Press Baron Rupert Murdoch started with his father's newspaper in Adelaide, South Australia, and built it into the world's second-biggest media empire. Time magazine has ranked him three times in their annual list of the 100 most influential people in the world. Vanity Fair routinely lists him in their "New Establishment" ranking of the 100 most influential people of the information age. And Forbes ranks him as one of the wealthiest men in the world, with an estimated net worth of $7.6 billion.
But now Murdoch's News Corporation is in hot water because reporters at Britain's News of the World tabloid illegally hacked into telephone voicemails across Britain. Since the scandal came to a boil, several company officials have resigned, others have been arrested, and the News of the World — which began publishing in 1843 when Queen Victoria ruled Britannia — has shut down. Here on our side of "the pond," the FBI is investigating whether Murdoch's forces may have hacked into the phones of 9/11 victims and their families.
But enough of all that legal wrangling. What does the tax man think? More specifically, what do the tax men think — specifically, the Australian Tax Office, with a top corporate tax rate of 36%, our own IRS, with a top rate of 35%, and Britain's Inland Revenue, with a top rate of 30%?
Well, the answer appears to be "not much." Murdoch is known for his anti-tax position. So it's no surprise that Murdoch has, in the words of Judge Learned Hand, "arrange[d] his affairs that his taxes shall be as low as possible." A 1999 study by The Economist magazine found that, for the four years ending in 1988, News Corp paid an effective tax rate of just 6%. That compares with fully 31% for News Corp's rival Disney, the world's biggest media conglomerate.
How do Murdoch and News Corp do it? First, by slicing and dicing their income into a dizzying number of pieces. And second, by taking advantage of seemingly every international tax loophole on the books. News Corp includes a staggering 800 subsidiaries. That number includes over 60 in various sunny tax havens like the Cayman Islands, Bermuda, the Netherlands Antilles, and the British Virgin Islands. (Hey, if you were picking someplace to send your money to avoid taxes, would you pick someplace like Iceland?)
Here's today's tax quiz question. What would you guess is Murdoch's most profitable subsidiary? Fox News? The Wall Street Journal? Britain's Sunday Times? Nope, nope, and nope. Try "News Publishers" — a Bermuda corporation with no newspapers, no magazines, and no TV stations. Heck, News Publishers doesn't even have employees! Shifting profits across national boundaries lets Murdoch Corp take advantage of jurisdictions like Bermuda with near-zero tax rates.
Ironically, though, all that chicanery may have actually cost Murdoch. As The Economist reported, "The complexity of News Corporation’s structure baffles analysts and puts off institutional investors." The magazine suggests that this complexity accounts for News Corp's share price underperformance in the late 1990s and makes it more expensive for him to finance new acquisitions.
Choosing the right entity for your business is one of the most important decisions you'll make. And while you probably don't need 800 entities, you might profit from more than one. Let us help you with the right plan to make the most of your business — with no illegal phone hacking involved!
Monday, July 25, 2011
Tuesday, July 19, 2011
IRS Hits Homer, Too!
Last Saturday, New York Yankees shortstop Derek Jeter became the 28th major leaguer — and only the first Yankee — to achieve 3,000 career hits. Jeter's third inning solo home run to left field wound up in the hands of a 23-year-old fan named Christian Lopez. Souvenier baseballs are big business, so team officials immediately whisked Lopez out of the stands, escorted him into the president's office, and asked him what he planned to do with his windfall. (The fan who caught Barry Bonds's 715th home run ball sold it on Ebay for $220,100. And Mark McGwire's record-breaking 70th home run ball sold for $3 million in 2006. Nice timing, too — in 2010, McGwire admitted using steroids while he played, and that ball's estimated value dropped faster than a pop fly!)
Lopez showed a bit of class that some would say is surprising from a Yankees fan. He passed on the chance to auction the ball, which some experts estimate would have fetched as much as $250,000. Then he told reporters he thought the ball belonged to Jeter and gave it back to the legendary slugger. But he still walked off with some lovely parting gifts, including three Jeter-autographed balls (worth about $600 each), three autographed bats ($900 each), and two autographed jerseys (another $1,000 each). The Bronx Bombers also gave him four tickets to every remaining home game this season. In fact, for the game after Lopez's lucky grab, they gave him four front-row "Legends" seats, which sell for up to a whopping $1,358.90 each. Quite a haul!
Oh, and you know what else he's likely to catch? That's right . . . a tax bill from the IRS! And those opponents won't be happy with jerseys or tickets, even if the Yanks make the Series. They just want cash, thank you very much.
