We're Number One!

New Year's day is almost here, and for millions of Americans, that means college football bowl games. Fans and alumni across the country are gearing up to root for their favorite school. LSU fans cry "Geaux Tigers!" 'Bama fans chant "Roll, Tide, Roll!" But only one team will be champion come January 9.

Regardless of which gridiron gladiators we support for the BCS championship, Americans are #1 in another competition. That's right, Americans cheat their government out of more tax dollars than the citizens of any other country in the world!

A recent study by the Tax Justice Network, a British think-tank dedicated to transparency in international finance, shows the U.S. government lost $337 billion annually to tax evasion. We're followed by Brazil ($280 billion), Italy ($238 billion), Russia, Germany, France, Japan, China, U.K., and Spain. Overall, the study finds that worldwide tax evasion tops $3 trillion, or 5% of the world's economy.

However, while Americans are #1 in absolute dollars lost to cheating, we're not actually the biggest fibbers. The report attempts to quantify the size of each country's "shadow economy" that hides from official view to avoid tax. Russia is the biggest loser here, with 44% of its Gross Domestic Product (GDP) lurking underground and evading tax. Brazil is next, with 39% of its economy hiding in the shadows. Our own shadow economy, at 8.6% of GDP, is actually the smallest of those top ten tax evaders listed above.

Looking at it from a different perspective, next to the cost of financing government, the cost of financing health care is perhaps our country's biggest fiscal challenge. The Tax Justice Network's report draws an interesting contrast between each country's cost of tax cheating and cost of health care. Worldwide tax evasion costs an average of 55% of worldwide health care costs. But that average encompasses an enormous range. Here in the U.S., for example, tax evasion drains the equivalent of just 15% of our national health care budget. By contrast, in Bolivia, where the "shadow economy" accounts for 66% of GDP, tax evasion costs that nation more than four times the amount of their annual health care spending.

American tax cheats may even show a conscientious side. The Charities Aid Foundation, a British organization dedicated to encouraging efficient charitable giving, just released their World Giving Index 2011 report. They found that the U.S. is #1 in charitable giving, out of 153 countries surveyed. "Using data from Gallup's Worldview World Poll," the report says, "the results show that the USA is officially the most charitable nation in the world." Now there's something we can all take pride in this holiday season!

The irony here is that there are so many legal ways to pay less tax that nobody needs to cheat. Proactive planning is the key to paying less tax without having to hide in the shadows. As 2012 dawns, remember that we're here to deliver that planning — for you, and for your family, friends, and colleagues as well.

More Money for Millionaires

Last year's federal budget deficit topped $1.48 billion. With money so tight, you'd expect government to focus its efforts on those who really need the help. But that's far from the case, according to Oklahoma Senator Tom Coburn. Last month, he released a 37-page report entitled Subsidies of the Rich and Famous, outlining "sheer Washington stupidity" that he claims costs taxpayers billions of dollars every year.

The first part of Coburn's report focuses on direct payments like Social Security and Medicare benefits, unemployment benefits, and farm subsidies. (NBA star Scottie Pippen, rocker Bruce Springsteen, and billionaire broadcaster Ted Turner have all gotten federal farm subsidies.) But Coburn also heaps his scorn on specific tax breaks that he calls a "reverse Robin Hood style of wealth distribution." He claims he's not interested in raising rates on anyone. And he cautions against demonizing "those who are successful." But he does want to means-test benefits, close loopholes, and limit deductions that pamper millionaires with "unnecessary welfare to create an appearance everyone is benefiting from federal programs."

What sort of tax breaks have Senator Coburn so upset? Here are three:
•"Subsidizing Millionaires' Mansions": For 2009, 143,441 out of the 235,413 taxpayers reporting incomes over $1 million claimed mortgage interest deductions, averaging $30,995 each.

•Rental Expense Deduction: 69,074 of those million-dollar earners claimed a total of $12.5 billion in rental property expenses, including mortgage interest, cleaning and maintenance, and depreciation.
•Gambling Losses Deduction: Finally, 8,225 of the top earners reported a total of $4.2 billion in gambling losses.

Coburn's points seem reasonable at first glance. Does Oprah Winfrey really "need" a tax break for her $50 million California mansion? Should Vegas high-rollers count on us to bail them out when the dice come up snake eyes? On closer look, however, his objections may not hold up. The mortgage interest deduction, for example, is already limited to interest on $1 million of "acquisition indebtedness" on a primary residence and one additional residence, plus $100,000 of home equity indebtedness. Coburn would ditch the deductions for second homes and home equity interest, and drop the overall cap to $500,000 of indebtedness. But critics respond that over 11% of American homes are valued over $500,000, and limiting the deduction would cut home prices off at the knees at a time when they need all the support they can get.

Coburn's objections to deducting rental real estate expenses and even gambling losses seem to make less sense. Paying tax on gross rents and gambling winnings? Rental real estate losses are already limited by "passive activity" rules. If millionaires can't deduct their rental real estate expenses, they won't invest in real estate at all. That would drag prices down in the same way as limiting mortgage interest deductions. And gambling losses are deductible only to the extent of gambling winnings. Is it fair to tax anyone, millionaire or not, on gross winnings without letting them net out losses?

As the economy continues to struggle, Washington gridlock intensifies — just look at the bickering over the payroll tax cut extension, which both parties say they want. And the 2012 presidential election draws near, we can expect to hear more rhetoric like Coburn's. What do you think? Do tax breaks for millionaires offend your sense of fairness? Or should millionaires get to take advantage of the same rules as the rest of us?

The Dog Ate My Tax Return

When you were a kid in school, you probably forgot your homework once or twice. And you probably came up with some sort of excuse to weasel out of trouble, right? 'Fess up now — did the dog ever really eat your homework?

Now that you're all grown up, you've got a different set of assignments you have to turn in. Few of them are more important than your annual tax return. Of course, even grownups sometimes forget their homework. But the IRS won't be buying that school kid whine!

Take supermodel Christie Brinkley, for example. Earlier this month, the IRS filed a lien for $531,720 in unpaid taxes against the "Uptown Girl's" $30 million country estate in swanky Bridgehampton, NY. That unpaid balance, of course, is also subject to interest compounded daily and a 0.5% monthly late payment penalty. Brinkley's publicist told E! Online that she "was surprised to hear today that a tax lien has been filed, and has instructed her team to resolve the matter immediately." Brinkley herself stated that "I have been, and remain focused on my whole family as both my parents navigate serious health issues."

At least Brinkley is facing the music willingly. Rapper Bow Wow — who must not think his "real" name (Shad Gregory Moss) gives him the street cred he wants — is putting up more of a fight. In November, the IRS filed a $91,105.61 lien against him for taxes dating back to 2006, when he was just 19 years old. But Bow Wow isn't taking this one lying down, declaring "we all know not to believe anything the media writes or blogs." And Bow Wow isn't the only rapper to run afoul of the IRS. In August, Beanie Sigel pleaded guilty to failing to file tax returns for three years in a row. (Prosecutors believe he owes up to $700,000 more in unpaid taxes dating back to the 1990s, but the statute of limitations has run out.) And in July, Ja Rule earned 28 months of federal housing for failing to file returns for tax losses from 2004 through 2008.

Rappers aren't the only musicians who don't always pay their taxes. Back in April, the IRS hit former Black Sabbath frontman and reality star Ozzy Osbourne with liens totaling over $2 million for unpaid taxes from 2007, 2008, and 2009. Ozzy's wife Sharon took to the "twitterverse" to admit her finances had gone off the rails. "You can't rely on anyone but yourself," she tweeted. "You have to be on top of your own business affairs. My fault...lesson learned."

And musicians, in turn, aren't the only celebrities who don't pay taxes. Former Green Bay Packers left guard Frederick "Fuzzy" Thurston dominated the frozen tundra of Lambeau Field from 1959-1967, then opened a chain of restaurants called the Left Guard after retiring. He and his partners withheld taxes from their employees' paychecks — just like they were supposed to — but they didn't actually pay the bill. Way back in 1984, the court flagged him with a $190,806 penalty for "roughing the IRS." With interest, that bill has grown to $1.7 million. Federal marshalls even seized his Super Bowl II ring commemorating Green Bay's 33-14 victory over Oakland to help pay!

Of course, our job is to make sure you don't need excuses for not paying your taxes. Proper planning is the key to making that bill affordable, and making sure you don't ever have to tell the IRS that the dog ate your homework!

"A Date Which Will Live In Infamy"

Wednesday marks the 70th anniversary of the bombing of Pearl Harbor that propelled the United States "officially" into World War II. The consequences of that single event still reverberate today, in dozens of unseen ways — including how you pay the taxes that support the national security apparatus that works to prevent such an attack from ever happening again.

World War II has been called the single most significant event in world history. So it's no surprise that financing the war led to some of the most significant taxes in history.

The Roosevelt administration had been gearing up to support the war effort long before the actual attack. When bombers struck on December 7, 1941, taxes were already high by historical standards. There were a dizzying 32 tax brackets, starting at 10% and topping out at 79% on incomes over $1 million, 80% on incomes over $2 million, and 81% on income over $5 million.

Just a few short months after the attack, in April, 1942, President Roosevelt proposed a 100% top rate! At a time of "grave national danger," he argued, "no American citizen ought to have a net income, after he has paid his taxes, of more than $25,000 a year" (roughly $300,000 in today's dollars). Patriotic Americans were eager to pay more to support the war effort — starlet Ann Sheridan, known as Hollywood's "Oomph girl," even famously announced "I regret that I have only one salary to give for my country."

Roosevelt never got his 100% rate. However, the Revenue Act of 1942 raised top rates to 88% on incomes over $200,000. (It also introduced the first deductions for medical expenses and personal investment expenses.) By 1944, the bottom rate had more than doubled to 23%, and the top rate reached reached an all-time high of 94%.

