Labor Day is almost here, and soon summer will be "officially" over. If that's got you down, here's a collection of tax quotes to brighten your day.
"A dog who thinks he is man's best friend is a dog who obviously has never met a tax lawyer."
Fran Lebowitz
"We have long had death and taxes as the two standards of inevitability. But there are those who believe that death is the preferable of the two. 'At least,' as one man said, 'there's one advantage about death; it doesn't get worse every time Congress meets.'"
Erwin Griswold
"Of course the truth is that the congresspersons are too busy raising campaign money to read the laws they pass. The laws are written by staff tax nerds who can put pretty much any wording they want in there. I bet that if you actually read the entire vastness of the U.S. Tax Code, you'd find at least one sex scene ("'Yes, yes, YES!" moaned Vanessa as Lance, his taut body moist with moisture, again and again depreciated her adjusted gross rate of annualized fiscal debenture')."
Dave Barry
"You must pay taxes. But there's no law that says you gotta leave a tip."
Morgan Stanley advertisement
"The flat tax would be so simple, you could fill it out on a post card. A post card that would say, in effect, having a wonderful time; glad most of my money is here."
Steve Forbes
"The income tax has made liars out of more Americans than golf."
Will Rogers
"An income tax form is like a laundry list - either way you lose your shirt."
Fred Allen
"Hating the Yankees is as American as pizza pie, unwed mothers, and cheating on your income tax."
Mike Royko
We hope you enjoyed these quotes. But please remember this: there's nothing funny about paying taxes you don't legally have to pay. If this season's pain has you looking for a plan to pay less tax, call us today. And remember, we're here for your family, friends, and colleagues too!
Monday, August 29, 2011
Wednesday, August 24, 2011
Coddling the Rich
Billionaire Warren Buffett, also known as "The Oracle of Omaha," works hard to keep a folksy, down-to-earth reputation despite a net worth reaching as high as $62 billion. His Berkshire Hathaway shareholder meetings are the rock concerts of the investment world, attracting upwards of 40,000 attendees, and his annual letter to shareholders is pored over like the latest pronouncement from the pope. Buffett has become a favorite "go-to" guy when lawmakers and reporters need a voice of financial reason, and he has weighed in on topics as diverse as the government bailouts, stimulus spending, and stock market gyrations.
So it's no surprise that Buffett has something to say about taxes. What's surprising is that he thinks people like himself and his mega-rich friends should pay more! Last week, he wrote a piece in the New York Times calling on government to stop coddling the super-rich. "Last year my federal tax bill - the income tax I paid, as well as payroll taxes paid by me and on my behalf - was $6,938,744," Buffett writes. "That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income - and that's actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent."
Buffett's solution? He argues that Congress should raise rates immediately on the 236,883 taxpayers reporting income over $1 million, and raise them even further on the 8,274 earning more than $10 million. "My friends and I have been coddled long enough by a billionaire-friendly Congress," he concludes. "It's time for our government to get serious about shared sacrifice."
Buffett saw his net worth drop $25 billion in just 12 months during 2008 and 2009. He's shown he can handle a little financial pain, and he probably won't miss any extra he pays in tax. But what about everyone else?
Three days later, The Wall Street Journal countered Buffett's argument and accused him of volunteering the middle class for a tax increase. The Journal cited their own former editor Barney Kilgore's observation that it's easy for rich people to call for higher taxes because they already have their money. And they pointed out what they called three flaws in Buffett's argument:
1.Much of the income Buffett says isn't taxed enough consists of "qualified corporate dividends," which are already taxed before they even reach him at corporate rates of up to 35%.
2.Taxing "the rich" alone won't raise enough to close the deficit gap because there just aren't enough of them. That's why the President has called for higher taxes on families making over $250,000 per year, most of whom aren't billionaires or even millionaires.
3.Finally, Buffett has already sheltered the bulk of his fortune from future taxes by pledging it to a charitable foundation.
If you're not sitting on a billion-dollar fortune, you have a couple of ways to look at Buffett's call - whether you think taxes should go up or not. Those of you who think taxes are high enough already can see how he uses perfectly legal tax planning to cut his own tax to the legal minimum - and resolve to do the same ourselves. Those of you who think the government really does need more revenue can see his voice as adding weight to the growing chorus for that revenue. Whichever side you take, though, we're here to keep your taxes to the absolute minimum possible.