Catching collectible baseballs presents all sorts of tricky tax questions that most fans won't think of when they suit up for a big game:
•When does the lucky fan who catches the ball fan "recognize" the income? Now, when he catches it? Or someday down the road, when he sells it?
•If tax is due immediately, before the fan sells, how does he determine what it's worth?
•If the proceeds qualify as capital gain, taxed at the special 28% rate for collectibles, what will the fan's "cost basis" be? Zero? The price of the ticket to the game? The price of his season-ticket package?
And what if the lucky fan gives the ball back to the hitter, like Lopez did with Jeter? Back in 1998, just before Mark McGwire beat Babe Ruth's single-season record, a reporter asked an IRS spokesman what would happen if the fan who caught that ball handed it back to McGwire. The spokesman replied that the fan might actually owe gift tax — and sparked howls of protest! Then-Commissioner Charles Rossoti quickly changed course, confessing that the Tax Code could be as hard to understand as the Infield Fly Rule.
Tax experts predict Lopez won't owe tax on the value of the ball he caught, but will owe it on the value of his memorabilia and tickets. What do you think? Is that fair? Or should the IRS "intentionally walk" the fans who catch souvenir balls and let them enjoy a little tax-free history?
Lopez showed a bit of class that some would say is surprising from a Yankees fan. He passed on the chance to auction the ball, which some experts estimate would have fetched as much as $250,000. Then he told reporters he thought the ball belonged to Jeter and gave it back to the legendary slugger. But he still walked off with some lovely parting gifts, including three Jeter-autographed balls (worth about $600 each), three autographed bats ($900 each), and two autographed jerseys (another $1,000 each). The Bronx Bombers also gave him four tickets to every remaining home game this season. In fact, for the game after Lopez's lucky grab, they gave him four front-row "Legends" seats, which sell for up to a whopping $1,358.90 each. Quite a haul!
Oh, and you know what else he's likely to catch? That's right . . . a tax bill from the IRS! And those opponents won't be happy with jerseys or tickets, even if the Yanks make the Series. They just want cash, thank you very much.
Catching collectible baseballs presents all sorts of tricky tax questions that most fans won't think of when they suit up for a big game:
•When does the lucky fan who catches the ball fan "recognize" the income? Now, when he catches it? Or someday down the road, when he sells it?
•If tax is due immediately, before the fan sells, how does he determine what it's worth?
•If the proceeds qualify as capital gain, taxed at the special 28% rate for collectibles, what will the fan's "cost basis" be? Zero? The price of the ticket to the game? The price of his season-ticket package?
And what if the lucky fan gives the ball back to the hitter, like Lopez did with Jeter? Back in 1998, just before Mark McGwire beat Babe Ruth's single-season record, a reporter asked an IRS spokesman what would happen if the fan who caught that ball handed it back to McGwire. The spokesman replied that the fan might actually owe gift tax — and sparked howls of protest! Then-Commissioner Charles Rossoti quickly changed course, confessing that the Tax Code could be as hard to understand as the Infield Fly Rule.
Tax experts predict Lopez won't owe tax on the value of the ball he caught, but will owe it on the value of his memorabilia and tickets. What do you think? Is that fair? Or should the IRS "intentionally walk" the fans who catch souvenir balls and let them enjoy a little tax-free history?
Monday, July 11, 2011
The Tax Man and the "Electric Amish
We've talked before about how the internet is changing so much of how we live our lives. The internet is changing how we shop, how we book travel, and even how some of us find romance.
It's no surprise, then, that the internet is changing how we file and pay our taxes. Just 10 years ago, online filing was a novelty. Now it's become the norm. Last year, two out of three Americans e-filed their income tax returns. Those who also opted for electronically deposited refunds saved the government mailing costs, saved themselves a trip to the bank, and even got their refunds a week faster than waiting for paper checks.
State and local governments are getting into the e-filing act, too. In fact, some state and local governments are mandating e-filing for certain returns. For example, New York has made e-filing mandatory for sales tax returns. They also want taxpayers' phone numbers and Social Security numbers. That's not really too much to ask, is it?
But what if your business isn't part of the internet revolution? What if you still take your goods to market in a black horse-drawn buggy? What if your store doesn't even have electricity?
That's the dilemma that many Amish are facing right now. The New York Department of Taxation and Finance wants them to file sales taxes electronically, like any other business. The Department has even sent Amish business owners — mainly furniture makers and shopkeepers — letters threatening a $50 penalty for every return not electronically filed!