World War II also marked the introduction of payroll withholding, which is the "dirty little secret" that makes today's tax system work. Traditionally, the government had collected taxes "in arrears," when taxpayers actually filed their returns. But as the war accelerated, government couldn't wait for the new, higher taxes. That created a problem, though — how could Americans afford to pay their 1942 taxes at the same time employers were withholding tax on 1943 income? To solve that problem, the Current Tax Payment Act of 1943 actually cancelled 75-100% of the lower of 1942 or 1943 individual tax liability.

Tax rates remained high for decades following the war. It wasn't until President Reagan took office in 1981 that the top rate dropped below 70%. Today's top rate of 35% is actually low by historical standards — and tax collections are at post-war lows as well.

Seventy years after that sunny Sunday morning at Pearl Harbor, the world is once again safe for democracy. Yes, we face real threats to our security, ranging from Iran's pursuit of nuclear weapons to China's growing economic might. But none threaten us so directly as did World War II's Axis powers. Military spending, which reached 42% of Gross Domestic Product in 1942, has fallen to just 6% today — even accounting for wars in Iraq and Afghanistan.

The generation that fought the war is often called the "Greatest Generation." What would those who made such awesome sacrifices back then think of today's tax debates? Would they side with those who feel "taxed enough already" to support today's peacetime needs? Or would they side those who call for more sacrifice from the wealthiest Americans? What do you think?

A Slice of IRS Pie

Millions of Americans earn their living collecting commissions on various products and services. Insurance agents collect commissions on premiums they write. Real estate agents collect commissions on homes they sell. Car salesmen, retail salespeople, and even restaurant servers all earn a piece of the business they generate.

Did you know there's a way to earn "commissions" on someone's taxes? That's right — tax whistleblowers can earn "commissions" of up to 30% of underpaid tax, plus penalties, interest, and other amounts they help recover. You'll need to give the IRS "specific and credible information" about a case that leads to collection — not just educated guesses or unsupported speculation. (As the IRS says, "this is not a program for resolving personal problems or disputes about a business relationship." Of course, if your jerk of an ex-husband or crook of an ex-partner really is a tax cheat, that's a different story!) You'll use Form 211 to file your report. And Internal Revenue Manual Section 25.2.2.9.2 outlines a predictably complicated formula for calculating just how much you'll get — but don't worry, if you don't like your booty, you can appeal it to the Tax Court!

The Treasury has been authorized to pay bounties for tax cheats since as far back as 1867. (No doubt they delivered rewards by Pony Express.) The program picked up steam in 1996, when the Taxpayer Bill of Rights authorized rewards for reporting mere underpayments in addition to outright cheating. And the Tax Relief and Health Care Act of 2006 created a dedicated Whistleblower Office, dedicated to tax underpayments topping $2 million. Since launching the new office, which has about 17 employees, the IRS has gotten 9,540 claims from 1,387 whistleblowers. Hundreds of those tips alleged tax underpayments topping $10 million, with dozens more alleging underpayments topping $100 million. Clearly there's big money — and big rewards — at stake.

What's the catch? Well, if you want to make a living tattling on taxpayers, you'll have to be prepared to wait for your reward. And wait . . . and wait . . . and wait. First the IRS has to audit the targeted returns to verify your claims. Taxpayers can appeal those findings and exercise other rights that add years to the process. And taxpayer privacy laws that prohibit the IRS from even acknowledging that your target is being audited make it impossible to just "check in" with the IRS on the status of "your" claim. The General Accounting Office reports that over two-thirds of the claims submitted as far back as 2007 and 2008 are still being processed.

But there is light at the end of the tunnel. Back in 2007, an in-house accountant tipped the IRS off to a $20 million underpayment by his financial-services employer. After hearing nothing for two years, he hired an attorney to follow up. Finally, this April, the IRS paid him a whopping $4.5 million reward. (It sure beats finding lost puppies for $100 a head!)

Oh, and because we know you'll ask — yes, you'll owe tax on your "commission." In fact, the IRS will helpfully withhold 28% of any award topping $10,000!

Of course, there's an easier way to slice the IRS pie. A good tax plan is the key to keeping the most of what you earn. And no one will call you a rat! But time is running out to plan for 2011. So, at the risk of sounding like a broken record, call us now for the plan you deserve. Your holiday season will be even brighter, knowing there's nothing more for the IRS to collect from you!

One Small Reason to Give Thanks

Nobody likes paying taxes. But what adds insult to injury for so many of us is just how maddeningly complicated it all gets. If you're like most Americans, you've seen your own return grow longer and more complicated over the years. Maybe you've noticed the new Schedule M for the Making Work Pay Credit. Maybe you've bought rental property and filed separate depreciation schedules for regular tax, state tax, and Alternative Minimum Tax. President Obama's 2010 tax return ran to 59 pages. And it's not unusual for complicated individual returns to run over 100 pages including forms, schedules, worksheets, and statements.

Of course, that's not really surprising, given the source of all the confusion. The U.S. Government Printing Office's own version of the Internal Revenue Code — available for the bargain price of just $179 — runs 3,387 pages. Add the IRS's regulations, for $974 more (shipping generously included!), and you're up to 16,845 pages. Sounds ugly, right? It is. (Trust us, we actually have to read this stuff.) But if you need any reason to be thankful this holiday season, be glad you're not responsible for filing the country's largest tax return.

General Electric is America's sixth-biggest corporation and its biggest conglomerate. Originally founded by Thomas Edison in 1890, GE manufactures everything from light bulbs and refrigerators to jet engines, locomotives, and nuclear reactors. Their NBC subsidiary reaches millions of viewers daily. And their GE Capital unit, which accounts for over half of their profit, is bigger than all but six standalone banks. It shouldn't surprise you, then, that GE files a pretty hefty tax return. Their tax department, which the New York Times reports "is often referred to as the world's best tax law firm," employs 975 people. They file literally thousands of tax returns every year, for every country in the world (or at least every one that requires a tax return), every state in this country, and more cities than you can name.

But nobody really cares what GE's Vermont return looks like, right? What about their flagship U.S. federal income tax? Well, 2006 was the first year the IRS required corporations with assets over $50 million to file electronically. That year, GE spent over $500,000 just to develop their own e-filing system! Their first electronic return took a full 30 minutes to transmit — but replaced what would have been 24,000 pages of paper. (That's 24,000 pages the IRS would have had to convert into electronic form anyway.)

Since then, GE's return has grown even fatter. For 2010, the firm reported worldwide profits of $14.2 billion. (That's more than the entire economies of Iceland and Jamaica.) They paid $2.7 billion in worldwide tax, but actually claimed a $3.2 billion refund from the U.S. Treasury — most of it due to losses at the GE Capital unit resulting from the 2008 financial collapse. Their actual tax return swelled to 57,000 pages. Print them all out and you'll have a stack of paper 19 feet high!

Oh, and of course they get audited, every year. Imagine the smile that brings to everyone's faces.

Here's the good news. You don't need a staff of 975 to manage your taxes. You just need a plan to make the most of every deduction, credit, loophole, and strategy the law allows. Now the bad news. Time is running out to get that plan. So enjoy the Thanksgiving holiday with your family. Brave the crowds for some Black Friday shopping if you feel like stimulating the economy. Then call us to make sure you're not missing any opportunity to bring good things to life!

Today's Tax Deadline

Today is November 16. And why, might you ask, is that important?

Well, on this date in 1914, the Federal Reserve Bank of the United States officially opened for business. (Some might argue it's all been downhill since!)

On November 16, 1945, the U.S. Army moved forward with "Operation Paperclip" and secretly admitted 88 German scientists and engineers to the United States to help develop rocket technology.

Oh, and November 16, 1964, marks the birthday of Canadian jazz singer and pianist Diana Krall. Her lush rendition of Boy From Ipanema was the highlight of her 2008 "Live in Rio" concert.

And tragedy struck on November 16, 2005, with the death of Donald Watson. Donald who, you ask? Watson, a British animal-rights activist, founded the Vegan Society, and even invented the word "vegan." Apparently his animal-free diet worked for him, as he lived to the ripe old age of 95.

But those aren't why November 16 is important. It's important because there are just 45 days left in the year.

That's plenty, right? Well, subtract out the weekends, and we're down to 34. Still plenty, right? Subtract all the holiday downtime and we're down to . . . what, 28 days? 29? Maybe 30?

That's not much time at all. Especially when it comes to year-end tax planning. Especially because so many tax breaks are a lot like Cinderella's carriage — that's right, at midnight on December 31, they turn into pumpkins. Some of them disappear for 2011 — you won't get a chance to use them again until next year. And some of them disappear for good — you won't ever get to use them again.

If you've already got a plan, that's great. Has anything changed in your life or your finances that we should know about?

If you don't have a plan, that's a different story. You don't have much time left to make one. And we don't have much time to help you!

The holidays are almost here. We know nobody wants to spend their holiday thinking about taxes. But nobody wants to waste money on taxes they don't have to pay, either. And good tax planning can help pay for a pretty nice holiday! We know your calendar is filling up fast. So is ours. That's why it's crucial to call now if you want a plan to save in 2011.

Tax Strategies for Kim Kardashian

When most women slide on a pair of jeans, the last thing they want is to make their butt look big. But socialite Kim Kardashian has parlayed her generous posterior into what passes for celebrity these days. She's appeared on Dancing With the Stars, penned an autobiography, launched her own fragrances, and starred in not one, not two, but three reality shows.

Kim married the latest love of her life, New Jersey Nets power forward Kris Humphries, on August 20. Just 72 days later — on Halloween, no less — she announced she was filing for divorce. And hearts across America sank. Why, if these two krazy kids can't make it, what hope do the rest of us have, right? Not surprisingly, skeptics have alleged that the wedding was just a hoax. (It's not clear that the groom, who has said "I love my wife and am devastated to learn she filed for divorce," was actually in on the joke.) We'll resist the temptation to heap more scorn on the situation, so we can focus on what people really want to know — specifically, how will the whole train wreck affect Kim's taxes?

For starters, how will the heartbroken Kim file, single or married? Filing status is determined as of the last day of the tax year. So if Kim rings in the New Year subject to a legal separation, she'll file at the higher single rate, even for income earned during the marriage. (Makes you wonder if anyone at the IRS has any romance in their soul.)