So it's no surprise that Buffett has something to say about taxes. What's surprising is that he thinks people like himself and his mega-rich friends should pay more! Last week, he wrote a piece in the New York Times calling on government to stop coddling the super-rich. "Last year my federal tax bill - the income tax I paid, as well as payroll taxes paid by me and on my behalf - was $6,938,744," Buffett writes. "That sounds like a lot of money. But what I paid was only 17.4 percent of my taxable income - and that's actually a lower percentage than was paid by any of the other 20 people in our office. Their tax burdens ranged from 33 percent to 41 percent and averaged 36 percent."
Buffett's solution? He argues that Congress should raise rates immediately on the 236,883 taxpayers reporting income over $1 million, and raise them even further on the 8,274 earning more than $10 million. "My friends and I have been coddled long enough by a billionaire-friendly Congress," he concludes. "It's time for our government to get serious about shared sacrifice."
Buffett saw his net worth drop $25 billion in just 12 months during 2008 and 2009. He's shown he can handle a little financial pain, and he probably won't miss any extra he pays in tax. But what about everyone else?
Three days later, The Wall Street Journal countered Buffett's argument and accused him of volunteering the middle class for a tax increase. The Journal cited their own former editor Barney Kilgore's observation that it's easy for rich people to call for higher taxes because they already have their money. And they pointed out what they called three flaws in Buffett's argument:
1.Much of the income Buffett says isn't taxed enough consists of "qualified corporate dividends," which are already taxed before they even reach him at corporate rates of up to 35%.
2.Taxing "the rich" alone won't raise enough to close the deficit gap because there just aren't enough of them. That's why the President has called for higher taxes on families making over $250,000 per year, most of whom aren't billionaires or even millionaires.
3.Finally, Buffett has already sheltered the bulk of his fortune from future taxes by pledging it to a charitable foundation.
If you're not sitting on a billion-dollar fortune, you have a couple of ways to look at Buffett's call - whether you think taxes should go up or not. Those of you who think taxes are high enough already can see how he uses perfectly legal tax planning to cut his own tax to the legal minimum - and resolve to do the same ourselves. Those of you who think the government really does need more revenue can see his voice as adding weight to the growing chorus for that revenue. Whichever side you take, though, we're here to keep your taxes to the absolute minimum possible.
Monday, August 15, 2011
Win the Battle, Lose the War
Earlier this month, Washington wound up an ugly slugfest over deficit reduction that left approval ratings lower than at any time in history. Congressional Republicans appear to have blocked tax increases, at least until the end of 2012. So we're safe, right? Well, not so fast. Legislation isn't the only way for taxes to go up. We still have to keep a sharp eye out for everything else coming from Washington. Take, for example, the "carried interest" debate.
Hedge fund managers, venture capital fund managers, and private equity fund managers are the rock stars of the money management world. John Paulson, who first gained fame for betting against housing prices in 2007, made an estimated $4.9 billion in 2010 alone. The top 25 managers as a group made $22.07 billion combined. Based on IRS figures, that's as much money as 667,816 average taxpayers — a population greater than the entire city of Boston!
Fund managers don't just make more than the rest of us, they keep more than the rest of us. That's because of how they get paid. They typically charge investors a management fee ranging from 2% to 4% of assets under management. They classify those fees as ordinary income, taxed at marginal rates up to 35%. But they also charge an incentive fee ranging from 20% to as high as 50% of annual gains. They classify those fees as an investment producing capital gains, with tax capped at the 15% maximum for long-term gains.
It's no surprise that some legislators have spotted what they call oversized paychecks, combined with undersized tax bills, and cried foul. Critics of "carried interest," as it's called, have tried several times to pass legislation recharacterizing it as ordinary income. But Congressional Republicans have blocked these efforts along with efforts to raise any other taxes. Now a recent Tax Court decision suggests that the IRS might accomplish through regulations what Congress can't accomplish through legislation.
Todd Dagres worked at Battery Management Company, a venture capital fund manager. From 1999 through 2003, he earned $10.9 million in compensation and $43.4 million in carried interest. In 2003, he deducted $3.6 million for a loan he made to a business associate that went bad. The IRS disallowed Dagres's deduction, arguing it was a personal loan not created in connection with his trade or business. As such, the IRS argued, it was deductible only as a short-term capital loss, and limited to the amount of any capital gain he reported for that year plus just $3,000 per year. Dagres's funds lost money in 2003 and he reported no capital gains for that year, so in the IRS's eyes, he was out of luck.
