Monday, August 31, 2015

What's in a Name?

Sports fans go nuts this time of year. Baseball fans are watching pennant races heat up; football fans are watching the NFL take the gridiron to kick off the new season; and tennis fans are moving their heads from side to side to take in the U.S. Open. Naturally, this means we're going to talk about basketball.
In Shakespeare's archetypal tragedy Romeo and Juliet, the star-crossed lovers bemoan the feud between their families that keeps them apart. In Act II, Scene II, Juliet gazes out her window and wonders, "What's in a name?" The answer, according to a Chicago jury: $8.9 million tax-deductible dollars!
Dominick's Finer Foods was a Chicago-area supermarket chain that wound up closing its doors after an ill-fated acquisition by Safeway. Back in 2009, probably watching their own clock run down to the buzzer, Dominick's took out an ad in a commemorative issue of Sports Illustrated congratulating Chicago Bulls basketball legend Michael Jordan on his induction into the NBA Hall of Fame. The ad declared, "Congratulations, Michael Jordan, you are a cut above," and included a coupon for $2 off on steaks. (Coincidentally, just two shoppers actually took the store up on their offer!)
A lesser athlete might have just been flattered. But Air Jordan isn't just the most accomplished basketball player of all time. He's also the most effectively marketed b-baller ever. (Forbes magazine estimates his net worth at $1.1 billion, and reports he earned more than $100 million from Nike last year.) And good marketing means protecting your name. So MJ did the same thing any athlete accused of, say, letting the air out of some footballs would do. He sued, claiming Dominick's had used his name without permission.
The jury agreed that Dominick's had fouled Jordan. That left them with the challenge of deciding how much that foul had cost him — in other words, how much Jordan's name was worth. Jordan lined up for $10 million, while Safeway's attorney's blocked with $126,900. The jury clearly thought Dominick's misuse was more than just a technical, and awarded the hardwood legend an $8.9 million bucket hit.
Here's where the IRS comes in. They don't. $8.9 million is probably real money to you, but it's pocket change for a billionaire like Jordan. So "His Airness" declared, even before his lawyers laced up their wingtips, that he would donate any award to local charities. He'll report it as "other income" on Page One of his form 1040, then deduct an identical amount as "Gifts to Charity" on his Schedule A.
Jordan probably feels lucky for lots of reasons. (A billion dollars and six NBA championship rings should do that.) But he's also lucky that he makes enough to dribble around one important limit on charitable gifts. Code Section 170(b)(1)(A) limits gifts to 50% of your adjusted gross income, but lets any excess "travel" forward for up to five years. The upshot? As far as the IRS is concerned, it's a free throw for Jordan.
Here's the lesson for us. It's not just how you make your money, or even how much of it you make. It's also when you make it. Choices like timing business or bonus income, deferring tax on retirement savings, and deciding when to recognize investment winners and losers all play a part in your overall game plan. But if you don't have a plan, you won't know when to lay up, and when to shoot for three. So call us when you're ready for a plan, and let us help you take it down the lane past the IRS guards!

Tuesday, August 25, 2015

Cadillac Taxes for Everyone!

