Presto Change-o

Back in December 2017, while you were finishing up your holiday shopping and spiking the eggnog, Congress spiked the tax code. The goal was simple. First, eliminate a bunch of deductions that made the whole thing more complicated. Then, take advantage of that broader base to cut overall rates. There's nothing radical about that sort of tinkering. The hard part is deciding which sacred cows get gored to make it work.

Much to many peoples' surprise, the state and local tax deduction wound up on the chopping block. Until 2018, you could deduct an unlimited amount of state and local income, sales, and property taxes. The new law capped that deduction at $10,000. That's a big deal in states with high income taxes like California (13.3% top rate), Hawaii (11%), and New York (8.95%). It's even a problem for a state like Texas with no income tax but high property taxes.

Naturally, the high-tax states weren't jazzed about that part of Uncle Sam's plan. They struck back with a fiendishly clever proposal that would have dazzled Harry Houdini with its sheer magic. Encourage residents to make gifts to special state funds, then give them dollar-for-dollar credits against their taxes for those contributions. Abracadabra! Now your payments aren't nondeductible taxes anymore. Now they're fully-deductible charitable gifts!

Last week, the IRS threw a wet blanket over the states' prestidigitation, issuing 74 pages of final regulations that they could have condensed into a single word. And that word is: "Really?!?" They start out by defining a "gift" as something you make with no expectation of return benefit. Then they go on to explain that if you make a "gift," and expect to receive a state or local tax credit in return, it's not a gift. It's a quid pro quo. And while the tax code is full of deductible quid pro quos, you can't write them off as charity.

The regulations outline a few exceptions to that general rule, including programs that give you dollar-for-dollar deductions (as opposed to credits), and programs that credit your tax bill for less than 15% of your gift. (They wouldn't be Treasury regulations without fine print, right?) But it really just comes down to substance over form. The IRS essentially said, "Look, it walks like a duck, it quacks like a duck, and if we put our tongue on it, we bet it tastes like a duck, too. So it's a tax, not a charitable contribution. Better luck next time!"

The truly amazing thing about the regulations isn't that they run 74 pages. (74 pages!) It's that they take the states' argument seriously in the first place. Of course the IRS was going to shoot them down! Are you kidding? If you surprise your six-year-old in the kitchen with crumbs all over his face, you don't listen to his excuses for why the cookies are gone. You give him an immediate time-out, not "due process"!

In the end, the change was more bark than bite. Many of affected taxpayers had already lost their state and local tax deductions to the alternative minimum tax. Even the ones who wound up paying tax on more income benefited from the lower overall rates.

Want some good news? You don't need to perform sleight-of-hand with the tax code to pay less. The law is full of legitimate deductions, credits, loopholes, and strategies you can use to pay the legal minimum. And you don't need to risk the IRS laughing at your arguments to succeed. So call us for a plan, see how much you can save, and let us worry about the 74-page regulations!

All Fun and Games Until Somebody Loses an Eye

On March 12, the "Varsity Blues" scandal hit the headlines, and gossips across America leaped at the fresh meat. That's the day we learned about a group of 1%ers who paid anywhere from $15,000 to $6.5 million to cheat their kids' way into some of the most prestigious colleges in America. The Department of Justice indicted 50 people, including actresses Felicity Huffman and Lori Loughlin. Those who pled guilty right away are starting to receive sentences. Those who claimed innocence got rewarded with additional money laundering charges.

The parents worked with a private college counselor named Rick Singer. In some cases, they paid him $15,000 or more for crooked proctors to doctor their kids' SAT tests. In others, they paid up to $6.5 million for him to bribe complicit coaches to tag the children as athletic recruits. Of course, nobody put "bribe" on the memo line of the check. Instead, they made "donations" to Singer's "charity," the Key Worldwide Foundation. That way, they got to deduct the bribes as charitable gifts! But now the chickens are coming home to roost . . . and the IRS is there to collect, too.

