Cast Your Ballot

The 2016 presidential election is almost here. Are you excited yet? (Some cynics would say the campaign actually started as long ago as November 7, 2012 — the day after the last election!) In just a few weeks, voters in Iowa and New Hampshire will gather to cast the first ballots to determine who takes the oath of office to become the 45th President of the United States. And while we aren't here to predict the winner, we can be sure that taxes and tax policy will take center stage. So we've assembled a collection of quotes from Presidents and presidential candidates to finish up your 2015:

"Our income tax system is a disgrace to the human race."
Jimmy Carter

"The really rich people figure out how to dodge taxes anyway."
George H.W. Bush

"If our current tax structure were a TV show, it would either be 'Foul-ups, Bleeps and Blunders,' or 'Gimme a Break.' If it were a record album, it would be 'Gimme Shelter.' If it were a movie, it would be 'Revenge of the Nerds' or maybe 'Take the Money and Run.' And if the IRS ever wants a theme song, maybe they'll get Sting to do 'Every breath you take, every move you make, I'll be watching you.'"
Ronald Reagan

"Make sure you pay your taxes; otherwise, you can get in a lot of trouble."
Richard M. Nixon

"I apologize for the inequities in the practical applications of the tax, but if we should wait before collecting a tax to adjust the taxes upon each man in exact proportion with every other, we shall never collect any tax at all."
Abraham Lincoln

"I'm delighted to pay big taxes. Big taxes mean big income."
H. Ross Perot

"[The tax code] is a monstrosity and there's only one thing to do with it. Scrap it, kill it, drive a stake through its heart, bury it and hope it never rises again to terrorize the American people."
Steve Forbes

"The taxpayer — that's someone who works for the federal government but doesn't have to take a civil service examination."
Ronald Reagan

Of course, 2016 is almost here too. And that means time for New Year's resolutions. This year you could be like everyone else and promise to lose weight, quit smoking, or call your parents every week. Or you could resolve to pay less tax. If that sounds like a resolution worth keeping, call us and we'll set you up with the plan you need!

Smile!

"Bar Rafaeli" sounds like a happening watering hole in a trendy part of Brooklyn — the kind of place where bearded hipsters rocking flannel shirts and man-buns tip back craft beers and artisanal cocktails with their tattooed girlfriends. But Bar Rafaeli is actually a 30-year-old Israeli supermodel. She's appeared on dozens of magazine covers, including the Sports Illustrated swimsuit edition. She's also hosted television programs, acted in television and films, and co-founded an online underwear retailer. And yes, she even made headlines for dating Leonardo DiCaprio — but clearly she's more than just another pretty face.

Models use all sorts of tricks to fool the camera. Smearing vaseline on their teeth to keep them from sticking to their lips? Check. Stretching pantyhose over the lens to create a gauzy, soft-focus look? Check. But Rafaeli stands accused of creating some new tricks to fool the taxman instead — and her next photoshoot may be a mugshot. That's because last week, the Israeli Tax Authority questioned her mother Tzipi and her on charges they they avoided millions of shekels in taxes. (A shekel is worth about 27 cents right now.)

Israel's tax law provides that citizens who live outside the country don't have to pay tax on the income they earn outside the country. (That's not the case here in the U.S., where citizens are taxed on their worldwide income wherever it's earned.) While that's great for expatriates, it also gives the country's top earners a pretty obvious incentive to leave the country — or at least look like they left the country — to avoid those taxes, which reach 50% on income over 811,560 shekels.

That said, then, the first allegation against Rafaeli is that she created the false appearance of living outside the country to avoid tax. Investigators accuse her of living in apartments in Israel rented under her mother's name and brother's name. (She claims the apartments were merely convenient alternatives to a hotel when she returns to her homeland — and since she doesn't actually "live" there, why should they have been in her name?) The Tax Authority also accuses Rafaeli of failing to report over a million shekels worth of benefits she received in exchange for promotional consideration. These include a Lexus and Range Rover from a rental car company in exchange for a secret agreement to be photographed in their cars. They also include use of an apartment at Tel Aviv's chi-chi YOO Towers in exchange for "leaking" her residency there to promote it.

Finally, they claim she failed to report a million shekels she received in the form of "celebrity discounts," like the 100,000 shekels worth of interior design work she got for 40,000 shekels (and even more publicity).

Naturally, the model denies the allegations. "There is no drama," her attorney says. "In the end, this is just a civil dispute. No one cheated anyone else. It will all clear up soon." In the meantime, Rafaeli and her mother have been ordered to turn over their passports. Neither can leave the country for the next 180 days without getting government permission and posting a 750,000 shekel bond.

It's too bad the supermodel Rafaeli isn't an American citizen! She would have thousands of pages of tax law, regulations, and court cases to help her pay less tax legitimately. We could have given her a plan to use them all to her advantage. But while it may be too late for her to avoid modeling the most stylish prison garb, it's not too late for you to take steps to pay less. So call us and see how much you can save!

Tax Advice for the Grinch

The holiday season is in full swing, and we expect you're on your best behavior to make Santa's nice list. But there's one famous guy who works harder than anyone else to be naughty this time of year, and that's everyone's favorite Dr. Seuss anti-hero, the Grinch.

We don't care if you prefer the original animated cartoon or Jim Carrey's 2000 live-action remake. Either way, when you think of the Grinch, you probably think about what he steals. But have you ever thought about what he pays? You can be sure the Whos down at the IRS do! Fortunately, the Grinch can take advantage of all sorts of tax deductions to help pull off his Grinchy plot. Those include:

• Mileage. The Grinch can choose to deduct "actual expenses" (maintenance, upkeep and depreciation on his ramshackle sleigh) or the standard allowance (currently 56 cents per mile). In the Grinch's case, the short trip down from the top of Mount Crumpet to Whoville makes actual expenses his best bet.
  
• Uniforms and Work Clothes. Uniforms the Grinch provides for himself 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 think the Grinch's fake-Santy Claus look should be distinctive enough to pass the IRS test.
• Meals and Entertainment. Feeding all those Whos at the end of a long day can't be cheap, even if you opt to save a little by carving the roast beast yourself. The Grinch can deduct 50% of all meals and entertainment he hosts, down to the last can of Who Hash. That's exactly the sort of subsidy that helps the Whos feast, feast, feast, feast.
• Contractor Fees It's clear that the Grinch's dog Max would prefer to just go along for the ride. But that's no reason not to deduct any payment the Grinch makes to his four-legged friend. Max isn't regularly engaged in the trade or business of helping the Grinch steal Christmas, which suggests the IRS would classify Max as an independent contractor (rather than an employee), responsible for his own employment tax and withholding. (Getting off that particular hook is sure to bring out that evil Grinch smile!)
• Medical and Dental. Speaking of the Grinch's smile, have you noticed how awful the Grinch's teeth are? With just a little planning, he could set up a Medical Expense Reimbursement Plan and deduct the cost of straightening and whitening those choppers!

Here's another reason for the Grinch to be happy that his heart grew three sizes that day — and he gave Christmas back. If he really had stolen Christmas, he would have owed tax on it! Ill-gotten gains are just as taxable as any other kind of income, right? We imagine all those flu floopers and tar tinklers would be treated as ordinary income — but who knows how an auditor would treat a set of silver jing tinglers, or a rare zu zitter carzay?

This holiday season, we wish you and your family all the best. And remember, don't hesitate to call us with any year-end finance questions!

IRS Employees Make the Naughty List

Back in 2002, Steve Epstein, the director of the Pentagon's Standards of Conduct Office, faced a common dilemma among ethics officials: how to keep his training sessions fresh and relevant? His answer was to avoid discussing dry statutes like 18 U.S.C. § 205, and focus instead on telling stories. "We discovered that the first thing you have to do is you have to entertain folks enough so they will pay attention."

Epstein found plenty of stories, and assembled them into the Encyclopedia of Ethical Failure, a compelling collection. He organized them into helpful categories like "Bribery," "Credit Card Abuse," and those always-entertaining "Time and Attendance Violations."