But the Tax Court disagreed. In Dagres v. Commissioner Judge David Gustafson ruled that Dagres's carried interest was compensation from a trade or business and the loan was "proximately related" to that business — therefore, Dagres could deduct the loan against his ordinary income for the year. Since Tax Court opinions set binding precedent, some observers argue the IRS can use this one to write regulations characterizing carried interest as ordinary income. This means Dagres could win his individual battle, but actually lose the bigger war.
We realize it's hard to feel much sympathy for an investment hotshot pulling down $10 million per year! But the debate over the Dagres decision illustrates how tax increases can come out of left field. That's why we spend valuable time monitoring the latest developments from everywhere in Washington, not just Capitol Hill. That proactive approach is the key to holding your taxes to the absolute legal minimum.
Hedge fund managers, venture capital fund managers, and private equity fund managers are the rock stars of the money management world. John Paulson, who first gained fame for betting against housing prices in 2007, made an estimated $4.9 billion in 2010 alone. The top 25 managers as a group made $22.07 billion combined. Based on IRS figures, that's as much money as 667,816 average taxpayers — a population greater than the entire city of Boston!
Fund managers don't just make more than the rest of us, they keep more than the rest of us. That's because of how they get paid. They typically charge investors a management fee ranging from 2% to 4% of assets under management. They classify those fees as ordinary income, taxed at marginal rates up to 35%. But they also charge an incentive fee ranging from 20% to as high as 50% of annual gains. They classify those fees as an investment producing capital gains, with tax capped at the 15% maximum for long-term gains.
It's no surprise that some legislators have spotted what they call oversized paychecks, combined with undersized tax bills, and cried foul. Critics of "carried interest," as it's called, have tried several times to pass legislation recharacterizing it as ordinary income. But Congressional Republicans have blocked these efforts along with efforts to raise any other taxes. Now a recent Tax Court decision suggests that the IRS might accomplish through regulations what Congress can't accomplish through legislation.
Todd Dagres worked at Battery Management Company, a venture capital fund manager. From 1999 through 2003, he earned $10.9 million in compensation and $43.4 million in carried interest. In 2003, he deducted $3.6 million for a loan he made to a business associate that went bad. The IRS disallowed Dagres's deduction, arguing it was a personal loan not created in connection with his trade or business. As such, the IRS argued, it was deductible only as a short-term capital loss, and limited to the amount of any capital gain he reported for that year plus just $3,000 per year. Dagres's funds lost money in 2003 and he reported no capital gains for that year, so in the IRS's eyes, he was out of luck.
But the Tax Court disagreed. In Dagres v. Commissioner Judge David Gustafson ruled that Dagres's carried interest was compensation from a trade or business and the loan was "proximately related" to that business — therefore, Dagres could deduct the loan against his ordinary income for the year. Since Tax Court opinions set binding precedent, some observers argue the IRS can use this one to write regulations characterizing carried interest as ordinary income. This means Dagres could win his individual battle, but actually lose the bigger war.
We realize it's hard to feel much sympathy for an investment hotshot pulling down $10 million per year! But the debate over the Dagres decision illustrates how tax increases can come out of left field. That's why we spend valuable time monitoring the latest developments from everywhere in Washington, not just Capitol Hill. That proactive approach is the key to holding your taxes to the absolute legal minimum.
Monday, August 8, 2011
Guess Who's Unhappy With the IRS?
Surveys show that most Americans would rather be caught naked in public than face a tax audit. So, what sort of knucklehead goes ahead and asks the IRS to audit him? Then actually takes them to court when they say no?
Fashion designer Georges Marciano left his native Marseilles with his brothers Armand, Paul, and Maurice in 1977, and founded Guess? jeans in 1981. Guess? helped popularize the stonewashed denim look, and gained fame with a series of iconic black-and-white ads featuring supermodels Claudia Schiffer, Eva Herzigova, and Laetitia Casta. Marciano built on that initial success with designer jeans by expanding into watches and accessories, footwear, meanswear, bedding, and fragrances.
Unfortunately, Marciano's eye for business never matched his eye for fashion. In the 1980s and early 1990s, Guess? fought allegations of sweatshop labor, which led to a $573,000 settlement. And in 2005, they were forced to apologize after releasing a line of t-shirts glamorizing the drug trade that proudly declared "Ski Colombia: Always Plenty of Fresh Powder."
