Her Majesty, the Snoop

Her Majesty, the Snoop

Getting audited by the IRS is rarely anyone's spot of tea -- unless, of course, you're the auditor. But at least our IRS "plays fair" and uses your actual return to decide whether to audit you. Not so for the folks at Her Majesty's Revenue and Customs Service across the pond! 

Here in the former colonies, the IRS uses statistical analysis to find most of their audit targets. Every return gets a super-secret score called a Discriminant Information Function, or "DIF." The higher your DIF, the more potential the IRS sees for bringing in additional taxes in an audit. So, with limited resources available for auditing returns, the IRS naturally strives to audit the higher-scoring returns first. (It's like why Willie Sutton robbed banks -- because that's where the money was!) Generally, small businesses organized as sole proprietorships face the greatest chance of audit -- as high as 4% or more -- because they have the greatest opportunity to underreport income and overstate deductions. 

But back in the old country, HMRC is getting a little more aggressive. They're not just looking at tax returns. They've just announced a new program to use credit checks to find suspected tax cheats. The plan is to cross-check details of the income people report on their return against their actual spending, to identify those at risk of both legal and illegal tax avoidance. Officials have just finished a pilot program involving 20,000 people -- but they expect to expand it to as many as two million. Blimey! 

The program sounds straightforward enough. Let's say you operate Ye Olde Cock & Bull Pub in a small town somewhere outside London. You report £20,000 in income. But your credit file shows you spending closer to £30,000. Now ye olde tax authorities have reason to believe you're not reporting all those pints of Boddingtons you've served -- and they have actual evidence to make their case. 

The problem, of course, comes when the program finds stashes of suspicious but legitimate assets. Let's say you're Robert Crawley, the 6th Earl of Grantham. Your own family money, which dated back to the Wars of the Roses, is long since gone. So you marry an American heiress. You make a genteel living managing Downton Abbey and occasionally sitting in Parliament. But if HMRC reviews your credit file, they're likely to find spending way out of line with your stated income! You can explain it, of course, as part of your wife Cora's inheritance. But who wants to have to explain that sort of thing to the tax man, even if you are paying your fair share? 

Of course, the program also raises enormous privacy concerns. It's fashionable to say that in today's internet age, privacy is a relic of the past. But it's also hard to see a program like that flying here in the United States -- at least not without howls of protest. 

We all know that proactive planning is the key to paying the least amount of tax allowed by law. But did you know that planning can also cut your chance of getting audited? Reorganizing your sole proprietorship as a partnership or subchapter-S corporation, for example, can cut your risk of audit by as much as 90%. So call us when you're ready for a plan that lets you pay less tax and attract less attention!

The Best Investment in Today's Economy

The Best Investment in Today's Economy

Investing isn't easy these days. Bank savings accounts and money market funds earn next to nothing. Bond yields are at historic lows. The stock market is at a recent high, but full of volatility. And alternative investments like real estate and private equity can be illiquid or bring with them other drawbacks. 

If you're a corporate treasurer, you might consider investing in a Washington lobbyist. Back in 2009, three professors conducted a study revealing that companies who helped lobby for one particular tax break earned a staggering 22,000% return on every dollar they invested in lobbying! (For those of you who didn't major in accounting, that's $220 dollars coming back on every dollar going in.)

Back in 2004, when Congress was considering the American Jobs Creation Act, an ad-hoc group calling itself the Homeland Investment Coalition lobbied for it to include a "tax repatriation holiday." Multinational corporations often structure their operations to earn profits overseas, then leave those profits overseas to avoid U.S. tax. The repatriation holiday cut the regular tax rate on those profits from 35% to just 5.25%, which encouraged them to bring those profits back home. The stated goal, naturally, was for those companies to reinvest those profits and create new jobs. 

More than 800 companies ended up celebrating the "holiday." Together, they saved an estimated $100 billion in tax, which certainly sounds worth celebrating! Winners included pharmaceutical and technology companies (Pfizer, Johnson & Johnson, and Merck), technology companies (Hewlett Packard and IBM), and financial services (Citigroup, J.P. Morgan Chase, Morgan Stanley, and Merrill Lynch). Not all of those companies "invested" in lobbying for the law, but even those that did, won big. For example drugmaker Eli Lilly reported spending $8.5 million to lobby for the tax break in 2003 and 2004 -- and saving more than $2 billion in tax. Not a bad "ROI"! (The jury is still out on whether the law actually created any jobs -- many of its beneficiaries actually cut jobs after the tax break, and most of the money went to stock buybacks or dividends.) 

Of course, not every lobbying "investment" pays off. Sometimes lobbyists strike out. And successful lobbying is harder in today's hyper-partisan gridlocked Congress. But shrewd lobbying still pays off. The New York Times reported earlier this week that lobbyists representing Amgen, the world's largest biotechnology firm, completed a "Hail Mary" pass by tucking language into the recent "fiscal cliff" bill. The provision delays a set of Medicare price restraints on a category of drugs that that includes Amgen's own Sensipar. This legislative goodie is estimated to benefit drugmakers by $500 million over the next two years. And it comes just two weeks after Amgen pled guilty to marketing another one of its drugs illegally, agreeing to pay a record $762 million in fines and penalties! And while the new law isn't a tax provision, per se, it still illustrates the power of lobbying. 