Prosecutors have piled up 3 million pages of evidence, including over a million pages of emails, 4,500 wiretapped phone conversations, extensive bank records, and cooperation agreements from Singer and half a dozen of his henchman. (When you conspire with a guy named "Singer," don't be shocked when he sings like a canary when the you-know-what hits the fan.) Deciding whether or not to plead sounds like some sort of one-question IQ test. Still, just 22 of the original 50 defendants have taken that easier way out.

Actresses Huffman and Loughlin have attracted the biggest headlines. Huffman represents the man-up end of the spectrum — she copped a tearful plea almost immediately to mail fraud charges for paying $15,000 to doctor her daughter's SAT scores. Since the dollar amount in her case was at the low end of the scale prosecutors have recommended a relatively light sentence: four months in a place that looks nothing like Wisteria Lane, 12 months of supervised release, a $20,000 fine, and additional restitution.

Loughlin and her husband, fashion designer Mossimo Gianulli, represent the opposite end of the spectrum. The couple dropped $500,000 to get their bratty daughters into a school they clearly don't even want to attend. Loughlin swiped left on a deal that would have included two years in a fuller house, and now faces up to 40 with the extra money laundering charge. Us magazine — everyone's go-to source for breaking legal news — reports that the IRS is eyeing the couple's tax returns like a hungry bear eyeing a particularly fat fish.

It looks like parents can count on paying back the taxes they avoided by deducting whatever they paid Singer. Real estate mogul Bruce Isackson pled guilty to paying (and deducting) $600,000 in bribes to pass his daughters off as athletes. The charges included one count of conspiracy to defraud the IRS. Prosecutors are recommending he spend 37-45 months occupying a 6'x8' parcel of federal property and pay $139,509 in restitution. That figure just happens to equal the exact amount of tax he saved by writing off the bogus "gifts."

Singer reports that he collected a total of $25 million to help 761 families open "side doors" to schools for their kids. That means we can probably expect more names to be named. Hopefully yours won't make the list! The good news is, while we can't help you get your kids into the Ivy League, we can help you make the most of tax breaks for paying the bill. So call us for a plan before you pack up the car to move them in, and see how much we can help you save!

Risky Business

Turn on any television, any time of day or night, and you're likely to see an insurance ad, or two, or a dozen. Flo is showing off her "name your price" tool, which sure looks like her company's way of saying "you may not be able to afford all the insurance you need, but we're happy to sell you whatever you can afford." There's the ubiquitous gecko, telling you his company sells insurance for your RV and motorcycle, too. And there's Duncan, age 42, buying an incredible half-million dollars of term life insurance for just $27 per month.

Of course, life insurance, homeowners insurance, and car insurance are just the tip of the insurance iceberg. Why do you think the tallest building in most cities has an insurance company's name up top? Businesses and professionals buy all sorts of commercial coverages for their operations. Celebrities are infamous for oddball policies covering whatever makes them money — so we have Kim Kardashian insuring her backside for $3 million and Keith Richards insuring his hands for $1.6 million. Insurance companies can even buy reinsurance, which is insurance for insurance companies.

Losing a tax audit may not sound as tragic as, say, Keith Richards losing his hands. But the whole concept of "insurance" is about guaranteeing payment in the event of a specified loss. So, if Keith Richards can insure the hands that conjured up "Jumpin' Jack Flash" out of an ordinary six-string, shouldn't we be able to buy insurance to cover unexpected losses to the IRS? It turns out the answer is yes . . . and there's even more than one way to do it.

The most obvious way is to buy something cleverly marketed as "tax insurance." And while you can't just go online to save 15% or more on tax insurance with GEICO, it's really not much tougher than that. High-end brokers sell coverage to reimburse bigger businesses for the cost of taxes, noncriminal penalties, and the cost of taking a case to court. (Typically, these arise out of mergers and acquisitions.) They can even buy extra coverage to "gross up" benefits to cover the new taxes companies owe when they collect on the insurance!

Business owners can use something called an enterprise risk management program to insure risks that they're currently covering out of their own pockets. These typically include operational and strategic risks, like the cost of defending sexual harassment claims, cyber risks, and the loss of key suppliers or vendors. But you might also insure against the cost of defending an IRS audit. The cost of insuring the risk is deductible — and if you have to collect, the cost of defending yourself is deductible, too!

