If you have kids and you celebrate Christmas, you're probably familiar with the Elf on the Shelf — a storybook and accompanying doll that help encourage your little darlings to behave themselves before the holidays. The book tells wide-eyed children how Santa marshals an army of scout elves to sneak into their houses before Christmas, then fly back to the North Pole every night to rat out the stinkers. Every day the elves return find a new place to hide, which turns this whole monstrous Fourth Amendment violation into an adorable ongoing game of hide and seek.
Parents love how the elf enforces good behavior. (Mommy says it's that or an extra glass of wine!) But not everyone is a fan. The Atlantic magazine mocks it as a "marketing juggernaut dressed up as a tradition" that bullies kids into thinking good behavior equals presents. The Washington Post condemns it as "just another nannycam in a nanny state obsessed with penal codes." And a Canadian professor argues that the elf brainwashes kids into accepting the surveillance state: "if you grow up thinking it's cool for the elves to watch me and report back to Santa, well, then it's cool for the NSA to watch me and report back to the government."
Our friends at the IRS have their own version of the Elf on the Shelf. In fact, they have several — and they're all more effective than the pointy-hatted little informant spying on your kids. Here's how the IRS knows if you've been naughty when it comes to reporting your presents throughout the year:
The first "elf" is the IRS's computerized income matching program. For example, employers report wages on Form W2, mutual funds report investment income on Form 1099-DIV, and partnerships report partners' income and expenses on Schedule K1. IRS computers cross-check these figures to your return to make sure you've reported those amount. If you haven't, you'll get a lump of coal notice calculating how much more you owe and a deadline for paying up.
If computerized matching fails, the IRS can squeeze more information out of third parties. If the IRS elves suspect mischief, they can subpoena your bank records then add up your deposits to make sure you've reported the income. If those deposits add up to more than you've reported, the IRS will assume the difference is taxable. Good luck convincing a Tax Court judge that Santa left that extra cash in your stocking!
Finally, the IRS dangles cash bounties to catch tax cheats. The IRS Whistleblower Office pays rewards of up to 30% of amounts it collects in disputes topping $2 million. Bradley Birkenfeld, who helped the IRS score an $852 million settlement with Swiss bank UBS, spent two years in jail for his part in the scheme, but walked away with a $104 million reward for his effort. We can think of an elf or two who would be happy to make that trade!
The IRS systems may not be quite as effective as what the CIA or Department of Homeland Security can put to work. But they put that stool pigeon Elf to shame, at least until they can force Santa into filing a 1099-GIFT for every present he leaves.
Here's the bottom line, for the elf and for you. Planning is the key to paying less tax, and you can do it without worrying about who's watching. So call us to pay less in 2017, and have a happy New Year!
Tuesday, December 27, 2016
Thursday, December 22, 2016
Christmas Tax Breaks for Christmas Tree Growers
'Tis the season to be jolly, and how jolly could we be without Christmas trees on display? For some of us it's the classic Pinus Sylvestris, or scotch pine. For others it's the soft-needled Abies fraserie, or Fraser fir. Still more make do with the store-bought plasticus annualensis, or "Target special." (Artificial trees can be beautiful, too!) Christmas trees are a festive symbol of holiday spirit, and most of us can't help but smile when we see one. (Unless we're at a department store in August.)
We're pretty sure that taxes are the last thing you think about when you see a gaily-decorated tree. But this is a tax column you're reading, and part of the fun is taking something you think has nothing to do with taxes, and showing how they fit behind the scenes. With that in mind, let's look at how the IRS treats your tree's trip from the stump to the stand.
Code section 631(a) states that, "For purposes of this subsection and subsection (b), the term 'timber' includes evergreen trees which are more than 6 years old at the time severed from the roots and are sold for ornamental purposes." That makes Christmas tree farming a business and not an investment. But timber lobbyists have been busy little elves, and they've found some presents to leave under the growers' trees:
To maximize their deductions, growers need to keep careful records. This might involve separate accounts for merchantable timber (measured in thousand board feet), young growth timber, deferred forestation, and reforestation amortization assets.
Unfortunately, trees planted for ornamental purposes don't qualify for the reforestation amortization deduction. (How's that for a lump of coal in a stocking?) Instead, growers capitalize planting costs and add them to their plantation account, then recover them as they harvest the trees for sale.
On the bright side, Revenue Ruling 71-228 clarifies that pruning and shearing costs are currently deductible business expenses, not capital expenditures.