Epstein's list focuses mainly on military personnel. But we were curious to see if anyone at the IRS had wound up in his Hall of Shame. And sure enough, we found a few. Now, the vast majority of IRS employees are honest, hardworking public servants, doing a thankless job in an era of shrinking budgets and rising hostility. But Christmas is approaching, and somebody has to wind up on Santa's naughty list!

• An IRS Revenue Agent became friends with the owner of a construction company that owed back taxes. The agent wound up accepting generous gifts like free dinners, free rounds of golf, and a check for $14,900 that he used to buy a car. He ended up admitting that the gifts from his new bestie made it hard to collect the construction company's outstanding debt, and spent three years thinking about it at a federal installation with no golf course.
  
• Two rental-car company owners conspired with two IRS employees to ignore their tax debt in exchange for free rental cars and paid vacations to Florida. Alas, people in stories that begin with the word "conspired" rarely end well, and this one was no exception. Instead of finishing with "they all lived happily ever after," this one features words like "jail," "restitution," and "supervised release."
• An IRS employee learned inside information about a stock transaction while he was working on a collection. After the assignment, he bought $2,000 worth of the stock. Apparently his conscience got the better of him, and he came clean to his supervisor. This led to charges for participating personally as a government employee in a matter in which he had a personal interest. The prosecution, in turn, led to his resignation, plus six months in a pretrial diversion program. Oh, and in a victory for karma, he lost money on the stock!
• An IRS officer and two tax preparers dreamed up a scheme to cheat the government. The tax preparers convinced clients who owed money to the government that they could negotiate a better deal if they made an up-front payment. Then the IRS officer falsified records to show the clients were "uncollectible," which meant the IRS stopped pursuing them. Meanwhile, the money the clients thought they were paying over to the IRS never actually found its way there. Naturally, all three of our criminal masterminds wound up serving time.

Here's the good news this holiday season. It really is possible to pay less and make the nice list. You don't even have to wait for Santa to leave anything under your tree. Just call us for a plan, before the clock strikes midnight on December 31!

New Tax Collection "Law"

Turn the dial on the Way-Back Machine to the days of the Great Depression. Millions of Americans are jobless, struggling just to eke out a living. But one man named Willie Sutton has discovered unlimited opportunities in a truly recession-proof field: robbing banks. And why did he choose banks, an enterprising reporter asked? "Because that's where the money is," Sutton supposedly replied.

When Sutton published his autobiography 40 years later, he denied saying those words. But by that point, they were so famous it didn't matter. Today, med students learn "Sutton's Law" to focus their workups on the most likely diagnosis, rather than every conceivable possibility. (Sutton obviously never saw an episode of Grey's Anatomy.) And accountants use the "Willie Sutton rule" when they focus their activity-based costing where the highest costs occur, because that's where they're likely to find the biggest savings.

Now it seems our friends at the IRS have stumbled upon Sutton's Law, too. Last month, the Treasury Inspector General for Tax Administration released a 34-page report arguing the service spends too much time auditing people who make "merely" $200,000-400,000, and should spend more time on "Global High Wealth" taxpayers earning even more. We know you don't want to read that report, so we'll go ahead and summarize it for you.

For the 2013 tax year, the IRS audited 1.5% of the returns reporting income from $200,000-399,999. They spent 726,258 hours on that effort, and dug up $605 in additional tax for every hour. That sounds like a pretty solid return on investment, until you look at what those auditors do with people stacking real paper. That same year, the IRS examined 12.1% of the returns reporting income of $5 million or more. (That's 6,309 out of 52,078 returns, if you're curious.) They spent 193,559 hours dissecting those returns, and brought in a whopping $4,545 for every hour invested.

Numbers like that suggest that the IRS audit should everyone, or at least everyone above a certain income. (Maybe just everyone who looks really sneaky?) So here's the challenge. Congress has slashed the IRS's budget by 18% in real dollars since 2010. That means picking audit targets more strategically. The Inspector General's report argues the service should spend more time on so-called "enterprise cases," where they examine individual taxpayers plus the corporations, partnerships, trusts, and other entities they control. Those efforts take more time, more effort, and more experienced staff — resources they can't spend on lower-income cases. But that's where the money is! So where should auditors draw the line? $200,000? $400,000? Or even higher? What do you think?

Of course, the IRS can't stop auditing everyone else entirely. Fear of an audit is their cheapest and best tool to ensure compliance. Focusing those efforts entirely on "the 1%" would undermine that deterrent. And if everyone earning less than $200,000 knew they had a hall pass from the IRS, pretty soon there wouldn't be enough tax dollars collected to pay auditors at all!

Here's the lesson for the week. You already know that the key to paying less tax is planning. But did you know that some of the most powerful tax-cutting strategies can also lower your audit odds, too? Planning to pay less doesn't mean waving a red flag in an auditor's face. It might even mean pulling one back. So call us to see if we can help keep you off the IRS radar!

Uncle Sam, Knowing When to Hold'em

Last month, millions of fans across America sat down in front of their televisions to watch the Kansas City Royals beat the New York Mets, 4 games to 1 in baseball's World Series. But few of those fans would ever dream they could suit up and join the players in the dugout. That's because, while many of us played as children or teens, America's national pastime is, for the most part, a spectator sport.

That's not the case with America's favorite indoor sport. Poker players across America look forward to the World Series of Poker, in part because, for just $10,000, they can buy in and join the action themselves. On July 8, a total of 6,420 players from 80 different countries gathered at Las Vegas's Rio Casino to compete in the no-limit hold'em Main Event. And on November 10, there was one clear winner: our friends at the Internal Revenue Service.

To be clear, no one from the Service actually appeared at the final table. And a 24-year-old pro named Joseph "Joey Ice Cube" McKeehen from North Wales, PA, walked away with the coveted gold and diamond bracelet. But the IRS walked away with a bigger chunk of the $24 million in prize money than anyone else!

Joe McKeehen sat down at the final table with three times as many chips as his nearest rival, and never let up. Three days and just 183 hands later, his pair of tens knocked out Joshua Beckley's pocket fours to end it all. McKeehen's share of the purse totaled $7,683,346. And sure, that sounds like real money. But assuming he pays tax on the full amount, he'll give back $3,073,240 of that in federal income tax, $292,000 in self-employment tax (because he's a professional), $235,879 in Pennsylvania income tax, and $76,833 in local Earned Income Tax. (He'll also owe tax on the $500,000 value of the bracelet.) That's sort of like taking a full house and chopping off the pair — it still leaves three of a kind, but it doesn't pack the same punch.

The story is much the same with the rest of the nine who sat down at the final table. Runner-up Beckley turned his $10,000 buy-in into $4,470,896, but gives back $2,081,719 in tax. (His tax rate as a New Jersey resident is a lot higher than McKeehen's.) Third-place winner Neil Blumenfield faces a 12% California tax on his winnings, while fourth-place finisher Max Steinberg of Las Vegas faces no state tax on his at all. Seventh-place finisher Pierre Neuville, of Belgium, actually finishes fifth after taxes. That's because the U.S.-Belgium tax treaty lets him keep all of his $1,203,293 prize. Ninth-place finisher Patrick Chan, who lives in New York City, played just two hands at the final table and gives back nearly half his $1,001,020 to taxes.

In the end, Uncle Sam should take home $8,467,081 of the total prize money. That's not bad considering he didn't even have to sit down to play! No tough decisions over going "all-in" before the flop, no sweating out gutshot draws on the turn or the river. On other continents, Israel's Tax Authority takes a shekel or two from fifth-place finisher Zvi Stern, and Italy's Agenzia delle Entrate takes half a million (dollars, not lire) from eighth-place finisher Federico Butteroni.

Here's the good news where it comes to taxes: Paying less is a lot easier than catching pocket aces at the final table. So if you want to pay less, and you can't take advantage of the U.S.-Belgium tax treaty, call us for a plan. Be sure to do it now, before the year runs out on you. We'll tell you which strategies to hold, and which to fold, and send you home a winner.

"Easily Satisfied with the Very Best"

Few figures from recent history loom larger than British Prime Minister Winston Churchill, "the Last Lion." He spent "the wilderness years" of the 1930s fighting the Conservative Party's leadership, most notably Neville Chamberlain, to campaign for rearmament. As prime minister, he fought the Nazis to victory in World War II. Throughout his life, he fought the "black dog" of depression. But did you know how much he fought the Board of Inland Revenue — his country's equivalent of our own IRS?