Employers have played a key role in financing their employees' healthcare since World War II, when they threw in tax-free benefits to attract talent in a time of wage controls. So it's no surprise that when Congress passed the Affordable Care Act, they gave employers all sorts of carrots and sticks to boost coverage. But Congress wanted to control overall costs, too, and didn't want employers being too generous. So they imposed a new tax on so-called "Cadillac" plans. Technically, it takes the form of a 40% penalty on annual premiums exceeding $10,200 for an individual or $27,500 for a family. But everyone knows what the term "Cadillac" plan means, even if Cadillacs have nothing to do with the cost of healthcare.
That got us to thinking . . . if the folks in Washington think a tax on Cadillac plans is a good idea, why stop there? What other sorts of taxes could they think of imposing?
  • The "Tiffany" Tax: The DeBeers group of companies, which monopolized rough diamond sales for much of the last century, helpfully "suggests" a young man spend two months' salary on an engagement ring for his betrothed. That's sweet and touching for the man who waits until he's that established before wooing a bride. But blowing two months' pay on something so purely symbolic hardly seems practical in today's era of six-figure student loans and increasingly pricey starter homes. (And is that two months' pre-tax or two months' take-home?) A 40% premium on anything over a carat sounds about right here.
  • The "Big Mac" Tax: Let's face it, when you think of junk food, you think of McDonald's. We know we need to eat less, but how? Former New York City Mayor Michael Bloomberg raised hackles when he tried to ban "Big Gulps" with more than 16 ounces of liquid candy in a single serving. He should have known that Americans will swallow a tax a lot faster than they'll swallow a ban. Today's point-of-sale computer systems could easily supersize sales taxes as calories, trans fats, and salt content go up.
  • The "McMansion" Tax: The average American family has dropped from 3.01 people in 1973 to just 2.54 today. Yet the average American house has added 1,000 square feet in that same time. Do we really need all those extra bathrooms? And nobody really parks a third car in that oversized garage, do they? Property-tax authorities can easily build out their assessments to penalize bloated square footage, fake turrets, more than seven gables, and random stone accent walls.
  • The "Dom Perignon" Tax: A generation ago, Orson Welles promised wine drinkers that Paul Masson would "sell no wine before its time." (Paul Masson himself stomped on the grapes at 9AM, and it was in the freezer at your local 7-11 at 3PM, but who's counting?) Now, it's all "vintage" this and "artisanal" that, and you're not a real wine aficionado if you haven't sampled the latest Chilean Malbec. Governments already load up wine with hefty excise and sales taxes, but why not fortify them with an extra 40% for anything over, say, $40 a bottle?
Fortunately, none of those taxes are real . . . yet. That's just as well, since we've got our hands full helping you pay less of the taxes Washington already imposes. The key, of course, is a plan. And with Labor Day just around the corner, it's not too soon to start thinking about year-end planning. So call us when you're ready to save. And don't pass along any of these ideas to anyone who could actually make them happen!

Tuesday, August 18, 2015

Bug Bonus

It seems like every day brings word of a new internet hack or data breach. Target got hacked by Russian teenagers and millions of credit cards had to be replaced. Sony got hacked by the North Koreans and a loungeful of smug Hollywood executives got embarrassed. The Office of Personnel Management got hacked by the Chinese and thousands of spies got their covers blown. It's almost enough to make you long for the return of old-fashioned computer punch cards.
United Airlines depends on internet technology as much any big business — the days of friendly travel agents patiently walking you through route choices are long gone. So back in May, they took advantage of a clever strategy for avoiding the sorts of attacks that make the skies less friendly. They call it the "Bug Bounty Program," and it pays "white knight" hackers to find the flaws in their system before the bad guys do. Last month, the airline paid two hackers a million "MileagePlus" points each for finding and documenting major flaws related to remote code execution (whatever that is).
A million miles is literally enough to fly to the Moon and back twice, if you don't mind cramped seats, surly gate agents, $15 snacks, and changing planes in Newark. (Can you imagine flying to the Moon in a middle seat? How much would they charge to check a bag?) But back here on earth, what do our friends at the IRS think of the Bug Bounty program?
The Service generally considers frequent flyer miles you earn from business travel to be nontaxable rebates. However, miles you earn from other sources, like opening a bank or brokerage account, may be taxable. In 2012, Citibank drew heat by issuing thousands of 1099s to customers who had opened new accounts. But many tax experts agreed the IRS wouldn't have noticed — or really, even cared — if Citibank hadn't blown the whistle by issuing the forms!
Last year, the Tax Court reinforced the notion of taxable miles, ordering a Citibank depositor to pay tax on 50,000 "Thank You Points" he redeemed for a $668 airline ticket. In Shankar v. Commissioner, the Court characterized the points as a premium for a deposit — "In other words, something given in exchange for the use (deposit) of Mr. Shankar's money; i.e., something in the nature of interest."
United has confirmed that they'll send 1099s to the Bug Bounty winners, valuing the miles at two cents each. That's great for United; it means they get to deduct the reward. But it also means the winning hackers get taxed on $20,000 each. That's a real problem. First, the miles may not actually be worth as much as United says they are. (, an online resource for points collectors, currently values MileagePlus points at just 1.5 cents each.) And second, the hackers can't sell their miles — which might not be such a problem if the IRS didn't want their taxes in cash.
The real lesson here, as with so many tax stories, is that it's not just how much you earn, it's how you earn it. That's why you need a plan, to make the most of all your different income sources. So call us for your plan, and treat yourself to some First Class service!