Individual taxpayers like you and me can't lobby for millions in tax breaks. But we can take advantage of the hundreds of tax breaks that somebody else has already created. The key, of course, is research to find those breaks and planning to take advantage of them. That's why we focus so much effort on proactive planning.

 Consider this as the 2013 tax season approaches. Any competent tax preparer can put the "right" numbers in the "right" boxes on the "right" forms. But then, most of them pretty much call it a day. They really just help you record history. Our job is much broader and much more valuable. So call us when you're ready to start writing your own history! And remember, we're here for your family, friends, and colleagues, too

Laissez Les Bons Temps Roulez. And Pay Up!

Laissez Les Bons Temps Roulez. And Pay Up!

Last week's Super Bowl in New Orleans was a week-long "fais do do" featuring world-class food, drinks, and music. Advertisers rolled out their newest, shiniest campaigns and newest, shiniest products (Apparently, Anheuser-Busch thinks they need to remind viewers to drink something called "beer"). Sharp-eyed fans even saw a football game between the AFC champion Baltimore Ravens and NFC champion San Francisco 49ers. 

The NFL estimated that the game would bring $434 million to the city. While some economists scoff that the real impact is just a fraction of the official estimate, there's no doubt that the Big Easy was thrilled to host their tenth "Big Game." Most of that revenue goes to the hotels, restaurants, and souvenir vendors who open their cash registers to affluent visitors. (While face value for game tickets was "just" $1,015, the average fan paid $3,000 for his seat.) Millions more goes to the bartenders, waiters, cabbies, and hotel staff that take care of those fans. But some of that money actually goes to the players, too. The NFL gave each of the winning Ravens a ring worth $20,000 plus another $88,000 in cash. The losing 49ers didn't get a ring, but still walked away with $44,000 for their valiant effort.

 So . . . with numbers like those on the field, do you really think the tax man can resist throwing a penalty flag or two? 

It turns out Super Bowl LXVII was pricier than usual to win. That's because Uncle Sam has drafted three rookie taxes for players to tackle. Last month's "fiscal cliff" bill raised the top tax rate from 35% to 39.6% on ordinary income topping $400,000 ($450,000 for joint filers). The fiscal cliff bill also phases out personal exemptions and itemized deductions for taxpayers earning over $250,000 ($300,000 for joint filers). Considering that the 2012 league minimum ranged from $390,000 for rookies to $925,000 for 10+ year veterans, those new taxes will hit every player on the field. And the 2010 Affordable Care Act adds a new 0.9% Medicare surtax on earned income topping $200,000 ($250,000 for joint filers). The 2012-level tax sacks each winning Raven for $41,000; the 2013 "extras" rough them up for another $4,860 or more. 

And Uncle Sam wasn't the only one paying attention. Don't forget the Bayou State and the Crescent City! Much of the money that comes into New Orleans heads right back out to the national corporations that rent hotel rooms, serve those meals, and sell those tacky t-shirts -- but at least it gets taxed locally. On January 30, the Louisiana Department of Revenue issued a helpful two-page bulletin alerting visitors that, "according to Louisiana Revised Statute 47:290, a tax is levied on all nonresident individuals who have income earned within or derived from sources in Louisiana." That "jock tax" reaches 6% on income over $50,000 ($100,000 for joint filers). Louisiana's tax compares with zero in Florida, which has also hosted the Super Bowl 15 times, and a whopping 12.3% in California, which has hosted it 11 times. 

Of course, none of the players actually care how much tax they'll pay on their bonuses. They just want that ring! But there's still a lesson here for some of you. We've said before that how you earn your money makes a difference in how you're taxed. It turns out that where you earn it and when you earn it makes a difference, too. Our answer, as always, is proactive planning to help you make the smartest decision. If you don't already have a game plan, the play clock is ticking!

Bad News From Your Friend at the IRS

Bad News From Your Friend at the IRS

You may not realize it, but you have a friend at the IRS. Her name is Nina Olson, and she's the "Taxpayer Advocate." Olson and her 2,000-person staff are an independent organization within the IRS, charged with cutting through IRS red tape when the Service can't get the job done itself. Are you stuck between cogs in the IRS machine? Have you experienced a delay of more than 30 days to resolve your issue? Have you not received a response or resolution to your problem by the date the IRS promised? If so, Nina Olson and her 1,400 Case Advocates throughout the IRS are waiting to help. 

Earlier this month, Olson released her 762-page Annual Report to Congress. And it's not pretty. In fact, it probably reads a lot like what your report on the IRS might read if your job was to dig up problems:

• The tax system is a mess. It's nearly 4 million words long, with over 4,680 changes since 2001 -- an average of one per day. Complying with tax laws consumes the equivalent of 3 million full-time workers annually. And only 16% of Americans think the tax code is "fair." (That puts the tax code slightly above Congress, at 9%, but still lagging Donald Trump, cockroaches, brussels sprouts, and NFL replacement refs.) That 4-million word code tops the problem list -- her report calls for overhauling the tax laws, eliminating "sunset" clauses like the expiration of the Bush tax cuts that led to the recent "fiscal cliff" crisis, and eliminating phase-outs that deny benefits as your income increases.