And what about the wedding payday? (Mock the Kardashians all you want, they still managed to turn a $10 million wedding into a profit center.) The star-krossed kouple reportedly earned $15 million from E! for broadcasting the ceremony, $2.5 million from People Magazine for photos, $300,000 more from People for their engagement announcement, and even $50,000 from Las Vegas nightclub Tao for hosting the bachelorette party. Those paydays are obviously taxable, of course. Kim will also owe tax on some of the freebies she got from publicity-hungry vendors. These include a $15,000 cake, $60,000 for three Vera Wang dresses, $400,000 in Perrier Jouet champagne, $150,000 (!) in hair and makeup, and even $10,000 in Lehr & Black wedding invitations. Dumping Humphries doesn't mean she gets to dump the taxes she owes on what she scored for marrying h im!

As for Kim's ring, it's a stunner — at 20.5 carats, it's roughly the size of the asteroid that wiped out the dinosaurs. TMZ reports that Kim's pre-nup requires her to buy the ring from Kris if she wants to keep it in case of divorce — ironic, considering that under California law, the bride usually just has to say "I do" to take ownership outright. This means if Kim someday sells the ring (at auction, televised on E!, no doubt), she'll owe tax on any gain above that purchase amount.

What about the wedding gifts from the 500 guests who presumably also weren't in on the joke? Gifts are never taxable as income, so there's no problem there. But Kim has announced she'll be donating the value of the gifts to the nonprofit Dream Foundation, a charitable organization that grants wishes to terminally ill adults. So she gets a double win — tax-free gifts plus a fat deduction for the value of her donation.

Most Americans spend a lot more time planning their wedding than they do planning their taxes. That can be an expensive mistake. For some of us, a good tax plan can actually pay for a pretty nice wedding. But time is running out. If you want to save taxes for 2011, you have to plan for it in 2011. There are fewer than two months left in the year — with plenty of time out for holidays — and our calendar is filling up fast. So call now, so you have plenty of time to enjoy A Very Kardashian Khristmas!

What Would Puss Do?

This weekend, DreamWorks Animation's Puss in Boots clawed to the top spot in the theatres, selling $34 million in tickets. The story follows Antonio Banderas's animated gato as he and his friends hunt for magic beans, grow a beanstalk to the sky, and make off with the goose that lays the golden eggs. (It's OK, your kids will follow it just fine.)

Meanwhile, here in the real world, the 2012 election is picking up steam. Federal spending has reached $3.7 trillion. But the politicians in charge of spending all that money are having no luck finding magic beans, let alone golden eggs. It looks like we're going to have to stick with plain old taxes. And of course the candidates have dramatically different visions of how to raise those taxes.

President Obama remains committed to our progressive tax system, where taxpayers with more beans pay a higher percentage of their income. Obama has proposed a new surtax for those earning over a million beans a year. And he's endorsed all sorts of targeted tax breaks for specific purposes, such as higher education, new homes, and even new cars.

Obama's Republican opponents, in contrast, lean towards broader, flatter taxes, with fewer deductions or credits and lower rates:

•Former Godfather's Pizza CEO Herman Cain has vaulted to the top of the polls with his catchy "9-9-9" plan, which would scrap the current 3-million word Tax Code for a 9% tax on personal income (minus charitable contributions), a 9% tax on business income, and a 9% national sales tax.

•Texas Governor Rick Perry would let taxpayers choose an optional 20% flat tax on earned income. Perry's plan also raises the personal exemption to $12,500 and preserves deductions for mortgage interest, state and local taxes, and charitable gifts for families earning up to $500,000.
•Libertarian Ron Paul would repeal the income tax entirely. (It doesn't get much flatter than that!)
•Even "establishment" candidate Mitt Romney has said "I love a flat tax" and proposed to eliminate tax on capital gains, interest, and dividends for those earning less than $200,000.
Realistically, even if Republicans retake the White House, we're not likely to see a true flat tax. Remember, it's Congress that actually makes the laws. And right now, the Democrats and Republicans who run things on Capitol Hill can't seem to agree on naming a post office — let alone remaking the Tax Code that powers government spending.

As for us, our job is to help you pay the legal minimum regardless of how the Tax Code works. We've told you before that planning is the key to keeping your magic beans — and that's still true even under the Republican flat-tax proposals. So why wait for the election when you can start cutting your tax now? Call us — before December 31 — to discover what we can do now!

What Do Accountants Think?

Americans love quizzes, surveys and polls. We love taking them, and we love seeing the results. Where would Nielsen be without his ratings? Who would Gallup be without his poll? Who would read Cosmo without their quizzes? So in the midst of all this polling, we felt sure you'd want to know what a bunch of accountants think of various tax topics. Every few weeks, Accounting Today magazine polls visitors to their web site — and the results just might surprise you!
•Does the Tax Code need to be simplified? Tax pros make their living managing complexity for clients. If taxes were easy, who would need us to prepare them? So you might expect us to want to keep the current system. But fully 72% disagreed, saying the Code should be simplified. Just 19% voted to keep the system that former President Jimmy Carter described as "a disgrace to the human race," and 9% said "not sure."

•Should Congress raise taxes to help close the budget deficit? If taxes go up, more clients come looking for ways to keep them down. So you might think accountants want taxes going up. But once again, you might be surprised. Just 40% said Congress should raise taxes, 59% said no, and 1% weren't sure. (Maybe we don't want to see our own taxes go up any more than we want to see yours?)
•Should Congress approve legislation to require online retailers to collect sales taxes? Web retailers like Amazon.com save billions by avoiding most state and local sales taxes, and this lets them undercut local brick 'n' mortar retailers. Requiring "e-tailers" to collect sales taxes would level the playing field. But it would also create mountains of new paperwork, and thousands of new jobs. Surprisingly, site visitors are evenly split on this question, with 50% voting "yes" and 50% voting "no."
•Do you think Herman Cain's 9-9-9 plan for a 9% individual, business, and sales tax would be viable? Former Godfather's Pizza CEO and presidential hopeful Herman Cain has taken a surprising lead atop Republican polls with his radical "9-9-9" plan. But just 17% of Accounting Today's visitors think "the Hermanator's" plan might actually work. 75% think not, and 8% aren't sure.
•Were your clients' finances generally in better shape this tax season compared to last tax season? You can't turn on the news without hearing about the stalling economy. But maybe things are starting to turn around — 55% said their clients were in better shape this season, while 45% disagreed.

Pretty exciting stuff, right? Seriously, who cares what People magazine readers think about Lindsay Lohan's latest arrest when you can see who accountants voted their favorite movie CPA! (For the record, 25% picked Ben Kingsley as Itzhak Stern in Schindler's List, followed by 18% for Rick Moranis as Louis Tully in Ghostbusters.)

We'll let you guess how you think we would have answered those questions. But there's one area where we're in a distinct minority — and we put it to your advantage. Most accountants do a fine job putting the right numbers in the right boxes on the right forms, and get them filed by the right deadlines. But then they call it a day. At our firm, we don't just record history. We help you write it, with a proactive attitude that takes advantage of every legal deduction, credit, strategy, and concept. We know that planning is the key to minimizing your taxes. So call us when you're ready for your plan!

The Steve Jobs Legacies

Pancreatic cancer robbed the world of a true genius on October 5, taking Apple founder Steve Jobs at the age of 56. Today's corporate CEOs are rarely shy about promoting themselves, but Jobs has been legitimately compared to Thomas Edison and Henry Ford. His Apple Corporation changed our relationship with technology. Apple's original Macintosh popularized the PC mouse and changed the way we interact with computers. Pixar Studios set a new standard in film animation. Apple's iPod changed the way we listen to music. And Apple's iPhone, love it or hate it, has changed how millions of us communicate with family, friends, and colleagues.

Here are two more tangible measures of Jobs's success:

1.On July 28, Apple Corporation had more cash on hand ($76.2 billion) than the United States government ($73.8 billion).

2.Just two weeks later, on August 8, Apple briefly surpassed ExxonMobil as the most valuable corporation in the world.
What's next — more money than God?

Well, at least some smart tax planning. Jobs was obviously as shrewd about business as he was smart about technology. His net worth, which reached as high as $8.3 billion ranked him #39 on the 2010 Forbes 400 list of the country's richest people and #110 on their list of the world's billionaires. Not bad for a college dropout! Ironically, the bulk of his fortune came from Disney stock he received for selling Pixar in 2006 — Jobs was Disney's largest shareholder and owned 7.4% of the company, with a stake worth more than $4.4 billion. (Does it surprise you to hear that a stock-for-stock deal let him defer tax on the gain until selling the Disney shares?)

Jobs acquired most of his Apple stock in 2006 as well, when it was trading at $64.66/share and was worth $325 million. Since then it has grown six-fold, to $2 billion. If Jobs had sold it before his death, he would have owed tax of 15% on the capital gain. But by holding it until his death, he lets his heirs inherit it with a "stepped-up basis." That means they could sell it immediately and pay no capital gain on the growth during his lifetime. If they sell down the road, they'll owe tax only on the growth from the date of his death.

Of course, his estate may also be subject to estate tax. Congress dropped the ball and let that tax expire entirely in 2010 before bringing it back, for this year and next, at a flat 35% on estates over $5 million. However, just as Jobs deferred income tax on the sale of his Pixar stock, his estate can defer estate tax on any amounts left to his wife.

Jobs's estate can also avoid tax on any amounts left to charity. High-profile billionaires like Jobs typically take up philanthropy after they make their pile. Microsoft founder Bill Gates and Berkshire Hathaway founder Warren Buffett, for example, have led the way in pledging to give away the bulk of their fortunes and even established the "Giving Pledge" to persuade their fellow wealthy elites to give away at least half of their fortunes. Jobs left little hint of any charitable intentions, and in fact, Apple Corporation doesn't even match employees' gifts! But Jobs is rumored to be the source of an anonymous $150 million donation to the Helen Diller Family Comprehensive Cancer Center at the University of California, San Francisco. And his wife Laurene sits on several prominent boards, including Teach for America.

