Final Tax Thoughts for 2012

2013 is almost here, and it looks like that old Grinch is leaving a "fiscal cliff" under every one's tree. Here are a few final thoughts to help usher in the New Year:

"There's no line on the tax return that asks 'what are you not telling us?'"
 Robert Goulder (tax attorney)
"The rich, indeed, are different from the rest of us; they have shiftier tax lawyers."
 Jim McTeague (columnist, Barron's)
"Dear Tax Commissioner: Three years ago I cheated on my taxes. Since then I have been unable to sleep at night. Enclosed is $5,000. If I still can’t sleep, I’ll send you the rest."
 Anonymous
"If you are truly serious about preparing your child for the future, don't teach him to subtract — teach him to deduct."
 Fran Lebowitz
"The ancient Egyptians built elaborate fortresses and tunnels and even posted guards at tombs to stop grave robbers. In today’s America, we call that estate planning."
 Rep. William R. Archer (former Chair, House Ways and Means Committee)
"[A] tax lawyer is a person who is good with numbers but does not have enough personality to be an accountant."
 James D. Gordon III (BYU Law School)
"Make sure you pay your taxes; otherwise you can get in a lot of trouble."
 Richard M. Nixon
"Just because you have a briefcase full of cash doesn't mean you're out to cheat the government."
 Pete Rose
"From a tax point of view, you're better off raising horses or cattle than children."
 Former U.S. Rep. Patricia Schroeder
We wish we could tell you exactly what's going to happen with the fiscal cliff and taxes. But we can promise we'll be here to help you make the best of it, in 2013 and beyond. And remember, we're here for your family, friends, and colleagues too!

Tax Strategies for Santa Claus

As 2012 draws to a close, most of us are preparing to take time off and enjoy friends and family. But there's one famous name who works harder than anyone else this time of year — everyone's favorite fat man in a red suit, Santa Claus.

When you think of Santa, you probably focus on what he gives. But have you ever thought about what he pays? You can be sure the grinches at the IRS do!

Santa is most famous for his holiday gift-giving. His "North Pole Foundation" is set up as a not-for-profit under Internal Revenue Code Section 501(c)(3). But Santa also operates a second, highly profitable business focused on licensing and endorsements. (In that sense, he's like top athletes whose off-the-field income from endorsements far outstrips their on-field earnings.) So how can Santa shelter some of his own presents?

Fortunately, Santa can take advantage of many of the same deductions as any other business owner. Those include:

• Mileage. Santa can choose to deduct "actual expenses" (maintenance, upkeep and depreciation on the sleigh, reindeer chow, etc.) or the standard allowance (currently 55.5 cents per mile). In Santa's case, the sheer length of his trip around the globe to deliver toys to all the good little girls and boys makes the allowance his best bet. (His sleigh also qualifies as "energy efficient" — it's 100% "green," running entirely on reindeer power, and even Rudolph's nose is low-wattage.)
  
• Uniforms and work clothes. Clothing Santa provides for himself and his elves are deductible so long as they're not "suitable for ordinary street wear." This time of year it seems like everyone enjoys a red coat and hat. Still, we feel confident Santa's classic look is distinctive enough to pass the IRS test.
• Home office. Home offices are deductible so long as they're used "regularly and exclusively" for work and constitute the "principal place of business." Santa's North Pole workshop certainly qualifies, which means he can write off depreciation, utilities, cleaning and maintenance, and holiday decorations. Code Section 132(j)(4) even lets him deduct an "on-premises employee athletic facilities" for hosting reindeer games.
• Retirement. Santa sure seems to love his job now. But how will he feel about his long night's work as he ages? He'll probably want to stuff some cheer in his own stocking. The problem is those naughty nondiscrimination rules that force him to contribute on behalf of his elves, too. We recommend a "safe harbor" 401(k) to maximize his own contributions without letting the plan become as "top-heavy" as his sleigh.
• Family employment. It's not clear if Mrs. Claus holds a formal position in Santa's organization. However, putting her "on the books" would let Santa boost the couple's qualified plan contributions. Perhaps he might even establish a Section 105 medical expense reimbursement plan to write off his cholesterol medication as a business expense.

This holiday season, we wish you and your family all the best. And remember, we're here for all your year-end tax questions — unlike Santa, we don't quit after the holiday!

By Any Other Name

In Shakespeare's classic drama Romeo and Juliet, star-crossed protagonists from feuding families meet and fall in love. In Act II, when the impossibility of their courtship has become clear, Juliet leans out her balcony and declares to her lover "What's in a name? That which we call a rose by any other name would smell as sweet." The line, of course, implies that Romeo's last name should mean nothing, and the two should be together.

Shakespeare may or may not have been right about love and roses. But what about taxes? Does that which we call a "tax," by any other name smell as sour? Apparently, Washington thinks not — if you pay attention to all the new euphemisms, you'd think Washington has given up imposing new "taxes" entirely!

In 1952, the IRS started charging "user fees" when the government provides special benefits to a recipient beyond those given to the general public. Today the government raises over $200 billion per year in fees for services like approving retirement plan applications, driving heavy vehicles, entering national parks, and even walking to the top of the Statue of Liberty. But "user fees" are still "fees," and Americans seem to have figured out that trick. So, what now?

Now we're seeing even more clever names for what most of us would consider plain old taxes. Take, for example, the new "unearned income Medicare contribution" that goes into effect on January 1. This is a 3.8% levy on "investment income" (interest dividends, capital gains, rents, royalties, and annuities) for individuals earning over $200,000 or joint filers earning over $250,000. Washington created it as part of the Obamacare package, along with an increase in the Medicare tax on earned incomes over those same thresholds. But, while they call it a "Medicare contribution," the money doesn't actually go into the Medicare trust fund. It goes straight into the general revenue fund, where Washington can spend it on whatever they want.

The "unearned income Medicare contribution" isn't Obamacare's only euphemism for "tax." Beginning on January 1, 2014, applicable large employers with 50 or more employees have to offer their employees minimum essential coverage or pay a $2,000/employee "assessable payment." That's a nondeductible "assessable payment," by the way, so the actual cost might be even higher. Sure sounds like a tax to us.

Finally, there are taxes in disguise that have the same bottom-line effect as more direct taxes. If you start taking Social Security benefits before your normal retirement age and earn more than the retirement earnings test exempt amount ($14,640 for 2012), you'll pay a Social Security earnings penalty of one dollar for every two dollars you earn above that limit. Doesn't that sound like a 50% tax? (The penalty drops to one dollar for every three dollars in earnings above $33,880 in the year you reach normal retirement age, then disappears after that year.)

The good news here is that we can help. Whether you're looking to pay less "tax", minimize your "unearned income medicare contribution," sidestep the "assessable penalty," or avoid the "Social Security earnings penalty," planning is your plain-English solution. So call us — and make sure you do it now before Washington comes up with any more new names for taxes! And remember, we're here for your family, friends, and colleagues, too!

Powerball Tax Planning

We all know money can't buy happiness, blah, blah, blah. But money can buy a lot of other good stuff we all want — like comfort, security, freedom, and independence. So, last week, millions of us across America lined up at gas stations, convenience stores, and bodegas to take a shot at last week's record Powerball jackpot of 588 million bucks.

Admit it — even if you didn't play, you couldn't help but dream at least a little about what you would do with all that money. That house you've always wanted on the most expensive street in town? The beach house or ski lodge you've always wanted to share with your friends? Lavish gifts for your family, favorite charities, and community? (It's OK to dream just a little bit more before you finish reading.)

But here's an ugly reality you probably don't want to think about. No matter where you choose to spend your windfall, the biggest piece of all will go to your friends at the IRS. (Yes, those nice folks at the Multi-State Lottery Association will send the IRS a Form W-2G alerting them to your good fortune.) With jackpots this big, the tax collectors in Washington will probably put a plaque on the wall with your name on it!

Your first decision involves whether to take your prize in a lump sum this year, or an inflation-adjusted annuity over the next 30 years. And big decisions, as always, mean taking taxes into consideration. Taking your loot all at once means paying the top federal income tax rate of 35%. That may sound like a lot, but at least you'll know exactly how much the tax will cost. Taking the prize in installments means paying whatever tax rate is in effect the year an installment is paid. Next year, for example, the Bush tax cuts are scheduled to expire, pushing the top tax rate to 39.6%. Next year also marks the first appearance of the Unearned Income Medicare Contribution, a 3.8% tax on "investment income" including annuities. And who knows what other new taxes might appear over the next 30 years?

Uncle Sam isn't the only one who's going to want a piece of your action. Forty-three states tax lottery winnings as ordinary income. Some states even tax your winnings if you just buy your ticket there without even living there. Do you live in Pennsylvania and work in New York? Don't buy your ticket around the corner from the office unless you want to cut the Empire State in for 8.82%!

Of course, there are plenty of strategies you can use to offset the income from the prize. Do you own your own business? Consider establishing or beefing up your qualified retirement plan. Maybe a closely-held insurance company (CHIC) makes sense for even bigger savings. Are you charitably-inclined? You can offset up to 30% of your "adjusted gross income" with gifts to a private foundation and 50% for gifts to a "public" charity.

So, if you find yourself with a winning ticket, call us before you host that press conference and cash your ticket!