• The Alternative Minimum Tax, a parallel tax system originally introduced to make sure that high-income taxpayers don't take advantage of too many deductions and credits to skate by without paying their fair share, is an even bigger mess. The AMT was never indexed for inflation until this month's "fiscal cliff" bill, so Congress repeatedly had to "patch" it to keep it from reaching even further into the middle class. The result, Olson writes, "is one law that grants popular tax benefits (the regular tax code), another law that eliminates the benefits (the AMT), and then yet a third law that undoes the elimination of benefits (the patches), usually at the last minute -- a legislative Rube Goldberg contraption of unnecessary complexity." Her recommendation? Scrap it.

• "Customer service" is a disgrace. Telephone and correspondence services have deteriorated over the last decade. Online services are primitive. "Processing flaws" and service delays are undermining taxpayers' rights to representation. In some cases, IRS rules actually discourage taxpayers from complying with the law. For example, the Offshore Voluntary Disclosure Program, which lets taxpayers who failed to report foreign financial accounts come clean, actually scares folks who inadvertently failed to report them and keeps them from 'fessing up.

• Finally, the IRS is underfunded. (Yeah, we didn't think you would be as happy with this one.) Olson likens the IRS to the government's "accounts receivable" department, and reports that they bring in seven dollars for every extra dollar they spend. "It is ironic and counterproductive that concerns about the deficit are leading to cuts in the I.R.S. budget, when those cuts are making the deficit larger," says Olson. "No business would fail to fund a unit that, on average, brought in $7 for every dollar spent. Shareholders would rebel and bring lawsuits, or at least oust the management or board of directors."

Are you thoroughly depressed yet? It gets worse. That's because these are essentially the same recommendations Olson has made in every Annual Report she's filed with Congress since 2001. And yet, we still have an offensively complicated tax code, a ridiculously ineffective Alternative Minimum Tax, and hideous thickets of bureaucracy that just drain taxpayers' souls. 

The solution for you, of course, is a proactive plan takes advantage of the code's hidden opportunities, steers clear of its hidden shoals, and keeps you out of the bureaucracy. If you don't have a plan yet, isn't it time you get one?

New Simplified Home Office Deduction

New Simplified Home Office Deduction

Home office expenses can be an overlooked source of valuable business deductions.  Many business owners don't claim them because they fear (incorrectly) that home offices are an audit "red flag," or because the recordkeeping is a pain.  (Form 8829, which helps calculate the deduction, includes 43 lines and asks you to "see instructions" 17 times.)  But now the IRS has released a "safe harbor" method that may make home office deductions more accessible. 

The new procedure, outlined in Revenue Procedure 2013-13, lets you deduct a flat rate of $5 per square foot, for up to 300 feet of qualifying office space.  You'll still deduct your mortgage interest and property tax attributable to the space on Schedule A as usual.  But you won't have to calculate any actual expense or depreciation deduction for the space.  On the downside, if your simplified home office deduction reduces your income below zero, you can't carry if forward to future years, as you can with the regular deduction. 

You can determine year-by-year which home office deduction method to use.  You don't have to elect one and lock yourself into it for the future. 

Do you have a space in your home that you use "regularly and exclusively" for business, but don't specifically deduct it as such?  To see if the new safe harbor makes sense for you, call us at 970.668.0772

New Simplified Home Office Deduction

New Simplified Home Office Deduction

Home office expenses can be an overlooked source of valuable business deductions.  Many business owners don't claim them because they fear (incorrectly) that home offices are an audit "red flag," or because the recordkeeping is a pain.  (Form 8829, which helps calculate the deduction, includes 43 lines and asks you to "see instructions" 17 times.)  But now the IRS has released a "safe harbor" method that may make home office deductions more accessible. 

The new procedure, outlined in Revenue Procedure 2013-13, lets you deduct a flat rate of $5 per square foot, for up to 300 feet of qualifying office space.  You'll still deduct your mortgage interest and property tax attributable to the space on Schedule A as usual.  But you won't have to calculate any actual expense or depreciation deduction for the space.  On the downside, if your simplified home office deduction reduces your income below zero, you can't carry if forward to future years, as you can with the regular deduction. 

You can determine year-by-year which home office deduction method to use.  You don't have to elect one and lock yourself into it for the future. 

Do you have a space in your home that you use "regularly and exclusively" for business, but don't specifically deduct it as such?  To see if the new safe harbor makes sense for you, call us at 970.668.0772.

 Sincerely,

Larry D. Stone, CPA

Final Tax Thoughts for 2012

Final Tax Thoughts for 2012

2013 is almost here, and it looks like that old Grinch is leaving a "fiscal cliff" under everyone's tree. Here are a few final thoughts to help usher in the New Year: 

"There's no line on the tax return that asks 'what are you not telling us?'"
Robert Goulder (tax attorney) 

"The rich, indeed, are different from the rest of us; they have shiftier tax lawyers."
Jim McTeague (columnist, Barron's) 

"Dear Tax Commissioner: Three years ago I cheated on my taxes. Since then I have been unable to sleep at night. Enclosed is $5,000. If I still can't sleep, I'll send you the rest."
Anonymous

"If you are truly serious about preparing your child for the future, don't teach him to subtract -- teach him to deduct."
Fran Lebowitz

"The ancient Egyptians built elaborate fortresses and tunnels and even posted guards at tombs to stop grave robbers. In today's America, we call that estate planning."
Rep. William R. Archer (former Chair, House Ways and Means Committee) 

"[A] tax lawyer is a person who is good with numbers but does not have enough personality to be an accountant."
James D. Gordon III (BYU Law School) 

"Make sure you pay your taxes; otherwise you can get in a lot of trouble."
Richard M. Nixon

"Just because you have a briefcase full of cash doesn't mean you're out to cheat the government."
Pete Rose

"From a tax point of view, you're better off raising horses or cattle than children."
Former U.S. Rep. Patricia Schroeder

We wish we could tell you exactly what's going to happen with the fiscal cliff and taxes. But we can promise we'll be here to help you make the best of it, in 2013 and beyond. And remember, we're here for your family, friends, and colleagues too!