The Right Honorable Sir Winston Leonard Spencer-Churchill was born into privilege. His grandfather was the seventh Duke of Marlborough and lorded over Blenheim Palace, one of England's stateliest homes. Maybe that's why Churchill picked up the sort of indulgent habits that led so many British aristocrats to lose their stately homes. Now David Lough, a former banker, has written No More Champagne: Churchill and His Money, to chronicle Churchill's precarious relationship with personal finance. And it includes a story to delight all of us who understand the value of smart tax planning.

Churchill loved to write. He loved to paint. He loved to drink champagne and smoke cigars. But most of all, it appears, he loved to spend. Take those infamous cigars, for example — by 1914, he was smoking a dozen a day, at a cost of about $1,600 per month in today's dollars. Yet he went five years without paying his bill to J. Grunebaum & Sons, his tobacconist.

"These filthy money matters are the curse of my life and my only worry," he wrote his mother when he was just 24 years old. Later, he told her: "It seems just as suicidal to me when you spend £200 on a ball dress as it does to me when I purchase a new polo pony for £100. And yet I feel that you ought to have the dress & I the polo pony. The pinch of the whole matter is that we are damned poor."

Lough's book recounts how Churchill even flirted with bankruptcy. Just one month after becoming PM, he ran out of money to pay his household bills, his taxes, and the interest on his loans. His assistant approached a prominent anti-Nazi banker for a £5,000 handout — equal to $250,000 in today's dollars.
Fortunately, Churchill had financial reinforcements outside his government salary: his income from writing. And that's where he conjured up a little tax-planning magic. In 1940, he cleverly persuaded his finance minister that since he was now "retired" from writing, any income he earned from that source should be treated as nontaxable capital gains rather than ordinary income. This would eventually mean no tax on the sale of film rights to his books, nor on advances for his memoirs. Of course, when he left office in 1945, he faced punishing 90% rates on any future works. (It's no wonder he turned to painting!)

Now it looks like clever planning is a Churchill family tradition. Last year, his daughter died at age 91, and Her Majesty's Revenue and Customs department agreed to accept 37 of his paintings in lieu of £9.4 million in inheritance taxes. The paintings will hang at the family's former home outside Kent.

If you're like most of our clients, when it comes to taxes, you want to fight them on the beaches, fight them on the landing grounds, and fight them in the fields and streams and hills and never surrender. The good news is you don't need to strongarm the Secretary of the Treasury into letting you pay less. You just need a plan. So call us, before December 31, to assure your finest hour!

Quantum Mechanics (or Something Equally Complicated)

How big a tax bill would you have to pay before it really hurt? Would sending the IRS $10,000 do it? What about $100,000? What about $1 million? Would you toast the good fortune that left you with enough income to owe that much tax, or would you stamp your foot and call for the peasants to storm Washington with pitchforks and torches?

Now imagine that you're hedge fund manager George Soros. You survived the Nazi occupation of Hungary and fled the communist regime that succeeded them. You made $1.8 billion shorting the British pound and earned the nickname "the man who broke the Bank of England." You've amassed a $24.5 billion fortune, enough to make number 24 on the Forbes 400 list. What's your reward? How about a tax bill of $6.7 billion.

Soros started his Quantum Endowment Fund back in 1973. Since then, he's grown that first fund into an entire family. Like most hedge fund managers, he charges a management fee based on a percentage of assets under management (typically 2%), along with an incentive fee equal to a percentage of profits (typically 20%). Ordinarily that would mean hefty taxes to accompany those hefty fees. But back then, the law gave hedge fund managers the opportunity to defer tax by reinvesting fees back into their funds.

The problem with deferring fees like that is that your investors — at least the ones who are taxed here in the U.S. — can't deduct your fees from their income. But that's no problem. Just set up offshore funds for clients like pension funds and endowments that aren't subject to U.S. taxes and keep deferring tax on their fees!

Of course, when Washington sees how taxpayers take advantage of the rules in the real world, it's easy enough to change them. In 2008, Congress closed that particular loophole and gave managers until 2017 to cough up the accumulated tax. Soros reports having $13 billion of his own money in the funds. He's subject to 39.6% ordinary income tax, 3.8% net investment income tax, and 12% New York state and city tax. Crunch the numbers and that's where we come up with that monster bill.

But that 2008 law also included a loophole for funds based outside the U.S. that pay local tax. So, just one week before President Bush signed the new law, Soros formed a company called Quantum Endowment in Ireland, where the top tax rate is just 25%, then transferred his accumulated gains into that new company. Of course, that doesn't mean he actually reports any profit. Instead, he issues investors something called "profit participation notes" and pays out most of the income as distributions on those notes. From 2008 through 2013, Quantum Endowment has paid just $962 in tax.

Ironically, back home in America, Soros has earned a reputation as a political liberal. Plenty of observers find it hypocritical ironic that a man who owes so much of his fortune to deferring his own taxes has chosen to dedicate part of it to causes like raising everyone else's.

George Soros has invested millions of dollars to assemble a team of world-class professionals to manage his fortune. This includes the traders who help him manage billions for himself and his clients, and the tax advisors who help them all keep as much as the law allows. You may not have as much at stake as Soros. But don't you deserve the same proactive attention to planning as he gets? You can have it . . . just give us a call!

Who Lives, Who Dies, Who Tells Your Story

Every so often a new show hits Broadway with lights that shine brighter than the rest. In 1996, Rent celebrated a group of impoverished East Village artists struggling to thrive in the shadow of AIDS. In 2003, Wicked imagined the lives of the witches of Oz before Dorothy's unexpected arrival. But who would have thought today's hottest ticket would be a rap-driven bio of the Founding Father responsible for the financial system that collects those taxes we all hate? This week's story is a bit different from our usual perspective. But stick with it . . . how often do you see taxes and finance starring in popular culture?

Hamilton began by chance when the show's creator, Tony award-winner Lin-Manuel Miranda, picked up Ron Chernow's landmark biography of Alexander Hamilton to read on vacation. Miranda saw "the $10 founding father/without a father" as the embodiment of hip-hop: a penniless immigrant who rose to power through the power of his words. The show began life as a concept album before morphing into a full-blown musical which debuted on Broadway in August. The show sold $30 million worth of tickets before it even opened, and prime seats currently commandover $1,300.

The story follows Hamilton's journey from his birth in illegitimate squalor "dropped in a forgotten spot in the Caribbean," through his appointment as George Washington's right-hand man and service as the nation's first Treasury Secretary, to his disgrace in the nation's first sex scandal and his death at the hands of rival Aaron Burr. Thomas Jefferson, James Madison, and Lafayette are all there to challenge him along the way. Even King George III saunters onstage to warn his unfaithful subjects: "And when push/Comes to shove/I will kill your friends and family/To remind you of my love."

Miranda's propulsive score will satisfy everyone who's waited for hip-hop to meet harpsichords and fall in love. It combines traditional Broadway influences from Gilbert & Sullivan and Stephen Sondheim to contemporary sounds like the rapper Notorious B.I.G.

The show has reduced sober critics to drooling fanboys. The New York Times' Ben Brantley gushed "it really is that good," and confessed, "I am loath to tell people to mortgage their houses and lease their children to acquire tickets to a Broadway show. But Hamilton . . . might just about be worth it." Even the Wall Street Journal's Terry Teachout calls it "the most exciting and significant musical of the decade," and says, "Do whatever you have to do short of grand larceny to score a ticket."

As it turns out, there are only a couple of direct references to taxes. At one point Thomas Jefferson snarls, "Look, when Britain taxed our tea, we got frisky/Imagine what gon' happen when you try to tax our whiskey." But that line appears in a song titled "Cabinet Battle #1" that turns Hamilton's plan to finance the U.S. government into a rap battle. (It's not the sort of thing you expect to hear on Broadway, right?) Hamilton championed a strong federal government, with implied powers to assume states' debts, and establish a national bank. His forceful advocacy is arguably why the bulk our taxes today go to Uncle Sam and not your state or local government.