But if you don't win that Powerball jackpot, good tax planning is even more important. That's because you don't have millions to waste on taxes you don't have to pay! So call us anyway — and make sure you do it now before the New Year brings new taxes. And remember, we're here for your family, friends, and colleagues, too!

A Different Kind of Black Friday Savings

Last week marked the celebration of our most uniquely American holiday. No, silly, we're not talking about Thanksgiving. We're talking about Black Friday, our national homage to consumerism, conspicuous consumption, and all things Capitalist. Walmart and other "big box" retailers pounded a final nail in Thanksgiving's coffin, opening at 8PM that night so shoppers could skip out on the pumpkin pie to save a couple hundred bucks on a flat-screen TV.

And this year, Walmart founder Sam Walton's heirs, who still own 48% of the company, have taken a lesson from their own shoppers. Only, the Waltons aren't just saving hundreds. They've found a way to save millions, just by accelerating a regularly-scheduled dividend payment from January 2 to December 27. (Apparently, they think "everyday low prices" applies to their tax bills, too!)

Under current law, tax on dividends is capped at just 15%. The Walmart dividend will be 39.75 cents/share, and the Waltons own approximately 1.6 billion shares. That means the family's payout will be $636 million, and their federal income tax bill on that payout will be a hefty $95.4 million.

If Walmart waits until January 1 to make the payment, though, taxes could go up — possibly way up. That's because the so-called "Bush tax cuts," in effect since 2003, expire. At that point, dividends lose their special protection, and the top rate jumps to 39.6%. Congress and the White House have both said they want to extend the current rates for most taxpayers. But if they can't come to some agreement to the contrary, the Waltons will pay an extra $156 million in tax on their dividend. (A recent CNN poll shows that two-thirds of Americans expect Washington officials to act like "spoiled children" rather than "responsible adults" during those upcoming negotiations, so the Waltons better cross their fingers!)

Waiting 'til January 1 would also make the Walton heirs subject to the new "Unearned Income Medicare Contribution" of 3.8%. (This is a special tax on investment income for taxpayers making over $200,000, or $250,000 for joint filers.) That would bring the effective tax rate on the January 2nd payment all the way up to 43.4%, and bring the Waltons' final tax bill up to a whopping $276 million. Ouch!

Walmart is hardly the only company accelerating dividends to beat the tax hike. One financial data firm estimates that 109 public companies will issue special dividend payments before January 1, more than three times as many as in recent years. Those special payments will actually be enough to give the IRS a significant spike in 2012 tax revenue. The New York Times reported last week that two recent studies show that companies where board members own a large percentage of company shares are likeliest to make this move. The three Walton family members who serve on the company's board of directors recused themselves from last week's vote, but a company spokesman confirmed the company did make the decision because of uncertainty over taxes.

It may be too late to take advantage of Black Friday shopping specials at Walmart. But it's assuredly not too late to take advantage of Black Friday planning for taxes! Tax planning is the key to paying the legal minimum, especially with the “fiscal cliff” looming on the horizon. And a good tax plan can pay for a holiday season full of gifts and fun. So call us if you don't already have a plan, and let us show you what we can do. We're sure you'll give thanks for the savings!

Final Expiration Date?

The history of American business is littered with companies that crash and burn. Sometimes they fly so high they attract attention from antitrust regulators. That's what happened with John D. Rockefeller's Standard Oil, which grew so big that a federal judge ordered it broken into pieces. Sometimes poor management or fraud are the culprit, like when energy giant Enron imploded. And sometimes technology overtakes a company, like when Henry Ford put the buggy whip manufacturers out of business.

Last week, another corporate stalwart threw in the towel. You've heard the sad news. Hostess Brands — maker of Wonder Bread, Ding Dongs, Ho Ho's, Sno Balls, and the pop-culture icon Twinkies — filed for bankruptcy in January. But last week, citing a strike by members of the Bakery, Confectionery, Tobacco Workers and Grain Millers International Union, the company announced they would wind down their operations and liquidate their assets. The move leaves over 18,000 Americans jobless just as holiday baking season moves into high gear.Foodies and gourmets reacted immediately to the devastating news. Shoppers across the country are quickly emptying shelves of Hostess goodies. An enterprising class of baked-goods arbitrageurs have even taken to the Internet, offering Twinkies on Ebay and Craigslist for $100 or more per box. (On the brighter side, dieters throughout the land are giving thanks this week that one more temptation is disappearing from their tables!)But what about the IRS? How will the tax man make out in Hostess's bankruptcy? Will he enjoy a delicious creamy filling? Or will he have to settle for stale crumbs? When debtors like Hostess go out of business, the bankruptcy court supervises liquidating the debtor's property and distributing the proceeds to creditors. Hostess has plenty to sell, including 40 bakeries, 400 retail locations, and thousands of trucks and trailers. Once those assets are liquidated, claims will be paid according to specific priority rules, starting with 1st-priority domestic support obligations, 2nd-priority administrative expenses, 4th-priority employee wages, and so forth. Uncle Sam rarely loses income taxes in corporate bankruptcies. That makes sense because companies that can't pay their bills aren't likely to owe much income tax to start with. But even unprofitable companies like Hostess still make the tax man happy. Consider the property taxes they owe on those bakeries and retail locations, the sales taxes they collect on every Ding Dong, and the payroll taxes they withhold on those 18,000 employees' wages. The bankruptcy rules acknowledge these debts by treating "pre-petition" taxes a debtor incurs before filing as an 8th-priority, and "post-petition" taxes a debtor incurs after filing as a 2nd-priority administrative expense.The good news here, at least for those of us not watching our weight, is that Twinkies might not be quite past their final expiration date. Popular consumer brands are worth big money in today's crowded marketplace. Hostess should be able to sell the Twinkies name and recipe to a rival like Kellogg (owner of Sara Lee) or Mexico's Grupo Bimbo (owner of Entenmann's). So odds are strong that Twinkies will someday appear back on your grocer's shelf. (Rumour has it that Twinkies are pumped so full of preservatives that they have no expiration date, which makes them as likely to survive a nuclear holocaust as the cockroaches. We'd hate to see them taken down by a simple bit of financial trouble!)

Our job, of course, is to help you manage your business and your finances to avoid the same fate as Hostess. We understand that planning is the key to minimizing the tax man's share of your Twinkie, and we're here to give you the plan that's right for you. But time is running out to plan for 2012, and many of the best tax breaks go stale on December 31. So don't wait to call us for your plan!

Jedi Tax Planning

Filmmaker George Lucas has been a Hollywood success since 1973, when he spent just $775,000 to produce American Graffiti — then watched it go on to gross over $200 million. Lucas has influenced a generation of filmmakers and films, as director (19 titles), producer (67 titles), writer (81 titles), and even an actor (he played an uncredited "Alien on TV Monitor" in the first Men in Black). Of course, he'll always be best known as creator of the Star Wars series, which popularized the "space opera" genre for a galaxy of fans.
Last month, Lucas announced that he's selling his production company, Lucasfilms, to The Walt Disney Company for $4.05 billion in cash and stock. And it should hardly come as a surprise ending that he found a way to beat the IRS that's almost as powerful as launching a proton torpedo down the Death Star's exhaust port.
How did he do it? Elaborate special effects? Computer-generated imaging? Nope. He did it just by selling now, in 2012.
We have no idea how the evil Empire collected taxes a long time ago, in a galaxy far, far away. (We suspect that R2D2 kept awesome records in case he was audited; Darth Vader hid his money on Endor, a forest moon bearing a striking resemblance to the Cayman Islands; and Chewbacca never bothered to file at all.) But here in the U.S., gains from the sale of a business are treated as capital gains and subject to tax up to 15%. Lucas is taking half of his proceeds in Disney stock, so that part escapes tax for now. (He'll pay if he sells those Disney shares sometime down the road.) But that still leaves up to $2 billion in fully taxable cash gains. And that means up to $300 million in tax for Uncle Sam.
At least, that's how it works this year. On January 1, the Empire strikes back, when those Bush-era rates expire. Unless Washington gives us a new hope, that capital gains rate jumps to 20%. President Obama has said he wants to extend the current rates for income under $200,000 ($250,000 for joint filers), and the Senate has passed a bill to do just that. But if the 20% Clinton capital gains rate returns, at least for guys in Lucas's bracket, selling in 2013 could have cost him up to $100 million more in immediate tax. That's at least enough to recondition a Millenium Falcon or two!
January 1 also marks the start of a new phantom menace, the "Unearned Income Medicare Contribution," on investment income, including capital gains, for those earning above that same $200,000 threshold. The new Medicare tax is "just" 3.8% — but 3.8% of $2 billion is still a hefty $76 million.
The sale also represents smart estate planning for Lucas, who is 68. While generations of fans hope to see him shepherd the final three Star Wars films to the theatre, the sale will spare his heirs the challenge of managing his affairs at his death. Lucas has already announced plans to donate the bulk of his estate to educational charities, and the gifts he's already made, including $175 million to his alma mater University of Southern California, will surely ease the tax bite on that transfer.
Selling a business is one of the toughest productions any entrepreneur directs. Making the most of that opportunity takes bits of Luke Skywalker's drive, Han Solo's skill, and Obi-Wan Kenobi's wisdom. And keeping the most of your proceeds takes the right tax advice. That's why we're here — to give you a plan to keep the most of your legacy. And remember, we're here for your family, friends, and colleagues, too. May the Force be with you!