The Watertown Daily Times, which publishes in an area that's home to the conservative Swartzentruber and Heuvelten Amish clans, reports that the Department really wants to help. Spokeswoman Susan Burns said in an email that "our expectation was that businesses with concerns about complying would call the Taxpayer Contact Center." Unfortunately, most Amish don't have a telephone to make the call in the first place! (The spokeswoman said they could write or have someone else call on their behalf.)
Oh, and the Department would love to have taxpayers' Social Security numbers, too. But the Amish have been exempt from Social Security since 1965. So they generally don't have Social Security numbers, either!
Electronic filing is just one of many conflicts the Amish are facing with government. Amish have fought to avoid putting orange reflective triangles on their buggies. Patriot Act requirements making photo identification more important have made banking and travel harder. And some New York Amish are in federal court, fighting requirements over home smoke detectors.
In the end, the NY Department of Taxation and Finance appears to be showing a little common sense, honoring the Amish sense of devotion and letting them snail-mail their returns the old-fashioned way. What do you think? Do we lose anything by letting Amish taxpayers kick it old school? Or should we find a way to drag them online with the rest of us
It's no surprise, then, that the internet is changing how we file and pay our taxes. Just 10 years ago, online filing was a novelty. Now it's become the norm. Last year, two out of three Americans e-filed their income tax returns. Those who also opted for electronically deposited refunds saved the government mailing costs, saved themselves a trip to the bank, and even got their refunds a week faster than waiting for paper checks.
State and local governments are getting into the e-filing act, too. In fact, some state and local governments are mandating e-filing for certain returns. For example, New York has made e-filing mandatory for sales tax returns. They also want taxpayers' phone numbers and Social Security numbers. That's not really too much to ask, is it?
But what if your business isn't part of the internet revolution? What if you still take your goods to market in a black horse-drawn buggy? What if your store doesn't even have electricity?
That's the dilemma that many Amish are facing right now. The New York Department of Taxation and Finance wants them to file sales taxes electronically, like any other business. The Department has even sent Amish business owners — mainly furniture makers and shopkeepers — letters threatening a $50 penalty for every return not electronically filed!
The Watertown Daily Times, which publishes in an area that's home to the conservative Swartzentruber and Heuvelten Amish clans, reports that the Department really wants to help. Spokeswoman Susan Burns said in an email that "our expectation was that businesses with concerns about complying would call the Taxpayer Contact Center." Unfortunately, most Amish don't have a telephone to make the call in the first place! (The spokeswoman said they could write or have someone else call on their behalf.)
Oh, and the Department would love to have taxpayers' Social Security numbers, too. But the Amish have been exempt from Social Security since 1965. So they generally don't have Social Security numbers, either!
Electronic filing is just one of many conflicts the Amish are facing with government. Amish have fought to avoid putting orange reflective triangles on their buggies. Patriot Act requirements making photo identification more important have made banking and travel harder. And some New York Amish are in federal court, fighting requirements over home smoke detectors.
In the end, the NY Department of Taxation and Finance appears to be showing a little common sense, honoring the Amish sense of devotion and letting them snail-mail their returns the old-fashioned way. What do you think? Do we lose anything by letting Amish taxpayers kick it old school? Or should we find a way to drag them online with the rest of us
Tuesday, July 5, 2011
IRS Strikes OUT!
Next week marks Major League Baseball's 2011 "Midsummer Classic" — the All-Star Game between fan favorites from the rival National and American leagues. Baseball is making the usual headlines on the field this year, with tight races in most divisions. And it's making headlines off the field, too — especially in Los Angeles, where Dodgers owners Frank McCourt and his wife Jamie are contesting an especially bitter divorce.
Frank McCourt is decidedly behind the count in this at-bat. He's accused of borrowing more than he could afford to buy the team in the first place, then using the team as a personal ATM to finance an extravagant lifestyle. That lifestyle included seven homes costing just over $99 million — two houses on Cape Cod, two houses next door to each other on Malibu's famed "Millionaire's Beach," two more houses next door to each other in LA's affluent Holmby Hills neighborhood (right down the street from the Playboy Mansion), and a $6 million condo in Vail. It also included $225,000 per month for a private jet, $10,000 per month for Jamie's hair stylist, and $386 per month for her makeup for Dodgers events. (Just weeks ago, the pair signed an agreement awarding Jamie $650,000 per month in spousal support plus ownership of the homes — one of which she uses just for swimming laps and another just for storing furniture.)
