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!
Monday, June 27, 2011
Tuesday, June 21, 2011
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.
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.
Monday, June 20, 2011
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.
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.
Monday, June 13, 2011
Will Taxes SAVE This "Celebrity"?
We're all used to seeing the high and mighty brought down by taxes. Actor Wesley Snipes is currently sitting in federal prison for failing to pay tax on millions of dollars of movie income. Representative Charlie Rangel was censured by the House of Representatives, in part for failing to report $75,000 of rental income on his villa in the Dominican Republic. Even Florida mom Casey Anthony, on trial for the murder of her daughter Caylee, faces a $68,520 IRS lien, apparently for failure to pay tax on money paid by ABC for family photos and video. (Maybe she thought paying her lawyer was more important than paying her taxes?)
Would it surprise you, then, to learn that one of our highest-profile scoundrels is counting on the IRS to help get him out of trouble?
Few Americans have fallen further from grace than John Edwards. We knew him first as a successful trial lawyer, a model family man with a wife courageously battling cancer, a United States Senator, and even a credible candidate for President. But when the National Enquirer, of all sources, blew the whistle on his affair with campaign videographer Rielle Hunter — then later fingered him as the father of Hunter's child — Edwards' golden world came crashing down.
Then things got really bad. On June 3, federal prosecutors indicted Edwards on six counts related to payments made to his former campaign aide and mistress. They allege that Edwards solicited $925,000 from two wealthy donors to cover up the affair and pregnancy. The prosecutors argue that the gifts were actually used for campaign purposes because, if the public knew of the affair, the campaign would have been over. As such, they contend, the gifts were subject to campaign finance laws that limit contributions to $2,300 per person and require public reporting.
Edwards' first donor, reclusive billionaire Rachel "Bunny" Mellon, gave $725,000 in the form of seven checks. Those checks were made payable to an interior decorator friend, and falsely indicated they were payment for items of furniture, such as "chairs," "antique Charleston table," and "book case." The checks were then forwarded to Edwards' former aide Andrew Young, endorsed by Young's wife in her maiden name, and deposited in the Youngs' personal accounts. (Mellon's attorney, the unfortunately-named Alexander Forger, insists Mellon had no idea the money was going to support Hunter.)
Edwards' second donor, his former campaign finance chair Fred Baron, allegedly paid several travel and lodging expenses for Hunter and the Youngs. These included a $29,259.85 charter flight from Fort Lauderdale to Aspen (!), a $25,283.50 tab at the Four Seasons Hotel in Santa Barbara (!!), and a $58,667 rental payment for a house in Santa Barbara (!!!). Not a bad lifestyle, right? Looks like "candidate's mistress" and "bagman" are still cushy gigs, even in today's recessionary economy.
Here's the tax twist. Mellon treated the $725,000 she gave as a personal gift, and even filed a gift tax return reporting it! Mellon is heir to the Mellon banking and the Listerine mouthwash fortunes, with fully-staffed homes in Virginia, Antigua, Paris, New York, Washington, Nantucket, and Cape Cod. Given her general wealth, she probably paid the maximum $326,250 tax on that gift. Edwards is certainly counting on that tax return to argue that the gifts were legal.
What do you think? Does Mellon's gift tax return legitimize her gift? Or is the tax payment just a part of a broader cover up?
Here at our firm, we focus on proactive tax-planning. Everything we do is court-tested and IRS-approved. Our strategies will never make headlines. And we think that's a good thing!
Would it surprise you, then, to learn that one of our highest-profile scoundrels is counting on the IRS to help get him out of trouble?
Few Americans have fallen further from grace than John Edwards. We knew him first as a successful trial lawyer, a model family man with a wife courageously battling cancer, a United States Senator, and even a credible candidate for President. But when the National Enquirer, of all sources, blew the whistle on his affair with campaign videographer Rielle Hunter — then later fingered him as the father of Hunter's child — Edwards' golden world came crashing down.
Then things got really bad. On June 3, federal prosecutors indicted Edwards on six counts related to payments made to his former campaign aide and mistress. They allege that Edwards solicited $925,000 from two wealthy donors to cover up the affair and pregnancy. The prosecutors argue that the gifts were actually used for campaign purposes because, if the public knew of the affair, the campaign would have been over. As such, they contend, the gifts were subject to campaign finance laws that limit contributions to $2,300 per person and require public reporting.