Tax Relief for "Superstorm" Sandy

Hurricane Sandy roared ashore last week, interrupting our regularly scheduled election already in progress. And yes, we'll be addressing election results shortly, especially as we get more guidance on what to expect for your taxes. But we're impressed, as always, with how a natural disaster brings out the best in Americans, and we're pleased to see both Democrats and Republicans joining together to help those most affected by the storm.

The IRS gives generous tax deductions to help make our own generous charitable gifts go further. So this week we're writing to help you make the most of efforts you might make to support storm victims — or any other year-end charitable gifts.

• You can deduct up to 50% of your adjusted gross income for cash gifts you make to so-called "501(c)(3) organizations," or public charities working on behalf of storm victims. These include the American Red Cross and similarly recognizable groups.
  
• If you give more than $250 in any single gift, you'll need a written receipt from the recipient, dated no later than the filing date of your return.
• Gifts of food, clothing, furniture, electronics, or household items are deductible at "fair-market value," such as the price you would get for them at a resale shop. Consider using software, available at any office-supply store, for tracking your gifts and their value. You might be surprised at how much you can save!
• Gifts of cars, trucks, and boats are a little trickier. Congress has cracked down on inflated car and truck deductions. If you donate a vehicle, you can deduct the fair-market value only if the charity actually uses it (such as a church using a van to drive its parishioners). If the charity sells the vehicle, your deduction is limited to the amount the charity actually realizes on the sale. And if that amount is more than $500, you'll have to attach a certification to your return that states the vehicle was sold in an arms-length sale and includes the gross proceeds from that sale.
• Donations you make by text message are deductible like any other cash gifts. You can use your phone bill to substantiate your deduction.

The IRS cautions us all to seek out qualified charities, and warns that bogus requests for charities that simply don't exist are common after natural disasters. The IRS also announced that they would give businesses and tax preparers affected by the hurricane an extra seven days to file payroll and excise tax returns that were due on October 31.

December 31 is approaching faster than you'd like, and that means time is running out for year-end tax planning. But it's not too late to take concrete steps to cut your 2012 taxes. What are your year-end financial goals? Helping the victims of the storm? Saving for your dream retirement? Helping finance your children's or grandchildren's education? Odds are good that we can help you save taxes while you do it. And remember, we're here for your family, friends, and colleagues too!

15, 25, 28, Hut!

There's no denying that amateur sports, especially college football, are big business. Together, the 15 top-grossing teams score over $1 billion in revenue, with the University of Texas Longhorns alone generating $71.2 million in profit.

Numbers like that would normally make the "receivers" at the IRS smile. But college football is different. The big Division I schools that sponsor the most competitive teams are all tax-exempt. And the IRS loses again on a juicy revenue stream that's unique to college sports — required donations, sometimes totaling twice the cost of a season ticket, that fans make to the school to secure those seats.

Back in 1986, boosters couldn't deduct the contributions they made specifically to secure sports tickets. But Louisiana Senator Russell Long, who sat on the Finance Committee, met with lobbyists who argued that his home state Louisiana State University needed tax-deductible contributions to add seats to Tiger Stadium. Long agreed, but didn't want to be seen showing favoritism to his own constituent. So he approached Texas Representative Jake Pickle, whose Austin district included the Longhorns' campus. Together, the two lawmakers cobbled together the sort of backroom deal that makes the rest of us proud to be Americans. They added a provision to the 1986 Tax Reform Act which preserved a 100% deduction — for just those two schools! Here's how the legislation describes one of them to limit its reach:

"Such institution was mandated by a State constitution in 1876; such institution was established by a State legislature in March 1881; is located in a State capital pursuant to a statewide election in Sept. 1881; the campus of such institution formally opened on Sept. 15, 1883; such institution is operated under the authority of a 9-member board of regents appointed by the governor.”

Naturally, every other school in the country complained. So — did the lawmakers turn red in embarrassment at getting caught with their hands in the cookie jar and shut down the offending provision? Noooooooo . . . two years later, they voted to trim the deduction to 80% of the donation, but extend it to everyone.

How much does this all cost the IRS? Well, nobody really knows. But Ohio State University is the leader in seat-related donations, with $38.7 million. LSU is next with $38 million, and Texas is third with $33.9 million. (In fact, LSU is about to spend $80 million to add 70 more luxury boxes and 6,900 more seats, which should bring in another $15 million in donations.) If the average donor pays 25% in federal tax, that means $22 million in lost tax dollars. And that's just three schools out of 1,000 eligible to collect such donations. Of course, defenders of the deduction argue that it's worth the hit to the Treasury. They note that donations go to support scholarships, facilities, and other university expenses.

This Saturday, it will be hard to turn on a television without hearing about the upcoming election or "Frankenstorm" Sandy. College football will provide a welcome respite to millions of fans across the country. So next time you sit down to watch your favorite team, hoist a cold one to the tax code that helps make their success possible!

Watching Out for the Cliff

Ordinarily, we use these posts to discuss fun items related to taxes and finances. We know that you can read the usual boring articles about the usual boring tax topics pretty much anywhere else. And most of you are happy to let us worry about "the details."

Every so often, though, we need to discuss more serious issues, even if it's just to let you know that we're on top of them. That's the case today with the so-called "fiscal cliff" — Federal Reserve Chairman Ben Bernanke's clever term for what happens on January 1, when a bunch of current tax rules expire, and some new rules take effect. Here's a quick rundown of what to expect:

• The Bush tax cuts expire. That means the top rates on ordinary income goes from 35% to 39.6%; the top rate on capital gains goes from 15% to 20%; and the top rate on qualified dividends jumps from 15% to 39.6%. Much of the debate over tax rates focuses on income at the top. But the expiration of the Bush tax cuts affects all of us. The lowest 10% rate will disappear entirely, and everyone who actually pays income tax will pay more.
  
• The 2011-2012 payroll tax cuts expire. That means Social Security and self-employment taxes go up by 2% on all earned income up to $113,700. Two percent may not sound like a lot — but it means higher taxes for about 163 million working Americans.
• New taxes imposed by the 2010 "Obamacare" legislation take effect. The Medicare portion of Social Security and self-employment taxes goes up from 2.9% to 3.8% on earned income topping $200,000 ($250,000 for joint filers). And there's a new 3.8% "Unearned Income Medicare Contribution" (which sounds so much better than "tax') on "net investment income" (interest, dividends, capital gains, rents, royalties, and annuities) over those same amounts.
• The Alternative Minimum Tax exemptions revert back to where they stood in 2000. Under current law, those exemptions aren't adjusted for inflation. So, every couple of years, Congress "patches" the system by temporarily raising the exemptions to where they would be if they were indexed for inflation. The AMT currently hits about 4½ million Americans — but without the "patch," that number explodes to 33 million.
• Oh, and don't think dying solves your tax problem. That's because estate taxes, which currently start at 45% on estates over $5 million, will jump to 55% on estates over just $1 million.

So, January 1 is our fiscal cliff, and we're hurtling towards it like Thelma and Louise. What can we do? Well, plenty of legislators have proposed extending part or all of the Bush tax cuts, extending the payroll tax cuts, patching the AMT, and raising the estate tax exemption. But actually passing anything will be a challenge — Congress has passed just 132 bills this year, and 20% of those were to name post offices!

The partisan gridlock has many observers convinced that we'll actually go over that fiscal cliff. (Maybe it'll be like those old Road Runner cartoons, where the coyote runs off a cliff and keeps right on going, just fine, until he looks down. That's when he realizes he's standing in thin air, then plummets 1,000 feet to the bottom of the canyon.) If that winds up being the case, we may see Washington wait for the election results and pass something noncontroversial like the AMT patch before the end of the year. Then in 2013 they'll pass legislation extending at least part of the Bush tax cuts and make it retroactive to January 1.

We're not writing today to take sides on any of these issues, or tell you where taxes should go. But we want you to know that we're watching everything closely to help you make the most of your opportunities and avoid land mines where possible. And remember, we're here for your family, friend, and colleagues, too!

Duh!

Today's wired world has most of us drowning in information. Twenty-four-hour cable news networks, instantaneous online updates, Facebook, and Twitter are constantly assaulting our senses. Much of what passes for "news" is really just noise — the latest statistical fluctuations in the presidential polls, for example, or the comings and goings of your favorite Kardashian sister. But every so often, we learn something so surprising that it rocks us to the core and causes us to re-evaluate everything we thought we knew.

Three professors have just revealed that sort of earth-shattering information in the newest issue of Accounting Review. They analyzed data from 5,000 corporations over 17 years from 1992-2008 to answer an age-old question: "Do IRS Audits Deter Corporate Tax Avoidance?" And here's their startling conclusion — make sure you're sitting down to read it: when audit rates go up, so do taxes!

"We extend research on the determinants of corporate tax avoidance to include the role of Internal Revenue Service (IRS) monitoring. Our evidence from large samples implies that U.S. public firms undertake less aggressive tax positions when tax enforcement is stricter. Reflecting its first-order economic impact on firms, our coefficient estimates imply that raising the probability of an IRS audit from 19 percent (the 25th percentile in our data) to 37 percent (the 75th percentile) increases their cash effective tax rates, on average, by nearly 2 percentage points, which amounts to a 7 percent increase in cash effective tax rates. These results are robust to controlling for firm size and time, which determine our primary proxy for IRS enforcement, in different ways; specifying several alternative dependent and test variables; and confronting potential endogeneity with instrumental variables and panel data estimations, among other techniques."