We realize that you don't enjoy quite the same fortune that Steve Jobs did! But the same strategies that let Jobs maximize his wealth and legacy can help you maximize your wealth and legacy too. The key, as always, is planning. So call us when you're ready for a plan!

The More Things Change . . .

This summer's debt-ceiling debate led to creation of a 12-member "Supercommittee," charged with finding $1.2 trillion in deficit cuts over the next decade. And wouldn't you know, the committee's progress seems to be sticking over taxes instead of spending. Both sides have said they're willing to close loopholes that benefit particular groups of taxpayers. But Democrats generally want to use new revenue to close the deficit, while Republicans generally want to use it to lower overall rates.

This debate over tax loopholes is hardly new. Way back in 1937, Treasury Secretary Henry Morgenthau drafted an 11-page memo for President Franklin Roosevelt revealing some of the perfectly legal "devices which have caused our revenues to be less than they should have been, and some of the taxpayers employing them." And Morgenthau didn't just reveal how his era's bold-face names used proactive planning to avoid taxes. He revealed who, naming names in a way that would delight today's Wikileaks fans! Here are a few cases Morgenthau thought had been taken to an inappropriate extreme:

•Creation of multiple trusts. Mr. Louis Blaustein of Baltimore established 64 different trusts for his wife and three children, saving them $485,257. Merrill Lynch founders Charles Merrill and Edwin Lynch had 40 trust funds and 23 personal holding companies. "They operate a great many numbered brokerage accounts and only at the end of the year identify for whose benefit the account has been operated. In this way innumerable transactions are carried on between the different corporations and trusts which have no effect upon the beneficial interests of Merrill and Lynch, but which are designed to reduce their tax liability very greatly."

•Foreign personal holding corporations. George Westinghouse, Jr. "has a $3 million Bahamas corporation and in an attempt to prevent the Bureau of Internal Revenue from catching up with him, moves his home address from one small hamlet to another each year." Razor king Jacob Schick renounced his citizenship (renouncing his U.S. Army pension in the process), formed Schick Industries in the Bahamas, and transferred to it his stock in his Connecticut company, thereby evading U.S. law imposing a 25% tax on transfers of securities to foreign corporations.
•Incorporated yachts and country places. "Mr. Alfred P. Sloan's yacht is owned by Rene Corporation, one of his personal holding companies, along with $3 million in securities. He rents the yacht from his company and the company uses its income from securities to pay depreciation on the yacht, the wages of the captain and crew, and the expenses of operating the yacht." Wilhelmina Du Pont Ross used a corporation to own her $421,000 country place, saving $20,000 in tax, and even paid her husband a salary for managing it — "she thereby supplies him with pocket money, and in effect secures a deduction for the expense of maintaining him."
•Percentage depletion. Morgenthau attacked the percentage depletion allowance, which lets oil and gas producers deduct part of their income as an allowance that the well will someday run dry. He reports that he had recommended eliminating this break back in 1934, "but nothing was done, presumably because of the heavy pressure from the large oil and mining companies which are profiting immensely" from them. (Sound familiar?)
•Municipal bonds. John D. Rockefeller, Jr. owned over $32 million worth of municipal bonds, while Frederick W. Vanderbilt owned $28.7 million. Morgenthau found wealthy taxpayers gradually increasing their purchases of these tax-free bonds.
Morgenthau's report reveals that legal tax avoidance is nothing new, and sophisticated planners have always worked the Tax Code to their clients' best advantage. All of the strategies he describes were legal back then, and many of them — such as percentage depletion and tax-free municipal bond income — remain legal today. (Is there anyone who seriously proposes eliminating the tax exclusion for municipal bond income?) You may not have the income or assets that Charles Merrill or Frederick Vanderbilt enjoyed. But you have the same right to arrange your affairs so that your taxes are as low as possible. Our job is to help you do just that. And make sure your family, friends, and colleagues know we're here for them, too!

Shooting Down the "Snooki Subsidy"

New Jersey Governor Chris Christie must feel like the Most Wanted Man in America as his fans clamor for him to join the 2012 presidential race. Some observers say it's too late to mount a credible run, while others worry about positions that might offend the Republican base. A year ago, he flatly ruled it out, declaring "Short of suicide, I don't really know what I'd have to do to convince you people that I'm not running." But since then, he appears to be warming to the idea, and he's expected to announce a final decision shortly.

Politicians usually work overtime to avoid offending anyone. And Republicans rarely meet a tax cut they don't like. So how serious can Christie be if he's willing to alienate the crucial "Guido" voting block — especially if it involves shooting down a tax break? That's right, last week Christie actually vetoed a $420,000 tax credit for producers of MTV's hit Jersey Shore reality show!

Film producers bring jobs, spending, and sometimes even a touch of glamour to the locations they choose. And who doesn't want to share a bit of that Hollywood spotlight? For those reasons, over half of all states now offer film tax credits to encourage in-state movie and television production. (Remember, a tax "credit" is a dollar-for-dollar cut in a taxpayer's actual tax bill, not just a deduction from that taxpayer's income.) New Jersey's program is typical, and gives production companies a credit equal to 20% of qualified expenses so long as they incur 60% of their costs in New Jersey. Fans of these programs argue that subsidized productions actually pay for themselves by creating jobs and increasing tourism. Skeptics respond that film credits just transfer existing jobs from one location to another and that they generate short-term, project-based jobs that leave specialized laborers out of work.

MTV's Jersey Shore premiered in late 2009 and quickly became the network's most-watched series ever. Cast members Nicole "Snooki" Polizzi, Mike "The Situation" Sorrentini, Jennifer "JWoww" Farley, and their outrageous, hard-partying housemates have become New Jersey's most famous "family" since The Sopranos. Snooki makes $30,000 per episode now, commands $10,000 for personal appearances, and even rang the bell to open the New York Stock Exchange.

The show's producers reported spending $2.1 million in New Jersey to tape the first season. And officials in Seaside Heights, where the show was first set, agree that it's been a bonanza. That sounds like success, especially in today's tough economy. But not everyone is pleased with how Jersey Shore portrays its subjects. Critics object that it paints New Jerseyites and Italian-Americans as drunken, brawling louts, obsessed with their "GTL" (gym, tanning, and laundry, for those not in-the-know). Ironically, most of the cast isn't even from New Jersey — and not all are Italian, either.

Governor Christie himself has previously blasted the show as "negative for New Jersey" and charges that it "takes a bunch of New Yorkers and drops them at the Jersey Shore and tries to make America feel like this is the real New Jersey." So it came as little surprise when he shot down the tax break. "In this difficult fiscal climate, the taxpayers of New Jersey should not be forced to subsidize such projects as ‘Jersey Shore,’” he wrote in his press release vetoing the credit. “As Chief Executive, I am duty-bound to ensure that taxpayers are not footing a $420,000 bill for a project which does nothing more than perpetuate misconceptions about the State and its citizens.”

So, it looks like Garden State taxpayers won't be subsidizing Snooki's bail the next time she's arrested. What do you think? Is Governor Christie right to stand up for New Jersey pride? Or should he just lighten up, grab a "blast in a glass," and join the fun?

Chicken Little Sells Her House

Life would be a lot easier for all of us if tax laws didn't change all the time. Every year, Washington writes new laws. The IRS writes new regulations interpreting those laws. The Tax Court issues new decisions interpreting those regulations. And the IRS issues enough revenue rulings, revenue procedures, private letter rulings, and similar proclamations to keep an army of accountants and attorneys gainfully employed.

Sometimes, in the midst of all that motion, facts get twisted and misinterpreted. Sometimes a rumor gets launched that takes on a life of its own. Right now, there's an email going around that has most of us tax professionals shaking our heads. It warns that, starting in 2013, the healthcare reform act imposes a 3.8% sales tax on home sales. If you sell your $400,000 home, you'll owe a $15,200 tax!

If you see it in an email, it must be true, right? The truth, as is often the case with taxes, is a little more complicated than that — and a lot less scary. First, let's take a look at how taxes are figured on home sales today:

•First, calculate "adjusted sale price." This is the sale price of the house, minus expenses of actually selling it (last-minute fixups, commissions, etc.).

•Next, subtract "adjusted basis." This is the price you paid for the house, plus closing costs, plus any improvements you make that add value, prolong its life, or give it a new or different use. "Adjusted sale price" minus "adjusted basis" equals "gross profit."
•If you've owned your home for more than two of the last five years and used it as your primary residence for more than two of the past five years, you can subtract a "Section 121 exclusion" of up to $250,000 if you file individually or $500,000 if you and your spouse file jointly. If you don't meet the two-year requirement, you can still take a pro-rated exclusion reflecting how long you did meet those requirements.
•"Gross profit" minus "allowable exclusion" equals taxable gain. If you hold your house longer than a year, it's taxed as long-term capital gain and capped at just 15%.
The bottom line here is that few home sales are taxable — especially in today's down market — because of that Section 121 exclusion. So, where does the new healthcare law come in? Well, it does impose a new "unearned income Medicare contribution," beginning in 2013, of 3.8% on capital gains, for individuals earning over $200,000 and families earning over $250,000. (Don't you love how the folks in Washington spin that 3.8% "unearned income Medicare contribution"? Wouldn't it just be easier to call it a "tax"?)

That means any gain on the sale of your home that isn't already sheltered by the $250,000 or $500,000 exclusion might be subject to the new tax if your adjusted gross income is over the $200,000 or $250,000 threshold. That's a pretty far cry from saying there's a new 3.8% sales tax on home sales!

But somewhere along the line, Chicken Little saw the new 3.8% tax, missed the rest of the process, and saw the sky starting to fall. Being a thoroughly modern chicken, she hopped on her computer to fire off an email telling all of us that the sky was falling — and that email spread faster than the latest news about Snooki or the Kardashians. So now here we are, setting the record straight.

The next time you get an email with a rumor that sounds too awful to be true, don't just run around like Chicken Little. Send it to us. We can tell you if it's something you really need to worry about — and if so, we'll help you craft a plan to avoid or minimize the threat!