We realize that when the curtain rises on April 15, you probably aren't humming show tunes. But it's worth remembering, at least occasionally, that taxes really are the price we pay for civilization. And while our current tax code may seem as illegitimately-conceived as the Founding Father who paved its way, it's the product of a uniquely American experiment in self-government that seems to still be working 200 years later.

No Extra Credit Here

Paying your taxes is one of those responsibilities that most of us accept when the time comes. Sure, we grumble about it. But we pay, then get on with the day. We don't expect to get brownie points just for doing our duty. In fact, if you give yourself too much credit for doing it, you might get yourself in trouble, as one tone-deaf tech company recently found out.

Airbnb (shortened from "AirBed & Breakfast") is an online marketplace for short-term rentals that lets people list and find acommodations across the world. Are you visiting the company's hometown of San Francisco and don't feel like checking into a hotel? Check out www.airbnb.com, where you can find everything from a spare guest room in someone's house to a fully furnished three-bedroom condo overlooking the Golden Gate Bridge. The concept has definitely caught on — the company currently offers over 1,500,000 listings in 34,000 cities and 190 countries, and boasts a $25.5 billion valuation.

However, many of the temporary innkeepers who list their homes on the site don't know they should be paying local hotel or occupancy taxes, which typically range from 5-15%. Airbnb has stepped in to help their users comply with these rules, reaching agreements with cities including Portland, San Jose, Chicago, and even Amsterdam to collect the taxes and pay them over to the right places.

In San Francisco, the company collects and then pays pays about a million dollars a month in tax. But city residents are about to vote on a ballot initiative that would limit short-term rentals to 75 nights per year. At a time when rents in the city have shot insanely high (the average studio apartment rents for over $2,800 per month), the goal of the initiative is to discourage landlords from reserving properties for tourists, which limits the housing stock and puts even more upward pressure on rents. Airbnb has committed $8 million to defeat the initiative, which is more than all 14 mayoral candidates together spent in the last election.

But here's where Airbnb took things a little far. Last week, the company irritated the City by the Bay with a snarky series of ads on billboards and city bus kiosks. "Dear Public Library System," read one. "We hope you use some of the $12 million in hotel taxes to keep the library open later. Love, Airbnb." Others urged the city to build more bike lanes, plant more trees, put escalators up the hills, keep parks clean, and keep art in schools. The company also told tax collectors not to spend the $12 million all in one place (unless they spend it on burritos).

Good stuff stuff, right? Well, maybe not so much. One resident crunched the numbers on the library ad and calculated the hotel tax might contribute as much as 78 cents per employee per day — hardly enough to keep the libraries open longer! Others commented that the ads were good at going viral, but not much else. Airbnb has already admitted the ads took the wrong tone, apologized to anyone they might have offended, and pledged to take the ads down.

So here's the moral of the story. You don't get brownie points for paying your taxes — so why pay more than you have to? Companies like Airbnb spend millions on plans to keep their tax burden as low as possible. But you can do the same thing for a far smaller investment — and with December 31 fast approaching, now is the time of year to plan. So call us, and see how much extra you might save!

Tax Man Turns $1 = $10,001

Here in the United States, Uncle Sam imposes a "progressive" income tax. As your income goes up, so does your tax rate. However, those rates go up incrementally. If you're married, filing jointly with your spouse, the 39.6% top rate kicks in at $413,201. (We use the term "kicks" deliberately because that's how it feels when you're giving Uncle Sam nearly 40 cents on the dollar.)

The good news, if there really is any, is that the higher tax applies only on the amount of income above the new threshold. If your income is $413,201, you'll pay the higher rate on that 413,201st dollar of income, but no higher on the first $413,200. Paying the higher tax on that last dollar hurts a little more, but not as much as if it meant paying more on every dollar.

But not all taxes are progressive in the same way. Sometimes governments impose taxes on certain transactions that kick in at a certain level but are based on the entire amount. Naturally, those sorts of taxes get buyers and sellers to sit up and take notice before they act. And we may be about to see that effect in one of the country's frothiest housing markets — the "Big Apple."

In 1989, New York Governor Mario Cuomo signed the "mansion tax" into law. It's a flat 1% surcharge you pay to close on property costing $1 million or more. Last year, it raised $362 million. That's a drop in the Empire State's $72 billion bucket. But it's a big deal for the buyers! If you pay "just" $999,999 for your new home, your mansion tax is zilch. But pay one dollar more, and you owe the tax on the entire $1 million. That single extra dollar of price just took $10,001 out of your pocket!

Back in 1989, $1 million really bought you a mansion. But today in Manhattan, the median sale price is a record-high $999,999, according to the Corcoran Group real estate brokers. You can drop $1 million just for a one-room studio. At the high end hedge fund manager Bill Ackman just paid $91.5 million for a condo at the One57 building in the heart of 57th Street's new "Billionaire's Row." (He's not actually going to live there, mind you — he'll just host an occasional party and watch his equity climb ever higher.)

Drive two hours east to the Hamptons (or better yet, fly 45 minutes on a helicopter) and the story is much the same. A million bucks buys you something the real estate agent might describe as "shabby chic," but that anyone without a vested interest in the sale price would just call "shabby." You've really got to make it rain to get something most of us would consider a "mansion."

Governments aren't the only ones to hustle some extra cash cash when a property changes hands. Many of the city's finer cooperative apartments impose a so-called "flip tax" to buy or sell. Want to join New York Jets owner Woody Johnson, fashion designer Vera Wang, and the rest of the billionaires hanging their bespoke hats at 740 Park Avenue? You'll pay the building an extra 3%. That might not sound like so much — but considering the last apartment sold there went for $71 million (do the math), it adds up fast!

Here's the lesson for the week. Buying big-ticket items like a house, an apartment, or business equipment can involve much more than just running down to the store and whipping out your American Express card. And selling those sorts of assets the wrong way can cost you even more. So don't make those decisions alone. Call us for the plan you need to buy and sell right!

Fahrvergtaxen

Every once in awhile, some knucklehead in a position of power at one of the world's biggest businesses does something so incredibly stupid, you wonder how they can remember to put their shoes on before they head to work in the morning. Bernie Madoff did it for decades by running a classic Ponzi scheme out of his New York office. The folks who ran Enron did it for years when they lied about their earnings. And right now in West Virginia, the former CEO of Massey Energy is on trial for covering up safety violations that led to the deaths of 29 coal miners. Stupid, stupid, stupid.

Volkswagen became the latest corporate villain when they came clean about selling 11 million cars with a secret feature they didn't advertise on the window sticker. Along with leather-trimmed seats, German-engineered sport suspensions, and fancy navigation systems, buyers who chose a "Type EA 189" diesel engine also took delivery of a "defeat device," buried deep in the car's software, designed explicitly to cheat emissions tests. Researchers from the International Council on Clean Transportation discovered that the cars were emitting up to 40 times more nitrogen oxide than allowed.

Naturally, environmental regulators are up in arms. VW's CEO has resigned, the company's stock has tanked, and the carmaker is looking at up to $18 billion in fines in the United States alone. But the devices apparently did more than just cheat pollution monitors. It looks like they also cheated the IRS. Uh oh.

Here's how it worked. The Energy Policy Act of 2005 gave taxpayers credits for buying certain alternative fuel vehicles, including lean-burn vehicles running on diesel fuel. Manufacturers have to swear on a stack of bibles that their cars meet the standards to earn the credits, which naturally make them more attractive to buyers. For 2009, VW pinky-swore that their Jetta 2.0L TDI sedan and Jetta 2.0L TDI SportWagen models qualified for a $1,300 credit. 39,500 people bought those cars, making the total tax fraud $51 million.

On October 6, Senate Finance Committee Chair Orrin Hatch and Ranking Member Ron Wyden sent VW a letter posing a blunt question: "Did Volkswagen make false or misleading assertions in any of the materials submitted to, or communications made to, the U.S. government regarding eligibility of Volkswagen vehicles for the lean-burn technology motor vehicle credit?" They letter also requested any marketing material alerting buyers to possible tax credits for their cars.