Shocking, isn't it? (Just FYI, "endogeneity" is a statistical condition that occurs when there's a correlation between a parameter or variable and an "error term." It can arise as a result of measurement error, or a few other things that require looking up, including autoregression with autocorrelated errors, simultaneity, omitted variables, or sample selection errors.)

Let's give the authors a little credit here — they do say it's not really surprising that more audits equal more taxes. But they say it was hardly obvious before they started their study. What if they found that corporations were just so confident they could outmaneuver the IRS that audit rates didn't matter?

The professors also argue that shareholders benefit from IRS audits — especially when corporate governance is weak. Co-author Jeffrey Hoopes of the University of Michigan reports that "strict tax enforcement promotes good financial reporting and tends to check managers' proclivities to divert corporate resources for their personal use under the guise of saving taxes.” They cite Tyco as an example, where top executives minimized taxes by relocating profits to low-tax foreign countries, then diverted millions of dollars for their own personal use. (Remember CEO Dennis Kozlowski, who spent $15,000 of shareholder money on an umbrella stand? Yeah, that guy . . . he's in jail now.)

What does all this mean for you? Well, audit rates for personal returns average just over one percent. That's a tiny fraction of the 30% or so that the biggest group of companies in the Accounting Review study faced. But we file every return as if we expect it to be audited. Yes, we work and plan to minimize your taxes. But the strategies we use are all court-tested and IRS-approved. That way, you save money and sleep well at night!

Department of Worst Nightmares

Last week, we wrote about a recent report issued by the Treasury Inspector General for Tax Administration ("TIGTA") — an independent board that works to prevent and detect fraud, waste, and abuse within the IRS and related entities. We were amused to learn that 70 federal agencies owed $14 million in unpaid employment taxes on their employees' wages — and 18 more agencies hadn't even filed their employment tax returns. But we were appalled to learn that the IRS can't take any effective action to collect those outstanding balances.

While we were busy bringing you the news about Uncle Sam's "Get Out of Jail Free" card, the TIGTA was busy issuing another report that we knew you'd want to hear about. And this one may be worth paying attention to. Would you believe that TIGTA thinks "Firearms Training for IRS Criminal Investigation Division Needs Improvement"?

When we think of IRS "agents," we typically think of deskbound bureaucrats who spend their days shuffling papers that would put the rest of us to sleep. And for the most part, that's true. "Revenue Agents" are the IRS's invaluable front line, auditing and examining financial records to make sure that taxes get paid.

But it's easy to forget that the IRS has a long history of law-enforcement success. (Remember who finally put Al Capone in jail?) Today's Criminal Investigation ("CI") Division employs 2,700 "Special Agents" — an elite force who investigate tax evasion, money laundering, narcotics-related financial crimes, and counter-terrorism financing. Their duties include executing search warrants and arresting fugitives. They're even authorized to use deadly force to protect themselves and the public. So, naturally, Special Agents must meet firearms training and qualifications standards every year, including "firing a handgun, entering a building with a firearm, and firing a weapon while wearing a bulletproof vest."

TIGTA looked at 597 Special Agents working out of the New York, Los Angeles, Chicago, and Washington D.C. field offices. They found that CI's firearms training and qualification requirements "generally met or exceeded those of other federal law enforcement agencies." That's certainly reassuring for those of us who think the only thing more terrifying than an IRS agent packing heat is an IRS agent with a gun he doesn't know how to use.

However, TIGTA found, some special agents don't actually meet those training and qualification requirements. Field office managers didn't always take consistent actions when special agents failed to meet the requirements. And there's no national-level review of firearms training to make sure all special agents meet their requirements. TIGTA recommended that CI either enforce the requirement that special agents who don't meet training requirements surrender their firearms, or modify the literal rules to reflect what actually happens in the field when an agent misses training requirements. TIGTA also recommended that CI establish a process to monitor and periodically review special agent firearms training and qualification records.

IRS Special Agents do some of the Service's most valuable work. Their efforts help keep everyone's taxes down, and keep us safe in other ways as well. We're confident none of you reading this will ever wind up on the wrong side of an IRS agent's gun. But if it ever did happen, wouldn't you want that agent to have a little experience?

Latest Government FAD

If you don't take care of your taxes, you risk some pretty expensive fines and penalties. Some of those amounts are fixed, like $89 per partner per month for failing to file your partnership return. Others are based on the actual tax due, like the 10% penalty for failing to file employment taxes. If the IRS has to come after you, they can slap liens on your home or other property. They can impose levies to pluck back taxes from your paycheck, your bank account, or your retirement plan. They can even seize your assets and auction them to collect their pound of flesh.

Having said all that, would it surprise you to learn that there's someone with a "Get Out of Jail Free" card for not paying his taxes? Would it surprise you even more to learn that it's Uncle Sam himself?

The Treasury Inspector General for Tax Administration ("TIGTA") is an independent board that oversees the IRS. Their job is to audit, investigate, and inspect the tax system itself, as well as to prevent and detect fraud, waste, and abuse within the IRS and related entities. Last month, the TIGTA issued a report with a bland and vague title: A Concerted Effort Should Be Taken to Improve Federal Government Agency Tax Compliance. But that deceptively bureaucratic name masks a pretty outrageous conclusion:

"Federal agencies are exempt from paying Federal income taxes; however, they are not exempt from meeting their employment tax deposits and related reporting requirements. As of December 31, 2011, 70 Federal agencies with 126 delinquent tax accounts owed approximately $14 million in unpaid taxes. In addition, 18 Federal agencies had not filed or were delinquent in filing 39 employment tax returns. Federal agencies should be held to the same filing and paying standards as all American taxpayers."

Fourteen million bucks might not seem like a lot compared to our sixteen trillion dollar debt. But believe it or not, the problem is bad enough that the IRS has an entire unit, called the Federal Agency Delinquency ("FAD") Program, just to collect delinquent taxes from other federal agencies! How well do they do? Last month's report took a look at the December 2008 "FAD list" of 132 delinquent accounts to see what had happened through December, 2011. The TIGTA found that just 33% of those agencies had paid their employment taxes. 30% of those accounts were still open and unresolved, three years later. Even worse, 36% of those accounts had actually expired; meaning the IRS won't ever collect those balances.

That "FAD" unit sounds like a real pit bull, right? Well, they might be, if they had any leash. IRS Policy Statement 2-4 says the IRS can't assess interest or penalties against delinquent federal agencies. And even if they could, Comptroller General Opinion B-161457 says that the agencies aren't authorized to pay them!

You might ask yourself why it even matters whether the government pays taxes to itself. We've all heard that people who live in glass houses shouldn't throw stones. That age-old advice seems especially appropriate here. We're in the home stretch of an election centered largely on the role we want entitlements to play in our society. And every time a federal agency short-changes its payroll tax obligation, it cheats the Social Security and Medicare trust funds of much-needed dollars. It hardly seems controversial to ask Uncle Sam to set the best example possible!

Don Draper on Taxes

Earlier this week, the Academy of Television Arts and Sciences handed out their 64th Primetime Emmy Awards. Showtime's political drama "Homeland" was the big winner — stars Damian Lewis and Clare Danes won Best Actor and Best Actress, and the series itself won Best Drama. AMC's period drama "Mad Men" was the big loser, failing to win the Best Drama award after four previous victories. And Mad Men's brooding star Jon Hamm lost again for Best Actor, for the fifth year in a row.

Hamm's character, Don Draper, is an advertising genius who creates campaigns for clients as diverse as Lucky Strike cigarettes, Mohawk Airlines, Menkens Department Store, and Utz potato chips. Don uses all sorts of psychological triggers to promote his clients' products. But one trigger he he hasn't used — at least, not yet — is everyone's dislike of paying taxes. So, as Hamm leaves the Emmys empty-handed again, we had to ask: which real-world advertisers have used taxes to promote their products?

"You must pay taxes. But there's no law that says you've gotta leave a tip."
Morgan Stanley"You’d be surprised at the frivolous things people spend their money on. Taxes, for example."
Nuveen Investments (tax-free bond funds)"Cheerios can lower cholesterol 4% in 6 weeks. To appreciate that number, give the IRS an extra 4%."
General Mills"There is an inherent hypocrisy in increasing taxes on consumers to discourage smoking, while simultaneously relying on that revenue to fund the increasing cost of children’s healthcare."
Lorillard Tobacco"The Higher the Tax Bracket, the Better the View."
Florida Real Estate Developer"Nowhere on any tax form does it say you can’t be crafty."
Nuveen Investments

It's certainly no surprise seeing financial firms like Morgan Stanley and Nuveen Investments in this list. But cigarette makers and luxury homebuilders are a bit of a surprise. And if the makers of Cheerios can advertise "against" taxes, well, anyone can!At our firm, we've known all along what these advertisers have discovered, too: you don't want to pay any more tax than you have to. That's why we focus on planning to pay less tax, legally. That's the kind of "can't miss" campaign that ought to finally win Don Draper an Emmy!