Monday, August 10, 2015

Ready or Not, Here We Come!

Campaign 2016 is here! Last Thursday, 10 Republican presidential candidates squared off against each other in Cleveland's Quicken Loans Arena, tackling such crucial topics as hugs, pimps, and Rosie O'Donnell. That same day, the Democratic National Committee announced their schedule of six debates to begin on October 13 in early-primary state Nevada. Sooner rather than later, we'll all be drowning in the vicious sort of campaign commercials that make some of us envy the North Koreans.
That also means now's the season when candidates are releasing tax returns and financial disclosures. Mitt Romney took heat when he 'fessed up to paying just 14% tax on $20 million in 2011, reinforcing the "GotRocks McBucks" caricature he worked so hard to shake. So candidates are doing their best to spin their numbers to look like they grew up in log cabins. Let's take a peek inside some of their wallets, shall we? (No fair crying if we poke a little fun at your favorite candidate!)
  • Former Florida Governor Jeb Bush takes the path of early and full disclosure, sharing 33 years of tax returns dating nearly back to his first job bussing tables at the Kennebunk Yacht Club. He paid an average tax of 36% on $44 million of lifetime income, including $7.4 million in 2013 alone.
  • Wisconsin Governor Scott Walker takes pride in being a financial Everyman who cuts his own grass and shops at discounter Kohls. Apparently that means he's up to his eyeballs in debt like so many voters. Walker's disclosure shows his net worth is actually $72,500 in the red. He also owes over $10,000 on a Barclays credit card with a 27.24% interest rate.
  • Developer Donald Trump hasn't released his taxes, and some observers scoff at his self-proclaimed $10 billion net worth. However, previous investigations reveal him to be a stingy charitable giver, at least as far as billionaires go. The hotelier and reality-TV star, who appears to dye his hair with Orange Tang, established The Donald J. Trump Foundation nearly 30 years ago in 1987 — but he's given it just $3.7 million since then.
  • On the Democratic side, Hillary Clinton just released her last eight years of returns, showing $139.1 million of earnings since 2007. She and husband Bill paid 31.6% in tax on that income — which works out to $43.8 million, or just enough to pay for an F-18 Hornet fighter jet. The Clintons also gave $15 million to charity, with 99% going to the Clinton Family Foundation and Clinton Global Initiative.
  • Clinton's chief rival, Vermont Senator Bernie Sanders, shows a net worth of $330,000. That lands him 14th from the bottom in the Senate, where the average net worth tops $2.8 million. The self-professed Democratic Socialist, who drives a Chevy Aveo (not the Prius you expected), reported $4,900 in income from his wife's position on a radioactive waste commission. (Of course, Sanders' most conservative rivals might say his entire economic platform consists of radioactive waste!)
We have no idea who's going to take the oath of office on January 20, 2017. But we can promise you, the new President will want to make changes to the tax code. And odds are good that at least one of those changes could cost you. So count on us to help you navigate those changes as favorably as possible. We work with Democrats, Republicans, and everyone in between! 

