Report Card Time

Memorial Day has come and gone, and the school year is quickly winding down, if it isn't already over. Kids are getting excited for summer vacay, and there's just one hurdle left — the dreaded report card. (If your kids are getting nervous and antsy around mail time, you might want to pay attention!)

Kids in school aren't the only ones who have to sweat report-card time. That's right, the IRS gets a report-card time, too. In fact, they get two. By law, National Taxpayer Advocate Nina Olson has to submit two reports to Congress each year: the "Objectives Report," which outlines goals and activities planned for the coming year, and the "Annual Report," which summarizes the 20 most serious problems encountered by taxpayers, recommendations for solving those problems, and other IRS efforts to improve "customer" service and reduce taxpayer burden.

And how do you think our friends at the IRS are doing? Well, this year's Annual Report listed twenty-two problems, not 20. Their biggest conclusion is that the IRS is simply "not adequately funded to serve taxpayers and collect taxes." It identifies "the combination of the IRS’s expanding workload and declining resources as the most serious problem facing taxpayers."

Granted, the IRS faces an especially tough challenge. "There were approximately 4,430 changes to the tax code from 2001 through 2010, an average of more than one a day, including an estimated 579 changes in 2010 alone. The IRS must explain each new provision to taxpayers, write computer code so it can process returns affected by the provision, and train its auditors to identify improper claims."

And there were more specific problems, too. The IRS has to rely on computers to do most of their work, and computers don't always get things right. The IRS adjusts about 15 million returns per year — but treats only 10% of those as "audits," so taxpayers don't always get traditional audit protections. And sometimes the IRS is just toobusy to respond: they answer just 70% of taxpayer phone calls, and just 53% of written correspondence gets answered in 45 days. It's hard to ace your report card when you're missing that much of your homework!

What can the IRS do about their report card? Well, they can't just make up their missing credit in summer school. But the Taxpayer Advocate does have two main recommendations. First, she urges Congress to "develop new budget procedures designed to fund the IRS at a level that will enable it to meet taxpayer needs and maximize tax compliance." And second, she suggests codifying a "Taxpayer Bill of Rights" to clearly outline and explain taxpayer protections and and responsibilities.

Fortunately, the news isn't all bad — the IRS has joined the social media revolution! There's a smartphone app to help track your refund, a YouTube channel with helpful videos in English, American Sign Language, and various foreign languages, and podcasts you can download from the iTunes store. You can even follow them on Facebook and Twitter!

Our "Plan A," of course, is to give you the concepts and strategies to help you pay the least amount of tax legally possible — then help prepare returns that avoid IRS scrutiny. But just in case that scrutiny finds you, we're always ready with "Plan B" — to help deal with the IRS on your behalf, and make sure you don't become another Annual Report statistic!

De-Friending Uncle Sam

Last week, Facebook's initial public offering hit the market like tickets to the season's hottest concert. Shares opened at $38, unlocking billions in new wealth for founders and early investors. While shares have actually fallen below that IPO level, investors will probably "like" Facebook for quite some time!

Taxes played a lead role in Facebook's IPO. The company went public largely so founder Mark Zuckerberg could pay $2 billion in taxes to exercise options on 120 million shares. And six insiders, including Zuckerberg, have set up annuity trusts most likely intended to minimize gift and estate taxes on transfers to future heirs. (In Zuckerberg's case, those future heirs haven't even been born — how's that for advance planning!) But one Facebook founder has taken an even more drastic step to avoid tax — he's actually renounced his American citizenship!

Eduardo Saverin was born in Brazil in 1982. His wealthy father moved the family to Miami in 1993 to avoid kidnapping threats, and Saverin became a U.S. citizen in 1998. He met Zuckerberg while the two were students at Harvard and, using his family's wealth, became Facebook's first investor. But Saverin was squeezed out shortly thereafter, reportedly at the urging of more experienced backers. He sued Zuckerberg, and settled out of court for what appears to be something between 2% and 4% of the company — worth as much as $4 billion at last week's market close.
Now, Americans like Saverin who give up their citizenship do pay an "exit tax" on the value of appreciated assets as of the time they leave. That means, essentially, you're taxed as if you sold everything the day before you surrender your U.S. passport. You'll file Form 8854 to calculate and report your tax. If you can't afford to pay on the spot, you can even "finance" it as long as you post adequate security.
In Saverin's case, that means he pays based on the pre-IPO value when he left in September — but he avoids tax on any appreciation after that date. This could spell hundreds of millions in savings. And where has Saverin settled? Singapore, where he has lived since 2009, and where the tax on capital gains is zero. Zip. Zilch. Nada. The Wall Street Journal reports that Saverin has become a Kardashian-like figure in his new home: "Mr. Saverin is regularly spotted lounging with models and wealthy friends at local night clubs, racking up tens of thousands of dollars in bar tabs by ordering bottles of Cristal Champagne and Belvedere vodka, according to people present on these occasions. He drives a Bentley, his friends say, wears expensive jackets and lives in one of Singapore's priciest penthouse apartments."
Saverin is hardly the first American to to de-friend Uncle Sam. The IRS publishes a quarterly list of Americans who leave, one that totaled 1,781 in 2011. And, while Saverin denies he left to avoid taxes, outrage has grown over his move. Senators Chuck Schumer (D-NY) and Bob Casey (D-PA) have even introduced legislation that would punish future Saverins — their so-called "Ex-Patriot Act" ("Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy") would impose a 30% tax on future expatriates' gains after they leave our shores.
Are you working to create the next Facebook? There are lots of ways to pay less tax tax when you eventually sell, and they don't require you to give up your citizenship! So call us when you're ready for your IPO — and remember, we're here for the rest of your social network, too!