Tax Inspiration from Warren Buffett

Last month, billionaire Warren Buffett wrote a piece for the New York Times arguing that it's time for our tax system to stop coddling the super-rich. Buffet reported that while he paid a healthy $6,938,744 in federal income and payroll taxes last year, that figure was just 17.4% of his taxable income — a lower percentage than was paid by any of the other 20 people in his office. The solution, Buffett proposed, is for Congress to raise rates immediately on the 236,883 taxpayers reporting income over $1 million, and raise them even further on the 8,274 earning more than $10 million. "My friends and I have been coddled long enough by a billionaire-friendly Congress," he concluded. "It’s time for our government to get serious about shared sacrifice."

Buffett's argument attracted immediate objectors. Some argue that taxing "the rich" can't raise enough revenue to close the deficit because there just aren't enough of them. Others pointed out that much of the income that Buffett says isn't taxed enough consists of "qualified corporate dividends," which are taxed at corporate rates ranging up to 35% before being paid out to individuals.

Now President Obama has weighed in — and it turns out, he likes Buffett's argument enough to adopt it as his own. On Monday, he proposed a $3 trillion deficit reduction package with several important tax provisions:

•First, he would let the Bush-era tax cuts expire, raising top rates on ordinary income from 35% to 39.6% and capital gains from 15% to 20%. This would raise $800 billion over the coming decade.

•Next, he would close corporate loopholes and cap the value of itemized deductions for individuals making more than $200,000 and joint filers making more than $250,000. This would raise another $700 billion.
•Finally, he would impose a special minimum tax, called "the Buffett Rule," on those earning more than $1 million. He didn't specify a rate, but said it should be no less than what the average middle-class taxpayer pays. The new rate would only apply to about 0.3% of taxpayers, and wouldn't raise significant revenue — but it sets a more populist tone for the debate and underscores Obama's assertion that "we can't cut our way out of this hole."
Polls show a majority of Americans favor higher taxes on top earners to help reduce the deficit. And Democrats generally favor this week's plan. In fact, some supporters don't think it goes far enough. Former Labor Secretary Robert Reich, for example, suggests raising taxes to 50% on income between $500,000 and $5 million, 60% on income between $5 million and $15 million, and 70% in income over $15 million.

Opponents, on the other hand, have already attacked the proposal as "class warfare" and "political games." Congressional Republicans have said they're willing to consider closing tax loopholes, so long as the resulting gains go towards lowering overall rates. But they've pledged to resist any net increase in revenue, and House Speaker John Boehner has declared tax hikes "off the table." That means this week's plan in general, and the Buffett Rule in particular, stand little chance of actually passing.

Obama's proposal is still worth paying attention to, even if Republicans don't pretend to take it seriously. It illustrates how the rising deficit is increasing pressure to raise taxes. And it signals where Obama might go if he wins next year's election — especially if Democrats retake the House of Representatives. Count on us to keep an eye out for you so that we're ready to keep your taxes as low as possible — no matter which proposals wind up passing into law!

Jobs and Taxes

Earlier this year, the men and women in what Donald Trump famously referred to as "Disneyland on the Potomac" battled it out over the debt ceiling, in a fight that turned largely over whether to include new taxes. Now the "Rock 'Em Sock 'Em Robots" in Washington are gearing up for another bout — and once again, taxes are taking center stage.

With "official" unemployment still hovering above 9%, and "unofficial" unemployment estimated at near double that, you might expect to hear clamoring for a New Deal-type employment plan — a sort of "Works Progress Administration" for a new era. Our roads, bridges, and schools could certainly use it! But deficit constraints make that impossible. So what do the candidates' plans have in common? Well, they all share a reliance on tax reform to encourage "job creators" to hire.

Last week, President Obama took to the airwaves to introduce his plan, which he presents as "recession insurance." Obama would extend the 2% payroll tax cut for employees (from 6.2% to 4.2%), currently in effect through the rest of this year, through 2012. He would cut the payroll tax on employers from 6.2% to 3.1% on their first $5 million of wages, and eliminate it entirely for any net increase in payroll up to $50 million. He would extend the current enhanced depreciation provisions scheduled to expire at the end of this year. And he would create a new "Returning Heroes" tax credit ranging up to $9,600 to encourage hiring unemployed veterans. (Come on, now . . . what heartless Scrooge could possibly oppose a "Returning Heroes" tax credit for veterans?)

Several Republican candidates have also weighed in with competing proposals:

•Former Massachusetts Governor Mitt Romney argues that "the best course in the near term is to overhaul and to dramatically simplify the current tax code, eliminate taxes on savings for the middle class, and recognize that because we tax investment at both the corporate and individual level, we should align our combined rates with those of competing nations. Lower taxes and a simpler tax code will help families and create jobs." Romney's plan would maintain marginal rates at their current level, further reduce taxes on savings and investments, eliminate the estate tax, and cut the corporate tax to 25%.

•Former Utah Governor and Ambassador to China John Huntsman released his "Time to Compete" jobs plan. Huntsman's plan would take an opposite approach from the President's plan by eliminating all deductions, credits, and loopholes. He would then introduce three rates of 8%, 14%, and 23%, eliminate the dreaded alternative minimum tax, eliminate tax on capital gains and dividends, and lower the corporate rate to 25%. Huntsman's plan has won praise from the usual flat-tax suspects — but unfortunately for them, most observers think Huntsman has as much chance of winning the Republican nomination as Lady Gaga.
•Finally, former Godfather's Pizza CEO and radio host Herman Cain has released an even more radical plan that would eliminate payroll taxes completely, cut corporate and personal taxes to 9%, and impose a 9% national sales tax.
The current debate reminds us of the role taxes play in so many seemingly unrelated issues. In today's political climate, when Washington wants to spend money on anything — whether it be healthcare reform, job stimulus, or even disaster relief — someone has to pay for it. Taxes are clearly at the heart of the job debate. And the candidates' job proposals, centered on taxes as they are, remind us why we need to pay attention to all the news coming out of Washington. What do you think? Are the candidates sincerely working to create new jobs? Or are they mainly interested in preserving their own?

Corporate Taxes and CEOs

Last week, the Institute for Policy Studies (IPS), a Washington-based think tank, released a report revealing that 25 major corporations paid more to their chief executive than they did to the IRS. That list includes household names like Ford, Coca-Cola, Verizon, Prudential, General Electric, Boeing, and eBay. Altogether, those 25 companies averaged $1.622 billion in pre-tax income. They paid their CEOs an average of $16,684,071. But when it came to taxes, they averaged $304 million in refunds on their federal corporate income tax.

How do they do it? The main culprit, according to the IPS, is "offshoring" revenue to low-tax countries. The study found that the 25 corporations collectively maintain 556 subsidiaries in "tax havens" as defined by the Government Accountability Office. And many of the corporations have a long history of working to reduce taxes on shareholder profits. For example, the New York Times once reported that "G.E.’s giant tax department, led by a bow-tied former Treasury official named John Samuels, is often referred to as the world’s best tax law firm." Overall, the study concluded that:

"Our 25 hyperactive tax-dodging corporations employed a variety of avoidance techniques. Not all of these techniques are nefarious. Some corporate tax breaks can have redeeming social value. Incentives that encourage our economic transition to a green energy economy offer one example of these beneficial breaks. But such incentives as these play only a minor role. The lion’s share of tax breaks reward corporate behaviors — from “offshoring” to accelerated depreciation — that are of questionable value to society, especially over the long term."

Not surprisingly, critics of the study have accused the IPS of political bias. And several of the companies cited have disputed the study's findings. For example, the IPS states that eBay paid CEO John J. Donahoe $12.4 million while claiming $131 million in federal tax benefits. EBay responded that they actually paid $646 million in worldwide taxes, with the majority paid here in the U.S. Boeing Corporation also disputes the study, claiming the IPS understated their actual cash tax bill by a factor of 20.

At the same time, the study's narrow focus on federal corporate income tax obscures the true tax burden on corporate profits. Corporations pay billions in state and local taxes in addition to federal tax. CEOs who earn millions in salary pay millions in taxes themselves — usually at higher effective rates than the corporations they work for. Every tax dollar saved for shareholder dividends ultimately gets taxed at the shareholder's own level. And ultimately, who can blame corporations for playing by the legal rules? "After all," says one Forbes magazine columnist, "CEOs and boards are supposed to be running their business for the benefit of shareholders, not the U.S. government."

Whichever side you take, as our nation's debt continues to spiral out of control, lawmakers are focusing more attention on taxes in general — and this includes efforts to reform corporate taxes and close corporate loopholes. What do you think? Are healthy corporate profits and low corporate taxes a ray of bright sunshine in an otherwise gloomy economy? Or should the townspeople be gathering up pitchforks, lighting torches, and preparing to storm the corporate castles?

Tax Thoughts for Labor Day

Labor Day is almost here, and soon summer will be "officially" over. If that's got you down, here's a collection of tax quotes to brighten your day.

"A dog who thinks he is man's best friend is a dog who obviously has never met a tax lawyer."
Fran Lebowitz

"We have long had death and taxes as the two standards of inevitability. But there are those who believe that death is the preferable of the two. 'At least,' as one man said, 'there's one advantage about death; it doesn't get worse every time Congress meets.'"
Erwin Griswold

"Of course the truth is that the congresspersons are too busy raising campaign money to read the laws they pass. The laws are written by staff tax nerds who can put pretty much any wording they want in there. I bet that if you actually read the entire vastness of the U.S. Tax Code, you'd find at least one sex scene ("'Yes, yes, YES!" moaned Vanessa as Lance, his taut body moist with moisture, again and again depreciated her adjusted gross rate of annualized fiscal debenture')."
Dave Barry

"You must pay taxes. But there's no law that says you gotta leave a tip."
Morgan Stanley advertisement

"The flat tax would be so simple, you could fill it out on a post card. A post card that would say, in effect, having a wonderful time; glad most of my money is here."
Steve Forbes

"The income tax has made liars out of more Americans than golf."
Will Rogers

"An income tax form is like a laundry list - either way you lose your shirt."
Fred Allen

"Hating the Yankees is as American as pizza pie, unwed mothers, and cheating on your income tax."
Mike Royko

We hope you enjoyed these quotes. But please remember this: there's nothing funny about paying taxes you don't legally have to pay. If this season's pain has you looking for a plan to pay less tax, call us today. And remember, we're here for your family, friends, and colleagues too!