Also in 2005, Marciano claims he uncovered evidence of identity theft, fraud, and embezzlement, that he said cost him nearly $200 million. He did exactly what you would do if you were missing that much money — he sued everyone in sight. But somewhere along the line, he started worrying that he owed tax on the stolen money. So in 2008, he wrote the IRS and asked them to audit him! You would think they would be happy to oblige. But Marciano claims they stonewalled his requests, and even sent him refunds totaling $880,997.17 based on a claim for a tentative carryback that Marciano says he never made!
Meanwhile, Marciano's former accountants won judgments against him for libel and intentional infliction of emotional distress, and his creditors forced him into involuntary bankruptcy. So in a last-ditch effort, Marciano filed suit in U.S. District Court, seeking relief from the state court judgments against him, arguing that the IRS had violated his rights (including his due process rights under the Constitution), and once again demanding a "thorough" audit of his tax liabilities.
Last month, Judge Henry Kennedy, Jr., threw out Marciano's case like last season's closeouts. "The extraction by the government of money or property via taxation implicates a constitutionally protected property interest, but, as noted above, Marciano has asserted repeatedly that he owes the government money, rather than the reverse,” Kennedy wrote. “The Court is aware of no precedent establishing a protected property interest in the ability to pay taxes.”
If you ever ask us to sue the IRS to audit you, we'll probably tell you to take a seat and make yourself comfortable while we find you some aspirin! What do you think? Does Marciano really think he owes tax on $200 million? Or is he just asking the IRS to clean up his accounting mess for him?
Fashion designer Georges Marciano left his native Marseilles with his brothers Armand, Paul, and Maurice in 1977, and founded Guess? jeans in 1981. Guess? helped popularize the stonewashed denim look, and gained fame with a series of iconic black-and-white ads featuring supermodels Claudia Schiffer, Eva Herzigova, and Laetitia Casta. Marciano built on that initial success with designer jeans by expanding into watches and accessories, footwear, meanswear, bedding, and fragrances.
Unfortunately, Marciano's eye for business never matched his eye for fashion. In the 1980s and early 1990s, Guess? fought allegations of sweatshop labor, which led to a $573,000 settlement. And in 2005, they were forced to apologize after releasing a line of t-shirts glamorizing the drug trade that proudly declared "Ski Colombia: Always Plenty of Fresh Powder."
Also in 2005, Marciano claims he uncovered evidence of identity theft, fraud, and embezzlement, that he said cost him nearly $200 million. He did exactly what you would do if you were missing that much money — he sued everyone in sight. But somewhere along the line, he started worrying that he owed tax on the stolen money. So in 2008, he wrote the IRS and asked them to audit him! You would think they would be happy to oblige. But Marciano claims they stonewalled his requests, and even sent him refunds totaling $880,997.17 based on a claim for a tentative carryback that Marciano says he never made!
Meanwhile, Marciano's former accountants won judgments against him for libel and intentional infliction of emotional distress, and his creditors forced him into involuntary bankruptcy. So in a last-ditch effort, Marciano filed suit in U.S. District Court, seeking relief from the state court judgments against him, arguing that the IRS had violated his rights (including his due process rights under the Constitution), and once again demanding a "thorough" audit of his tax liabilities.
Last month, Judge Henry Kennedy, Jr., threw out Marciano's case like last season's closeouts. "The extraction by the government of money or property via taxation implicates a constitutionally protected property interest, but, as noted above, Marciano has asserted repeatedly that he owes the government money, rather than the reverse,” Kennedy wrote. “The Court is aware of no precedent establishing a protected property interest in the ability to pay taxes.”
If you ever ask us to sue the IRS to audit you, we'll probably tell you to take a seat and make yourself comfortable while we find you some aspirin! What do you think? Does Marciano really think he owes tax on $200 million? Or is he just asking the IRS to clean up his accounting mess for him?
Monday, August 1, 2011
How To Pay Zero Tax
Years ago, comedian Steve Martin gave us an easy formula for making a million dollars without paying tax. "First . . . ya get a million dollars." Then, when the tax man comes to your door and says you never paid taxes, just tell him "I forgot!" That's a great plan, assuming you can get your hands on the million bucks and you're willing to take your chances with the tax man. But what about those of us who don't have a million dollars and those of us who remember we have to pay taxes? Are there better ways for getting that tax bill down to zero?
The Washington-based Tax Policy Center estimates that a full 46% of Americans pay no federal income tax. And those non-payers represent a surprisingly broad cross section of Americans. Over 10% of them report incomes over $50,000. And in 2008, there were 18,783 who earned over $200,000 and owed no federal income tax. So, how do they do it?