And so, McCourt's mountain of debt has finally loaded the bases against him. Earlier this year, Baseball Commissioner Bud Selig balked at McCourt's plans to make payroll and appointed a trustee to take over the team's finances. And last month, McCourt threw a beanball of his own, defying MLB rules and filing bankruptcy while he works to sign a television deal which he says will let him pay all his creditors. In the meantime, season ticket sales are down, and some say he's the worst owner since Red Sox skipper Harry Frazee sold Babe Ruth to the Yankees for $125,000.
But there's one opponent who's batting zero against the McCourt's, and that's the tax man. Court papers filed last February show that from 2004-2009, the McCourts drew $108 million from their various businesses — and paid zero taxes to the IRS or State of California. Zip. Zilch. Nada. How the heck does a family make $108 million and pay zero taxes?
McCourt began his career developing commercial real estate. Real estate developers frequently fund their lifestyles primarily from tax-free loans secured by the equity in their properties. In fact, McCourt used a loan secured by a 24-acre parking facility in Boston to finance his original purchase of the team. And he continued that strategy even after taking over the team, borrowing $390 million against future revenues, in part to finance tax-free distributions for himself and his family.
McCourt also benefits from generous depreciation deductions against his properties. Depreciation is a "paper" deduction representing wear and tear on a property; however, in the right circumstances, it's available to offset ordinary income. Court papers reveal that the McCourts arrived in California with over $100 million in net operating loss carryforwards; thus, they can expect to continue paying little or no taxes for quite some time.
There's nothing illegal about the McCourts' strategy. The loan proceeds represent advances against future income that will be taxable, even if they're offset by the real estate losses. And those real estate losses are part of a long-established tax rules designed to spur real estate development that drives economic growth. The legislators who write the tax laws probably never imagined anyone woud be living quite so well while paying quite so little tax. But we use some of the same strategies ourselves — for the right clients. So call us when you need a strong closer to save your game!
Frank McCourt is decidedly behind the count in this at-bat. He's accused of borrowing more than he could afford to buy the team in the first place, then using the team as a personal ATM to finance an extravagant lifestyle. That lifestyle included seven homes costing just over $99 million — two houses on Cape Cod, two houses next door to each other on Malibu's famed "Millionaire's Beach," two more houses next door to each other in LA's affluent Holmby Hills neighborhood (right down the street from the Playboy Mansion), and a $6 million condo in Vail. It also included $225,000 per month for a private jet, $10,000 per month for Jamie's hair stylist, and $386 per month for her makeup for Dodgers events. (Just weeks ago, the pair signed an agreement awarding Jamie $650,000 per month in spousal support plus ownership of the homes — one of which she uses just for swimming laps and another just for storing furniture.)
And so, McCourt's mountain of debt has finally loaded the bases against him. Earlier this year, Baseball Commissioner Bud Selig balked at McCourt's plans to make payroll and appointed a trustee to take over the team's finances. And last month, McCourt threw a beanball of his own, defying MLB rules and filing bankruptcy while he works to sign a television deal which he says will let him pay all his creditors. In the meantime, season ticket sales are down, and some say he's the worst owner since Red Sox skipper Harry Frazee sold Babe Ruth to the Yankees for $125,000.
But there's one opponent who's batting zero against the McCourt's, and that's the tax man. Court papers filed last February show that from 2004-2009, the McCourts drew $108 million from their various businesses — and paid zero taxes to the IRS or State of California. Zip. Zilch. Nada. How the heck does a family make $108 million and pay zero taxes?
McCourt began his career developing commercial real estate. Real estate developers frequently fund their lifestyles primarily from tax-free loans secured by the equity in their properties. In fact, McCourt used a loan secured by a 24-acre parking facility in Boston to finance his original purchase of the team. And he continued that strategy even after taking over the team, borrowing $390 million against future revenues, in part to finance tax-free distributions for himself and his family.
McCourt also benefits from generous depreciation deductions against his properties. Depreciation is a "paper" deduction representing wear and tear on a property; however, in the right circumstances, it's available to offset ordinary income. Court papers reveal that the McCourts arrived in California with over $100 million in net operating loss carryforwards; thus, they can expect to continue paying little or no taxes for quite some time.
There's nothing illegal about the McCourts' strategy. The loan proceeds represent advances against future income that will be taxable, even if they're offset by the real estate losses. And those real estate losses are part of a long-established tax rules designed to spur real estate development that drives economic growth. The legislators who write the tax laws probably never imagined anyone woud be living quite so well while paying quite so little tax. But we use some of the same strategies ourselves — for the right clients. So call us when you need a strong closer to save your game!