Coddling the Rich

Billionaire Warren Buffett, also known as "The Oracle of Omaha," works hard to keep a folksy, down-to-earth reputation despite a net worth reaching as high as $62 billion. His Berkshire Hathaway shareholder meetings are the rock concerts of the investment world, attracting upwards of 40,000 attendees, and his annual letter to shareholders is pored over like the latest pronouncement from the pope. Buffett has become a favorite "go-to" guy when lawmakers and reporters need a voice of financial reason, and he has weighed in on topics as diverse as the government bailouts, stimulus spending, and stock market gyrations.

So it's no surprise that Buffett has something to say about taxes. What's surprising is that he thinks people like himself and his mega-rich friends should pay more! Last week, he wrote a piece in the New York Times calling on government to stop coddling the super-rich. "Last year my federal tax bill - the income tax I paid, as well as payroll taxes paid by me and on my behalf - was $6,938,744," Buffett writes. "That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income - and that's actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent."

Buffett's solution? He argues that Congress should raise rates immediately on the 236,883 taxpayers reporting income over $1 million, and raise them even further on the 8,274 earning more than $10 million. "My friends and I have been coddled long enough by a billionaire-friendly Congress," he concludes. "It's time for our government to get serious about shared sacrifice."

Buffett saw his net worth drop $25 billion in just 12 months during 2008 and 2009. He's shown he can handle a little financial pain, and he probably won't miss any extra he pays in tax. But what about everyone else?

Three days later, The Wall Street Journal countered Buffett's argument and accused him of volunteering the middle class for a tax increase. The Journal cited their own former editor Barney Kilgore's observation that it's easy for rich people to call for higher taxes because they already have their money. And they pointed out what they called three flaws in Buffett's argument:

1.Much of the income Buffett says isn't taxed enough consists of "qualified corporate dividends," which are already taxed before they even reach him at corporate rates of up to 35%.


2.Taxing "the rich" alone won't raise enough to close the deficit gap because there just aren't enough of them. That's why the President has called for higher taxes on families making over $250,000 per year, most of whom aren't billionaires or even millionaires.


3.Finally, Buffett has already sheltered the bulk of his fortune from future taxes by pledging it to a charitable foundation.


If you're not sitting on a billion-dollar fortune, you have a couple of ways to look at Buffett's call - whether you think taxes should go up or not. Those of you who think taxes are high enough already can see how he uses perfectly legal tax planning to cut his own tax to the legal minimum - and resolve to do the same ourselves. Those of you who think the government really does need more revenue can see his voice as adding weight to the growing chorus for that revenue. Whichever side you take, though, we're here to keep your taxes to the absolute minimum possible.

Win the Battle, Lose the War

Earlier this month, Washington wound up an ugly slugfest over deficit reduction that left approval ratings lower than at any time in history. Congressional Republicans appear to have blocked tax increases, at least until the end of 2012. So we're safe, right? Well, not so fast. Legislation isn't the only way for taxes to go up. We still have to keep a sharp eye out for everything else coming from Washington. Take, for example, the "carried interest" debate.

Hedge fund managers, venture capital fund managers, and private equity fund managers are the rock stars of the money management world. John Paulson, who first gained fame for betting against housing prices in 2007, made an estimated $4.9 billion in 2010 alone. The top 25 managers as a group made $22.07 billion combined. Based on IRS figures, that's as much money as 667,816 average taxpayers — a population greater than the entire city of Boston!

Fund managers don't just make more than the rest of us, they keep more than the rest of us. That's because of how they get paid. They typically charge investors a management fee ranging from 2% to 4% of assets under management. They classify those fees as ordinary income, taxed at marginal rates up to 35%. But they also charge an incentive fee ranging from 20% to as high as 50% of annual gains. They classify those fees as an investment producing capital gains, with tax capped at the 15% maximum for long-term gains.

It's no surprise that some legislators have spotted what they call oversized paychecks, combined with undersized tax bills, and cried foul. Critics of "carried interest," as it's called, have tried several times to pass legislation recharacterizing it as ordinary income. But Congressional Republicans have blocked these efforts along with efforts to raise any other taxes. Now a recent Tax Court decision suggests that the IRS might accomplish through regulations what Congress can't accomplish through legislation.

Todd Dagres worked at Battery Management Company, a venture capital fund manager. From 1999 through 2003, he earned $10.9 million in compensation and $43.4 million in carried interest. In 2003, he deducted $3.6 million for a loan he made to a business associate that went bad. The IRS disallowed Dagres's deduction, arguing it was a personal loan not created in connection with his trade or business. As such, the IRS argued, it was deductible only as a short-term capital loss, and limited to the amount of any capital gain he reported for that year plus just $3,000 per year. Dagres's funds lost money in 2003 and he reported no capital gains for that year, so in the IRS's eyes, he was out of luck.

But the Tax Court disagreed. In Dagres v. Commissioner Judge David Gustafson ruled that Dagres's carried interest was compensation from a trade or business and the loan was "proximately related" to that business — therefore, Dagres could deduct the loan against his ordinary income for the year. Since Tax Court opinions set binding precedent, some observers argue the IRS can use this one to write regulations characterizing carried interest as ordinary income. This means Dagres could win his individual battle, but actually lose the bigger war.

We realize it's hard to feel much sympathy for an investment hotshot pulling down $10 million per year! But the debate over the Dagres decision illustrates how tax increases can come out of left field. That's why we spend valuable time monitoring the latest developments from everywhere in Washington, not just Capitol Hill. That proactive approach is the key to holding your taxes to the absolute legal minimum.

Guess Who's Unhappy With the IRS?

Surveys show that most Americans would rather be caught naked in public than face a tax audit. So, what sort of knucklehead goes ahead and asks the IRS to audit him? Then actually takes them to court when they say no?

Fashion designer Georges Marciano left his native Marseilles with his brothers Armand, Paul, and Maurice in 1977, and founded Guess? jeans in 1981. Guess? helped popularize the stonewashed denim look, and gained fame with a series of iconic black-and-white ads featuring supermodels Claudia Schiffer, Eva Herzigova, and Laetitia Casta. Marciano built on that initial success with designer jeans by expanding into watches and accessories, footwear, meanswear, bedding, and fragrances.

Unfortunately, Marciano's eye for business never matched his eye for fashion. In the 1980s and early 1990s, Guess? fought allegations of sweatshop labor, which led to a $573,000 settlement. And in 2005, they were forced to apologize after releasing a line of t-shirts glamorizing the drug trade that proudly declared "Ski Colombia: Always Plenty of Fresh Powder."

Also in 2005, Marciano claims he uncovered evidence of identity theft, fraud, and embezzlement, that he said cost him nearly $200 million. He did exactly what you would do if you were missing that much money — he sued everyone in sight. But somewhere along the line, he started worrying that he owed tax on the stolen money. So in 2008, he wrote the IRS and asked them to audit him! You would think they would be happy to oblige. But Marciano claims they stonewalled his requests, and even sent him refunds totaling $880,997.17 based on a claim for a tentative carryback that Marciano says he never made!

Meanwhile, Marciano's former accountants won judgments against him for libel and intentional infliction of emotional distress, and his creditors forced him into involuntary bankruptcy. So in a last-ditch effort, Marciano filed suit in U.S. District Court, seeking relief from the state court judgments against him, arguing that the IRS had violated his rights (including his due process rights under the Constitution), and once again demanding a "thorough" audit of his tax liabilities.

Last month, Judge Henry Kennedy, Jr., threw out Marciano's case like last season's closeouts. "The extraction by the government of money or property via taxation implicates a constitutionally protected property interest, but, as noted above, Marciano has asserted repeatedly that he owes the government money, rather than the reverse,” Kennedy wrote. “The Court is aware of no precedent establishing a protected property interest in the ability to pay taxes.”

If you ever ask us to sue the IRS to audit you, we'll probably tell you to take a seat and make yourself comfortable while we find you some aspirin! What do you think? Does Marciano really think he owes tax on $200 million? Or is he just asking the IRS to clean up his accounting mess for him?

How To Pay Zero Tax

Years ago, comedian Steve Martin gave us an easy formula for making a million dollars without paying tax. "First . . . ya get a million dollars." Then, when the tax man comes to your door and says you never paid taxes, just tell him "I forgot!" That's a great plan, assuming you can get your hands on the million bucks and you're willing to take your chances with the tax man. But what about those of us who don't have a million dollars and those of us who remember we have to pay taxes? Are there better ways for getting that tax bill down to zero?

The Washington-based Tax Policy Center estimates that a full 46% of Americans pay no federal income tax. And those non-payers represent a surprisingly broad cross section of Americans. Over 10% of them report incomes over $50,000. And in 2008, there were 18,783 who earned over $200,000 and owed no federal income tax. So, how do they do it?

About half of the non-payers just don't make enough money to owe any tax. They rely on the standard deduction and personal exemptions to avoid any tax on their income. But the Tax Policy Center identified 38 million Americans who rely on one or more tax expenditures to pull their tax down to zero. ("Tax expenditure" is Washington-speak for tax provisions like deductions and credits that reduce tax revenue.)
•Seniors: 44% of non-payers benefit from the extra standard deduction for those over age 65, the elderly tax credit, and the exclusion of Social Security from taxable income. (The TPC study calls these "elderly tax benefits" — our own unscientific survey shows that half of all seniors don't mind being called "elderly" if it means paying less tax!)
•Families: 30.4% of non-payers benefit from the child tax credit, the dependent care credit, and the earned income tax credit. (It's worth noting that if the Bush tax cuts actually expire on schedule after 2012, the child tax credit will disappear — throwing millions back into the "taxpayer" category.)
•Beneficiaries: 6.0% draw income from tax-free benefit programs, including Supplemental Security Income and Temporary Assistance for Needy Families.
•Students: 5.6% benefit from education credits to eliminate their tax.
•Adjustments: Another 5.1% of non-payers benefit from "above the line" deductions like self-employed health insurance and student loan interest and from tax-exempt interest income.
•Itemizers: 5.0% benefit from itemized deductions like mortgage interest, state and local taxes, and charitable gifts. (The Obama administration has proposed limiting the value of itemized deductions for higher-income earners to just 28%; however, in today's anti-tax climate, the President is about as likely to appear on Jersey Shore as he is to raise taxes.)
•Credits: 2.5% benefit from other credits, including the Savers Credit for retirement savings and the general business credit.
•Investors: Finally, 1.3% benefit from the special 0% rate for certain capital gains and qualified corporate dividends.