VW has until October 30 to reply. It's unlikely that buyers will have to repay credits — they didn't do anything wrong, and VW's pockets are deeper anyway. Sure, VW will recall as many of the vehicles as they can. (Of course, some of those buyers will prefer the performance they get from the dishonest engines.) So the tax offense will probably get rolled up in whatever settlement VW winds up negotiating with the government. The company has put aside $7 billion to handle the fallout. Sure hope that's enough!

You'd like to think the boneheads who decided to cheat the emissions tests at least worried about the civil and criminal risks they were taking. But smart money would bet they didn't consider the tax consequences, either. While that wasn't their biggest mistake, it's still likely to push the ultimate cost of the scandal even higher. That's why it's so important to have a plan that helps you anticipate the tax costs of everything you do. So call us for your plan and avoid running off the road! 

Yogi Berra on Taxes

Last month, one of the most truly American lives came to an end at age 90. Baseball legend Lawrence "Yogi" Berra was a superstar both on and off the field. As a player, he won 10 World Series rings and made the All-Star team 18 times in 19 seasons. He was American League MVP five times and won election to the Hall of Fame in 1972. Off the field, he managed and coached the New York Yankees, New York Mets, and Houston Astros.

Yogi Berra was more than just a baseball legend. Many people are surprised to learn that he served on a Navy rocket boat and stormed Omaha beach on D-Day. He endowed the Yogi Berra Museum and Learning Center and Yogi Berra Stadium at New Jersey's Montclair State University. He even opened a bowling alley with former teammate Phil Rizzuto.

But when you think of Yogi, you think of Yogi-isms — those pithy one-liners that leave you simultaneously befuddled and enlightened. And as we looked over some of the quotes that inspired The Economist to name him the "Wisest Fool of the Past 50 Years," we were struck by how many of them he could have uttered in a parallel universe as Yogi Berra, tax planner. Consider these:

• "It ain't over 'til it's over." Fighting the IRS can take a long time, long enough to make 16 or 18 scoreless innings fly by in comparison. If you get audited and wind up behind the count with a deficiency notice, you can appeal it within the IRS. Then, depending on the specifics, you can take it to the Tax Court, appeal a decision to the U.S. Court of Appeals, and even take it to the Supreme Court. The whole process can take years.
• "The future ain't what it used to be." Some of your most important tax-planning calls require you to weigh uncertain future alternatives. Are you better off with a traditional 401k (where you deduct your contributions today and pay tax at unknown future rates on your withdrawals) or a Roth 401k (where you pay tax on your contributions today and avoid an unknown future rate on your withdrawals)? Choose right and save big. Choose poorly and pay for it!
• "You should always go to other people's funerals, otherwise, they won't go to yours." Clearly Yogi was anticipating estate tax here. He would have been disappointed to learn the IRS never attends a funeral, even if they plan on stripping millions from the guest of honor!
• "We made too many wrong mistakes." Lots of our clients come to us after making expensive mistakes that cost them thousands. Fortunately, good tax planning can correct those mistakes and stop the bleeding. Sometimes we can even "turn back the clock" and recover past overpayments!
• A nickel ain't worth a dime anymore." This one's pretty obvious, isn't it? Yogi must have said it after he saw how much the IRS took out of his last paycheck!

Finally, who can forget, "When you come to a fork in the road, take it"? Tax planning is full of forks in the road. Cash or accrual? C-corp or S-corp? Medical expense reimbursement plan or HSA? As Yogi says, "You've got to be very careful if you don't know where you're going, because you may never get there." So call us for the plan you need if you don't want April 15 to feel like deja vu all over again!

Don't Bogart That Deduction, My Friend

Imagine you're a hardworking pot dealer just trying to operate an honest shop in the newly legal marijuana industry. You get audited, and the examiner hits you with a $290,000 bill. He then asks to talk "off the record," and tells you he was lenient with your examination. The real bill, he says, should have been a million dollars higher. Then he looks you in the eye and says, "Hey . . . how about a little something, you know, for the effort?"

That's pretty much what happened to one marijuana dispensary owner in Seattle. Except the auditor's dopey request didn't quite work out the way he hoped. (And really, if it had, would you be reading about it here?)

You may think that running a legal marijuana dispensary is 4:20 all day long, but it's no ordinary business challenge. Polls show that a majority of Americans think it's high time for legalization, yet there's still a stigma attached. Banks and other financial institutions are reluctant to deal with the industry, which forces most vendors to do business in cash.

If those challenges aren't enough, the tax code makes "ganjapreneurship" even harder. Section 280E says you can't deduct any expenses for trafficking in controlled substances. Marijuana sellers can deduct their "cost of goods sold." But there are none of the usual deductions for overhead expenses like rent, salaries, utilities, and professional fees that any other business can write off. That's why tax advisors generally recommend that dispensaries sell as much other stuff, like apparel and accessories, as they possibly can. That way, they can allocate at least part of those overhead expenses to deductible purposes.

Now back to our Seattle story, already in progress. Paul Hurley is was an auditor working in the Seattle IRS office. But he wanted to "roll his own bonus" so he could pay down student loans. That's when he went off the record with our pot shop owner and complained about living paycheck-to-paycheck. The shop owner sensed that Hurley was looking for a bribe, held up his hand to rub his fingers together, and looked dubiously at Hurley to see if that was the case. Hurley replied with a simple "20," then specified that he wanted it in cash.

The shop owner agreed to meet the auditor at a local Starbucks. (Where else do you go to collect a bribe in Seattle?) But here's where Hurley's fortunes went up in smoke. The shop owner had called the FBI. Special agents gave him cash to pay the bribe, wired him for sound, and set up cameras outside the shop. They recorded the first meeting, on September 16, when the shop owner gave Hurley $5,000. They recorded a second meeting, on September 21, when he paid the remaining $15,000 and put a lid on Hurley's fate. The FBI then swooped in and arrested him "without incident."

Not surprisingly, Hurley is looking at 15 years in the joint. (Sometimes the jokes just write themselves.) That's on top of a $250,000 fine, which makes the $20,000 request look like seeds and stems.

Of course, the real moral here isn't to "just say no" when the IRS asks for a bribe, it's to avoid getting into that situation in the first place! Our honest dealer really did owe a bale of extra tax, because he didn't have the right plan. So don't get busted like he did — call us today for your plan! 

Share a Coke with the IRS

Coca Cola has earned a lot of headlines for their "Share a Coke with . . . " marketing campaign, printing bottles and cans with 1,000 of the most popular names in the country, along with nicknames like "Mom," "Dad," Soulmate," and "BFF." You can even go online to customize your own bottle for just five bucks. (Just imagine the possibilities . . . "Share a Koke with a Kardashian" for reality-TV wannabes, or "Share a Diet Coke with Your Yoga Instructor" for fitness fanatics? The Center for Science in the Public Interest even created a "Share a Coke with Obesity" can.)

Last week, our friends at the IRS decided to open a little happiness of their own. And apparently, they want more than just a can or two of fizzy sugar water. On Friday, Coca Cola Enterprises filed a Form 8-K with the Securities and Exchange Commission revealing that, after a five-year audit, the IRS is dunning them for $3.3 billion in extra taxes. Plus interest! (Fun fact: the audit covered just three tax years from 2007-2009. That means the IRS spent more time auditing Coke's income than Coke spent earning it!)

The issue centers on "transfer pricing," which governs how businesses set prices between controlled or related entities. Let's say Coca Cola sells a bottle of their delicious Vanilla Coke in Bermuda. (That sounds especially delicious, right?) How much of their profit should be taxed in Bermuda, where the average effective tax rate for multinational corporations is just 12%? And how much of it should be taxed back here in the U.S., where the rate tops out at 35%? That may not sound like a huge difference on something you can buy for a pocket change at a highway rest stop. But Coca Cola sells a lot of beverages — $46 billion worth last year. And 57% of that revenue comes from international markets.

With all that money sloshing back and forth across international borders, you can see how shifting tax rates on a few cents of income per drink can really add up. Transfer pricing issues may sound boring (and they are), but they're a big deal. The very serious lawyers who specialize in these sorts of disputes work out of stuffy offices in high-rent big-city buildings, and they've never even heard of casual Fridays.