Tuesday, August 4, 2015

2015: A Tax Odyssey

On July 23, NASA announced the discovery of Kepler-452b, the first potentially Earth-like planet within the "habitable zone" of a star like our Sun. Kepler-452b is 1,400 light-years away, meaning the New Horizons space probe that just passed Pluto should get there in another 26 million years. (Mom, are we there yet?) It's 60% bigger than Earth, with a "better than even chance" of having a rocky composition, and takes 385 of our days to orbit its sun. Reporters instantly dubbed the planet "Earth 2.0," and scientists from the Search for Extraterrestrial Intelligence Institute have already begun targeting it for signs of intelligent life.
Ironically, at the same time, officials in Washington are searching for signs of intelligence in the tax code. (So far, they're not doing any better than the astronomers at NASA.) So we got to wondering . . . is there any way that our search for extraterrestrial life might help us out of our current budget jam? In plainer terms, can we tax it?
Let's start closest to home. Our own astronauts are subject to U.S. tax on all of their worldwide income, regardless of where they live. (They get an automatic two-month extension to file if they're outside the U.S. on April 15. We'd assume "off the planet" counts.) Astronauts pay regular tax on their salaries, which range from $64,724 to $141,715 per year. So, while our astronauts might escape earth's gravity, there's no escaping the IRS. On the brighter side, they also get a tax-free "dwarf" per diem for their time on the space station. (Seriously. Former astronaut Clayton Anderson reported he had $172 in his account after 152 days in the International Space Station.)
Further outside Earth's orbit, asteroid mining might lead to some nice new tax gains. Our home planet is running out of key elements like phosphorus, antimony, zinc, tin, lead, silver, and gold. So companies like Planetary Resources are working to expand Earth's dwindling resource base by mining asteroids. While their "cost of goods sold" will be higher than for comparable land-based minerals, the profit will be taxed as ordinary income at rates up to 35%. That's a pretty sweet deal for the IRS, considering the asteroid miners just find this stuff drifting out in space.
The real tax jackpot comes when extraterrestrials join us here on Earth. U.S. resident aliens — presumably including space aliens — are generally taxed the same way as U.S. citizens, which means their worldwide income is subject to U.S. tax. While we don't know anything about the economy on Kepler-452b, it's safe to assume that a civilization advanced enough to travel 1,400 light years has created high amounts of material wealth — and as sure as the sun rises in the east, our federal, state, and local governments won't hesitate to ask for their cut. (While we're at it, when E.T. phones home, the telephone excise tax alone has to be pretty phenomenal.)
Finally, there's one unsettling possibility we can't ignore. What if we do find intelligent life somewhere out there, and they don't like us? Famed physicist Stephen Hawking suggests we're safer not waving too hard to attract alien attention, simply because if they can find us and reach us, they can probably destroy us, too. "If aliens ever visit us," Hawking says, "I think the outcome would be much as when Christopher Columbus first landed in America, which didn't turn out very well for the American Indians." If that's the case, the only tax worth collecting will be the estate tax — if there's anyone left to collect it!
Our friends at the IRS may be yearning to boldly tax where no man has taxed before. But they can't ever count on it, which means squeezing more and more revenue out of us here on Earth. The best way to beat them, without fleeing the planet, is a plan. So count on us to give you the "right stuff" — and remember, we're here for your friends, family, and capsule-mates, too!