If you're like most clients, you see something on that list that saves you taxes, even if it's not enough to pull your taxes all the way down to zero. It's our job to help you take advantage of all of those strategies and more. If you know someone who's not happy with the taxes they pay, pass along this email, and we'll see how we can help!

Tax "Hacking" With Rupert Murdoch

Press Baron Rupert Murdoch started with his father's newspaper in Adelaide, South Australia, and built it into the world's second-biggest media empire. Time magazine has ranked him three times in their annual list of the 100 most influential people in the world. Vanity Fair routinely lists him in their "New Establishment" ranking of the 100 most influential people of the information age. And Forbes ranks him as one of the wealthiest men in the world, with an estimated net worth of $7.6 billion.

But now Murdoch's News Corporation is in hot water because reporters at Britain's News of the World tabloid illegally hacked into telephone voicemails across Britain. Since the scandal came to a boil, several company officials have resigned, others have been arrested, and the News of the World — which began publishing in 1843 when Queen Victoria ruled Britannia — has shut down. Here on our side of "the pond," the FBI is investigating whether Murdoch's forces may have hacked into the phones of 9/11 victims and their families.

But enough of all that legal wrangling. What does the tax man think? More specifically, what do the tax men think — specifically, the Australian Tax Office, with a top corporate tax rate of 36%, our own IRS, with a top rate of 35%, and Britain's Inland Revenue, with a top rate of 30%?

Well, the answer appears to be "not much." Murdoch is known for his anti-tax position. So it's no surprise that Murdoch has, in the words of Judge Learned Hand, "arrange[d] his affairs that his taxes shall be as low as possible." A 1999 study by The Economist magazine found that, for the four years ending in 1988, News Corp paid an effective tax rate of just 6%. That compares with fully 31% for News Corp's rival Disney, the world's biggest media conglomerate.

How do Murdoch and News Corp do it? First, by slicing and dicing their income into a dizzying number of pieces. And second, by taking advantage of seemingly every international tax loophole on the books. News Corp includes a staggering 800 subsidiaries. That number includes over 60 in various sunny tax havens like the Cayman Islands, Bermuda, the Netherlands Antilles, and the British Virgin Islands. (Hey, if you were picking someplace to send your money to avoid taxes, would you pick someplace like Iceland?)

Here's today's tax quiz question. What would you guess is Murdoch's most profitable subsidiary? Fox News? The Wall Street Journal? Britain's Sunday Times? Nope, nope, and nope. Try "News Publishers" — a Bermuda corporation with no newspapers, no magazines, and no TV stations. Heck, News Publishers doesn't even have employees! Shifting profits across national boundaries lets Murdoch Corp take advantage of jurisdictions like Bermuda with near-zero tax rates.

Ironically, though, all that chicanery may have actually cost Murdoch. As The Economist reported, "The complexity of News Corporation’s structure baffles analysts and puts off institutional investors." The magazine suggests that this complexity accounts for News Corp's share price underperformance in the late 1990s and makes it more expensive for him to finance new acquisitions.

Choosing the right entity for your business is one of the most important decisions you'll make. And while you probably don't need 800 entities, you might profit from more than one. Let us help you with the right plan to make the most of your business — with no illegal phone hacking involved!

IRS Hits Homer, Too!

Last Saturday, New York Yankees shortstop Derek Jeter became the 28th major leaguer — and only the first Yankee — to achieve 3,000 career hits. Jeter's third inning solo home run to left field wound up in the hands of a 23-year-old fan named Christian Lopez. Souvenier baseballs are big business, so team officials immediately whisked Lopez out of the stands, escorted him into the president's office, and asked him what he planned to do with his windfall. (The fan who caught Barry Bonds's 715th home run ball sold it on Ebay for $220,100. And Mark McGwire's record-breaking 70th home run ball sold for $3 million in 2006. Nice timing, too — in 2010, McGwire admitted using steroids while he played, and that ball's estimated value dropped faster than a pop fly!)

Lopez showed a bit of class that some would say is surprising from a Yankees fan. He passed on the chance to auction the ball, which some experts estimate would have fetched as much as $250,000. Then he told reporters he thought the ball belonged to Jeter and gave it back to the legendary slugger. But he still walked off with some lovely parting gifts, including three Jeter-autographed balls (worth about $600 each), three autographed bats ($900 each), and two autographed jerseys (another $1,000 each). The Bronx Bombers also gave him four tickets to every remaining home game this season. In fact, for the game after Lopez's lucky grab, they gave him four front-row "Legends" seats, which sell for up to a whopping $1,358.90 each. Quite a haul!

Oh, and you know what else he's likely to catch? That's right . . . a tax bill from the IRS! And those opponents won't be happy with jerseys or tickets, even if the Yanks make the Series. They just want cash, thank you very much.

Catching collectible baseballs presents all sorts of tricky tax questions that most fans won't think of when they suit up for a big game:

•When does the lucky fan who catches the ball fan "recognize" the income? Now, when he catches it? Or someday down the road, when he sells it?

•If tax is due immediately, before the fan sells, how does he determine what it's worth?
•If the proceeds qualify as capital gain, taxed at the special 28% rate for collectibles, what will the fan's "cost basis" be? Zero? The price of the ticket to the game? The price of his season-ticket package?
And what if the lucky fan gives the ball back to the hitter, like Lopez did with Jeter? Back in 1998, just before Mark McGwire beat Babe Ruth's single-season record, a reporter asked an IRS spokesman what would happen if the fan who caught that ball handed it back to McGwire. The spokesman replied that the fan might actually owe gift tax — and sparked howls of protest! Then-Commissioner Charles Rossoti quickly changed course, confessing that the Tax Code could be as hard to understand as the Infield Fly Rule.

Tax experts predict Lopez won't owe tax on the value of the ball he caught, but will owe it on the value of his memorabilia and tickets. What do you think? Is that fair? Or should the IRS "intentionally walk" the fans who catch souvenir balls and let them enjoy a little tax-free history?

The Tax Man and the "Electric Amish

We've talked before about how the internet is changing so much of how we live our lives. The internet is changing how we shop, how we book travel, and even how some of us find romance.

It's no surprise, then, that the internet is changing how we file and pay our taxes. Just 10 years ago, online filing was a novelty. Now it's become the norm. Last year, two out of three Americans e-filed their income tax returns. Those who also opted for electronically deposited refunds saved the government mailing costs, saved themselves a trip to the bank, and even got their refunds a week faster than waiting for paper checks.

State and local governments are getting into the e-filing act, too. In fact, some state and local governments are mandating e-filing for certain returns. For example, New York has made e-filing mandatory for sales tax returns. They also want taxpayers' phone numbers and Social Security numbers. That's not really too much to ask, is it?

But what if your business isn't part of the internet revolution? What if you still take your goods to market in a black horse-drawn buggy? What if your store doesn't even have electricity?

That's the dilemma that many Amish are facing right now. The New York Department of Taxation and Finance wants them to file sales taxes electronically, like any other business. The Department has even sent Amish business owners — mainly furniture makers and shopkeepers — letters threatening a $50 penalty for every return not electronically filed!

The Watertown Daily Times, which publishes in an area that's home to the conservative Swartzentruber and Heuvelten Amish clans, reports that the Department really wants to help. Spokeswoman Susan Burns said in an email that "our expectation was that businesses with concerns about complying would call the Taxpayer Contact Center." Unfortunately, most Amish don't have a telephone to make the call in the first place! (The spokeswoman said they could write or have someone else call on their behalf.)

Oh, and the Department would love to have taxpayers' Social Security numbers, too. But the Amish have been exempt from Social Security since 1965. So they generally don't have Social Security numbers, either!

Electronic filing is just one of many conflicts the Amish are facing with government. Amish have fought to avoid putting orange reflective triangles on their buggies. Patriot Act requirements making photo identification more important have made banking and travel harder. And some New York Amish are in federal court, fighting requirements over home smoke detectors.

In the end, the NY Department of Taxation and Finance appears to be showing a little common sense, honoring the Amish sense of devotion and letting them snail-mail their returns the old-fashioned way. What do you think? Do we lose anything by letting Amish taxpayers kick it old school? Or should we find a way to drag them online with the rest of us

IRS Strikes OUT!

Next week marks Major League Baseball's 2011 "Midsummer Classic" — the All-Star Game between fan favorites from the rival National and American leagues. Baseball is making the usual headlines on the field this year, with tight races in most divisions. And it's making headlines off the field, too — especially in Los Angeles, where Dodgers owners Frank McCourt and his wife Jamie are contesting an especially bitter divorce.

Frank McCourt is decidedly behind the count in this at-bat. He's accused of borrowing more than he could afford to buy the team in the first place, then using the team as a personal ATM to finance an extravagant lifestyle. That lifestyle included seven homes costing just over $99 million — two houses on Cape Cod, two houses next door to each other on Malibu's famed "Millionaire's Beach," two more houses next door to each other in LA's affluent Holmby Hills neighborhood (right down the street from the Playboy Mansion), and a $6 million condo in Vail. It also included $225,000 per month for a private jet, $10,000 per month for Jamie's hair stylist, and $386 per month for her makeup for Dodgers events. (Just weeks ago, the pair signed an agreement awarding Jamie $650,000 per month in spousal support plus ownership of the homes — one of which she uses just for swimming laps and another just for storing furniture.)