Turns Out Crime DOES Pay

Back when you were a little kid, Mom and Dad warned you that crime doesn't pay. (They also told you it was the tooth fairy leaving that money under your pillow.) But it turns out that crime does pay — at least for one felon-turned-whistleblower.

Bradley Birkenfeld grew up in suburban Boston before moving to Switzerland to pursue a career in banking. In 2001, he started work at Switzerland's biggest bank, UBS. His job was to solicit American depositors, 90% of whom he said were trying to evade taxes. His main duties included schmoozing clients at UBS-sponsored events like yacht races in Newport or the Art Basel festival in Miami Beach. But he also helped clients create shell companies to hide ownership of their accounts, shredded documents recording transactions in their accounts, and once even smuggled a pair of diamonds through U.S. Customs in a tube of toothpaste. (Doesn't everyone carry their diamonds in their toothpaste?)

By 2005, Birkenfeld reports, he suffered a crippling attack of conscience. He approached his superiors at the bank to complain about "unfair and deceptive" business practices. When those complaints went nowhere, he took his story to the U.S. government. He originally sought immunity for his own role in any crimes, but wound up pleading guilty to a single count of conspiracy to defraud the United States. He spent 2½ years in prison before moving to a halfway house, and he's scheduled to be released for good on November 29.

Now Birkenfeld is getting ready to "re-enter society." But he leaves the Big House with parting gifts that most felons don't enjoy. He'll have $104 million dollars waiting for him, courtesy of none other than — you guessed it — the IRS! That works out to $4,600 for every hour he spent behind bars. Of course, Birkenfeld doesn't get to keep all those millions. His lawyers get a cut, and the rest is fully taxable. But some of you reading these words might consider taking the same deal for yourself!

Birkenfeld wasn't the first guy to tell the IRS that rich Americans were using Swiss banks to cheat on their taxes. But he was the first to document it so devastatingly, and he was the first to offer evidence that the bank itself encouraged illegal behavior. The IRS said, "While the IRS was aware of tax compliance issues related to secret bank accounts in Switzerland and elsewhere, the information provided by the whistleblower formed the basis for unprecedented actions against UBS.”

How much was Birkenfeld's help worth? Well, UBS itself paid $780 million in fines and ratted out their 4,700 biggest American clients. But that's just the tip of the iceberg. Nearly 35,000 Americans have taken advantage of special IRS amnesty programs and have collectively paid more than $5 billion in back taxes. And Birkenfeld's bars-to-riches story, which included an appearance on 60 Minutes, has spurred a gold rush of whistleblower claims. In some cases, enterprising hedge funds have actually "invested" in those claims, paying whistleblowers up front in exchange for a share of any future awards.

The irony here is that none of the cheaters who sent their money on an alpine vacation had to cheat to pay less tax. They just needed to plan to take advantage of perfectly legal concepts and strategies. We give you the plan you need to pay less tax, legally, so you can spend your time in Switzerland visiting chocolate factories and cuckoo clocks — not your hidden bank accounts!

Gentlemen Prefer Tax-Free

Fifty years after her mysterious death, Marilyn Monroe's image remains as profitable as ever. In 1999, the dress she wore to sing "Happy Birthday, Mr. President" to John F. Kennedy sold at auction for $1.26 million. Forbes magazine lists her as #3 on their "Top-Earning Dead Celebrities" list (topped only by Michael Jackson and Elvis Presley). And In 2009, a Japanese man paid $4.6 million for the crypt directly above hers at Westwood Village Memorial Park Cemetery in Los Angeles. (Some people really do have too much money.) Now Marilyn is in the news again, this time for the financial consequences of her tax planning. If Hollywood made the story into a movie, nobody would believe it.

When Marilyn died in 1962, she left $40,000 to her secretary, 25% of her estate to her psychiatrist, and the remaining 75% of her estate, including the "residuary," to her friend and acting coach, Lee Strasberg. The estate sat in probate for 41 years before finally settling, with the bulk of the assets eventually passing to an entity called Monroe, LLC, a Delaware limited liability company managed by Strasberg's widow. (It might be worth mentioning here that Alexander the Great took just ten years to conquer the entire civilized world.) Marilyn died at her home in California. However, she executed her Last Will and Testament in New York — where she owned an apartment at 444 E. 57th Street — and named a New York attorney, Aaron Frosch, as her executor. Frosch consistently treated Marilyn as a New York resident in order to avoid California estate taxes. And it worked — her estate paid just $777.63 in inheritance taxes there. Fast forward to 2005. That year, the new LLC set up to manage the estate's assets sued the heirs of several photographers who had taken pictures of Marilyn while she was still alive, heirs who were licensing those images for commercial use. Marilyn's estate argued that this violated her "right of publicity," which included their rights to control the commercial use of Marilyn's name, her image, her likeness, and other aspects of her identity. The heirs, in turn, countersued, arguing that Monroe, LLC didn't own the star's right to publicity. A district court in California declared that at the time of her death, the state didn't recognize any such right of publicity, and ruled in favor of the photographers' heirs. Just one month after that decision, California passed a law creating a posthumous right to publicity that would be transferable to Marilyn's estate. Armed with the new law, the estate's attorneys went back to court to overturn their previous decision. Not so fast, the Court said. Yes, the California law would let Marilyn's estate inherit her right to publicity, if she had been a California resident at her death. But she didn't die a California resident, she died a New York resident — and New York doesn't recognize a right to publicity. Last month, the U.S. Circuit Court for the Ninth District issued what should hopefully be the last word, just over 50 years after her death. "We conclude that because Monroe’s executors consistently represented during the probate proceedings and elsewhere that she was domiciled in New York at her death to avoid payment of California estate taxes, among other things, appellants are judicially estopped from asserting California’s posthumous right of publicity." In other words, go pound sand. Here's the lesson. Sometimes, avoiding tax shouldn't be our most important goal. Sometimes, focusing on taxes means letting the tail wag the dog. And sometimes, our job is to help you put taxes in the right perspective. In Marilyn Monroe's case, her executor made a smart decision to treat her as a New York resident, and succeeded in avoiding California tax. He certainly couldn't have foreseen the development of any right to publicity, and he can't be said to have done anything wrong. But focusing solely on taxes did cost Marilyn's estate big in the end. So call us when you've got big decisions to make — we'll help you avoid making similar mistakes!

Players Behaving Badly

Football season is back! College teams have started already, and the pros kick off this weekend. So welcome back to the energy and excitement of game day. Enjoy the pageantry and the tailgating as the days get shorter and the air gets crisp. And don't forget the tax liens! What?!? Don't forget the tax liens . . . ? That's right, sometimes the surest hands in the game drop the ball on their taxes. We'll start our tour of NFL tax offenders with Plaxico Burress. The free-agent wide receiver, who once signed a $25 million contract with the New York Giants, owes New York state a cool $59,241 in tax. Of course, Burress is no stranger to the law — he spent nearly two years scrimmaging behind bars after accidentally shooting himself in the leg at Manhattan's glitzy Latin Quarter nightclub.

Running back Jamal Anderson played eight seasons for the Atlanta Falcons, where he earned the nickname "Dirty Bird" for his touchdown celebration dance. But the IRS will be dancing in the end zone when they collect $478,247.57 in unpaid taxes for 2007 (when he appeared on MTV's "Celebrity Rap Superstar") and $627,015.94 for 2008 (when he appeared as an analyst for ESPN). Like Burress, Anderson has also had brushes with the law — in 2012, he was arrested for drunk driving, and in 2009, he was arrested after Atlanta police reported him snorting cocaine off a toilet bowl in the Peachtree Tavern's restroom. Quarterback Ken Stabler led the Oakland Raiders to a 32-14 win over the Minneapolis Vikings in Super Bowl XI. (That was so long ago, people paid more attention to the game than the commercials!) Now it looks like he'll be playing for the IRS. Earlier this summer, a federal judge sacked Stabler for $259,851 in unpaid business and personal taxes. (Oh, and the IRS piled on for another $5,509 in penalties.) Stabler's attorney says the former passer has sold his house to help pay the debt, and will also make monthly payments out of income he earns appearing at NFL events. At least Burress, Anderson, and Stabler actually filed their returns, even though they didn't pay. Cornerback William James played for the New York Giants, Philadelphia Eagles, Buffalo Bills, Jacksonville Jaguars, Detroit Lions, and San Francisco 49ers. Apparently he lost his W2 in one of those moves. Federal prosecutors say he earned over $9 million during his career — but failed to file returns for 2005-2009. Now he faces up to a year in prison and $100,000 in fines when he's sentenced later this month. Oops! And what about everyone's favorite former All-Pro felon, O.J. Simpson? Would you be shocked to learn that "the Juice" is fumbling his taxes, too? That's right, the IRS announced just last week that they had tackled him with liens for $15,927.89 for 2007, $105,119.71 for 2008, $49,490.27 for 2009, and $8,897.20 for 2010. Of course, taxes are probably the least of O.J.'s worries right now, considering he's got 29 years left to serve on armed robbery and kidnapping charges. And he still owes murder victim Ron Goldman's family $33 million in civil damages! There's not really a specific tax-planning lesson here — we just hope you're paying more attention to the game than these guys are! Either way, you can trust us to keep an eye downfield for you, and help you stay out of those IRS tackles!