By Any Other Name

By Any Other Name

In Shakespeare's classic drama Romeo and Juliet, star-crossed protagonists from feuding families meet and fall in love. In Act II, when the impossibility of their courtship has become clear, Juliet leans out her balcony and declares to her lover "What's in a name? That which we call a rose by any other name would smell as sweet." The line, of course, implies that Romeo's last name should mean nothing, and the two should be together. 

Shakespeare may or may not have been right about love and roses. But what about taxes? Does that which we call a "tax," by any other name smell as sour? Apparently, Washington thinks not -- if you pay attention to all the new euphemisms, you'd think Washington has given up imposing new "taxes" entirely!

In 1952, the IRS started charging "user fees" when the government provides special benefits to a recipient beyond those given to the general public. Today the government raises over $200 billion per year in fees for services like approving retirement plan applications, driving heavy vehicles, entering national parks, and even walking to the top of the Statue of Liberty. But "user fees" are still "fees," and Americans seem to have figured out that trick. So, what now?

Now we're seeing even more clever names for what most of us would consider plain old taxes. Take, for example, the new "unearned income Medicare contribution" that goes into effect on January 1. This is a 3.8% levy on "investment income" (interest dividends, capital gains, rents, royalties, and annuities) for individuals earning over $200,000 or joint filers earning over $250,000. Washington created it as part of the Obamacare package, along with an increase in the Medicare tax on earned incomes over those same thresholds. But, while they call it a "Medicare contribution," the money doesn't actually go into the Medicare trust fund. It goes straight into the general revenue fund, where Washington can spend it on whatever they want.

The "unearned income Medicare contribution" isn't Obamacare's only euphemism for "tax." Beginning on January 1, 2014, applicable large employers with 50 or more employees have to offer their employees minimum essential coverage or pay a $2,000/employee "assessable payment." That's a nondeductible "assessable payment," by the way, so the actual cost might be even higher. Sure sounds like a tax to us.

Finally, there are taxes in disguise that have the same bottom-line effect as more direct taxes. If you start taking Social Security benefits before your normal retirement age and earn more than the retirement earnings test exempt amount ($14,640 for 2012), you'll pay a Social Security earnings penalty of one dollar for every two dollars you earn above that limit. Doesn't that sound like a 50% tax? (The penalty drops to one dollar for every three dollars in earnings above $33,880 in the year you reach normal retirement age, then disappears after that year.)

The good news here is that we can help. Whether you're looking to pay less "tax", minimize your "unearned income medicare contribution," sidestep the "assessable penalty," or avoid the "Social Security earnings penalty," planning is your plain-English solution. So call us -- and make sure you do it now before Washington comes up with any more new names for taxes! And remember, we're here for your family, friends, and colleagues, too!

Powerball Tax Planning

Powerball Tax Planning

We all know money can't buy happiness, blah, blah, blah. But money can buy a lot of other good stuff we all want -- like comfort, security, freedom, and independence. So, last week, millions of us across America lined up at gas stations, convenience stores, and bodegas to take a shot at last week's record Powerball jackpot of 588 million bucks.

Admit it -- even if you didn't play, you couldn't help but dream at least a little about what you would do with all that money. That house you've always wanted on the most expensive street in town? The beach house or ski lodge you've always wanted to share with your friends? Lavish gifts for your family, favorite charities, and community? (It's OK to dream just a little bit more before you finish reading.)

But here's an ugly reality you probably don't want to think about. No matter where you choose to spend your windfall, the biggest piece of all will go to your friends at the IRS. (Yes, those nice folks at the Multi-State Lottery Association will send the IRS a Form W-2G alerting them to your good fortune.) With jackpots this big, the tax collectors in Washington will probably put a plaque on the wall with your name on it!

Your first decision involves whether to take your prize in a lump sum this year, or an inflation-adjusted annuity over the next 30 years. And big decisions, as always, mean taking taxes into consideration. Taking your loot all at once means paying the top federal income tax rate of 35%. That may sound like a lot, but at least you'll know exactly how much the tax will cost. Taking the prize in installments means paying whatever tax rate is in effect the year an installment is paid. Next year, for example, the Bush tax cuts are scheduled to expire, pushing the top tax rate to 39.6%. Next year also marks the first appearance of the Unearned Income Medicare Contribution, a 3.8% tax on "investment income" including annuities. And who knows what other new taxes might appear over the next 30 years?

Uncle Sam isn't the only one who's going to want a piece of your action. Forty-three states tax lottery winnings as ordinary income. Some states even tax your winnings if you just buy your ticket there without even living there. Do you live in Pennsylvania and work in New York? Don't buy your ticket around the corner from the office unless you want to cut the Empire State in for 8.82%!