Monday, June 27, 2011
A Date With the IRS
The internet has transformed so much of how we live our lives. We find our news online, find books and music online, and find travel bargains online. The internet has even transformed how many of us find romance, with a dizzying range of sites for suitors of all interests. Match.com advertises that one out of five relationships now begins on an online dating site. EHarmony ads feature smiling couples, married after meeting online. And let's not forget the raft of specialized dating sites like dateHarvardSquare.com (free for Harvard students and alumni), VeggieConnection.com (for those who won't be ordering steak on their date), and WeWaited.com (for those who won't be getting lucky on their date). What would Yente, the village matchmaker from Fiddler on the Roof, think of JDate.com for Jewish singles?
Now there's a new site called WhatsYourPrice.com that offers a decidedly commercial twist on the age-old quest for true love. Their romantic slogan: "Buy a First Date With Anyone." Generous daters (mostly men, of course), post what they're willing to pay for a date. Attractive daters (mostly women), post what they want to get for a date. As one woman from the site said, "If it's going to be a big, huge waste of time, at least I'm going to get paid for it . . . . A lot of these guys are wealthy gentlemen, and I think my time is as valuable as their time."
Guys, your friends might snicker if they find you paying for dates. Ladies, you probably wouldn't want to tell your mother. But forget what your friends and family think. What does the IRS think of getting paid to date?
Let's say a generous gentleman pays $100 for a date. That $100, given in exchange for his date's time, company, and conversation, is clearly taxable income to her, reportable as "Other income" on Line 21 of her Form 1040. (Taken to its logical extreme, generous gentlemen ought to be issuing 1099s for dating over $600!)
Now, what about the value of dinner? Is it additional compensation for the date? Presumably, a generous gentleman wants to impress his date with more than just coffee at Starbucks. Internal Revenue Code Section 83 states that property transferred in connection with services is taxable at its fair market value. Fortunately, daters can pay the actual tax in cash — otherwise, they might have to bring doggie bags for the IRS. (What sounds like the right tax for dinner at a nice steakhouse, anyway? Three bites of filet and half of a baked potato?)
And what about the generous gentlemen? Are there any deductions available for them? Maybe, if they take their date to a business function. Otherwise, no dice — and the gifts aren't "charitable contributions," either, unless the date is a "registered nonprofit."
At first glance, taxing daters might not seem like a "10" on the IRS's priority list. But WhatsYourPrice.com boasts 50,000 members and says the average bid for a date is $138! That suggests there's a fair amount of tax revenue worth chasing. Of course, there would be certain challenges collecting that revenue. It's bad enough when gossipy co-workers and nosy family members poke their nose in your love life. Who needs an IRS auditor tagging along on a date?
In all seriousness, the internet really is changing how taxes work. Take sales taxes, for example — state governments would love to collect sales taxes from online retailers, and several have taken aim at Amazon.com. But online daters, you're still safe — at least for now — and we'll be sure to let you know if that changes!
Now there's a new site called WhatsYourPrice.com that offers a decidedly commercial twist on the age-old quest for true love. Their romantic slogan: "Buy a First Date With Anyone." Generous daters (mostly men, of course), post what they're willing to pay for a date. Attractive daters (mostly women), post what they want to get for a date. As one woman from the site said, "If it's going to be a big, huge waste of time, at least I'm going to get paid for it . . . . A lot of these guys are wealthy gentlemen, and I think my time is as valuable as their time."
Guys, your friends might snicker if they find you paying for dates. Ladies, you probably wouldn't want to tell your mother. But forget what your friends and family think. What does the IRS think of getting paid to date?
Let's say a generous gentleman pays $100 for a date. That $100, given in exchange for his date's time, company, and conversation, is clearly taxable income to her, reportable as "Other income" on Line 21 of her Form 1040. (Taken to its logical extreme, generous gentlemen ought to be issuing 1099s for dating over $600!)
Now, what about the value of dinner? Is it additional compensation for the date? Presumably, a generous gentleman wants to impress his date with more than just coffee at Starbucks. Internal Revenue Code Section 83 states that property transferred in connection with services is taxable at its fair market value. Fortunately, daters can pay the actual tax in cash — otherwise, they might have to bring doggie bags for the IRS. (What sounds like the right tax for dinner at a nice steakhouse, anyway? Three bites of filet and half of a baked potato?)
And what about the generous gentlemen? Are there any deductions available for them? Maybe, if they take their date to a business function. Otherwise, no dice — and the gifts aren't "charitable contributions," either, unless the date is a "registered nonprofit."
At first glance, taxing daters might not seem like a "10" on the IRS's priority list. But WhatsYourPrice.com boasts 50,000 members and says the average bid for a date is $138! That suggests there's a fair amount of tax revenue worth chasing. Of course, there would be certain challenges collecting that revenue. It's bad enough when gossipy co-workers and nosy family members poke their nose in your love life. Who needs an IRS auditor tagging along on a date?