"Occasional producers" who sell on the stump might take advantage of lower capital gains rates by establishing on-site sales procedures to qualify under Section 631(b). But beware Revenue Ruling 77-229, which held that income from "choose and cut" operations are ordinary income unless the grower makes a special election to determine gain or loss under the rules of Regulations Section 1.631-1(e)(1).
Aren't you glad you've got us to worry about all this stuff?
Try thinking about it this way. The tax code itself is really just one giant Christmas tree! It starts with the trunk, branches, and needles — the sections imposing the tax and setting the rates. Then Washington tarts it up with lights, ornaments, tinsel, and candy canes — the deductions, credits, loopholes, and strategies you hang on your return to lower your bill. (Cynical scrooges might even say we have too much hanging on that tree, but that's a discussion for a different day.)
Here's wishing you and your family the happiest holiday this season, however you celebrate. We'll be back in 2017 to make sure you pay as little tax as possible, not just during the holidays, but all season long!
We're pretty sure that taxes are the last thing you think about when you see a gaily-decorated tree. But this is a tax column you're reading, and part of the fun is taking something you think has nothing to do with taxes, and showing how they fit behind the scenes. With that in mind, let's look at how the IRS treats your tree's trip from the stump to the stand.
Code section 631(a) states that, "For purposes of this subsection and subsection (b), the term 'timber' includes evergreen trees which are more than 6 years old at the time severed from the roots and are sold for ornamental purposes." That makes Christmas tree farming a business and not an investment. But timber lobbyists have been busy little elves, and they've found some presents to leave under the growers' trees:
To maximize their deductions, growers need to keep careful records. This might involve separate accounts for merchantable timber (measured in thousand board feet), young growth timber, deferred forestation, and reforestation amortization assets.
Unfortunately, trees planted for ornamental purposes don't qualify for the reforestation amortization deduction. (How's that for a lump of coal in a stocking?) Instead, growers capitalize planting costs and add them to their plantation account, then recover them as they harvest the trees for sale.
On the bright side, Revenue Ruling 71-228 clarifies that pruning and shearing costs are currently deductible business expenses, not capital expenditures.
"Occasional producers" who sell on the stump might take advantage of lower capital gains rates by establishing on-site sales procedures to qualify under Section 631(b). But beware Revenue Ruling 77-229, which held that income from "choose and cut" operations are ordinary income unless the grower makes a special election to determine gain or loss under the rules of Regulations Section 1.631-1(e)(1).
Aren't you glad you've got us to worry about all this stuff?
Try thinking about it this way. The tax code itself is really just one giant Christmas tree! It starts with the trunk, branches, and needles — the sections imposing the tax and setting the rates. Then Washington tarts it up with lights, ornaments, tinsel, and candy canes — the deductions, credits, loopholes, and strategies you hang on your return to lower your bill. (Cynical scrooges might even say we have too much hanging on that tree, but that's a discussion for a different day.)
Here's wishing you and your family the happiest holiday this season, however you celebrate. We'll be back in 2017 to make sure you pay as little tax as possible, not just during the holidays, but all season long!
Monday, December 12, 2016
Sweet!
December is a busy month for holidays, what with Christmas, Hanukkah, and Kwanzaa all crowding calendars. But there's a lesser-known holiday that falls on December 16 that we don't want you to miss. It's not Ugly Christmas Sweater Day or Free Shipping Day (although those are both fun, too). We're talking, of course, about the obvious celebrations surrounding Chocolate Covered Anything Day. (Look it up!)
Most of us look for foods that are delicious, filling, and healthy. Chocolate-covered pretzels, chocolate-covered potato chips, chocolate-covered bacon, and chocolate-covered chili peppers are all yummy and filling, and — well, as the philosopher-poet Meat Loaf taught us, "Two out of three ain't bad." Think of Chocolate Covered Anything Day as pre-season training for the real binging that comes later in the month. (ABC News reports the average American consumes nearly 7,000 calories on Christmas Day alone.)
Just like the rest of us, tax collectors love chocolate-covered treats, too. They're not savages! But tax collectors have been plying their trade alongside candy makers and pastry chefs, for nearly as long as the rest of us have been enjoying their treats:
The Aztecs, who believed their feathered serpent deity Quetzalcoatl had received chocolate as a gift from the gods, used cocoa beans as actual currency. We're not sure what sort of taxes the Aztecs might have levied on themselves . . . but it had to make it a little easier to pay them in beans!
