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!