In all seriousness, the internet really is changing how taxes work. Take sales taxes, for example — state governments would love to collect sales taxes from online retailers, and several have taken aim at Amazon.com. But online daters, you're still safe — at least for now — and we'll be sure to let you know if that changes!
Tuesday, June 21, 2011
Tax Strategies for Anthony Weiner
Just a few short weeks ago, Anthony Weiner was a rising star in the Democratic party. The seven-term Congressman from New York's Ninth District, straddling Brooklyn and Queens, was a well-respected liberal voice, with frequent appearances on cable news networks and a legitimate shot at becoming Gotham's next mayor. Now, he joins fellow New Yorkers Elliot Spitzer, Chris Lee, and Eric Massa in the Disgraced Politicians Hall of Shame. (Must be something in that New York water.) Weiner's already enough of a national laughingstock that we can just skip all the wisecracks you expected when you saw the subject line of this email and get on with it!
Weiner may be on his way out for now, but he's not likely to be gone forever. Former Governor Elliot Spitzer, who left office after being uncovered as a high-end escort service's "Client 9," hosts his own talk show on CNN. New York native and former mayor of Cincinnati Jerry Springer, who was caught paying for similar services with a check, overcame that disgrace to become a wildly successful national television personality. And of Weiner, even President Obama told ABC news that "he'll refocus, and he'll end up being able to bounce back."
But will there be any tax breaks to help ease the shame that he must feel, as he and wife Huma Abedin prepare to welcome a little Weiner into their family? Weiner starts out with some pretty sweet perks as a former Congressman — perks which are already tax-advantaged. His Congressional pension will grow tax-deferred until he reaches age 62. He'll also get access to the house floor during regular business or joint sessions, free parking for life on the House side of the Capitol building, and even access to the House gym where he took some of the photos that ultimately brought him down — all tax-free.
But of course, Weiner will have to find work to replace his $174,000 congressional salary. Fortunately, job-hunting expenses are deductible too, as a miscellaneous itemized deduction, subject to a 2% floor on adjusted gross income. This holds true whether he parlays his cable-news appearances into a full-time broadcast career, or starts lobbying former colleagues at $500 per hour. (Good news: porn mogul Larry Flynt has already offered Weiner a job with a 20% raise, medical benefits, and even relocation costs!)
Speaking of medical benefits, Weiner has announced plans to enter a "treatment center." While he hasn't revealed exactly where he's going, it makes sense to assume he'll seek counseling for online sex addiction. That sort of psychological treatment — which generally runs $500-1,000 per day for 30-45 days — is a deductible medical expense, subject to a 7.5% floor on adjusted gross income (or 10%, if he's subject to Alternative Minimum Tax, which hits New Yorkers especially hard). Weiner was an early and enthusiastic supporter of last year's health reform package, but he originally threatened not to support it without a "public option." We'll be intrigued to see if he's happy with his own "public option" once he gets the bill!
In the end, it's easy to make fun of high-profile names like Weiner when they stumble and fall. But we all make mistakes. The real challenge is learning from those mistakes and moving on to greater success. When it comes to taxes, your mistakes won't cost you your reputation. But they can cost you a fortune. So if you don't already have a plan, let us create one for you! And remember, we're here for your family, friends, and colleagues too.
Weiner may be on his way out for now, but he's not likely to be gone forever. Former Governor Elliot Spitzer, who left office after being uncovered as a high-end escort service's "Client 9," hosts his own talk show on CNN. New York native and former mayor of Cincinnati Jerry Springer, who was caught paying for similar services with a check, overcame that disgrace to become a wildly successful national television personality. And of Weiner, even President Obama told ABC news that "he'll refocus, and he'll end up being able to bounce back."
But will there be any tax breaks to help ease the shame that he must feel, as he and wife Huma Abedin prepare to welcome a little Weiner into their family? Weiner starts out with some pretty sweet perks as a former Congressman — perks which are already tax-advantaged. His Congressional pension will grow tax-deferred until he reaches age 62. He'll also get access to the house floor during regular business or joint sessions, free parking for life on the House side of the Capitol building, and even access to the House gym where he took some of the photos that ultimately brought him down — all tax-free.
But of course, Weiner will have to find work to replace his $174,000 congressional salary. Fortunately, job-hunting expenses are deductible too, as a miscellaneous itemized deduction, subject to a 2% floor on adjusted gross income. This holds true whether he parlays his cable-news appearances into a full-time broadcast career, or starts lobbying former colleagues at $500 per hour. (Good news: porn mogul Larry Flynt has already offered Weiner a job with a 20% raise, medical benefits, and even relocation costs!)