And so, McCourt's mountain of debt has finally loaded the bases against him. Earlier this year, Baseball Commissioner Bud Selig balked at McCourt's plans to make payroll and appointed a trustee to take over the team's finances. And last month, McCourt threw a beanball of his own, defying MLB rules and filing bankruptcy while he works to sign a television deal which he says will let him pay all his creditors. In the meantime, season ticket sales are down, and some say he's the worst owner since Red Sox skipper Harry Frazee sold Babe Ruth to the Yankees for $125,000.

But there's one opponent who's batting zero against the McCourt's, and that's the tax man. Court papers filed last February show that from 2004-2009, the McCourts drew $108 million from their various businesses — and paid zero taxes to the IRS or State of California. Zip. Zilch. Nada. How the heck does a family make $108 million and pay zero taxes?

McCourt began his career developing commercial real estate. Real estate developers frequently fund their lifestyles primarily from tax-free loans secured by the equity in their properties. In fact, McCourt used a loan secured by a 24-acre parking facility in Boston to finance his original purchase of the team. And he continued that strategy even after taking over the team, borrowing $390 million against future revenues, in part to finance tax-free distributions for himself and his family.

McCourt also benefits from generous depreciation deductions against his properties. Depreciation is a "paper" deduction representing wear and tear on a property; however, in the right circumstances, it's available to offset ordinary income. Court papers reveal that the McCourts arrived in California with over $100 million in net operating loss carryforwards; thus, they can expect to continue paying little or no taxes for quite some time.

There's nothing illegal about the McCourts' strategy. The loan proceeds represent advances against future income that will be taxable, even if they're offset by the real estate losses. And those real estate losses are part of a long-established tax rules designed to spur real estate development that drives economic growth. The legislators who write the tax laws probably never imagined anyone woud be living quite so well while paying quite so little tax. But we use some of the same strategies ourselves — for the right clients. So call us when you need a strong closer to save your game!

A Date With the IRS

The internet has transformed so much of how we live our lives. We find our news online, find books and music online, and find travel bargains online. The internet has even transformed how many of us find romance, with a dizzying range of sites for suitors of all interests. Match.com advertises that one out of five relationships now begins on an online dating site. EHarmony ads feature smiling couples, married after meeting online. And let's not forget the raft of specialized dating sites like dateHarvardSquare.com (free for Harvard students and alumni), VeggieConnection.com (for those who won't be ordering steak on their date), and WeWaited.com (for those who won't be getting lucky on their date). What would Yente, the village matchmaker from Fiddler on the Roof, think of JDate.com for Jewish singles?

Now there's a new site called WhatsYourPrice.com that offers a decidedly commercial twist on the age-old quest for true love. Their romantic slogan: "Buy a First Date With Anyone." Generous daters (mostly men, of course), post what they're willing to pay for a date. Attractive daters (mostly women), post what they want to get for a date. As one woman from the site said, "If it's going to be a big, huge waste of time, at least I'm going to get paid for it . . . . A lot of these guys are wealthy gentlemen, and I think my time is as valuable as their time."

Guys, your friends might snicker if they find you paying for dates. Ladies, you probably wouldn't want to tell your mother. But forget what your friends and family think. What does the IRS think of getting paid to date?

Let's say a generous gentleman pays $100 for a date. That $100, given in exchange for his date's time, company, and conversation, is clearly taxable income to her, reportable as "Other income" on Line 21 of her Form 1040. (Taken to its logical extreme, generous gentlemen ought to be issuing 1099s for dating over $600!)

Now, what about the value of dinner? Is it additional compensation for the date? Presumably, a generous gentleman wants to impress his date with more than just coffee at Starbucks. Internal Revenue Code Section 83 states that property transferred in connection with services is taxable at its fair market value. Fortunately, daters can pay the actual tax in cash — otherwise, they might have to bring doggie bags for the IRS. (What sounds like the right tax for dinner at a nice steakhouse, anyway? Three bites of filet and half of a baked potato?)

And what about the generous gentlemen? Are there any deductions available for them? Maybe, if they take their date to a business function. Otherwise, no dice — and the gifts aren't "charitable contributions," either, unless the date is a "registered nonprofit."

At first glance, taxing daters might not seem like a "10" on the IRS's priority list. But WhatsYourPrice.com boasts 50,000 members and says the average bid for a date is $138! That suggests there's a fair amount of tax revenue worth chasing. Of course, there would be certain challenges collecting that revenue. It's bad enough when gossipy co-workers and nosy family members poke their nose in your love life. Who needs an IRS auditor tagging along on a date?

In all seriousness, the internet really is changing how taxes work. Take sales taxes, for example — state governments would love to collect sales taxes from online retailers, and several have taken aim at Amazon.com. But online daters, you're still safe — at least for now — and we'll be sure to let you know if that changes!

Tax Strategies for Anthony Weiner

Just a few short weeks ago, Anthony Weiner was a rising star in the Democratic party. The seven-term Congressman from New York's Ninth District, straddling Brooklyn and Queens, was a well-respected liberal voice, with frequent appearances on cable news networks and a legitimate shot at becoming Gotham's next mayor. Now, he joins fellow New Yorkers Elliot Spitzer, Chris Lee, and Eric Massa in the Disgraced Politicians Hall of Shame. (Must be something in that New York water.) Weiner's already enough of a national laughingstock that we can just skip all the wisecracks you expected when you saw the subject line of this email and get on with it!

Weiner may be on his way out for now, but he's not likely to be gone forever. Former Governor Elliot Spitzer, who left office after being uncovered as a high-end escort service's "Client 9," hosts his own talk show on CNN. New York native and former mayor of Cincinnati Jerry Springer, who was caught paying for similar services with a check, overcame that disgrace to become a wildly successful national television personality. And of Weiner, even President Obama told ABC news that "he'll refocus, and he'll end up being able to bounce back."

But will there be any tax breaks to help ease the shame that he must feel, as he and wife Huma Abedin prepare to welcome a little Weiner into their family? Weiner starts out with some pretty sweet perks as a former Congressman — perks which are already tax-advantaged. His Congressional pension will grow tax-deferred until he reaches age 62. He'll also get access to the house floor during regular business or joint sessions, free parking for life on the House side of the Capitol building, and even access to the House gym where he took some of the photos that ultimately brought him down — all tax-free.

But of course, Weiner will have to find work to replace his $174,000 congressional salary. Fortunately, job-hunting expenses are deductible too, as a miscellaneous itemized deduction, subject to a 2% floor on adjusted gross income. This holds true whether he parlays his cable-news appearances into a full-time broadcast career, or starts lobbying former colleagues at $500 per hour. (Good news: porn mogul Larry Flynt has already offered Weiner a job with a 20% raise, medical benefits, and even relocation costs!)

Speaking of medical benefits, Weiner has announced plans to enter a "treatment center." While he hasn't revealed exactly where he's going, it makes sense to assume he'll seek counseling for online sex addiction. That sort of psychological treatment — which generally runs $500-1,000 per day for 30-45 days — is a deductible medical expense, subject to a 7.5% floor on adjusted gross income (or 10%, if he's subject to Alternative Minimum Tax, which hits New Yorkers especially hard). Weiner was an early and enthusiastic supporter of last year's health reform package, but he originally threatened not to support it without a "public option." We'll be intrigued to see if he's happy with his own "public option" once he gets the bill!

In the end, it's easy to make fun of high-profile names like Weiner when they stumble and fall. But we all make mistakes. The real challenge is learning from those mistakes and moving on to greater success. When it comes to taxes, your mistakes won't cost you your reputation. But they can cost you a fortune. So if you don't already have a plan, let us create one for you! And remember, we're here for your family, friends, and colleagues too.

The Mortgage Forgiveness Debt Relief Act and Debt Cancellation

The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reducing through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

What is Cancellation of Debt?

If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the canceled amount in income for tax purposes, depending on the circumstances. When the borrowed money you were not required to include the loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a form 1099-C, Cancellation of Debt.

Is Cancellation of Debt income always taxable?

Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:

Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
Insolvency: If you are insolvent when the debt is canceled, some or all of the canceled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your canceled debt is generally not considered taxable income.
Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.
What is the Mortgage Forgiveness Debt Relief Act of 2007?

The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.

What does exclusion of income mean?

Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.

Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?

No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately.

Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?

Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.

How long is this special relief in effect?

It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.

Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?

The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed example in Publication 4681.

If the forgiven debt is excluded from income, do I have to report it on my tax return?

Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.

Do I have to complete the entire Form 982?

No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness.

If part of the forgiven debt doesn’t qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?

Yes. The forgiven debt may qualify under the insolvency exclusion. Normally, you are not required to include forgiven debts in income to the extent that you are insolvent. You are insolvent when your total liabilities exceed your total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982. Publication 4681 discusses each of these exceptions and includes examples.

I lost money on the foreclosure of my home. Can I claim a loss on my tax return?

No. Losses from the sale or foreclosure of personal property are not deductible.

If the remaining balance owed on my mortgage loan that I was personally liable for was canceled after my foreclosure, may I still exclude the canceled debt from income under the qualified principal residence exclusion, even though I no longer own my residence?

Yes, as long as the canceled debt was qualified principal residence indebtedness. See Example 2 on page 13 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.

Will I receive notification of cancellation of debt from my lender?

Yes. Lenders are required to send Form 1099-C, Cancellation of Debt, when they cancel any debt of $600 or more. The amount cancelled will be in box 2 of the form.

How do I report the forgiveness of debt that is excluded from gross income?

Check the appropriate box under line 1 on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to indicate the type of discharge of indebtedness and enter the amount of the discharged debt excluded from gross income on line 2. Any remaining canceled debt must be included as income on your tax return.

How do I know if I was insolvent?

You are insolvent when your total debts exceed the total fair market value of all of your assets. Assets include everything you own, e.g., your car, house, condominium, furniture, life insurance policies, stocks, other investments, or your pension and other retirement accounts.

How should I report the information and items needed to prove insolvency?

Use Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to exclude canceled debt from income to the extent you were insolvent immediately before the cancellation. You were insolvent to the extent that your liabilities exceeded the fair market value of your assets immediately before the cancellation.