Naturally, the folks at Coke don't think it will be especially refreshing to send the IRS an extra $3.3 billion:

"The Company has followed the same transfer pricing methodology for these licenses since the methodology was agreed with the IRS in a 1996 closing agreement that applied back to 1987. The closing agreement provides prospective penalty protection as long as the Company follows the prescribed methodology, and the Company has continued to abide by its terms for all subsequent years. The Company's compliance with the closing agreement was audited and confirmed by the IRS in five successive audit cycles covering the subsequent 11 years through 2006, with the last audit concluding as recently as 2009."

Coke says they plan to file a notice challenging the deficiency in Tax Court. They've reassured shareholders that they have "adequate tax reserves," which means they can pay up if they lose. And if all else fails, they've got that secret formula locked up in a vault in Atlanta. That's got to be good for something, right?

Here's the bottom line. Coke makes billions of dollars a year. But they understand it's what they keep that counts, and they're willing to fight to keep more. Shouldn't you be working for the same goal? So call us for a plan, and pay for your next Coke with the savings. It's the real thing! 

Alibaba and the Forty Percent

Turn on the financial news and you'll hear all sorts of explanations for the stock market's ups and downs. Oh no, the Fed's going to raise rates! Oh no, they're not! Who knows what the real answer is? But last week, the IRS moved the market — when they casually signaled they wouldn't be greenlighting Yahoo's plan to spin off their remaining stake in the Chinese company Alibaba.

Yahoo was the first big online search engine, and they helped popularize services like free email addresses. It's still the most-read news website and fourth-most visited site in the world. But those eyeballs just aren't translating into dollars, especially now that search engine advertisers have surfed their way over to Google.

But Yahoo can brag about one grand-slam home run — back in 2005, they paid $1 billion for a 40% stake in Alibaba, "the Amazon of China." Since going public, Alibaba's "market capitalization" (the total value of outstanding shares) has climbed as high as $248 billion. (It's down to a paltry $162 billion today.) In fact, some analysts argue Yahoo's entire market capitalization was worth less than its holdings in Alibaba and Yahoo Japan, making its core U.S. businesses worth less than zero!

Naturally, Yahoo's long-suffering shareholders want to unlock that value. So when Alibaba went public, Yahoo sold a slice of their stake for $7.6 billion — but therefore got hit with a $2 billion tax bill. The folks at the IRS said "Yahoo!" But shareholders, not so much.

Earlier this year, Yahoo proposed a different strategy for the rest of their stake. First, create an entirely new company. Then stuff it full of their remaining Alibaba stock, along with a dinky slice of Yahoo's remaining operating business. Then spin it off to their existing shareholders. Why jump through all those hoops? Well, if Yahoo just distributes cash and prizes like the Alibaba stock, the IRS gets their usual cut. But if they include an active trade or business in the new entity, Code Section 355 says it's tax-free. (Wink, wink.)

There's just one problem. The IRS doesn't say how big that operating business has to be to make the whole thing work. Would a lemonade stand work? How about a hot-dog cart? Just to be sure, Yahoo went to the IRS to get their blessing first. They applied for a "private letter ruling," which is a written ruling that interprets and applies tax laws to one specific taxpayer's facts. Fees for a letter ruling range from $625 to $50,000, which makes them a cheap form of insurance against billions in taxes. (Of course, the kind of law firm that handles those sorts of requests can run up that much in legal fees just answering the phone!)

Here's where our story gets interesting. Last week, an IRS attorney announced at a bar association conference that the IRS was "reconsidering their ruling policy" on spinoff requests — and Yahoo's stock price promptly dropped 7.6%. That meant over $2 billion in value vanished in a heartbeat. Now, Yahoo can certainly proceed with the deal. They still have an opinion letter from their lawyers telling them it will work. But their profile is high enough that they're under constant audit. It's not like they can pretend they never asked for the ruling, or just hope that nobody at the IRS "notices" the spinoff!

Here's the lesson. Tech companies like Yahoo understand the value of proactive tax planning. They've used it to save billions in taxes, and they realize the money they spend on it is an investment, not an expense. Shouldn't you take advantage of that same opportunity yourself? 

Vive le Tax!

This year, as usual, millions of American tourists took advantage of summer vacation to travel abroad. Favorable exchange rates made European destinations especially attractive. Seeing Old World cultures gives us perspective that we just can't get when we load up the family truckster and head for Disney World. The sights, the sounds, and the great big smells we encounter abroad shed new light on our ordinary lives. New languages, new governments, and even new taxes can prompt us to reconsider our place in the world.

Take Paris, for example. France is the most popular tourist destination in the world, and the City of Light sees almost 2 million American visitors per year. So what sort of tax system do visitors to Paris encounter?

Income taxes are the first place to start. We don't see them, of course, but our French hosts certainly do! Impôts sur le revenu start at 14% on taxable incomes over €9,691 (about $10,800) and rise to 45% on amounts over €151,956 ($169,400). There are also surcharges on incomes above €250,000, and again at €500,000.

Income taxes are just the start. French taxpayers also shell out 7.5% for their version of Social Security, a 0.5% "social debt" tax, plus 3.4% in "additional sampling social contribution" and 1.1% in "solidarity labor" tax on investment income. And that's all before they pay their local professional taxes, residence taxes, and land taxes!

That may sound like a lot. But French employers have even more to grumble about. Employers pay 13.1% of their employees' wages for medical and disability programs, 5.4% for parenting benefits, 4% for unemployment programs, and at least 18.2% for retirement benefits. Granted, that first 13.1% replaces much of what American employers pay for health and disability insurance. But you can certainly see why the Parisians think twice before deciding to hire someone new. Oh, and don't forget the 33.1% corporate income tax!

No visit to Paris would be complete without a pain au chocolat at a sidewalk cafe or a late-night degustation of foie gras, escargot, and cheese. The good news is, the price you see on the menu is the price you actually pay. Value-added taxes (which take the place of our sales taxes) and even service charges are included in the marked price. It's customary to leave a small amount of cash (5% or so) as a tip. But it's reassuring to know that when the snooty waiter brings you l'addition and sneers at your AmericanExpress card, you won't have to calculate the usual 15-20% that we tack on here. (Go ahead, have an extra macaron, they're delicious!)

We're not done yet. France levies an impôt de solidarité sur la fortune (wealth tax), starting at 0.55% on net worth over €790,000 and rising to 1.80% on fortunes over €16,540,000. The wealth tax only raises about two percent of the country's revenue, but it's quite controversial — some consider it a symbol of worker solidarity, while others object that it encourages the wealthy to leave the country. Last but not least, droits de succession et de donation (gift and estate taxes) climb as high as 60%, with no unlimited marital exclusion like we enjoy here in the U.S.

Here in the states, we complain that our taxes are too high. But a quick look at the French tax system reveals that liberté, égalité and fraternité don't come cheap, either! Fortunately, our tax code is stuffed like a crepe with all sorts of deductions, credits, loopholes, and strategies to cut your bill. So call us when you're ready to pay less, and see how much more you can put towards your dream vacation! 

What's in a Name?

Sports fans go nuts this time of year. Baseball fans are watching pennant races heat up; football fans are watching the NFL take the gridiron to kick off the new season; and tennis fans are moving their heads from side to side to take in the U.S. Open. Naturally, this means we're going to talk about basketball.

In Shakespeare's archetypal tragedy Romeo and Juliet, the star-crossed lovers bemoan the feud between their families that keeps them apart. In Act II, Scene II, Juliet gazes out her window and wonders, "What's in a name?" The answer, according to a Chicago jury: $8.9 million tax-deductible dollars!

Dominick's Finer Foods was a Chicago-area supermarket chain that wound up closing its doors after an ill-fated acquisition by Safeway. Back in 2009, probably watching their own clock run down to the buzzer, Dominick's took out an ad in a commemorative issue of Sports Illustrated congratulating Chicago Bulls basketball legend Michael Jordan on his induction into the NBA Hall of Fame. The ad declared, "Congratulations, Michael Jordan, you are a cut above," and included a coupon for $2 off on steaks. (Coincidentally, just two shoppers actually took the store up on their offer!)