About half of the non-payers just don't make enough money to owe any tax. They rely on the standard deduction and personal exemptions to avoid any tax on their income. But the Tax Policy Center identified 38 million Americans who rely on one or more tax expenditures to pull their tax down to zero. ("Tax expenditure" is Washington-speak for tax provisions like deductions and credits that reduce tax revenue.)
•Seniors: 44% of non-payers benefit from the extra standard deduction for those over age 65, the elderly tax credit, and the exclusion of Social Security from taxable income. (The TPC study calls these "elderly tax benefits" — our own unscientific survey shows that half of all seniors don't mind being called "elderly" if it means paying less tax!)
•Families: 30.4% of non-payers benefit from the child tax credit, the dependent care credit, and the earned income tax credit. (It's worth noting that if the Bush tax cuts actually expire on schedule after 2012, the child tax credit will disappear — throwing millions back into the "taxpayer" category.)
•Beneficiaries: 6.0% draw income from tax-free benefit programs, including Supplemental Security Income and Temporary Assistance for Needy Families.
•Students: 5.6% benefit from education credits to eliminate their tax.
•Adjustments: Another 5.1% of non-payers benefit from "above the line" deductions like self-employed health insurance and student loan interest and from tax-exempt interest income.
•Itemizers: 5.0% benefit from itemized deductions like mortgage interest, state and local taxes, and charitable gifts. (The Obama administration has proposed limiting the value of itemized deductions for higher-income earners to just 28%; however, in today's anti-tax climate, the President is about as likely to appear on Jersey Shore as he is to raise taxes.)
•Credits: 2.5% benefit from other credits, including the Savers Credit for retirement savings and the general business credit.
•Investors: Finally, 1.3% benefit from the special 0% rate for certain capital gains and qualified corporate dividends.
If you're like most clients, you see something on that list that saves you taxes, even if it's not enough to pull your taxes all the way down to zero. It's our job to help you take advantage of all of those strategies and more. If you know someone who's not happy with the taxes they pay, pass along this email, and we'll see how we can help!
The Washington-based Tax Policy Center estimates that a full 46% of Americans pay no federal income tax. And those non-payers represent a surprisingly broad cross section of Americans. Over 10% of them report incomes over $50,000. And in 2008, there were 18,783 who earned over $200,000 and owed no federal income tax. So, how do they do it?
About half of the non-payers just don't make enough money to owe any tax. They rely on the standard deduction and personal exemptions to avoid any tax on their income. But the Tax Policy Center identified 38 million Americans who rely on one or more tax expenditures to pull their tax down to zero. ("Tax expenditure" is Washington-speak for tax provisions like deductions and credits that reduce tax revenue.)
•Seniors: 44% of non-payers benefit from the extra standard deduction for those over age 65, the elderly tax credit, and the exclusion of Social Security from taxable income. (The TPC study calls these "elderly tax benefits" — our own unscientific survey shows that half of all seniors don't mind being called "elderly" if it means paying less tax!)
•Families: 30.4% of non-payers benefit from the child tax credit, the dependent care credit, and the earned income tax credit. (It's worth noting that if the Bush tax cuts actually expire on schedule after 2012, the child tax credit will disappear — throwing millions back into the "taxpayer" category.)
•Beneficiaries: 6.0% draw income from tax-free benefit programs, including Supplemental Security Income and Temporary Assistance for Needy Families.
•Students: 5.6% benefit from education credits to eliminate their tax.
•Adjustments: Another 5.1% of non-payers benefit from "above the line" deductions like self-employed health insurance and student loan interest and from tax-exempt interest income.
•Itemizers: 5.0% benefit from itemized deductions like mortgage interest, state and local taxes, and charitable gifts. (The Obama administration has proposed limiting the value of itemized deductions for higher-income earners to just 28%; however, in today's anti-tax climate, the President is about as likely to appear on Jersey Shore as he is to raise taxes.)
•Credits: 2.5% benefit from other credits, including the Savers Credit for retirement savings and the general business credit.
•Investors: Finally, 1.3% benefit from the special 0% rate for certain capital gains and qualified corporate dividends.
If you're like most clients, you see something on that list that saves you taxes, even if it's not enough to pull your taxes all the way down to zero. It's our job to help you take advantage of all of those strategies and more. If you know someone who's not happy with the taxes they pay, pass along this email, and we'll see how we can help!
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