Of course, there are plenty of strategies you can use to offset the income from the prize. Do you own your own business? Consider establishing or beefing up your qualified retirement plan. Maybe a closely-held insurance company (CHIC) makes sense for even bigger savings. Are you charitably-inclined? You can offset up to 30% of your "adjusted gross income" with gifts to a private foundation and 50% for gifts to a "public" charity.

So, if you find yourself with a winning ticket, call us before you host that press conference and cash your ticket!

But if you don't win that Powerball jackpot, good tax planning is even more important. That's because you don't have millions to waste on taxes you don't have to pay! So call us anyway -- and make sure you do it now before the New Year brings new taxes. And remember, we're here for your family, friends, and colleagues, too!

A Different Kind of Black Friday Savings

A Different Kind of Black Friday Savings

Last week marked the celebration of our most uniquely American holiday. No, silly, we're not talking about Thanksgiving. We're talking about Black Friday, our national homage to consumerism, conspicuous consumption, and all things capitalist. Walmart and other "big box" retailers pounded a final nail in Thanksgiving's coffin, opening at 8PM that night so shoppers could skip out on the pumpkin pie to save a couple hundred bucks on a flat-screen TV. 

And this year, Walmart founder Sam Walton's heirs, who still own 48% of the company, have taken a lesson from their own shoppers. Only, the Waltons aren't just saving hundreds. They've found a way to save millions, just by accelerating a regularly-scheduled dividend payment from January 2 to December 27. (Apparently, they think "everyday low prices" applies to their tax bills, too!) 

Under current law, tax on dividends is capped at just 15%. The Walmart dividend will be 39.75 cents/share, and the Waltons own approximately 1.6 billion shares. That means the family's payout will be $636 million, and their federal income tax bill on that payout will be a hefty $95.4 million. 

If Walmart waits until January 1 to make the payment, though, taxes could go up -- possibly way up. That's because the so-called "Bush tax cuts," in effect since 2003, expire. At that point, dividends lose their special protection, and the top rate jumps to 39.6%. Congress and the White House have both said they want to extend the current rates for most taxpayers. But if they can't come to some agreement to the contrary, the Waltons will pay an extra $156 million in tax on their dividend. (A recent CNN poll shows that two-thirds of Americans expect Washington officials to act like "spoiled children" rather than "responsible adults" during those upcoming negotiations, so the Waltons better cross their fingers!) 

Waiting 'til January 1 would also make the Walton heirs subject to the new "Unearned Income Medicare Contribution" of 3.8%. (This is a special tax on investment income for taxpayers making over $200,000, or $250,000 for joint filers.) That would bring the effective tax rate on the January 2nd payment all the way up to 43.4%, and bring the Waltons' final tax bill up to a whopping $276 million. Ouch! 

Walmart is hardly the only company accelerating dividends to beat the tax hike. One financial data firm estimates that 109 public companies will issue special dividend payments before January 1, more than three times as many as in recent years. Those special payments will actually be enough to give the IRS a significant spike in 2012 tax revenue. The New York Times reported last week that two recent studies show that companies where board members own a large percentage of company shares are likeliest to make this move. The three Walton family members who serve on the company's board of directors recused themselves from last week's vote, but a company spokesman confirmed the company did make the decision because of uncertainty over taxes. 

It may be too late to take advantage of Black Friday shopping specials at Walmart. But it's assuredly not too late to take advantage of Black Friday planning for taxes! Tax planning is the key to paying the legal minimum, especially with the "fiscal cliff" looming on the horizon. And a good tax plan can pay for a holiday season full of gifts and fun. So call us if you don't already have a plan, and let us show you what we can do. We're sure you'll give thanks for the savings!

Jedi Tax Planning

Filmmaker George Lucas has been a Hollywood success since 1973, when he spent just $775,000 to produce American Graffiti — then watched it go on to gross over $200 million. Lucas has influenced a generation of filmmakers and films, as director (19 titles), producer (67 titles), writer (81 titles), and even an actor (he played an uncredited "Alien on TV Monitor" in the first Men in Black). Of course, he'll always be best known as creator of the Star Wars series, which popularized the "space opera" genre for a galaxy of fans.

Last month, Lucas announced that he's selling his production company, Lucasfilms, to The Walt Disney Company for $4.05 billion in cash and stock. And it should hardly come as a surprise ending that he found a way to beat the IRS that's almost as powerful as launching a proton torpedo down the Death Star's exhaust port.

How did he do it? Elaborate special effects? Computer-generated imaging? Nope. He did it just by selling now, in 2012.

We have no idea how the evil Empire collected taxes a long time ago, in a galaxy far, far away. (We suspect that R2D2 kept awesome records in case he was audited; Darth Vader hid his money on Endor, a forest moon bearing a striking resemblance to the Cayman Islands; and Chewbacca never bothered to file at all.) But here in the U.S., gains from the sale of a business are treated as capital gains and subject to tax up to 15%. Lucas is taking half of his proceeds in Disney stock, so that part escapes tax for now. (He'll pay if he sells those Disney shares sometime down the road.) But that still leaves up to $2 billion in fully taxable cash gains. And that means up to $300 million in tax for Uncle Sam.