Speaking of medical benefits, Weiner has announced plans to enter a "treatment center." While he hasn't revealed exactly where he's going, it makes sense to assume he'll seek counseling for online sex addiction. That sort of psychological treatment — which generally runs $500-1,000 per day for 30-45 days — is a deductible medical expense, subject to a 7.5% floor on adjusted gross income (or 10%, if he's subject to Alternative Minimum Tax, which hits New Yorkers especially hard). Weiner was an early and enthusiastic supporter of last year's health reform package, but he originally threatened not to support it without a "public option." We'll be intrigued to see if he's happy with his own "public option" once he gets the bill!
In the end, it's easy to make fun of high-profile names like Weiner when they stumble and fall. But we all make mistakes. The real challenge is learning from those mistakes and moving on to greater success. When it comes to taxes, your mistakes won't cost you your reputation. But they can cost you a fortune. So if you don't already have a plan, let us create one for you! And remember, we're here for your family, friends, and colleagues too.
Monday, June 20, 2011
The Mortgage Forgiveness Debt Relief Act and Debt Cancellation
The Mortgage Debt Relief Act of 2007 generally allows taxpayers to exclude income from the discharge of debt on their principal residence. Debt reducing through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the canceled amount in income for tax purposes, depending on the circumstances. When the borrowed money you were not required to include the loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a form 1099-C, Cancellation of Debt.
Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
Insolvency: If you are insolvent when the debt is canceled, some or all of the canceled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your canceled debt is generally not considered taxable income.
Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.
What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.
What does exclusion of income mean?
Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?
No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately.
Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.
How long is this special relief in effect?
It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.
Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed example in Publication 4681.
If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.
Do I have to complete the entire Form 982?
No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness.
If part of the forgiven debt doesn’t qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?
Yes. The forgiven debt may qualify under the insolvency exclusion. Normally, you are not required to include forgiven debts in income to the extent that you are insolvent. You are insolvent when your total liabilities exceed your total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982. Publication 4681 discusses each of these exceptions and includes examples.
I lost money on the foreclosure of my home. Can I claim a loss on my tax return?
No. Losses from the sale or foreclosure of personal property are not deductible.
If the remaining balance owed on my mortgage loan that I was personally liable for was canceled after my foreclosure, may I still exclude the canceled debt from income under the qualified principal residence exclusion, even though I no longer own my residence?
Yes, as long as the canceled debt was qualified principal residence indebtedness. See Example 2 on page 13 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
Will I receive notification of cancellation of debt from my lender?
Yes. Lenders are required to send Form 1099-C, Cancellation of Debt, when they cancel any debt of $600 or more. The amount cancelled will be in box 2 of the form.
How do I report the forgiveness of debt that is excluded from gross income?
Check the appropriate box under line 1 on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to indicate the type of discharge of indebtedness and enter the amount of the discharged debt excluded from gross income on line 2. Any remaining canceled debt must be included as income on your tax return.
How do I know if I was insolvent?
You are insolvent when your total debts exceed the total fair market value of all of your assets. Assets include everything you own, e.g., your car, house, condominium, furniture, life insurance policies, stocks, other investments, or your pension and other retirement accounts.
How should I report the information and items needed to prove insolvency?
Use Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to exclude canceled debt from income to the extent you were insolvent immediately before the cancellation. You were insolvent to the extent that your liabilities exceeded the fair market value of your assets immediately before the cancellation.
What is Cancellation of Debt?
If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the canceled amount in income for tax purposes, depending on the circumstances. When the borrowed money you were not required to include the loan proceeds is normally reportable as income because you no longer have an obligation to repay the lender. The lender is usually required to report the amount of the canceled debt to you and the IRS on a form 1099-C, Cancellation of Debt.
Is Cancellation of Debt income always taxable?
Not always. There are some exceptions. The most common situations when cancellation of debt income is not taxable involve:
Qualified principal residence indebtedness: This is the exception created by the Mortgage Debt Relief Act of 2007 and applies to most homeowners.
Bankruptcy: Debts discharged through bankruptcy are not considered taxable income.
Insolvency: If you are insolvent when the debt is canceled, some or all of the canceled debt may not be taxable to you. You are insolvent when your total debts are more than the fair market value of your total assets.
Certain farm debts: If you incurred the debt directly in operation of a farm, more than half your income from the prior three years was from farming, and the loan was owed to a person or agency regularly engaged in lending, your canceled debt is generally not considered taxable income.