In 1692, France's King Louis XIV, whose wife loved drinking chocolate, levied one of the first actual cash taxes on the delicacy.
In 1847, a British chocolate company called J.S. Fry & Sons produced the first modern-day chocolate bar. Shortly thereafter, Britain lowered taxes on chocolate to encourage production of the new treats.
In Finland, taxes on chocolates and other sweets will melt away on January 1, 2017. A Finnish financial parliamentary committee decided last year that the taxes violated European Union rules on treating similar products fairly and equitably.
Today's chocolate makers are just as tempted by sweet tax breaks as the rest of us. In 2010, Kraft Foods bought British chocolatier Cadbury in a bittersweet hostile takeover for £11.5 billion ($18.9 billion). Since then, they've left a bad taste in the taxpaying public's mouth by using interest payments on the debt they used to buy the company to avoid paying tax on hundreds of millions of pounds of profits. Even worse, they changed the recipe for Cadbury creme eggs (!) and started selling them in packages of five instead of six (!!).
There's nothing sweet about paying taxes you don't have to pay. That goes for your chocolates, your income, your investments, and anything else. And we're always looking for ways to help accomplish that goal. So think about us while you're dipping a twinkie into chocolate sauce, and call us with your questions!
Most of us look for foods that are delicious, filling, and healthy. Chocolate-covered pretzels, chocolate-covered potato chips, chocolate-covered bacon, and chocolate-covered chili peppers are all yummy and filling, and — well, as the philosopher-poet Meat Loaf taught us, "Two out of three ain't bad." Think of Chocolate Covered Anything Day as pre-season training for the real binging that comes later in the month. (ABC News reports the average American consumes nearly 7,000 calories on Christmas Day alone.)
Just like the rest of us, tax collectors love chocolate-covered treats, too. They're not savages! But tax collectors have been plying their trade alongside candy makers and pastry chefs, for nearly as long as the rest of us have been enjoying their treats:
The Aztecs, who believed their feathered serpent deity Quetzalcoatl had received chocolate as a gift from the gods, used cocoa beans as actual currency. We're not sure what sort of taxes the Aztecs might have levied on themselves . . . but it had to make it a little easier to pay them in beans!
In 1692, France's King Louis XIV, whose wife loved drinking chocolate, levied one of the first actual cash taxes on the delicacy.
In 1847, a British chocolate company called J.S. Fry & Sons produced the first modern-day chocolate bar. Shortly thereafter, Britain lowered taxes on chocolate to encourage production of the new treats.
In Finland, taxes on chocolates and other sweets will melt away on January 1, 2017. A Finnish financial parliamentary committee decided last year that the taxes violated European Union rules on treating similar products fairly and equitably.
Today's chocolate makers are just as tempted by sweet tax breaks as the rest of us. In 2010, Kraft Foods bought British chocolatier Cadbury in a bittersweet hostile takeover for £11.5 billion ($18.9 billion). Since then, they've left a bad taste in the taxpaying public's mouth by using interest payments on the debt they used to buy the company to avoid paying tax on hundreds of millions of pounds of profits. Even worse, they changed the recipe for Cadbury creme eggs (!) and started selling them in packages of five instead of six (!!).
There's nothing sweet about paying taxes you don't have to pay. That goes for your chocolates, your income, your investments, and anything else. And we're always looking for ways to help accomplish that goal. So think about us while you're dipping a twinkie into chocolate sauce, and call us with your questions!
Monday, December 5, 2016
400 Cigar-Chomping Fat Cats Aren't Enough Anymore
Author F. Scott Fitzgerald, who brought us the Great Gatsby among other well-heeled characters, once said the rich are very different from you and me. To which Fitzgerald's jazz age compatriot Ernest Hemingway sarcastically retorted, "Yes, they have more money." But how much more money do they really have? Nosey parkers want to know!
Every year, the financial snoops at the IRS release a study analyzing the income and the taxes of the top 400 earners in the country. We're not talking ordinary 1%ers here — we're talking card-carrying plutocrats. If you show these people your Hamptons house, they'll raise you their bigger Hamptons house, right on the beach — plus a penthouse in Manhattan plus a ski chalet in Gstaad plus a second beach house in St. Bart's.
Last week, the IRS released their report for 2014, and revealed that the country's 400 fattest cats had gotten 20% fatter. It took $127 million of adjusted gross income to join the top group, up from $100 million in 2013. But that was just the ante — the average income was $318 million, 20% more than the previous year. The 400's total income was $128 billion, which is just a few billion shy of Nevada's Gross Domestic Product.