At least, that's how it works this year. On January 1, the Empire strikes back, when those Bush-era rates expire. Unless Washington gives us a new hope, that capital gains rate jumps to 20%. President Obama has said he wants to extend the current rates for income under $200,000 ($250,000 for joint filers), and the Senate has passed a bill to do just that. But if the 20% Clinton capital gains rate returns, at least for guys in Lucas's bracket, selling in 2013 could have cost him up to $100 million more in immediate tax. That's at least enough to recondition a Millenium Falcon or two!

January 1 also marks the start of a new phantom menace, the "Unearned Income Medicare Contribution," on investment income, including capital gains, for those earning above that same $200,000 threshold. The new Medicare tax is "just" 3.8% — but 3.8% of $2 billion is still a hefty $76 million.

The sale also represents smart estate planning for Lucas, who is 68. While generations of fans hope to see him shepherd the final three Star Wars films to the theatre, the sale will spare his heirs the challenge of managing his affairs at his death. Lucas has already announced plans to donate the bulk of his estate to educational charities, and the gifts he's already made, including $175 million to his alma mater University of Southern California, will surely ease the tax bite on that transfer.

Selling a business is one of the toughest productions any entrepreneur directs. Making the most of that opportunity takes bits of Luke Skywalker's drive, Han Solo's skill, and Obi-Wan Kenobi's wisdom. And keeping the most of your proceeds takes the right tax advice. That's why we're here — to give you a plan to keep the most of your legacy. And remember, we're here for your family, friends, and colleagues, too. May the Force be with you!

Tax Relief for Superstorm Sandy

Tax Relief for "Superstorm" Sandy

Hurricane Sandy roared ashore last week, interrupting our regularly scheduled election already in progress. And yes, we'll be addressing election results shortly, especially as we get more guidance on what to expect for your taxes. But we're impressed, as always, with how a natural disaster brings out the best in Americans, and we're pleased to see both Democrats and Republicans joining together to help those most affected by the storm.

The IRS gives generous tax deductions to help make our own generous charitable gifts go further. So this week we're writing to help you make the most of efforts you might make to support storm victims -- or any other year-end charitable gifts.

• You can deduct up to 50% of your adjusted gross income for cash gifts you make to so-called "501(c)(3) organizations," or public charities working on behalf of storm victims. These include the American Red Cross and similarly recognizeable groups.

• If you give more than $250 in any single gift, you'll need a written receipt from the recipient, dated no later than the filing date of your return.

• Gifts of food, clothing, furniture, electronics, or household items are deductible at "fair-market value," such as the price you would get for them at a resale shop. Consider using software, available at any office-supply store, for tracking your gifts and their value. You might be surprised at how much you can save!

• Gifts of cars, trucks, and boats are a little trickier. Congress has cracked down on inflated car and truck deductions. If you donate a vehicle, you can deduct the fair-market value only if the charity actually uses it (such as a church using a van to drive its parishioners). If the charity sells the vehicle, your deduction is limted to the amount the charity actually realizes on the sale. And if that amount is more than $500, you'll have to attach a certification to your return that states the vehicle was sold in an arms-length sale and includes the gross proceeds from that sale.

• Donations you make by text message are deductible like any other cash gifts. You can use your phone bill to substantiate your deduction.

The IRS cautions us all to seek out qualified charities, and warns that bogus requests for charities that simply don't exist are common after natural disasters. The IRS also announced that they would give businesses and tax preparers affected by the hurricane an extra seven days to file payroll and excise tax returns that were due on October 31.

December 31 is approaching faster than you'd like, and that means time is running out for year-end tax planning. But it's not too late to take concrete steps to cut your 2012 taxes. What are your year-end financial goals? Helping the victims of the storm? Saving for your dream retirement? Helping finance your children's or grandchildren's education? Odds are good that we can help you save taxes while you do it. And remember, we're here for your family, friends, and colleagues too!

Our Office Warming Party!

COME JOIN US AT OUR OFFICE WARMING PARTY! CELEBRATING THE ADDITION OF DIANE TO OUR FIRM AND KICKING OFF THE HOLIDAY SEASON Enjoy Light Refreshments and Cocktails Tuesday, November 13th, 4:00 – 6:00 PM at Stone CPA 699 Summit Boulevard Frisco, CO Call 970-668-0772 for More Details