Trillion-Dollar Taxpayer

When America's biggest corporations make news for their taxes, it's usually for how little they pay. One recent study, for example, argues that 26 big corporations, including AT&T, Boeing, and Citigroup, paid their CEOs more than they paid Uncle Sam in federal income tax. (Comparisons like that might bring to mind an old Babe Ruth quote. In 1930, a reporter pointed out that Ruth's $80,000 salary was more than the President's — to which the Babe replied "I know, but I had a better year . . .") Now, another corporate giant is making headlines for its taxes. And for once, the surprising news involves how much it paid, not how little.

Exxon and Mobil are iconic corporate names. Both began life as parts of John D. Rockefeller's original Standard Oil Company. Both were spun off in 1911 when the U.S. Supreme Court found Standard Oil guilty of illegally monopolizing the oil refining industry. ("Standard Oil Company of New Jersey" eventually grew into Exxon, while "Standard Oil Company of New York" morphed into Mobil.) When the two giants re-joined to create ExxonMobile in 1999, they instantly became the biggest publicly-traded corporation on earth. And since then, they've only gotten bigger, with a "market capitalization" (total value of outstanding publicly-traded shares) topped only by tech giants Apple and Microsoft, and the largest company on earth by revenue.You would expect a corporation this size to pay a lot in taxes, right? And for once, you would be right. In fact, a recent study by economist Mark Perry reveals that ExxonMobil has paid over one trillion dollars in taxes since that merger. That's a full three times the profit the company earned for its actual shareholders.Take 2008, for example. ExxonMobil's profit reached a staggering $46.87 billion, the highest annual profit since the Romans invented the corporation. But they also paid $36.53 billion in income taxes, $34.51 billion in excise taxes, and $41.72 billion in other taxes, including sales taxes. Do the math and you'll see that totals $112.76 billion — $9.4 billion per month, $2.17 billion per week, $309 million per day, and $214,535 per minute.Skeptics might reply that ExxonMobil doesn't actually "pay" all those taxes out of its own pocket. They argue that the corporation just passes the cost of excise taxes on to customers and merely collects sales taxes imposed by state and local governments on buyers. But there's no arguing that the economic activity generated by this particular actor ultimately led to that trillion dollars in worldwide tax revenue.We're not here to champion "Big Oil" in general, or ExxonMobil in particular. We realize ExxonMobil has been criticized for inadequately responding to various oil spills, funding research disputing "global warming" claims, and even violating workers' human rights in Indonesia. We're here to champion the value of surprising information — especially when we can use that information to your benefit. You'd probably be surprised, for example, to learn that some business owners deduct their family's medical bills as a business expense. But that's exactly what a medical expense reimbursement plan allows. You'd probably be surprised to learn that you can deduct the cost of crashing your car if it happens while you're driving for work. But that's what the law allows. We constantly go to the well for smart tax strategies, so you don't have to. Call us if you want to put this sort of information to work for you! And remember, we're here for your friends, family, and colleagues, too.

Linsanity!

The clock is ticking down on "summer." July 4th barbecues are a distant memory, and Labor Day is looming near. Forget about baseball's pennant races starting to heat up. Forget about the upcoming NFL season. It's time to talk basketball!

Taiwanese-American point guard Jeremy Lin played college ball at Harvard, where he notched an Ivy League-record 1,483 points, 487 rebounds, 406 assists, and 225 steals. That might have been enough to get drafted if "Ivy League" earned any respect with NBA scouts. Instead, he walked on to the Dallas Mavericks and warmed various benches for the Golden State Warriors, Houston Rockets, and (Chinese Basketball Association) Dongguan Leopards before catching fire with the New York Knicks. He averaged 18.5 points and 7.6 assists over 26 games before leaving because of a torn meniscus. But those 26 games were enough to ignite "Linsanity," with New York bars and restaurants introducing "Lintinis," asian-spiced chicken "Lings," and asian-inspired "lin-burgers" for beleaguered Knicks fans who finally had a reason to cheer.At the end of the season, Lin became a restricted free agent. This meant he could sign an offer with another team — but the Knicks could match it and keep him. Last month, the Houston Rockets re-signed him to a three-year, $25.1 million deal, which New York declined to match, and now, Linsanity moves south to Houston. So naturally, we want to know what it means for Lin's tax bill!

Let's start with Lin's rooting section at the IRS. Regardless of where he plays, he'll pay federal income tax at the top marginal rate of 35%. He'll also pay Medicare tax of 2.9%. If the Bush tax cuts expire at the end of the year, as they're already scheduled to do, that top rate will rise to 39.6%. And the Medicare tax jumps to 3.8% on January 1 as tax hikes included in the Affordable Care Act take effect.Now let's look at his old tax bill for the Knicks. In "New York, New York", Frank Sinatra sings "If I can make it there, I'll make it anywhere." What ol' Blue Eyes probably meant is that if he could afford the taxes there, he can afford them anywhere. So, Lin starts out owing Uncle Sam anywhere from 37.9 to 43.4%. New York State shakes him down for 8.82%. Then New York City runs up the score for another 3.876% more. If Lin counted baskets like he paid taxes, he would have scored 481 points for the Knicks — but kept just 239 after taxes!Now let's look at his new tax bill for the Rockets. Lin will be glad that basketball is an indoor sport when he gets a taste of Houston humidity. But he'll find the tax climate a lot cooler. He'll pay the same amount to Uncle Sam, of course. But neither Texas nor Houston impose any tax on his income at all. None! So this difference could mean as much as a million dollars more per year in Lin's oversized pockets. Smart planning for a guy who graduated with an economics degree and a 3.1 GPA!Of course, as is usually the case with taxes, things aren't quite so simple. Professional athletes pay state and local taxes wherever they play. That means that when Lin travels back to Gotham to play the Knicks, he'll renew his friendship with New York tax collectors — but when he plays the Orlando Magic or Miami Heat, he'll enjoy the same zero percent tax rate in Florida that he gets in Texas. And of course he can deduct state and local taxes he pays from his federal taxable income. Are you expecting an outstanding season in 2012? Maybe wondering where it makes the most sense to play ball? We're here to prevent the IRS from "calling a technical" on your finances. And remember, we're here for your teammates, too!

Living the Tax-Free Life

As the 2012 election draws near, and taxes take center stage in that election, politicians and pundits are weighing in on Republican nominee Mitt Romney's personal taxes. Will he release any of his returns for years before 2010? Did he really not pay any tax at all in some of those years? Is there something in those returns that he fears might jeopardize his campaign?But Mitt Romney isn't the only candidate enjoying tax-advantaged income. President Barack Obama, like Presidents before him, enjoys tax-free benefits that would make most corporate CEOs drool with envy. And it's not a scandal — it's all out in the open for any voter to see.Let's start with the basics. The President earns a $400,000 annual salary — barely enough, by itself, to put him in the much-vaunted "1%." He also gets a $50,000 annual entertainment allowance, which helps support those State Dinners.But salary and allowance are just the tip of the President's compensation iceberg. For starters, there's a 55,000 square-foot house on 18 prime acres of Washington real estate that Zillow.com estimates would rent for $1,752,296 per month. (The tax alone on the value of that rent is $7.36 million per year.) There's also a rustic cottage just outside DC, staffed by the U.S. Navy and Marine Corps, that he uses as a vacation retreat.Next, there's security. Plenty of CEOs and celebrities hire bodyguards to ward off real or imagined threats. And that security may be tax-deductible. (Hard for the IRS to collect tax on your income if you're not alive to earn it.) But the President's Secret Service protection is tax-free, and his guards are the best of the best. While the exact value of the President's protection is a closely-guarded secret, the House of Representatives voted $113 million in funding for the 2012 campaign.

Those of you travel often will probably agree that the President's most valuable perk is the privilege to fly without the usual TSA "perp walk." CEOs typically fly Gulfstreams, Bombardiers, and similar aircraft, with barely enough headroom to stand up straight. The President, on the other hand, enjoys not one, but two fully-loaded 747-200Bs, both equipped with executive stateroom, office, conference room, and state-of-the-art navigation and communications systems that let him conduct business in the air, even if the country is under attack. (The term "Air Force One" doesn't refer to a specific plane — it's the official air traffic control signal for any aircraft carrying the President.) Corporate jets typically carry a dozen passengers and cost $3,000 to $6,000 per hour to operate, while Air Force One carries 102 passengers and crew and costs a whopping $181,000 per hour.Then there are the "little" perks that ease the stress of leading the free world. The fawning staff. The private chefs. The first-run movies, delivered straight to your own "media room." Fully tax-free, of course . . . who can even figure out how to tax them?The perks won't stop when the President leaves office. As with all former Presidents, he'll enjoy a pension equal to a Cabinet-level salary (currently $199,700). He'll enjoy continued Secret Service protection, for himself and his family, for 10 years from the date he leaves office. He'll get reimbursed for staff, travel, and office expenses. And he'll be able to earn a small fortune writing memoirs and giving speeches — although that fortune will be fully taxable.Most of us would agree that any President earns every dime we pay him, whether that income takes the form of salary or benefits. But you don't have to be President of the United States to profit from tax-free perks and benefits. Helping you make the most of those opportunities for your business is a big part of our business. Call us for a plan that makes the most of your opportunities!