A lesser athlete might have just been flattered. But Air Jordan isn't just the most accomplished basketball player of all time. He's also the most effectively marketed b-baller ever. (Forbes magazine estimates his net worth at $1.1 billion, and reports he earned more than $100 million from Nike last year.) And good marketing means protecting your name. So MJ did the same thing any athlete accused of, say, letting the air out of some footballs would do. He sued, claiming Dominick's had used his name without permission.

The jury agreed that Dominick's had fouled Jordan. That left them with the challenge of deciding how much that foul had cost him — in other words, how much Jordan's name was worth. Jordan lined up for $10 million, while Safeway's attorney's blocked with $126,900. The jury clearly thought Dominick's misuse was more than just a technical, and awarded the hardwood legend an $8.9 million bucket hit.

Here's where the IRS comes in. They don't. $8.9 million is probably real money to you, but it's pocket change for a billionaire like Jordan. So "His Airness" declared, even before his lawyers laced up their wingtips, that he would donate any award to local charities. He'll report it as "other income" on Page One of his form 1040, then deduct an identical amount as "Gifts to Charity" on his Schedule A.

Jordan probably feels lucky for lots of reasons. (A billion dollars and six NBA championship rings should do that.) But he's also lucky that he makes enough to dribble around one important limit on charitable gifts. Code Section 170(b)(1)(A) limits gifts to 50% of your adjusted gross income, but lets any excess "travel" forward for up to five years. The upshot? As far as the IRS is concerned, it's a free throw for Jordan.

Here's the lesson for us. It's not just how you make your money, or even how much of it you make. It's also when you make it. Choices like timing business or bonus income, deferring tax on retirement savings, and deciding when to recognize investment winners and losers all play a part in your overall game plan. But if you don't have a plan, you won't know when to lay up, and when to shoot for three. So call us when you're ready for a plan, and let us help you take it down the lane past the IRS guards!

Cadillac Taxes for Everyone!

Employers have played a key role in financing their employees' healthcare since World War II, when they threw in tax-free benefits to attract talent in a time of wage controls. So it's no surprise that when Congress passed the Affordable Care Act, they gave employers all sorts of carrots and sticks to boost coverage. But Congress wanted to control overall costs, too, and didn't want employers being too generous. So they imposed a new tax on so-called "Cadillac" plans. Technically, it takes the form of a 40% penalty on annual premiums exceeding $10,200 for an individual or $27,500 for a family. But everyone knows what the term "Cadillac" plan means, even if Cadillacs have nothing to do with the cost of healthcare.

That got us to thinking . . . if the folks in Washington think a tax on Cadillac plans is a good idea, why stop there? What other sorts of taxes could they think of imposing?

• The "Tiffany" Tax: The DeBeers group of companies, which monopolized rough diamond sales for much of the last century, helpfully "suggests" a young man spend two months' salary on an engagement ring for his betrothed. That's sweet and touching for the man who waits until he's that established before wooing a bride. But blowing two months' pay on something so purely symbolic hardly seems practical in today's era of six-figure student loans and increasingly pricey starter homes. (And is that two months' pre-tax or two months' take-home?) A 40% premium on anything over a carat sounds about right here.
• The "Big Mac" Tax: Let's face it, when you think of junk food, you think of McDonald's. We know we need to eat less, but how? Former New York City Mayor Michael Bloomberg raised hackles when he tried to ban "Big Gulps" with more than 16 ounces of liquid candy in a single serving. He should have known that Americans will swallow a tax a lot faster than they'll swallow a ban. Today's point-of-sale computer systems could easily supersize sales taxes as calories, trans fats, and salt content go up.
• The "McMansion" Tax: The average American family has dropped from 3.01 people in 1973 to just 2.54 today. Yet the average American house has added 1,000 square feet in that same time. Do we really need all those extra bathrooms? And nobody really parks a third car in that oversized garage, do they? Property-tax authorities can easily build out their assessments to penalize bloated square footage, fake turrets, more than seven gables, and random stone accent walls.
• The "Dom Perignon" Tax: A generation ago, Orson Welles promised wine drinkers that Paul Masson would "sell no wine before its time." (Paul Masson himself stomped on the grapes at 9AM, and it was in the freezer at your local 7-11 at 3PM, but who's counting?) Now, it's all "vintage" this and "artisanal" that, and you're not a real wine aficionado if you haven't sampled the latest Chilean Malbec. Governments already load up wine with hefty excise and sales taxes, but why not fortify them with an extra 40% for anything over, say, $40 a bottle?

Fortunately, none of those taxes are real . . . yet. That's just as well, since we've got our hands full helping you pay less of the taxes Washington already imposes. The key, of course, is a plan. And with Labor Day just around the corner, it's not too soon to start thinking about year-end planning. So call us when you're ready to save. And don't pass along any of these ideas to anyone who could actually make them happen!

Bug Bonus

It seems like every day brings word of a new internet hack or data breach. Target got hacked by Russian teenagers and millions of credit cards had to be replaced. Sony got hacked by the North Koreans and a loungeful of smug Hollywood executives got embarrassed. The Office of Personnel Management got hacked by the Chinese and thousands of spies got their covers blown. It's almost enough to make you long for the return of old-fashioned computer punch cards.

United Airlines depends on internet technology as much any big business — the days of friendly travel agents patiently walking you through route choices are long gone. So back in May, they took advantage of a clever strategy for avoiding the sorts of attacks that make the skies less friendly. They call it the "Bug Bounty Program," and it pays "white knight" hackers to find the flaws in their system before the bad guys do. Last month, the airline paid two hackers a million "MileagePlus" points each for finding and documenting major flaws related to remote code execution (whatever that is).

A million miles is literally enough to fly to the Moon and back twice, if you don't mind cramped seats, surly gate agents, $15 snacks, and changing planes in Newark. (Can you imagine flying to the Moon in a middle seat? How much would they charge to check a bag?) But back here on earth, what do our friends at the IRS think of the Bug Bounty program?

The Service generally considers frequent flyer miles you earn from business travel to be nontaxable rebates. However, miles you earn from other sources, like opening a bank or brokerage account, may be taxable. In 2012, Citibank drew heat by issuing thousands of 1099s to customers who had opened new accounts. But many tax experts agreed the IRS wouldn't have noticed — or really, even cared — if Citibank hadn't blown the whistle by issuing the forms!

Last year, the Tax Court reinforced the notion of taxable miles, ordering a Citibank depositor to pay tax on 50,000 "Thank You Points" he redeemed for a $668 airline ticket. In Shankar v. Commissioner, the Court characterized the points as a premium for a deposit — "In other words, something given in exchange for the use (deposit) of Mr. Shankar's money; i.e., something in the nature of interest."

United has confirmed that they'll send 1099s to the Bug Bounty winners, valuing the miles at two cents each. That's great for United; it means they get to deduct the reward. But it also means the winning hackers get taxed on $20,000 each. That's a real problem. First, the miles may not actually be worth as much as United says they are. (Thepointsguy.com, an online resource for points collectors, currently values MileagePlus points at just 1.5 cents each.) And second, the hackers can't sell their miles — which might not be such a problem if the IRS didn't want their taxes in cash.

The real lesson here, as with so many tax stories, is that it's not just how much you earn, it's how you earn it. That's why you need a plan, to make the most of all your different income sources. So call us for your plan, and treat yourself to some First Class service!

Ready or Not, Here We Come!

Campaign 2016 is here! Last Thursday, 10 Republican presidential candidates squared off against each other in Cleveland's Quicken Loans Arena, tackling such crucial topics as hugs, pimps, and Rosie O'Donnell. That same day, the Democratic National Committee announced their schedule of six debates to begin on October 13 in early-primary state Nevada. Sooner rather than later, we'll all be drowning in the vicious sort of campaign commercials that make some of us envy the North Koreans.

That also means now's the season when candidates are releasing tax returns and financial disclosures. Mitt Romney took heat when he 'fessed up to paying just 14% tax on $20 million in 2011, reinforcing the "GotRocks McBucks" caricature he worked so hard to shake. So candidates are doing their best to spin their numbers to look like they grew up in log cabins. Let's take a peek inside some of their wallets, shall we? (No fair crying if we poke a little fun at your favorite candidate!)