Watching Out for the Cliff

Watching Out for the Cliff Ordinarily, we use these posts to discuss fun items related to taxes and finances. We know that you can read the usual boring articles about the usual boring tax topics pretty much anywhere else. And most of you are happy to let us worry about "the details." Every so often, though, we need to discuss more serious issues, even if it's just to let you know that we're on top of them. That's the case today with the so-called "fiscal cliff" -- Federal Reserve Chairman Ben Bernanke's clever term for what happens on January 1, when a bunch of current tax rules expire, and some new rules take effect. Here's a quick rundown of what to expect: • The Bush tax cuts expire. That means the top rates on ordinary income goes from 35% to 39.6%; the top rate on capital gains goes from 15% to 20%; and the top rate on qualified dividends jumps from 15% to 39.6%. Much of the debate over tax rates focuses on income at the top. But the expiration of the Bush tax cuts affects all of us. The lowest 10% rate will disappear entirely, and everyone who actually pays income tax will pay more. • The 2011-2012 payroll tax cuts expire. That means Social Security and self-employment taxes go up by 2% on all earned income up to $113,700. Two percent may not sound like a lot -- but it means higher taxes for about 163 million working Americans. • New taxes imposed by the 2010 "Obamacare" legislation take effect. The Medicare portion of Social Security and self-employment taxes goes up from 2.9% to 3.8% on earned income topping $200,000 ($250,000 for joint filers). And there's a new 3.8% "Unearned Income Medicare Contribution" (which sounds so much better than "tax') on "net investment income" (interest, dividends, capital gains, rents, royalties, and annuities) over those same amounts. • The Alternative Minimum Tax exemptions revert back to where they stood in 2000. Under current law, those exemptions aren't adjusted for inflation. So, every couple of years, Congress "patches" the system by temporarily raising the exemptions to where they would be if they were indexed for inflation. The AMT currently hits about 4½ million Americans -- but without the "patch," that number explodes to 33 million. • Oh, and don't think dying solves your tax problem. That's because estate taxes, which currently start at 45% on estates over $5 million, will jump to 55% on estates over just $1 million. So, January 1 is our fiscal cliff, and we're hurtling towards it like Thelma and Louise. What can we do? Well, plenty of legislators have proposed extending part or all of the Bush tax cuts, extending the payroll tax cuts, patching the AMT, and raising the estate tax exemption. But actually passing anything will be a challenge -- Congress has passed just 132 bills this year, and 20% of those were to name post offices! The partisan gridlock has many observers convinced that we'll actually go over that fiscal cliff. (Maybe it'll be like those old Road Runner cartoons, where the coyote runs off a cliff and keeps right on going, just fine, until he looks down. That's when he realizes he's standing in thin air, then plummets 1,000 feet to the bottom of the canyon.) If that winds up being the case, we may see Washington wait for the election results and pass something noncontroversial like the AMT patch before the end of the year. Then in 2013 they'll pass legislation extending at least part of the Bush tax cuts and make it retroactive to January 1. We're not writing today to take sides on any of these issues, or tell you where taxes should go. But we want you to know that we're watching everything closely to help you make the most of your opportunities and avoid land mines where possible. And remember, we're here for your family, friends, and colleagues, too!

Plan Now or Pay Later

Plan Now or Pay Later

If you’re like most builders, you heard about tax Armageddon or the “fiscal cliff”. 

• Learn techniques to use in avoiding the “fiscal cliff” approaching at the end of the year because of automatic tax increases.

• How will the expiration of the $500 billion in tax breaks affect you?

• How should you invest your savings to keep more of your hard earned cash

• Learn strategies to avoid paying more taxes on the earnings you work hard to obtain

• Learn how much these expected tax increases will cost you.

Attend our entertaining, fast-paced seminar to learn how to take advantage of these strategies and more:

Larry Stone, Stone CPA-Colorado Tax Coach, is the best-selling author of the “Secrets of a Tax Free Life”.    He has specialized training in tax reduction strategies and uses a comprehensive system to save you money. 

5:30 PM

Thursday, November 8, 2012

Eagle Valley Home Builders Association

Admittance $20: Includes Appetizers and Drinks

Please email sue@EVHBA.COM or call Sue at 970.376.2033 to RSVP

Avoiding the Fiscal Cliff

Hi Fellow Investors!

Our next meeting is Thursday, November 15, at 6:00 p.m.  BCREI Members will get an email giving you a link to register for the simulcast webinar, if you would rather join the meeting via webinar. 

Whether you know it, or not, the tax laws are changing at the end of the year.  The changes are being referred to as the “fiscal cliff”.  It pays to be well informed about what is coming and what you can do it about it.  Be sure to come and hear CPA Larry Stone.  He will tell us about how to look at the coming tax changes in regards to real estate investing... 

"Plan Now or Pay Later", with Larry Stone

·         Learn techniques to use in avoiding the “fiscal cliff” approaching at the end of the year because of automatic tax increases

·         How should you invest your savings to keep more of your hard earned cash

·         Learn how much these expected tax increases will cost you.

Larry Stone, Stone CPA-Colorado Tax Coach, is the best-selling author of the “Secrets of a Tax Free Life”.    He has specialized training in tax reduction strategies and uses a comprehensive system to save you money. 

WE ARE NO LONGER MEETING IN LONGMONT!

Starting in June we started meeting in an open space outside the BCREI office on the second floor of 6655 Lookout Road, Boulder, CO  80301.  This is in Gunbarrel.  Here is a link to Google map... http://maps.google.com/maps?hl=en&bav=on.2,or.r_gc.r_pw.r_qf.,cf.osb&biw=1600&bih=748&q=6655+Lookout+Road,+Boulder,+CO&um=1&ie=UTF-8&hq=&hnear=0x876bf0351f393987:0xdefaf86e3db33215,6655+Lookout+Rd,+Boulder,+CO+80301&gl=us&ei=exPST7GOOueW2AXw55iTDw&sa=X&oi=geocode_result&ct=title&resnum=1&ved=0CAkQ8gEwAA

If you are late, please text 720-329-1328 to see if we can send someone down to let you in.  Texting is preferred, and you can call if you do not have texting capability.

15, 25, 28, Hut!

15, 25, 28, Hut!

There's no denying that amateur sports, especially college football, are big business. Together, the 15 top-grossing teams score over $1 billion in revenue, with the University of Texas Longhorns alone generating $71.2 million in profit.