Tax Code Runs Deep

American capitalism has produced generations of great brand names, and Chevrolet is one of the most iconic. Swiss race car driver Louis Chevrolet founded his car company in 1911, then sold it to his partner just four years later. General Motors acquired the company in 1918, and positioned Chevrolet as an everyman's car to compete with Ford's Model T. The company prospered through the 1950s and 60s, producing the legendary Corvette among other models. More recently, Chevy was caught in the economic downturn of 2007-2010, leading to General Motors bankruptcy reorganization. But GM and Chevy rebounded quickly, and now actually are in one of the strongest periods in their history.
Right now, Chevrolet is running a truly bold marketing campaign for our era of skeptical consumers. Their "Love It or Return It" campaign lets you buy any new Chevy through September 4 — and, as the name implies, if you don't love it, you can actually return it. There's fine print, of course. You have just 60 days to decide, and you can't drive it more than 4,000 miles. Oh, and — you knew the tax angle was coming, right — "you may be subject to federal, state, or local tax on any benefit paid."
Huh? Tax on a benefit? What "benefit" is there in returning a car you decide you don't like?
Well, as so often happens with a question like this, the answer is, "it depends." Let's say you take delivery of a new Corvette. (Red, of course.) The manufacturer's suggested retail price on a base coupe is $49,600. You drive it off the lot, confident you're behind the wheel of your dreams. But soon you get tired of the 430-horsepower V-8, the 4.2-second 0-60 acceleration, or the standard leather 6-way power seats. So after 60 days and 3,999 miles, you take it back.

You've always heard that cars lose half their value the minute you drive them off the lot, right? Well, that's an exaggeration — but "your" Corvette is still probably worth $8,000 less than than what you paid for it. So if you get a full refund, have you just realized $8,000 in income? And if you used the car for business, do you have to recapture anything you depreciated?

Let's take another example. You're an environmentally responsible driver, but you can't afford the sexy new Tesla Model S. So you settle for a $40,000 Chevy Volt. You gleefully claim the $7,500 plug-in motor vehicle credit. And again, after 60 days and 3,999 miles (but only a couple of tankfuls of gas), you return it and get your $40,000 back. Now what? First off, have you even kept the car long enough to claim the credit? And as with the 'Vette, if you owe tax on the "benefit"... what is that benefit? That credit reduces your "basis" in the car to $32,500, so how much tax you owe on the difference depends both on what the car is worth and whether you get to keep the credit! (Oy!)
Washington knows how important the auto industry is to our economy, so the tax code is full of incentives to drive sales. This credit is just one example. Business owners have long known of another one — which is that buying a truck in December can make for some nice year-end planning. Then there was 2009, when we saw a limited-time above-the-line deduction for state and local sales and excise taxes on new car sales. And in that same year, the much-mocked "Cash for Clunkers" program generated $2.877 billion in rebates on 690,114 vehicles, too. So don't be surprised if the IRS really does pay attention to these sorts of questions!

We want you to enjoy the freedom of the open road — especially if it means a sweet convertible with the wind in your hair. But — especially if you use your vehicle for business — we want you to make smart choices. So call us before you trade in your old ride, and let us help you get the most out of your wheels!

Bringing Home the Gold

Friday marked the Opening Ceremonies of the Games of the XXX Olympiad. Britain's Queen Elizabeth, along with her Corgis, made their film debut parachuting into the stadium with superspy James Bond. The world's eyes are waiting to see who takes home the gold — and whenever someone takes home "the gold," you know the IRS will be there to help them count it!

How excited do our friends at the IRS get when the Olympics roll around? Well, believe it or not, there's an argument to be made that the medals themselves are taxable. Way back in 1969, the Ninth Circuit Court of Appeals ruled that shortstop Maury Wills owed tax on the $10,000 value of the Hickock Belt he received for being named Athlete of the Year. But the IRS isn't taxing Olympiads on their medals — at least, not yet. (Would that mean a Gold medal is just a Silver, after taxes?)

The United States Olympic Committee — the nonprofit organization that coordinates U.S. Olympic efforts — awards its own cash prizes to U.S. medalists. Those prizes are $25,000 for each Gold medal, $15,000 for each Silver, and $10,000 for each Bronze. That income is obviously taxable.

But the IRS knows the real payoff doesn't come from the medal itself. The real payoff comes from endorsement deals the stars make. Take swimmer Ryan Lochte, for example. On Saturday, he dethroned Michael Phelps as king of the mens' 400 meter individual medley. Lochte had already appeared in commercials for Nissan, AT&T, Gatorade, and Gillette, before the games had even begun. Fortune magazine estimates he'll make $2.3 million this year, before any bonuses for, you know, actually bringing home an Olympic medal. Forbes estimates that if Lochte picks up more gold in London, his endorsements might actually top those of Phelps. And Bloomberg BusinessWeek guesses that Phelps made $6 million in 2010. With possibilities like that, you can be sure the IRS will have their fingers crossed for Thursday's 200 meter individual medley!

Some athletes do well in competition and do well in endorsements, but still manage to disappoint the IRS. In 2010, skiier Lyndsey Vonn took home the gold in womens' downhill, which led to endorsement deals with Under Armour, Red Bull, Rolex, and Kohl's. Earlier this year, the IRS slapped her with a lien for $1.7 million in tax. (Lyndsey promptly settled her debt, blamed it on a nasty divorce from her husband and trainer, and apologized on her Facebook page.)

Olympic fame and fortune can pay financial dividends for decades to come. Thirty-six years ago, a determined American athlete named Bruce Jenner became a national hero, setting a new Olympic record while winning the gold in the decathlon. Three decades later, he's making headlines again as stepfather to those krazy Kardashian sisters. Is it paranoid to start wondering now which of today's Olympic champions will preside over a reality-TV trainwreck in 2042?

We realize that few of you are reading these words from Olympic Village in London's East End. But it's important to plan ahead for any sort of special prizes or windfalls you enjoy. Whether you're bringing home a medal, or you just want to keep more of the gold you've already got, we're here for you, and for your family, friends, and colleagues, too.

Hot Thoughts

What do Margaret Mitchell, Mark Twain, and Shaquille O'Neill all have in common? None of them like paying taxes, that's what! Here's a collection of tax quotes to start your day.

"Death and taxes and childbirth. There’s never any convenient time for any of them."
Margaret Mitchell

"Blessed are the young, for they shall inherit the national debt."
Herbert Hoover

"You know we all hate paying taxes, but the truth of the matter is without our tax money, many politicians wouldn’t be able to afford prostitutes."
Jimmy Kimmel
"The government deficit is the difference between the amount of money the government spends and the amount it has the nerve to collect."
Sam Ewing
"Basic tax, as everyone knows, is the only genuinely funny subject in law school."
Martin Ginsburg (Professor, Georgetown University Law Center)
"You’d be surprised at the frivolous things people spend their money on. Taxes, for example."
Nuveen Investments (Advertisement)
"If you sell your soul to the Devil, do you need a receipt for tax purposes?"
Mark Russell
"I shall never use profanity except in discussing house rent and taxes."
Mark Twain
"Last time I looked at a check, I said to myself, 'Who the hell is FICA? And when I meet him, I’m going to punch him in the face. Oh my God, FICA is killing me.'"
Shaquille O'Neill
"The invention of the teenager was a mistake. Once you identify a period of life in which people get to stay out late but don’t have to pay taxes — naturally, no one wants to live any other way."
Judith Martin ("Miss Manners")

We hope you enjoyed these quotes. But please remember this: there's nothing funny about paying more tax than you legally have to. If this summer's heat has your blood boiling about taxes and you're looking for a plan to pay less, call us today!

You're Fired!

Nobody really likes paying taxes. Sometimes, even the folks who work for the IRS resent paying the taxes that go towards funding their own salaries. Usually they just grumble about it and then go on with their day. But sometimes they try a little "self help." So now let's look at what one auditor did when she wanted to minimize her taxes.
Jacynthia Quinn spent 20 years as an IRS auditor in El Monte, California. The IRS audited her and her husband for 2006 (when she claimed $23,549 in charitable deductions and $22,217 in medical expenses) and 2007 (when she claimed $24,567 in charitable deductions and $25,325 in medical expenses). The Service disallowed those charitable and medical deductions, among other writeoffs, and the case wound up in Tax Court.
You'd think an IRS auditor would be the first to know how to avoid an audit! So, how did Quinn do on the other end of the hot seat? Well, let's look at those charitable contributions first:

"Petitioner proffered 'receipts' purportedly confirming charitable contributions. They were inconsistent and unreliable. Representatives from seven different charitable organizations credibly testified that the receipts were altered or fabricated. For example, petitioner offered a receipt purportedly substantiating $12,500 of charitable contributions to a religious organization. The purported receipt, however, identified individuals other than the couple as the donors. The organization’s records did not reflect any contributions made by the couple and confirmed that the other identified individuals had contributed $12,500."

Uh oh. That doesn't sound good. Bad enough if one donor testifies your receipts are faked. But seven? How about those medical deductions? Any better luck there?