Edwards' first donor, reclusive billionaire Rachel "Bunny" Mellon, gave $725,000 in the form of seven checks. Those checks were made payable to an interior decorator friend, and falsely indicated they were payment for items of furniture, such as "chairs," "antique Charleston table," and "book case." The checks were then forwarded to Edwards' former aide Andrew Young, endorsed by Young's wife in her maiden name, and deposited in the Youngs' personal accounts. (Mellon's attorney, the unfortunately-named Alexander Forger, insists Mellon had no idea the money was going to support Hunter.)
Edwards' second donor, his former campaign finance chair Fred Baron, allegedly paid several travel and lodging expenses for Hunter and the Youngs. These included a $29,259.85 charter flight from Fort Lauderdale to Aspen (!), a $25,283.50 tab at the Four Seasons Hotel in Santa Barbara (!!), and a $58,667 rental payment for a house in Santa Barbara (!!!). Not a bad lifestyle, right? Looks like "candidate's mistress" and "bagman" are still cushy gigs, even in today's recessionary economy.
Here's the tax twist. Mellon treated the $725,000 she gave as a personal gift, and even filed a gift tax return reporting it! Mellon is heir to the Mellon banking and the Listerine mouthwash fortunes, with fully-staffed homes in Virginia, Antigua, Paris, New York, Washington, Nantucket, and Cape Cod. Given her general wealth, she probably paid the maximum $326,250 tax on that gift. Edwards is certainly counting on that tax return to argue that the gifts were legal.
What do you think? Does Mellon's gift tax return legitimize her gift? Or is the tax payment just a part of a broader cover up?
Here at our firm, we focus on proactive tax-planning. Everything we do is court-tested and IRS-approved. Our strategies will never make headlines. And we think that's a good thing!
Monday, June 6, 2011
Crazy Cat Lady Takes On IRS
Every town has a crazy cat lady, with way too many cats littering her property. Neighborhood kids walk past the house and wonder if it's haunted. Adults drive past and imagine the interior looks like a scene from Hoarders. But — what if the crazy cat lady is a sharp-as-a-claw attorney who's not afraid to take on the IRS?
Jan Elizabeth Van Dusen is a graduate of UC Hastings College of Law and an attorney in Oakland, CA. She's also a volunteer for Fix Our Ferals, an IRS-recognized 501(c)(3) nonprofit organization dedicated to providing free spay/neuter clinics for feral cats in San Francisco's East Bay area. Van Dusen devoted essentially her entire life outside work to the organization. She trapped feral cats, had them neutered, obtained vaccinations and necessary medical treatments, housed them while they recuperated, placed some of them for adoption, and released others back into the wild.
In 2004, Van Dusen reported keeping between 70-80 cats — so many, in fact, that she couldn't recall where they all came from. Seven of the cats were her own pets; the rest were foster cats she cared for as part of her volunteer activity. Most of them roamed freely around her home (except for bathrooms); however, some of the less-domesticated cats stayed in a room called the "feral room" or lived in cages for taming or because of illness. Every day she fed, cleaned, and looked after the cats, laundered their bedding, and sanitized the floors, household surfaces, and cages. She even bought her house "with the idea of fostering in mind."
Van Dusen also spent a small fortune taking care of the cats, including pet supplies (food, medicine, litter and litter boxes, pet dishes, and other supplies), cleaning supplies (garbage bags, paper towels, laundry and dish detergent, and other similar cleaning supplies), and even higher utility bills from laundering so many loads of cat bedding and running a special ventilation system to ensure fresh air. (Let's face it, folks, with 80 cats in the house, it had to smell at least a little gamey.) Even her garbage bill went up because of all the cat waste!
For 2004, Van Dusen claimed $12,068 in noncash charitable contributions for her rescue work on behalf of Fix Our Ferals — $1,381 in supplies, $9,607 in vet bills, and $1,080 in utilities. The IRS shot her down. But tax deductions for foster cats, like Van Dusen's cats themselves, may really have nine lives — so Van Dusen appealed to the Tax Court and even chose to represent herself.
