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!