Non-recourse loans: A non-recourse loan is a loan for which the lender’s only remedy in case of default is to repossess the property being financed or used as collateral. That is, the lender cannot pursue you personally in case of default. Forgiveness of a non-recourse loan resulting from a foreclosure does not result in cancellation of debt income. However, it may result in other tax consequences.
What is the Mortgage Forgiveness Debt Relief Act of 2007?
The Mortgage Forgiveness Debt Relief Act of 2007 was enacted on December 20, 2007 (see News Release IR-2008-17). Generally, the Act allows exclusion of income realized as a result of modification of the terms of the mortgage, or foreclosure on your principal residence.
What does exclusion of income mean?
Normally, debt that is forgiven or cancelled by a lender must be included as income on your tax return and is taxable. But the Mortgage Forgiveness Debt Relief Act allows you to exclude certain cancelled debt on your principal residence from income. Debt reduced through mortgage restructuring, as well as mortgage debt forgiven in connection with a foreclosure, qualifies for the relief.
Does the Mortgage Forgiveness Debt Relief Act apply to all forgiven or cancelled debts?
No. The Act applies only to forgiven or cancelled debt used to buy, build or substantially improve your principal residence, or to refinance debt incurred for those purposes. In addition, the debt must be secured by the home. This is known as qualified principal residence indebtedness. The maximum amount you can treat as qualified principal residence indebtedness is $2 million or $1 million if married filing separately.
Does the Mortgage Forgiveness Debt Relief Act apply to debt incurred to refinance a home?
Debt used to refinance your home qualifies for this exclusion, but only to the extent that the principal balance of the old mortgage, immediately before the refinancing, would have qualified. For more information, including an example, see Publication 4681.
How long is this special relief in effect?
It applies to qualified principal residence indebtedness forgiven in calendar years 2007 through 2012.
Is there a limit on the amount of forgiven qualified principal residence indebtedness that can be excluded from income?
The maximum amount you can treat as qualified principal residence indebtedness is $2 million ($1 million if married filing separately for the tax year), at the time the loan was forgiven. If the balance was greater, see the instructions to Form 982 and the detailed example in Publication 4681.
If the forgiven debt is excluded from income, do I have to report it on my tax return?
Yes. The amount of debt forgiven must be reported on Form 982 and this form must be attached to your tax return.
Do I have to complete the entire Form 982?
No. Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Adjustment), is used for other purposes in addition to reporting the exclusion of forgiveness of qualified principal residence indebtedness.
If part of the forgiven debt doesn’t qualify for exclusion from income under this provision, is it possible that it may qualify for exclusion under a different provision?
Yes. The forgiven debt may qualify under the insolvency exclusion. Normally, you are not required to include forgiven debts in income to the extent that you are insolvent. You are insolvent when your total liabilities exceed your total assets. The forgiven debt may also qualify for exclusion if the debt was discharged in a Title 11 bankruptcy proceeding or if the debt is qualified farm indebtedness or qualified real property business indebtedness. If you believe you qualify for any of these exceptions, see the instructions for Form 982. Publication 4681 discusses each of these exceptions and includes examples.
I lost money on the foreclosure of my home. Can I claim a loss on my tax return?
No. Losses from the sale or foreclosure of personal property are not deductible.
If the remaining balance owed on my mortgage loan that I was personally liable for was canceled after my foreclosure, may I still exclude the canceled debt from income under the qualified principal residence exclusion, even though I no longer own my residence?
Yes, as long as the canceled debt was qualified principal residence indebtedness. See Example 2 on page 13 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments.
Will I receive notification of cancellation of debt from my lender?
Yes. Lenders are required to send Form 1099-C, Cancellation of Debt, when they cancel any debt of $600 or more. The amount cancelled will be in box 2 of the form.
How do I report the forgiveness of debt that is excluded from gross income?
Check the appropriate box under line 1 on Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to indicate the type of discharge of indebtedness and enter the amount of the discharged debt excluded from gross income on line 2. Any remaining canceled debt must be included as income on your tax return.
How do I know if I was insolvent?
You are insolvent when your total debts exceed the total fair market value of all of your assets. Assets include everything you own, e.g., your car, house, condominium, furniture, life insurance policies, stocks, other investments, or your pension and other retirement accounts.
How should I report the information and items needed to prove insolvency?
Use Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) to exclude canceled debt from income to the extent you were insolvent immediately before the cancellation. You were insolvent to the extent that your liabilities exceeded the fair market value of your assets immediately before the cancellation.
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