"Petitioner similarly failed to substantiate the claimed medical and dental expenses. Some of her documentation also suffered from authenticity problems and appeared to have been 'doctored.' Petitioner offered three documents purportedly issued by Dr. Christopher Ajigbotafe or his staff confirming more than $9,000 in medical expenses for Mr. Quinn. Each document, however, spelled the doctor’s last name differently ('Ajigohotafe,' 'Ajibotafe' and 'Ajigbotafe'). One 'statement' was dated in January 2006 and estimated expenses for the upcoming year. The amount of expenses for 2007 contained in another 'statement' was contradicted by a letter purportedly from the doctor’s staff."

Keep in mind here that Quinn is an IRS auditor, with 20 years of training and experience auditing exactly these sorts of deductions! Naturally, the Tax Court didn't show her a lot of sympathy — they sided with the IRS on every issue and even smacked her with a civil fraud penalty. In fact, the IRS Restructuring and Reform Act of 1998 requires the IRS to fire any employee who willfully understates their federal tax liability (unless they can show the understatement is due to "reasonable cause" and not "willful neglect"). Since Quinn's own "excuse" is on a par with the dog eating her homework, she's likely to lose her job as well.
It's certainly entertaining to read about cases like Jacynthia Quinn's. It's satisfying to see a cheater get her comeuppance. And it's great to see the IRS enforcing the same rules for its own employees as it does for us. But there's a valuable lesson here, even for the majority of us who don't cheat. Dotting the "i's" and crossing the "t's" is important for everyone. That's why we don't just outline strategies and concepts to help you pay less tax. We work with you to implement those strategies and document them to survive scrutiny. And remember, we're here for your family, friends, and colleagues too!

Show Me the Money!

The week before last, while most of America was still digesting news of the Supreme Court's decision on healthcare reform, more news hit the wires. That's right, Hollywood A-listers Tom Cruise and Katie Holmes, better known as "TomKat," are calling it quits after nearly six years of marriage. Of course, Tom has been down this road twice before. But this split has already spawned far and away the biggest headlines, and tinseltown gossips are working overtime. How long has Katie planned her escape? What role does Cruise's association with the controversial Church of Scientology really play? Were Tom's lawyers really letting Katie "play the media" while they readied his reply?

News of the split came at nearly the same time as Forbes naming Cruise the world's top-earning actor. His latest blockbuster, #4 in the Mission: Impossible franchise, pulled in a whopping $700 million, powering Cruise to a $75 million year. So naturally, we want to know what the divorce means for the IRS!

Divorce is usually pretty straightforward, at least from the taxman's perspective. Property settlements between divorcing spouses are generally tax-free. Alimony or spousal support is usually deductible by the payor and taxable to the payee — which lets the divorcing couple shift the tax burden on that income from the higher-taxed "ex" to the lower-taxed ex. Child support is both nondeductible and nontaxable — it's strictly an after-tax obligation. And legal fees are a nondeductible personal expense, except for amounts allocated to figuring alimony payments.

But celebrity divorces can be risky business. Sometimes it's hard for outsiders to understand the stakes, which can be as different from ordinary splits as night and day. Katie hired a top gun New York attorney to represent her, one who knows all the right moves where celebrity divorce is concerned. You can be sure the tabloids were rooting for a war of the worlds — but we were just hoping daughter Suri, age 6, wouldn't end up as collateral damage!
The Cruises had a prenup, of course. It reportedly gave Katie $3 million for each year of marriage, plus a 5,878 square foot house in Montecito, CA, where Oprah Winfrey, Kevin Costner, and Rob Lowe also have homes. And last year, Cruise deeded Holmes an apartment in Manhattan. We're sure the firm that drafted TomKat's prenup did a fine job. Of course, golfer Tiger Woods also had a prenup limiting wife Elin Nordegrin to $20 million — but she wound up walking away with five times that amount.
What sort of romantic prospects will the couple enjoy after the divorce? Well, Cruise should be fine. He's already a legend — he can sit back with a cocktail and audition new starlets for the role of Wife #4. And as for Holmes, she's still young, so we're sure she can still attract at least a few good men who want to show her the color of their money.
So Hollywood is playing "Taps" for Tom and Katie's storytale romance. It wasn't endless love after all. Though the media had already shifted into over-drive, anticipating a public PR battle, the quick and confidential resolution makes it possible that the story may actually just fade into oblivion.
Now, if you look carefully at this email, you'll find references to seventeen Tom Cruise movies. Can't find 'em all? Give us a call. We're experts at finding hidden opportunities, especially where it comes to taxes!

The Cost of Reform

By now, of course, you've heard the news that the U.S. Supreme Court upheld the Affordable Care Act, also known as "Obamacare." Ironically, the Court ruled that the controversial individual mandate is constitutional under the government’s power to tax, rather than its power to regulate commerce.

We're not here to debate the merits of the Court's decision. If that's what you want, turn on any cable news network and you'll find various assorted bloviators from both sides, bloviating right now. (Try it. It's fun!)

What we are here to discuss is how the Court's decision affects your tax bill. That's because the original legislation that the Court upheld makes care affordable in part by imposing several new taxes — in addition to the "tax" or "penalty" imposed by the individual mandate — that will now go into effect as already scheduled:

• On January 1, 2013, the Medicare tax on earned income, currently set at 2.9%, jumps to 3.8% for individuals earning over $200,000 ($250,000 for joint filers, $125,000 for married individuals filing separately).
  
• Also on January 1, there’s a new “Unearned Income Medicare Contribution” of 3.8% on investment income of those earning more than $200,000 for individuals or joint filers earning more than $250,000. (Doesn't that sound better than "tax"?)
• Beginning January 1, 2014, there's a $2,500 cap on tax-free contributions to flexible spending accounts.
• Also beginning January 1, 2014, employers with more than 50 employees face a penalty of $2,000 per employee for not offering health insurance to full-time employees.
• Finally, the threshold for deducting medical and dental expenses rises from 7.5% of your adjusted gross income to 10%. You probably don't get to deduct your out-of-pocket medical expenses anyway — but the new, higher threshold will just make it that much harder.

These new taxes raise new planning questions. How can we structure your investment portfolio to avoid the new "Unearned Income Medicare Contribution"? (Doesn't that sound better than "tax"?) What role should flexible spending accounts play in your finances? Should we look at a Health Savings Account or Medical Expense Reimbursement Plan to write off newly-disallowed medical expenses?
And the new healthcare taxes aren't the only challenge we face this Independence Day. We're six months away from what some wags are calling "Taxmageddon." On January 1, the Bush tax cuts are scheduled to expire. And the 2% payroll tax "holiday" expires as well. These mean higher taxes for everyone, not just "the 1%." But with Washington geared up for elections, there's little hope for quick or easy resolution.
Together, these new developments make for some real planning challenges. But when the going gets tough . . . the tough get going. So count on us to get going on today's most pressing planning questions. And remember, we're here for everyone at your July 4th barbecue!

Less Rich. Less Famous. Less Tax

Last week, we brought you a story from those party animals at the IRS Statistics of Income Division about an annual report on the 400 highest incomes in America. It turns out they're a very successful bunch — for 2009, they earned an average of $202.4 million and paid an average of $40.9 million in tax. This week, we're going to talk about a different group of taxpayers. Less rich, less famous, but maybe more successful in their own way.
Back in 1969, Treasury Secretary Joseph Barr was shocked to discover that 155 Americans had earned over $200,000 that year, yet paid nothing in tax. Zip. Zilch. Nada. ($200,000 isn't bad money now — back then, it had about the same buying power as $1.2 million today.) Washington huffed and puffed, then passed the "Alternative Minimum Tax," or AMT. In 1970, the new tax surprised 18,464 unhappy taxpayers. No one could have foreseen it growing into a complete "parallel" tax system, a many-headed Hydra that millions every year.

Fast-forward to today. With the AMT firmly in place, the IRS has just released a 61-page report revealing that in 2009, 20,752 taxpayers earned over $200,000 and paid — you guessed it — zero tax. (Aren't you glad you've got us to go through those 61-page IRS reports?) That's one out of every 189 Americans earning above that amount. And the number of nontaxable high-income returns is growing fast — five years earlier, there were just 2,833 tax-free winners.

How do they do it? The IRS identified "four categories that most frequently had the largest effect in reducing taxes":

1. Tax-exempt interest: Municipal bond interest income is exempt from federal and most state income taxes (although income from "private activity" bonds is subject to AMT). If you're paying significant tax on interest income, we can help you decide if municipal bonds can help cut your tax.
   
2. Medical and dental expenses: These are deductible to the extent they top 7.5% of your adjusted gross income (going up to 10% next year, unless the Supreme Court strikes down that part of the Affordable Care Act). Medical deductions include far more than just the obvious doctors, dentists, and prescriptions. If you suffer from arthritis, for example, you might write off the cost of a swimming pool your doctor prescribes to relieve your symptoms.
3. Charitable contributions: Charitable gifts let you do well for yourself while you do well for others. They're deductible up to 50% of your adjusted gross income. We can help you make the most of your gifts, especially noncash contributions and appreciated property.
4. Partnership and S corporation net losses: "Pass-through" entities let you report business losses on your personal return. We can help you decide if these are right for your business.

There you have it. Four ways to turn $200,000 into zero tax — and 20,752 stories to help inspire you. We're pleased that you take time to read these weekly emails. But it's not enough just to give you the news. Our real job is to help you put it to use to pay less tax yourself. And don't forget, we're here for your family, friends, and colleagues too!