congress could deduct up to $3,000 per year for their living expenses while they’re away from their districts. At this point, though, Congressional net worths are hitting all-time highs (Montana Rep. Greg Gianforte, who started two software companies, is worth $315 million). And congressional approval ratings are hitting all-time lows, hovering somewhere around 11%. So the new law eliminates that little boondoggle.

This is the last time we'll be writing to you in 2017, and 2018 promises to be a busy year, full of opportunity and promise. So count on us to help you navigate the new rules, as you ring in the New Year. And don't forget, we'll be here for your family, friends, and colleagues, too!

Monday, December 18, 2017

The Twelve Days of Taxmas

Every year, PNC Bank publishes their "Christmas Price Index" to track the cost of the Twelve Days of Christmas. For 2017, it's a hefty $157,558. (And you thought your holiday spending was out of control!) The index may not be completely accurate — for example, the ten lords-a-leaping are valued using the cost of male ballet dancers, rather than actual lords, and the eight maids-a-milking don't include eight actual cows. But still, it got us wondering . . . what sort of taxes are we looking at on the whole affair?
•Twelve drummers drumming and eleven pipers piping make quite a racket every holiday season. Hiring all that help will stir up a cacophony of payroll taxes!

•Ten lords may look perfectly happy while they're leaping. But surely they must pay a king's ransom in income taxes — after all, they are lords!

•Nine ladies dancing make a lovely sight at Christmas time — especially if they're Rockettes. They also pay a cabaret tax for the privilege of displaying their talent.
•Eight maids-a-milking help make sure we have plenty of tasty eggnog to drink. Good thing so many states offer dairy tax credits to spur the cows on to higher holiday production!
•Seven swans-a-swimming? Six geese-a-laying? If we accept the rule of thumb that two birds per acre of pond is a manageable number, then we're looking at some serious property taxes to host our holiday flock!
•Who doesn't want five gold rings under the tree? But selling those rings can be an expensive proposition. Remember, jewelry held for personal use is still subject to 20% tax on long-term capital gains, plus an extra 3.8% "net investment income tax"!
•Four calling birds use a lot of cell phone minutes over twelve days. (They're calling birds, so unlimited texting won't help.) Naturally, that means a 5.82% federal excise tax, plus state and local sales tax too.
•Three French hens add a sophisticated "continental" touch to any one's holiday festivities. But don't forget the import duties you pay to bring foreign livestock into the country!
•Two turtle doves are known among bird watchers for forming strong "pair bonds," which makes them a symbol of devoted love. (That's why they're in the song.) Too bad that means they pay that pesky marriage penalty that hits high-income couples who file jointly! (Okay, we know this this one's a stretch. But we've got twelve days of taxes to fill here, so what can we do?)
•Nothing says "Christmas" like a partridge in a pear tree. And our tax code is full of juicy incentives for growing pear trees. You can deduct operating expenses associated with your crop; you can depreciate equipment and land improvements you use to manage your groves; and you can even take generous charitable deductions for rights you give up for conservation easements. Why, the tax savings alone should be more than enough to pay for the partridge!
Yes, even Twelve Days of Christmas just means twelve more opportunities for the taxman. So here's wishing you and your family the best this holiday season. We'll be back in 2018 to make sure you pay as little tax as possible, not just during the holidays, but all year long!

Tuesday, December 12, 2017

A Different Kind of Holiday Party

Your kids have finally finished eating their Halloween candy, which means that the real holidays are right around the corner. But before you sit down to open presents, December 16th marks the 244th anniversary of an important holiday in tax history — a pop-up costume ball in Boston Harbor called the Boston Tea Party.

From 1698 through 1767, Britain's Parliament passed a series of laws giving the East India Company a monopoly on the British tea trade, forcing the colonies to buy their tea from British wholesalers, and slapping hefty taxes on it all. But Dutch traders, who paid no tax, could sell their tea for less, costing the East India Company a fortune. (If you remember Miami Vice in the 1980s, try picturing a colonial-era Crockett and Tubbs, dressed in fly white buckskins, chasing Dutch bootleggers in a sleek Italian brigantine.)

In 1767, Parliament passed the Indemnity Act to lower the tax on tea to compete with the Dutch. (Earl Gray was just three years old, so he didn't vote.) But they needed a "payfor" to make up the lost revenue, so they brewed up the Townshend Acts taxing colonial imports, including tea. (Hmmmm . . . sounds like the sort of horse-trading today's Congress is up to right now with the Tax Cuts and Jobs Act.) Five years later, the Indemnity Act expired, and everyone was back where they started. (Sort of like what happened in 2013 when the Bush tax cuts expired . . . . )

The Tea Act of 1773 brought things to a head. The new law actually lowered the price of tea to undercut the smugglers. But the colonists still hated Parliament taxing them without their consent. They hated how England used those taxes to pay colonial governors and judges, thus insulating them from local influence. And that's where things stood in November, 1773, as the tea ship Dartmouth sailed into a Boston Harbor steeped in resentment and controversy.