Tuesday, July 28, 2015

Toxic Deductible Sludge

Back in 2010, British Petroleum's Deepwater Horizon drilling rig exploded and spilled millions of barrels of oil off the Louisiana coast. Countless small business owners, including fishermen, hotel operators, restaurants, rental companies, and seafood processors, suffered and went bankrupt. State and local governments lost billions more in tax revenue. Lawyers, who may be some of the few people to actually profit from the disaster, are still fighting over compensation and claims, and will probably still be fighting until long after anyone reading these words is still alive.
BP has been gushing cash ever since the spill to clean up its mess and restore its reputation the damaged environment. The total includes $20 billion for a trust fund to settle financial claims, $4.5 billion in criminal fines and other penalties, and $18.7 billion to settle federal and state claims. But there's good news for the company, too — they'll be getting billions in help from their friends at the IRS!
Here's how that little plot twist works. Section 162(f) of the Internal Revenue Code states that "no deduction shall be allowed . . . for any fine or similar penalty paid to a government for the violation of any law." But defining exactly what makes up a "fine or penalty" isn't as obvious as you might think (and it gives those lawyers we just talked about the opportunity to bill a lot of hours arguing about it). Payments that aren't considered fines or penalties are deductible just like any other business expense. So let's take a look at exactly how BP will be structuring this final settlement:
  • $5.5 billion goes towards a Clean Water Act penalty. This amount should be nondeductible. However, the press release announcing the settlement states that 80% of the penalty "will go to restoration efforts in the affected states pursuant to a Deepwater-specific statute, the RESTORE Act." That should give a clever lawyer more than enough rope to argue for deductibility!
  • $8.8 billion goes towards natural resource damage and funding Gulf restoration projects. Since it's not explicitly designated a "fine" or "penalty," BP will probably deduct it.
  • $5.9 billion goes towards state and local governments to settle their claims. Again, since it's being paid to "settle" claims, BP will likely deduct it.
  • $600 million goes towards "other claims," including "unreimbursed federal expenses due to this incident." (Sounds like the sort of "slush fund" favored by Louisiana politicians of yore, doesn't it?) And really, how much fun is a slush fund if you have to pay tax on it?
We may never know exactly how much BP writes off because deductions on settlements are confidential business information. But we know the company's federal tax rate is 35%. So that means, if BP writes off, say, $20 billion of the payments, they'll save $7 billion in taxes. That money, of course, comes out of all of our pockets. So pat yourself on the back for playing your part in cleaning up the Gulf.
Nobody ever plans to suffer through a disaster like the Deepwater Horizon spill. But it's worth remembering that how you clean up your mistakes can make a real difference. So think of us as your financial "911," and don't hesitate to call if trouble strikes!

Tuesday, July 21, 2015


Nina Olson is the most important person you've never heard of at the IRS. She's the "National Taxpayer Advocate," and she heads up an organization created to cut through the red tape when the Service can't get the job done itself. If you're stuck between cogs in the IRS machine, Olson and her staff of 1,400 Case Advocates are poised to pull you out. She's like the Lorax, except she speaks for the taxpayer instead of the trees.
Last week, Olson released her mid-year report to Congress. It's hundreds of pages long, full of dense bureaucratese and government jargon, all leading to one inescapable (and rhyming) conclusion: the IRS is a mess. Olson likened the situation to Charles Dickens' Tale of Two Cities. "For the majority of taxpayers who filed their returns and did not need IRS assistance," she writes, "the filing season was generally successful. For the segment of taxpayers who required help from the IRS, the filing season was by far the worst in memory."
Take a look at some of the "customer service" statistics Olson revealed, and you'll see why we put the term "customer service" in quotes:
  • The IRS answered just 37% of the phone calls taxpayers made to customer service representatives, with an average hold time of more than half an hour. That's down from 71% for the 2014 filing season.
  • Olson's own unit did barely better, answering just 39% of calls made to the National Taxpayer Advocate Toll-Free Hotline. (Hint: a toll-free number won't save taxpayers much money — and really, it isn't much of a "hotline" — if nobody answers the phone!)
  • Tax professionals have always been able to "cut the line" by calling the Practitioner Priority Service line. Surely they get better service, right? Not so much. The IRS answered just 45% of those calls, with an average hold time of 3/4 of an hour.
Where do all those unanswered calls go? Here's a clue: the number of "courtesy disconnects" jumped from 544,000 last year to 8.8 million this year. "Courtesy disconnect" is the ironic term the IRS uses when the phone lines get so jammed there's no hope you'll ever reach an actual human being anyway — so the system just says "peace out" and hangs up on you.
Why are things so miserable? The problem, of course, is money. The IRS budget is down 17% (adjusted for inflation) from 2010. Yet even as Congress has gleefully slashed funding for everyone's least-favorite agency, they've stuck the IRS with the responsibility of riding shotgun over big chunks of both the Affordable Care Act and the new "FATCA" rules designed to sniff out hidden offshore accounts. The end result is a "customer service" experience that makes a trip to the DMV look like a beach vacation.
If you've never gotten a dreaded "CP-2000" notice, you might not see the connection between IRS "service" and what we do. But here it is, in a nutshell: the sort of tax planning we offer doesn't just save you money, it helps protect you from IRS bureaucracy to save you time. So make sure you've got a plan in place before you file your next return!