Last week, the Court issued a 42-page opinion in Van Dusen v. Commissioner. The Court found that portions of Van Dusen's veterinary expenses, pet supplies, cleaning supplies, and utilities were "directly connected with and solely attributable to" her services to Fix Our Ferals. After several pages examining the state of Van Dusen's records (including three full pages on the woodstove pellets she used as cat litter), the Court let her take 90% of her vet bills and 50% of the supplies and utilities. However, charitable contributions of $250 or more must be substantiated with a contemporaneous written record from the charity itself. Since Van Dusen had no such acknowledgment, the Court disallowed all expenses above $250.
You don't have to be a crazy cat lady to deduct your volunteer expenses. You just have to know the rules. Keep good records! Make sure you get a statement from the organization acknowledging any expenses over $250. And call us with your questions, so we can help you make the most of those often-overlooked deductions!
Jan Elizabeth Van Dusen is a graduate of UC Hastings College of Law and an attorney in Oakland, CA. She's also a volunteer for Fix Our Ferals, an IRS-recognized 501(c)(3) nonprofit organization dedicated to providing free spay/neuter clinics for feral cats in San Francisco's East Bay area. Van Dusen devoted essentially her entire life outside work to the organization. She trapped feral cats, had them neutered, obtained vaccinations and necessary medical treatments, housed them while they recuperated, placed some of them for adoption, and released others back into the wild.
In 2004, Van Dusen reported keeping between 70-80 cats — so many, in fact, that she couldn't recall where they all came from. Seven of the cats were her own pets; the rest were foster cats she cared for as part of her volunteer activity. Most of them roamed freely around her home (except for bathrooms); however, some of the less-domesticated cats stayed in a room called the "feral room" or lived in cages for taming or because of illness. Every day she fed, cleaned, and looked after the cats, laundered their bedding, and sanitized the floors, household surfaces, and cages. She even bought her house "with the idea of fostering in mind."
Van Dusen also spent a small fortune taking care of the cats, including pet supplies (food, medicine, litter and litter boxes, pet dishes, and other supplies), cleaning supplies (garbage bags, paper towels, laundry and dish detergent, and other similar cleaning supplies), and even higher utility bills from laundering so many loads of cat bedding and running a special ventilation system to ensure fresh air. (Let's face it, folks, with 80 cats in the house, it had to smell at least a little gamey.) Even her garbage bill went up because of all the cat waste!
For 2004, Van Dusen claimed $12,068 in noncash charitable contributions for her rescue work on behalf of Fix Our Ferals — $1,381 in supplies, $9,607 in vet bills, and $1,080 in utilities. The IRS shot her down. But tax deductions for foster cats, like Van Dusen's cats themselves, may really have nine lives — so Van Dusen appealed to the Tax Court and even chose to represent herself.
Last week, the Court issued a 42-page opinion in Van Dusen v. Commissioner. The Court found that portions of Van Dusen's veterinary expenses, pet supplies, cleaning supplies, and utilities were "directly connected with and solely attributable to" her services to Fix Our Ferals. After several pages examining the state of Van Dusen's records (including three full pages on the woodstove pellets she used as cat litter), the Court let her take 90% of her vet bills and 50% of the supplies and utilities. However, charitable contributions of $250 or more must be substantiated with a contemporaneous written record from the charity itself. Since Van Dusen had no such acknowledgment, the Court disallowed all expenses above $250.
You don't have to be a crazy cat lady to deduct your volunteer expenses. You just have to know the rules. Keep good records! Make sure you get a statement from the organization acknowledging any expenses over $250. And call us with your questions, so we can help you make the most of those often-overlooked deductions!
Wednesday, June 1, 2011
Oops, Our Bad
Have you ever wondered how Washington can set out to make tax policy — starting with the best possible information and most up-to-date projections — and get it so completely wrong?
Last month, the Congressional Budget Office (CBO) released an eye-opening report on changes in baseline projections for the past 10 years. CBO states that "those projections are not intended as a forecast of future outcomes; rather, they are estimates of spending and revenues under the laws that are in effect at that time and are designed to provide a benchmark against which to measure future policy changes." In other words, they start by estimating what will happen under current law — then report what really happens after a decade's worth of policy changes and economic reality. (Sounds grim already, right?)