Thou Shalt Not Sin?

It's no secret that Washington uses the tax code to do more than just raise revenue. Lawmakers also use it to influence some of our biggest financial decisions, with tax deductions for mortgage interest to encourage homeownership, tax credits for fuel-efficient cars to encourage conservation, and "bonus depreciation" to stimulate business spending. Washington seems to believe those incentives really work. And cynics argue that the real reason we'll never see a true flat tax is because lawmakers are loath to give up the power to regulate that comes with their power to tax.
Government also uses the tax code to sway some of our smaller decisions, too. This is especially true with so-called "sin taxes" — essentially, fees we pay to consume unhealthy products or engage in unhealthy behaviors. As Adam Smith wrote in The Wealth of Nations, “sugar, rum and tobacco are commodities which are nowhere necessaries of life, which are become objects of universal consumption, and which are therefore extremely proper subjects of taxation.”

230 years later, sugar, rum, and tobacco are still taxed. (In New York City, a pack of smokes comes with a hefty $6.86 in federal, state, and local taxes — the tobacco is extra!) The 2010 health care reform slapped a 10% tax on tanning beds. Public health advocates have proposed taxes on fatty foods and sugary sodas to fight obesity. And many Americans, discouraged by what they see as a decades-long failure in the War on Drugs, call for legalizing drugs, taxing them to shift profits from private cartels, and using the revenue to fund anti-addiction efforts.

So, how effective are sin taxes at balancing their dual goals of raising revenue and discouraging unhealthy behavior? Well, federal and state tobacco taxes alone raise nearly $30 billion per year. They seem to do that job just fine. But some economists find that sin taxes send the wrong message by legitimizing the behavior they try to discourage. Here's what Harvard Professor Michael J. Sandel says in his new book, What Money Can't Buy: The Moral Limits of Markets:

"A study of some child-care centers in Israel shows how this can happen. The centers faced a familiar problem: parents came late to pick up their children. A teacher had to stay with the children until the tardy parents arrived. To solve this problem, the centers imposed a fine for late pickups. What do you suppose happened? Late pickups actually increased."

Clearly, telling parents "don't be late or we'll fine you" sends a very different message than telling them simply "don't be late." And so it goes with sin taxes, too. Telling smokers and drinkers "don't indulge or we'll tax you" offers them implicit forgiveness — that it's actually OK to light up and enjoy two-for-one Happy Hour so long as they pay the fee. (If you're reading these words with a cigarette in one hand and a Red Bull in the other, you can breathe a sigh of relief!) It may sound hypocritical for Uncle Sam to wag his finger at you with one hand while he reaches into your pocket with the other. But sin taxes have been around a lot longer than income taxes, and they aren't going away.
There's really no "planning" we can help you do to avoid sin taxes. (We would just give you the same advice as your mother.) But it may be worth it, next time you pay any tax, to ask yourself "what's the government trying to accomplish with this tax? What's the government trying to get me to do?" Understanding why you pay a tax can make you a better-informed consumer. And that, in turn, helps all your dollars go farther.

Green Apple

For 20 years now, Apple has blazed a reputation for stylish design and innovative products, creating a near-cult following among fans. Apple's computers appeal to the artists and designers who set so many of today's trends. Their iPod has helped change how the world listens to music. Their iPad has made online content available nearly anywhere. And their iPhone is helping change the way we communicate with friends, family, and colleagues. (Just a few years ago, your mother-in-law didn't have a cell phone. Now she sends text messages and "checks in" on Facebook.)