British law required the shipper to unload and pay the tax within 20 days. But colonists, who gathered by the thousands, were determined to prevent that. On the night of December 16, the final deadline, a group of 30 to 130 of them boarded the Dartmouth and two more ships. A few of them sported elaborate Mohawk warrior costumes to hide their faces and show their loyalty to American identity. They spent three hours dumping 342 chests of tea into the water. The next day, future President John Adams wrote in his diary:


"There is a Dignity, a Majesty, a Sublimity, in this last Effort of the Patriots, that I greatly admire . . . . This Destruction of the Tea is so bold, so daring, so firm, intrepid and inflexible, and it must have so important Consequences, and so lasting, that I cant but consider it as an Epocha in History."

The Tea Party set all sorts of consequences in motion besides the obvious "American Revolution" thing. (Does that remind you of Taylor Swift's song, "We Are Never Ever Getting Back Together"?) If you're a coffee drinker, for example, you should know that coffee first became popular here as an alternative to "unpatriotic" tea. (Sort of like renaming french fries "freedom fries" during the Second Iraq War . . . . )

244 years later, we still resent paying taxes we don't have to pay. The good news is, you don't have to don a Mohawk headdress and row out into the middle of the harbor for three hours of creative vandalism to pay less. You just need a plan. So call us when you're ready to save, and let us give you something to celebrate!

Tuesday, December 5, 2017

Area Actress to Wed Ex-Soldier

Two hundred and forty one years ago, we declared our independence from Mother England — over taxes, of course. But here on our side of the pond, we've never completely lost our affection for all things British. We applauded as the Queen celebrated her 70th wedding anniversary. Netflix fans who just finished binge-watching Stranger Things are eagerly awaiting Season Two of The Crown. And now we've learned that Prince Harry and his longtime girlfriend, actress Meghan Markle, are getting married in May.

Now, Harry may be just fifth in line for the throne, and about to be bumped down to sixth when Princess Kate gives birth to her third child next spring. But a royal wedding is still a Very Big Deal. There's going to be lots of work to keep the couple knackered out for months to come. That includes a guest list, a gown, and flowers. And of course there will tax questions, too.

Here's the issue: Markle isn't a Brit. She's a Yank. Buckingham Palace has already announced that Markle will become a British citizen, which involves passing a test with questions like "What did the Statute of Rhuddlan in 1284 lay the basis for?" and, "Who or what is Vindolanda"? But that transition will certainly complicate her finances, and possibly the rest of the royal family's, whether she says cheerio to her American citizenship or not.

Giving up her U.S. passport would be a simple but possibly pricey proposition. There's no magic to it: you make an appointment at the nearest embassy, sign some forms, and take an Oath of Renunciation. There's a $2,350 fee to process the paperwork, but that's low enough that she could probably add it to her wedding registry and count on a generous Member of Parliament, or maybe a lesser Marchioness, pick it up for her.

The real problem with expatriating is the bloody exit tax. If your net worth is over $2 million, or your average annual income for the five years before you leave tops $162,000, you'll owe tax on any appreciated assets you own, calculated as if you had sold them on the day you leave. That could make it frightfully expensive to move into a palace!

Things get more complicated if Markle keeps her U.S. citizenship. She'll still owe U.S. tax on her worldwide income. And she can't hide foreign holdings from the IRS. If she keeps more than $300,000 in assets abroad, she'll have to file Form 8938 reporting them. (And, really, what's the point of being "Her Royal Highness Princess Henry of Wales" if she's not going to have more than $300,000 in assets?)

If Her Royal Yankee Highness hold anything jointly with Harry, those U.S. filings could reveal assets the Crown prefers keeping confidential. We know that Harry inherited half of his mother, Princess Diana's £21.5 million estate (roughly $28.5 million), and he shares a £3.5 million allowance with his brother. But the royals work hard to keep the bulk of their finances private. The recent "Paradise Papers" leak revealed that Harry's grandmum the Queen benefits from investments the Duchy of Lancaster holds in the Cayman Islands and Bermuda.

You probably thought that marrying a royal would solve your financial problems, not create new ones. But life is full of surprises, even for princesses. So let us propose a jolly good solution: a plan for paying the legal minimum, no matter who you marry! Call us when you're ready to save, and take a few quid to treat the queen to a cuppa!

Tuesday, November 28, 2017

Good Guys Share $175 Million Refund

April 15 hasn't always been the national exercise in self-flagellation that it is today. Up until the 1940s, you could just waltz into your local IRS office and they would do your taxes for you. But those days have long since passed. You're still welcome to do it yourself, if you need more stress in your life. But how will you know if you're paying too much? Even software like TurboTax can't guarantee you'll get it right. If you don't know how to use it, the program just helps you make the same expensive mistakes faster than when you made them with paper and pencils.