• Former Florida Governor Jeb Bush takes the path of early and full disclosure, sharing 33 years of tax returns dating nearly back to his first job bussing tables at the Kennebunk Yacht Club. He paid an average tax of 36% on $44 million of lifetime income, including $7.4 million in 2013 alone.
• Wisconsin Governor Scott Walker takes pride in being a financial Everyman who cuts his own grass and shops at discounter Kohls. Apparently that means he's up to his eyeballs in debt like so many voters. Walker's disclosure shows his net worth is actually $72,500 in the red. He also owes over $10,000 on a Barclays credit card with a 27.24% interest rate.
• Developer Donald Trump hasn't released his taxes, and some observers scoff at his self-proclaimed $10 billion net worth. However, previous investigations reveal him to be a stingy charitable giver, at least as far as billionaires go. The hotelier and reality-TV star, who appears to dye his hair with Orange Tang, established The Donald J. Trump Foundation nearly 30 years ago in 1987 — but he's given it just $3.7 million since then.
• On the Democratic side, Hillary Clinton just released her last eight years of returns, showing $139.1 million of earnings since 2007. She and husband Bill paid 31.6% in tax on that income — which works out to $43.8 million, or just enough to pay for an F-18 Hornet fighter jet. The Clintons also gave $15 million to charity, with 99% going to the Clinton Family Foundation and Clinton Global Initiative.
• Clinton's chief rival, Vermont Senator Bernie Sanders, shows a net worth of $330,000. That lands him 14th from the bottom in the Senate, where the average net worth tops $2.8 million. The self-professed Democratic Socialist, who drives a Chevy Aveo (not the Prius you expected), reported $4,900 in income from his wife's position on a radioactive waste commission. (Of course, Sanders' most conservative rivals might say his entire economic platform consists of radioactive waste!)

We have no idea who's going to take the oath of office on January 20, 2017. But we can promise you, the new President will want to make changes to the tax code. And odds are good that at least one of those changes could cost you. So count on us to help you navigate those changes as favorably as possible. We work with Democrats, Republicans, and everyone in between! 

2015: A Tax Odyssey

On July 23, NASA announced the discovery of Kepler-452b, the first potentially Earth-like planet within the "habitable zone" of a star like our Sun. Kepler-452b is 1,400 light-years away, meaning the New Horizons space probe that just passed Pluto should get there in another 26 million years. (Mom, are we there yet?) It's 60% bigger than Earth, with a "better than even chance" of having a rocky composition, and takes 385 of our days to orbit its sun. Reporters instantly dubbed the planet "Earth 2.0," and scientists from the Search for Extraterrestrial Intelligence Institute have already begun targeting it for signs of intelligent life.

Ironically, at the same time, officials in Washington are searching for signs of intelligence in the tax code. (So far, they're not doing any better than the astronomers at NASA.) So we got to wondering . . . is there any way that our search for extraterrestrial life might help us out of our current budget jam? In plainer terms, can we tax it?

Let's start closest to home. Our own astronauts are subject to U.S. tax on all of their worldwide income, regardless of where they live. (They get an automatic two-month extension to file if they're outside the U.S. on April 15. We'd assume "off the planet" counts.) Astronauts pay regular tax on their salaries, which range from $64,724 to $141,715 per year. So, while our astronauts might escape earth's gravity, there's no escaping the IRS. On the brighter side, they also get a tax-free "dwarf" per diem for their time on the space station. (Seriously. Former astronaut Clayton Anderson reported he had $172 in his account after 152 days in the International Space Station.)

Further outside Earth's orbit, asteroid mining might lead to some nice new tax gains. Our home planet is running out of key elements like phosphorus, antimony, zinc, tin, lead, silver, and gold. So companies like Planetary Resources are working to expand Earth's dwindling resource base by mining asteroids. While their "cost of goods sold" will be higher than for comparable land-based minerals, the profit will be taxed as ordinary income at rates up to 35%. That's a pretty sweet deal for the IRS, considering the asteroid miners just find this stuff drifting out in space.

The real tax jackpot comes when extraterrestrials join us here on Earth. U.S. resident aliens — presumably including space aliens — are generally taxed the same way as U.S. citizens, which means their worldwide income is subject to U.S. tax. While we don't know anything about the economy on Kepler-452b, it's safe to assume that a civilization advanced enough to travel 1,400 light years has created high amounts of material wealth — and as sure as the sun rises in the east, our federal, state, and local governments won't hesitate to ask for their cut. (While we're at it, when E.T. phones home, the telephone excise tax alone has to be pretty phenomenal.)

Finally, there's one unsettling possibility we can't ignore. What if we do find intelligent life somewhere out there, and they don't like us? Famed physicist Stephen Hawking suggests we're safer not waving too hard to attract alien attention, simply because if they can find us and reach us, they can probably destroy us, too. "If aliens ever visit us," Hawking says, "I think the outcome would be much as when Christopher Columbus first landed in America, which didn't turn out very well for the American Indians." If that's the case, the only tax worth collecting will be the estate tax — if there's anyone left to collect it!

Our friends at the IRS may be yearning to boldly tax where no man has taxed before. But they can't ever count on it, which means squeezing more and more revenue out of us here on Earth. The best way to beat them, without fleeing the planet, is a plan. So count on us to give you the "right stuff" — and remember, we're here for your friends, family, and capsule-mates, too!

Toxic Deductible Sludge

Back in 2010, British Petroleum's Deepwater Horizon drilling rig exploded and spilled millions of barrels of oil off the Louisiana coast. Countless small business owners, including fishermen, hotel operators, restaurants, rental companies, and seafood processors, suffered and went bankrupt. State and local governments lost billions more in tax revenue. Lawyers, who may be some of the few people to actually profit from the disaster, are still fighting over compensation and claims, and will probably still be fighting until long after anyone reading these words is still alive.

BP has been gushing cash ever since the spill to clean up its mess and restore its reputation the damaged environment. The total includes $20 billion for a trust fund to settle financial claims, $4.5 billion in criminal fines and other penalties, and $18.7 billion to settle federal and state claims. But there's good news for the company, too — they'll be getting billions in help from their friends at the IRS!

Here's how that little plot twist works. Section 162(f) of the Internal Revenue Code states that "no deduction shall be allowed . . . for any fine or similar penalty paid to a government for the violation of any law." But defining exactly what makes up a "fine or penalty" isn't as obvious as you might think (and it gives those lawyers we just talked about the opportunity to bill a lot of hours arguing about it). Payments that aren't considered fines or penalties are deductible just like any other business expense. So let's take a look at exactly how BP will be structuring this final settlement:

• $5.5 billion goes towards a Clean Water Act penalty. This amount should be nondeductible. However, the press release announcing the settlement states that 80% of the penalty "will go to restoration efforts in the affected states pursuant to a Deepwater-specific statute, the RESTORE Act." That should give a clever lawyer more than enough rope to argue for deductibility!
• $8.8 billion goes towards natural resource damage and funding Gulf restoration projects. Since it's not explicitly designated a "fine" or "penalty," BP will probably deduct it.
• $5.9 billion goes towards state and local governments to settle their claims. Again, since it's being paid to "settle" claims, BP will likely deduct it.
• $600 million goes towards "other claims," including "unreimbursed federal expenses due to this incident." (Sounds like the sort of "slush fund" favored by Louisiana politicians of yore, doesn't it?) And really, how much fun is a slush fund if you have to pay tax on it?

We may never know exactly how much BP writes off because deductions on settlements are confidential business information. But we know the company's federal tax rate is 35%. So that means, if BP writes off, say, $20 billion of the payments, they'll save $7 billion in taxes. That money, of course, comes out of all of our pockets. So pat yourself on the back for playing your part in cleaning up the Gulf.

Nobody ever plans to suffer through a disaster like the Deepwater Horizon spill. But it's worth remembering that how you clean up your mistakes can make a real difference. So think of us as your financial "911," and don't hesitate to call if trouble strikes!