The IRS at the Wedding

You've all heard that April showers bring May flowers. That's fine and all, and it doesn't leave anything for the IRS unless you're a farmer or a florist. But June brings brides — young brides, old brides, blushing brides, even bridezillas. Now the IRS pays attention, because now the IRS gets to reach out for all sorts of extra taxes from the happy couple.

So, Mike and Sarah meet in college, fall in love, and get married. Maybe they host the big day at their college chapel. Maybe they get creative with the reception and throw a barbecue in a barn. What will the IRS think?

The classic "marriage penalty" occurs when two spouses, earning roughly equal amounts, earn enough together to push their taxable income into the 28% bracket for joint filers. For 2012, that bracket started at $142,700. So if Mike and Sarah each reported $100,000 in 2012 taxable income before the wedding, they each owed $21,454 in tax. But if they got married any time before the end of the year and reported $200,000 in joint income, they would owe $43,779 together. Do you think it will bug them to send the IRS an extra $871?

It gets worse when kids are involved. If Sarah has a qualifying child, she gets a $1,000 child tax credit, so long as her income is under $75,000. But when she and Mike get married and file together, that threshold doesn't double. It goes up just $45,000. That's barely half again what Mike would get on his own.

Those obvious examples are just a starting point. There are plenty of other marriage penalties scattered like icebergs throughout the tax code. For example, the Affordable Care Act imposes a 0.9% Medicare surtax, starting this year, on earned income over $200,000 for single filers and $250,000 for joint filers. If Mike and Sarah each report $200,000 in earned income singly, no surtax. But if our newlyweds report the same $400,000 each as husband and wife, Uncle Sam gets an extra $1,350. Wait a minute . . . shouldn't your uncle be giving wedding presents instead of taking them?

Maybe Mike owns a rental property. Like most rental properties, it loses money "on paper." There's a special "rental real estate loss allowance" that lets him deduct up to $25,000 of rental loss against his other income — so long as that income doesn't top $150,000. When Mike gets married, he and Sarah can still take that same $25,000 loss — so long as their combined income doesn't top that same $150,000! Oh, and that's only if they file jointly. If they file separately, and lived apart for the year, they get just $12,500 each. If they file separately and lived together during the year, the allowance is zero. Who wants to raise a toast to that?

There's still time for you to throw rice (or birdseed) at a wedding or two this month. So if someone you know is getting married, have them call us. We'll see if we can keep a a marriage "penalty" from turning into a marriage "surprise." And don't forget to save some cake for the IRS!

Dad and Taxes

Sunday was Father's Day, and if your family is like most, you talked about golf, or fishing, or the latest happenings on Duck Dynasty. You probably didn't talk about taxes, just because Dad doesn't like paying them! So here are some "father and family" themed tax quotes to put a smile on your face today:

"Every year, the night before he paid his taxes, my father had a ritual of watching the news. We figured it made him feel better to know that others were suffering."
Narrator, The Wonder Years television series

"My father has a great expression: 'The capital-gains tax has created more millionaires than any other government policy.' The capital-gains tax tends to make investors hold longer. That is almost always the right decision."
Chris Davis

"Our forefathers made one mistake. What they should have fought for was representation without taxation."
Fletcher Knebel

"Throughout the first half of our history, Americans hated tax with passion, something they inherited from the founding fathers."
Charles Adams"Giving money and power to government is like giving whiskey and car keys to teenage boys."
P.J. O'Rourke"The trouble with being a breadwinner nowadays is that the government is in for such a big slice."
Mary McCoy"A well-timed death is the acme of good tax planning, better even than a well-timed marriage."
Donald C. Alexander (former IRS Commissioner under Richard M. Nixon)"If you are truly serious about preparing your child for the future, don't teach him to subtract — teach him to deduct."
Fran Lebowitz

If Dad wants to pay less tax, he needs the same thing you do — a proactive tax plan! Summer may not seem like the obvious time to do it, but now is when we have the most time available to help you pay less. So have Dad give us a call — he'll appreciate paying less tax a lot more than he'll appreciate another tie!

Party Time at the IRS

You probably don't think a conference for a bunch of IRS bureaucrats would be much fun. Apparently, though, the IRS knows how to throw a party. Back in 2010, they hosted an event dedicated to "Leading into the Future" for 2,609 executives and managers in the Small Business/Self-Employed division. (You're excited already, aren't you?) It turned into a $4.1 million boondoggle, complete with first-class air travel and Presidential Suites at three different hotels, that even Jay Gatsby might appreciate.

We'll never know how many of our friends at the party woke up hung over the next morning. But predictably, someone blew the whistle on "excessive spending," and now we have another IRS scandal on our hands. Last week, the party poopers at the Treasury Inspector General for Tax Administration released a 56-page report titled "Review of the August 2010 SmallBusiness/Self-Employed Division's Conference in Anaheim, California". Not surprisingly, they found several ways to "enhance controls over conference spending." How's this for genius advice?

• Don't spend $50,187 to produce parody videos like the one featuring IRS officials as characters from "Star Trek", boldly going where no government employee has gone before. (New York Representative Carolyn Maloney called the video "an insult to the memory of 'Star Trek'" and said "I could do a better Captain Kirk.")
  