CBO's budget geeks are good. Yes, they probably got more than their fair share of wedgies growing up. But they understand federal spending better than anyone else. And they realize the federal budget, like the US Constitution, is a "living document."
Ten years ago, former President Clinton was just leaving office. The federal budget showed a surplus of $230 billion, at least according to the particular mathematics that Washington calls "accounting." (Remember, private-sector accountants have done hard time for reporting numbers less inaccurate than the federal government's.) And CBO felt confident projecting that, under the current baseline, the period from 2002-2011 would show a cumulative surplus of $5.6 trillion.
So, how did the budget geeks do? Well, as the insurance commercials say, "life comes at you fast." Washington cut taxes, shrinking revenue by $2.8 trillion. We fought major wars in Iraq and Afghanistan, costing trillions more. The housing and credit bubbles burst, prompting billions in stimulus and relief spending. Soaring deficits cost us $1.375 trillion in unanticipated interest.
Bottom line? Instead of $5.6 trillion in cumulative surplus, we wound up with $6.2 billion in cumulative deficit. Ouch. That's an $11.8 trillion swing over just 10 years! It would be nice if someone in Washington would come out and say "oops . . . our bad" — but don't hold your breath waiting.
Right now, the looming debt ceiling and 2012 presidential race are forcing Washington into a crucial debate over getting out of this mess. Democrats generally advocate a combination of revenue enhancements (in plain English, "tax increases") and spending cuts. Republicans have embraced a plan to take serious aim at entitlement spending, but generally reject tax increases. Regardless of which path Washington ultimately takes, the new plan will be subject to the same "real world" adjustments that produced CBO's $11.8 trillion difference.
The good news is, you can take steps to minimize your contribution no matter how much Washington spends. Proactive tax planning is the first step, of course. But just as CBO adjusts their numbers in light of real-world experience, we have to monitor and adjust your plan in light of your real-world experience. Be sure to let us know how your finances change, so we can do the best job possible!
Last month, the Congressional Budget Office (CBO) released an eye-opening report on changes in baseline projections for the past 10 years. CBO states that "those projections are not intended as a forecast of future outcomes; rather, they are estimates of spending and revenues under the laws that are in effect at that time and are designed to provide a benchmark against which to measure future policy changes." In other words, they start by estimating what will happen under current law — then report what really happens after a decade's worth of policy changes and economic reality. (Sounds grim already, right?)
CBO's budget geeks are good. Yes, they probably got more than their fair share of wedgies growing up. But they understand federal spending better than anyone else. And they realize the federal budget, like the US Constitution, is a "living document."
Ten years ago, former President Clinton was just leaving office. The federal budget showed a surplus of $230 billion, at least according to the particular mathematics that Washington calls "accounting." (Remember, private-sector accountants have done hard time for reporting numbers less inaccurate than the federal government's.) And CBO felt confident projecting that, under the current baseline, the period from 2002-2011 would show a cumulative surplus of $5.6 trillion.
So, how did the budget geeks do? Well, as the insurance commercials say, "life comes at you fast." Washington cut taxes, shrinking revenue by $2.8 trillion. We fought major wars in Iraq and Afghanistan, costing trillions more. The housing and credit bubbles burst, prompting billions in stimulus and relief spending. Soaring deficits cost us $1.375 trillion in unanticipated interest.
Bottom line? Instead of $5.6 trillion in cumulative surplus, we wound up with $6.2 billion in cumulative deficit. Ouch. That's an $11.8 trillion swing over just 10 years! It would be nice if someone in Washington would come out and say "oops . . . our bad" — but don't hold your breath waiting.
Right now, the looming debt ceiling and 2012 presidential race are forcing Washington into a crucial debate over getting out of this mess. Democrats generally advocate a combination of revenue enhancements (in plain English, "tax increases") and spending cuts. Republicans have embraced a plan to take serious aim at entitlement spending, but generally reject tax increases. Regardless of which path Washington ultimately takes, the new plan will be subject to the same "real world" adjustments that produced CBO's $11.8 trillion difference.
The good news is, you can take steps to minimize your contribution no matter how much Washington spends. Proactive tax planning is the first step, of course. But just as CBO adjusts their numbers in light of real-world experience, we have to monitor and adjust your plan in light of your real-world experience. Be sure to let us know how your finances change, so we can do the best job possible!
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