Finally, if you're not sure the IRS will accept your tax treatment of a particular transaction, consider visiting a tax attorney for an opinion letter. Opinion letters aren't "insurance," per se. They can't guarantee you'll avoid actual tax. But in some circumstances, even if you wind up paying tax, the opinion letter can eliminate penalties you might have otherwise paid. In other cases, the attorney can essentially cover your extra costs out of their own malpractice insurance.

Fortunately, most tax savings don't call for any insurance at all. We help clients save taxes with a complete menu of court-tested, IRS-approved strategies. In fact, some of our most powerful strategies actually lower your risk of being audited. So leave the gecko at home, because he wouldn't be any help at an audit anyway, and see if we can save you 15% or more on your income tax!

Summer Reading for Tax Geeks

Memorial Day has come and gone, and while summer doesn't officially unlock the door and open for business until June 21, who's waiting? Craft beer fans are swapping out those dark malts that taste like tree bark, and stocking up on summer brews with hints of lemon, lime, and cherry. Sports fans are turning their eyes towards baseball's upcoming All-Star game. (Yeah, hockey and basketball are still going on — but aren't those supposed to be winter sports?) And readers across America are combing shelves for the summer's hottest summer beach reads.

Beach books typically don't ask you to do much heavy intellectual lifting. They're usually the literary equivalent of bingeing an entire season of The Bachelorette in a single weekend. Some readers don't even bring books at all — they drop a kindle or an iPad in their bag to hide the latest 50 Shades story from the folks on the next towel. Occasionally, though, you find something weightier catching readers' eyes. So if that's what you need, NYU Professor Jonathan Choi has assembled a list of the 50 most-cited law review tax articles of all time. Boring, you say? Prepare to be surprised!

Taking home the gold, with 1220 total citations, is William D. Andrews' 1974 thriller, A Consumption-Type or Cash Flow Personal Income Tax. The plot follows a plucky tax professor challenging the conventional wisdom that taxable income should equal the sum of personal consumption plus accumulation. But that plot is really just an excuse to propose a graduated consumption tax. The story also takes us down subplots involving cash-flow accounting for loan proceeds to curb tax shelter abuses, nontaxation of reinvested capital gains, and a proposed zero basis for inherited assets. (See? Riveting!)

Claiming the silver, with 992 citations, we have Harvard professors Louis Kaplow and Steven Shavell arguing Why the Legal System Is Less Efficient Than the Income Tax in Redistributing Income. This is a classic legal thriller in the vein of John Grisham or Scott Turow. Except, in this case, the parties are "legal rules" and "the income tax system." Kaplow and Shavell put them both on trial and declare taxes to be the victor.

Finally, taking the bronze with 762 citations, is Boris Bittker's 1967 classic, A Comprehensive Tax Base as a Goal of Income Tax Reform. Bittker argues that it's simply too hard to define a neutral, scientific measure of taxable income, and each policy proposal should be judged provision by provision. (It's easy to be disappointed with Bittker's meek conclusion — after all, isn't the whole point of a law review article to propose something with no chance of real-world success?)

The rest of Choi's top 50 cover the same beach book ground you'd find at your local bookseller. There's rich historical drama. (Edward Zelinsky's James Madison and Public Choice at Gucci Gulch: A Procedural Defense of Tax Expenditures and Tax Institutions.) There's gripping family conflict. (Paul Caron's Tax Myopia, or Mamas Don't Let Your Babies Grow up to Be Tax Lawyers.) There's even a sex scene or two to heat up your afternoon. (Marjorie Kornhauser's The Rhetoric of the Anti-Progressive Income Tax Movement: A Typical Male Reaction.)

So, tax articles are fun, right? Unfortunately, you can read them all summer long without learning anything about how to pay less. That's where we come in. Just pick up the phone before you head to the beach, or the lake, or the mountains, and see how much we can save you while you're enjoying a real beach read!