• Don't forget to negotiate with hotels over "details" like room rates, continental breakfasts, wireless internet, or "free" cocktails at a welcome reception with salad, appetizers, fajitas, pasta, and dessert.
• Don't spend $17,000 for a keynote speaker to paint portraits of historic figures, including Bono and Michael Jordan, to illustrate lessons on "unlearning the rules, breaking the boundaries, and freeing the thought processes to find creative solutions to challenges."
• Don't spend $29,364 to let IRS employees living within 30 miles of the meeting stay at conference hotels "to reduce the demands on local travelers who would otherwise experience lengthy commutes daily during the conference and to foster employee morale and team spirit." (Oh, and while you're at it, would it kill you to issue a W-2 to those local employees so they can pay tax on the value of those stays?)

Does $4.1 million really sound like too much for that sort of fun? Unfortunately, IRS procedures in effect at the time of the conference didn't require management to track or report actual expenses, so the Inspector General can't verify how much the whole thing cost. Reassuring, right? The people who make us track receipts for a $4 coffee can't track their own expenses?

Just two days after the report came out, IRS officials trekked to Capitol Hill to commit hari kari. Faris Fink, who now heads the Small Business/Self-Employed division (and who played Mr. Spock in that infamous "Star Trek" video), apologized and confessed he didn't know his agency could have negotiated for lower hotel room rates. Acting Commissioner Danny Werfel called the whole thing "an unfortunate vestige from a prior era" and reported that spending on travel and training has fallen 80% since then.

We send these emails urging you to come in for tax planning week after week. And usually we just assume you know why our proactive tax-planning service is such an obvious no-brainer. But seriously — don't you think you can do a better job of spending your money than the IRS? If so, then call us today to get started with your plan!

An Apple a Day

Back when you were a kid, your mom probably told you "an apple a day keeps the doctor away." Well here's something Mom didn't know — apparently, an apple a day keeps the tax man away, too. At least, that's the conclusion we might draw from recent Congressional hearings focused on Apple Incorporated and its strategies for avoiding taxes!

Last month, the Senate Permanent Committee on Investigations conducted a hearing compellingly titled "Offshore Profit Shifting and the U.S. Tax Code — Part 2 (Apple Inc.)." The Committee graciously invited Apple's CEO, Tim Cook, to share how Apple avoids U.S. tax. (We can only imagine how delighted Cook was to receive the Committee's "invitation" — no doubt delivered on the same sort of elegant stationery you might use to announce a spring cotillion or send a "thank you" note to Grandmother.)

Here's the issue in a nutshell. Apple earns tens of billions of dollars per year from their innovative desktop and laptop computers, iPods, iPads, and ubiquitous iPhones. And Apple pays billions in tax on its U.S. profits — in 2012 alone, the company paid $6 billion in federal income tax, $327 million in payroll tax, and $830 million in state income tax. But international operations account for about 61% of the company's gross revenue. So Apple's accountants and attorneys, who sound at least as clever as the engineers who design the company's products, find ways to leave that revenue outside the U.S., where it sidesteps our 35% corporate income tax. From 2009-2012, Apple shifted at least $74 billion away from the IRS's reach.

How do they do it? Mainly through use of subsidiaries in places as diverse and exotic as Ireland, Luxembourg, the British Virgin Islands, and Reno (yes, the one in Nevada). For example, Apple owns a holding company organized in Ireland called Apple Operations International. Because the company is domiciled in Ireland, the IRS doesn't consider it to be a U.S. corporation subject to the 35% U.S. tax. But because Apple manages and controls the company from the U.S., Irish law doesn't consider it to be subject to the 12.5% Irish tax, either. Apple Operations International earned $30 billion from 2009-2012 — and didn't even file tax returns for those years. Edward Kleinbard, a law professor at the University of Southern California and former staff director at the Congressional Joint Committee on Taxation says "There is a technical term economists like to use for behavior like this. Unbelievable chutzpah."

Apple's defenders point out that Apple doesn't make the rules — they're just doing their best on behalf of their shareholders with a tax code that "has not kept up with the digital age." CEO Cook points out that Apple has created or supported 600,000 U.S. jobs (including 50,000 for Apple's own employees and 550,000 at other companies) involved in engineering, manufacturing, logistics, and software development, including third-party "app" development. They claim that Apple is probably the biggest corporate income taxpayer in the country, accounting for $1 of every $40 in corporate tax the IRS collected last year. And they argue that they don't use "tax gimmicks" like moving intellectual property offshore to sell products back into the U.S., using revolving loans from foreign subsidiaries to fund U.S. operations, or holding money in Caribbean islands or Cayman Islands bank accounts.

We realize that some of you reading these words will be outraged, and others will be envious. We're not here to pass judgment on Apple's tax strategy. But we do want to point out that Apple pays less tax the same way we help you pay less — through proactive planning. You may not have quite the same opportunities to save as Apple. But you'll never know how much you can save if you don't sit down with us to try. So call us today!