Apple may be the most successful company on earth. At one point last year, they had more cash on hand ($76.2 billion) than the United States government ($73.8 billion). And Apple is currently the most valuable company on the planet, with a "market cap" (total value of tradeable shares) that topped $590 billion dollars on April 10. (That's right . . . those iTunes you casually download for a buck each have created a company worth over half a trillion dollars.) In fact, Apple's current market cap is more than the gross domestic products of Iraq, North Korea, Vietnam, Puerto Rico, and New Zealand — combined.
But Apple's most recent annual report reveals the company's genius for creating successful marketing strategies also extends to successful tax strategies. How else would you describe a strategy that lets Apple earn billions and pays less than 10% of their taxable income in tax?
How do they do it? Largely by keeping the money they earn outside the United States, outside the United States. Apple owns subsidiaries in tax havens like Ireland, the Netherlands, Luxembourg, and the British Virgin islands. They helped pioneer the "Double Irish with a Dutch Sandwich" strategy that hundreds of other multinational companies have imitated. Apple even maintains a subsidiary in tax-free Nevada — the blandly-named "Braeburn Capital" — to manage that enormous cash haul without paying tax in its home state of California. For 2011, the company paid a worldwide tax of $3.3 billion on $34.2 billion of profit. But one study concludes that Apple would have paid $2.4 billion more without these rules.
Now Apple has become part of the political debate. At the risk of grossly oversimplifying a pretty complicated discussion, Democrats in Washington scoff that taking an extra $2.4 billion in tax last year would have squelched Apple's creativity. Republicans reply that using the cash to grow the business or distribute more dividends to shareholders will grow the economy faster than if it goes to the IRS. Both President Obama and presumed Republican nominee Mitt Romney have called for eliminating corporate tax loopholes in order to pay for lower rates (28% in President Obama's plan, 25% in Governor Romney's). Either way, Apple is likely to become one of the stories — like Warren Buffett paying a higher tax rate than his secretary — that come to define this year's campaign.
Taxes always play a part in Presidential races. But this time, with the economy still struggling and the Bush tax cuts scheduled to expire in a few short months, taxes will be even more important than usual. Our job, as November approaches, includes helping you understand just what the candidates' proposals mean for your bottom line. So keep up with these emails — and if you're curious how any of the proposals you hear about would affect your plan, call us!

Chimpanzees and Charity

Disneynature's newest movie, Chimpanzee, is a documentary masterpiece for all ages. It's a truly original film that stands out in a multiplex of lookalikes, copies, remakes, and sequels. And Chimpanzee's cinematography is amazing — the simple beauty of the jungles and the animals stands in contrast to so many of today's movies all tricked out with 3D gimmicks and computer-generated special effects.

Filmmakers spent four years "embedded" in the lush rainforest of Ivory Coast's Tai National Park to make the movie, which follows the life of "Oscar," a predictably adorable young chimp. Oscar learns how to use rocks to open nuts (apparently harder than it looks) and use sticks to go "fishing" for army ants (apparently a real delicacy to chimpanzee foodies). There's a turf war with a rival community for control over a valuable nut grove. And, this being a Disney movie, Oscar loses his mother to a leopard around the beginning of the third reel. (It's handled sensitively — there's nothing to terrify children or grandchildren in the audience.) Losing his mother poses a real threat to Oscar's life, until, remarkably, he's "adopted" by Freddy, the community's alpha male. The film is narrated by Tim Allen, whom even the youngest viewers will recognize as the voice of "Buzz Lightyear" from Disney/Pixar's mega-successful Toy Story series.

Primatologists have suspected that chimpanzees like Freddy might altruistically adopt orphaned young in their group. But this is the first example of such behavior actually caught on film. (There's no word on whether Freddy "taxed" the rest of the community for the expenses of caring for Oscar, or whether "tax avoidance" is part of their natural behavior!)

Disney has announced that they are donating a portion of Chimpanzee's opening-weekend ticket sales to the Jane Goodall Institute for the "See Chimpanzee, Save Chimpanzee" program to protect habitats. Disney will donate 20 cents for every ticket sold, with a minimum donation of $100,000. (The movie grossed $10.2 million over its opening weekend, the highest opening gross in history for any nature documentary.) So — and here at last we come to the tax question of the day — does that mean that if you were one of the first to see it, you can deduct part of your ticket?
Unfortunately, no, that's not how it works. You got your "money's worth" from the movie itself, although Disneynature can certainly deduct the contribution on its return. It's like buying a ticket to a college football game. The college itself may be a not-for-profit organization — but buying a ticket isn't a "donation" because you get something of value in exchange. (Some colleges let you make donations in exchange for the right to buy season tickets — in those cases, the IRS treats that "right" as being worth 20% of the donation amount and lets you deduct the remaining 80%.)
Deductions for charitable contributions are a mainstay of the tax code. Charitable contributions let you do well for society while you do well for yourself — which of course is something we want to help with, too! We can help you maximize deductions for gifts of used clothing and household accessories. We can help you plan for bigger gifts of cash, cars or boats, art or antiques, appreciated securities, real estate, and even life insurance. And don't forget, we're here for the rest of your "community," too!