If you're like most Americans, you just throw up your hands and call a pro. That begs a new question: who to call? Certified Public Accountants and Enrolled Agents have traditionally dominated the field. But up until 2010, anyone with a pencil could call himself a tax preparer. (Most of them use computers now — but, surprisingly, not all. Hey, some people still carry flip phones, too.) That seems like an obvious vacuum in today's regulatory environment, considering that in most places, you need a license just to catch a fish. And we all know bureaucracy abhors a vacuum.

In 2009, the IRS decided to do something. After a series of public forums and comments, they launched the Registered Tax Return Preparer (RTRP) program. The new rules required preparers to: 1) sign up for a Preparer Tax Identification Number, 2) pass a 2.5 hour test, and 3) complete 15 hours of continuing education per year. Naturally, the IRS charged a fee for the program, which started at $64.25 per year. And they based their authority to do it all on an obscure 1884 law regulating representatives of civil war soldiers looking for compensation for dead horses.

Everyone was happy with the RTRP, except the people subject to the new rules (and maybe those long-dead horses). Preparers felt like they were being forced to take a test to prove they could do something they had done, in some cases, for decades. So three of them sued to shut down the program. And they won — the court agreed that the 1884 law didn't give the IRS authority to regulate an industry that didn't even exist when it was passed. (Oops.)

The IRS suspended the RTRP program. But they kept charging the PTIN fees, even though the program the fees were supposed to finance had ended. So, one year later, a different group of preparers filed another suit to recover those fees.

Once again, the court ruled in their favor. This June, the court decided that PTINs aren't a "service or thing of value" justifying a fee. The IRS can't charge fees for PTINs, "because this would be equivalent to imposing a regulatory licensing scheme and the IRS does not have such regulatory authority." (Don't hold your breath waiting for Congress to give it to them.) And yes, the IRS has to give back all the PTIN fees they've collected. That was $175 million when the plaintiffs filed their complaint; but it could be as high as $300 million now.

Chalk one up for the good guys, right? Well, sure. But here's the real lesson: most tax preparers, credentialed or not, focus on putting the "right" numbers in the "right" boxes on the "right" forms. They do a great job of telling you how much you owe — but nothing about how to pay less. And that has everything to do with attitude, not credentials. So call us when you're ready to save — and remember, we're here for your family, friends, and colleagues, too!

Tuesday, November 21, 2017

Ivy League Tax Problems

They say that "what goes up must come down." But that's not true when it comes to college costs. U.S. News reports the average private college tuition stood at $16,233 back in 1997-98 — roughly $24,973 in 2017 dollars. But the same tuition today costs $41,727. And that's before pricing in luxuries like, you know, meals, and a place to sleep. In-state college costs are rising even faster as legislatures cut budgets for higher education. That means colleges are increasingly turning to alternate funding sources, including their endowments.

In academia, though, as in so many other parts of our "winner take all" society, there's the 1%, and there's everyone else. America's richest 800 colleges and universities hold over $500 billion in endowments, which sounds like there should be plenty to help supplement tuition and fees. But the top 1% of schools hold over $10 billion each, and 11% of schools hog 74% of those assets. That leaves the Faber Colleges of the world essentially fighting over scraps. ("Knowledge is good.")

Now, the Phi Beta Kappas who write our tax code have turned their green eyeshades towards those mammoth pools of tax-free wealth. Both the House and Senate tax bills working through Congress would impose a 1.4% excise tax on net investment income of private colleges holding more than $250,000 per student. That group includes about 70 schools, including obvious targets like Harvard, Yale, and Princeton. At the same time, the proposal spares public school systems with big endowments like the Universities of Texas ($25.4 billion), Michigan ($9.7 billion), and California ($7.4 billion).

It's true that if any schools have "too much money" (LOL), it's the top-shelf Ivies. Harvard's endowment started in 1638 with £779 and 400 books. Over the next 379 years, it's grown to over $37 billion (and 16 million books), leading critics to call it a hedge fund with a university attached. In 2015 that fund grew by just 5.8%, compared to rival Yale's 11.5%. But Harvard Management Company paid its chief executive a whopping $14.9 million, with his deputy taking home $11.6 million. (And you thought college football coaches were overpaid!)

Academic endowments have grown so large that they're starting to use some of the same tax strategies as the richest individuals. The New York Times recently exposed how colleges use offshore entities to boost earnings, including "blocker corporations" that let them avoid tax on debt-financed "unrelated business taxable income." (Trust us, those UBTI rules are even more boring and technical than they sound.)

But naturally, academics are irate at the proposal, rolling up their leather-patched tweed sleeves and prepping for a (genteel) fight. "Endowments support substantial student aid and student service programs, and provide funding for instruction, research, and for building and maintaining classrooms, labs, libraries, and other facilities," said the Association of American Universities. At Princeton (the #1 target with $2.5 million per student), undergraduates from families earning under $56,000 pay no tuition, room, or board, while those from families earning under $160,000 pay no tuition.

Here's the good news. You don't have to be an Ivy League university — or even have an Ivy League education — to save big on your tax bill. You just need a proactive plan. So call us when you're ready for some real-world lessons on how to pay less!