Where does all that money come gushing in from? It's not salaries and wages (4.47% of the total), interest and dividends (15.13%), or even closely-held businesses (11.6%). You'll have to turn to Schedule D, "Capital Gains and Losses." The average Fortunate 400 filer reported $192 million in gains. This suggests our typical tippy-top earner makes it by selling a business they spent a lifetime growing. As it turns out, 3,262 of the 4,584 Fortunate 400 who have appeared on the list in the last 23 years have made it just once, which reinforces this point.
The numbers going out are just as impressive, too. The group averaged $37 million in charitable contributions (6.9% of the country's total), $22 million in state and local taxes, $5 million in interest, and $11 million in miscellaneous itemized deductions. Sadly, the report doesn't tell us how much they spent on million-dollar watches, diamond-studded dog collars, and other essentials of over-funded lives.
As for taxes, the group's average IRS contribution was $73.5 million, which represents a 23.13% rate. Of course, those are just averages — the study revealed that nine of our super-earners paid less than 10% and 26 more paid less than 15%. (It's probably a good thing their neighbors don't know who they are!)
It's all an early Christmas for data nerds. Now here's the bad news. This year we'll be waving goodbye to our lucky 400 winners. Because of our growing population, the IRS will shift their focus to the country's top 0.001% of taxpayers, or 1,396 returns. "This is a more analytically useful tabulation compared to the top 400 tabulation in that it provides a longitudinally consistent data point relative to the entire percentile distribution," they say. (We told you this was data nerd stuff.)
Here's one last thing the Fortunate 400 have in common. They don't just take a shoebox full of receipts to their accountant on April 14 and say, "What do I owe?" No, these very smart people plan and plan and plan — to ensure they keep every last penny possible. It works for them, and it can work for you. So call us to take advantage of opportunities still remaining in 2016, and let's see what we can do for you!
Every year, the financial snoops at the IRS release a study analyzing the income and the taxes of the top 400 earners in the country. We're not talking ordinary 1%ers here — we're talking card-carrying plutocrats. If you show these people your Hamptons house, they'll raise you their bigger Hamptons house, right on the beach — plus a penthouse in Manhattan plus a ski chalet in Gstaad plus a second beach house in St. Bart's.
Last week, the IRS released their report for 2014, and revealed that the country's 400 fattest cats had gotten 20% fatter. It took $127 million of adjusted gross income to join the top group, up from $100 million in 2013. But that was just the ante — the average income was $318 million, 20% more than the previous year. The 400's total income was $128 billion, which is just a few billion shy of Nevada's Gross Domestic Product.
Where does all that money come gushing in from? It's not salaries and wages (4.47% of the total), interest and dividends (15.13%), or even closely-held businesses (11.6%). You'll have to turn to Schedule D, "Capital Gains and Losses." The average Fortunate 400 filer reported $192 million in gains. This suggests our typical tippy-top earner makes it by selling a business they spent a lifetime growing. As it turns out, 3,262 of the 4,584 Fortunate 400 who have appeared on the list in the last 23 years have made it just once, which reinforces this point.
The numbers going out are just as impressive, too. The group averaged $37 million in charitable contributions (6.9% of the country's total), $22 million in state and local taxes, $5 million in interest, and $11 million in miscellaneous itemized deductions. Sadly, the report doesn't tell us how much they spent on million-dollar watches, diamond-studded dog collars, and other essentials of over-funded lives.
As for taxes, the group's average IRS contribution was $73.5 million, which represents a 23.13% rate. Of course, those are just averages — the study revealed that nine of our super-earners paid less than 10% and 26 more paid less than 15%. (It's probably a good thing their neighbors don't know who they are!)
It's all an early Christmas for data nerds. Now here's the bad news. This year we'll be waving goodbye to our lucky 400 winners. Because of our growing population, the IRS will shift their focus to the country's top 0.001% of taxpayers, or 1,396 returns. "This is a more analytically useful tabulation compared to the top 400 tabulation in that it provides a longitudinally consistent data point relative to the entire percentile distribution," they say. (We told you this was data nerd stuff.)
Here's one last thing the Fortunate 400 have in common. They don't just take a shoebox full of receipts to their accountant on April 14 and say, "What do I owe?" No, these very smart people plan and plan and plan — to ensure they keep every last penny possible. It works for them, and it can work for you. So call us to take advantage of opportunities still remaining in 2016, and let's see what we can do for you!
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