Numbers like that would normally make the "receivers" at the IRS smile. But college football is different. The big Division I schools that sponsor the most competitive teams are all tax-exempt. And the IRS loses again on a juicy revenue stream that's unique to college sports -- required donations, sometimes totaling twice the cost of a season ticket, that fans make to the school to secure those seats.

Back in 1986, boosters couldn't deduct the contributions they made specifically to secure sports tickets. But Louisiana Senator Russell Long, who sat on the Finance Committee, met with lobbyists who argued that his home state Louisiana State University needed tax-deductible contributions to add seats to Tiger Stadium. Long agreed, but didn't want to be seen showing favoritism to his own constituent. So he approached Texas Representative Jake Pickle, whose Austin district included the Longhorns' campus. Together, the two lawmakers cobbled together the sort of backroom deal that makes the rest of us proud to be Americans. They added a provision to the 1986 Tax Reform Act which preserved a 100% deduction -- for just those two schools! Here's how the legislation describes one of them to limit its reach:

"Such institution was mandated by a State constitution in 1876; such institution was established by a State legislature in March 1881; is located in a State capital pursuant to a statewide election in Sept. 1881; the campus of such institution formally opened on Sept. 15, 1883; such institution is operated under the authority of a 9-member board of regents appointed by the governor."

Naturally, every other school in the country complained. So -- did the lawmakers turn red in embarrassment at getting caught with their hands in the cookie jar and shut down the offending provision? Noooooooo . . . two years later, they voted to trim the deduction to 80% of the donation, but extend it to everyone.

How much does this all cost the IRS? Well, nobody really knows. But Ohio State University is the leader in seat-related donations, with $38.7 million. LSU is next with $38 million, and Texas is third with $33.9 million. (In fact, LSU is about to spend $80 million to add 70 more luxury boxes and 6,900 more seats, which should bring in another $15 million in donations.) If the average donor pays 25% in federal tax, that means $22 million in lost tax dollars. And that's just three schools out of 1,000 eligible to collect such donations. Of course, defenders of the deduction argue that it's worth the hit to the Treasury. They note that donations go to support scholarships, facilities, and other university expenses.

This Saturday, it will be hard to turn on a television without hearing about the upcoming election or "Frankenstorm" Sandy. College football will provide a welcome respite to millions of fans across the country. So next time you sit down to watch your favorite team, hoist a cold one to the tax code that helps make their success possible!

Duh!

Three professors have just revealed that sort of earth-shattering information in the newest issue of Accounting Review. They analyzed data from 5,000 corporations over 17 years from 1992-2008 to answer an age-old question: "Do IRS Audits Deter Corporate Tax Avoidance?" And here's their startling conclusion — make sure you're sitting down to read it: when audit rates go up, so do taxes!

Shocking, isn't it? (Just FYI, "endogeneity" is a statistical condition that occurs when there's a correlation between a parameter or variable and an "error term." It can arise as a result of measurement error, or a few other things that require looking up, including autoregression with autocorrelated errors, simultaneity, omitted variables, or sample selection errors.)

The professors also argue that shareholders benefit from IRS audits — especially when corporate governance is weak. Co-author Jeffrey Hoopes of the University of Michigan reports that "strict tax enforcement promotes good financial reporting and tends to check managers' proclivities to divert corporate resources for their personal use under the guise of saving taxes.” They cite Tyco as an example, where top executives minimized taxes by relocating profits to low-tax foreign countries, then diverted millions of dollars for their own personal use. (Remember CEO Dennis Kozlowski, who spent $15,000 of shareholder money on an umbrella stand? Yeah, that guy . . . he's in jail now.)

What does all this mean for you? Well, audit rates for personal returns average just over one percent. That's a tiny fraction of the 30% or so that the biggest group of companies in the Accounting Review study faced. But we file every return as if we expect it to be audited. Yes, we work and plan to minimize your taxes. But the strategies we use are all court-tested and IRS-approved. That way, you save money and sleep well at night!

Department of Worst Nightmares

Department of Worst Nightmares

Last week, we wrote about a recent report issued by the Treasury Inspector General for Tax Administration ("TIGTA") -- an independent board that works to prevent and detect fraud, waste, and abuse within the IRS and related entities. We were amused to learn that 70 federal agencies owed $14 million in unpaid employment taxes on their employees' wages -- and 18 more agencies hadn't even filed their employment tax returns. But we were appalled to learn that the IRS can't take any effective action to collect those outstanding balances.

While we were busy bringing you the news about Uncle Sam's "Get Out of Jail Free" card, the TIGTA was busy issuing another report that we knew you'd want to hear about. And this one may be worth paying attention to. Would you believe that TIGTA thinks "Firearms Training for IRS Criminal Investigation Division Needs Improvement"?

When we think of IRS "agents," we typically think of deskbound bureaucrats who spend their days shuffling papers that would put the rest of us to sleep. And for the most part, that's true. "Revenue Agents" are the IRS's invaluable front line, auditing and examining financial records to make sure that taxes get paid.

But it's easy to forget that the IRS has a long history of law-enforcement success. (Remember who finally put Al Capone in jail?) Today's Criminal Investigation ("CI") Division employs 2,700 "Special Agents" -- an elite force who investigate tax evasion, money laundering, narcotics-related financial crimes, and counterterrorism financing. Their duties include executing search warrants and arresting fugitives. They're even authorized to use deadly force to protect themselves and the public. So, naturally, Special Agents must meet firearms training and qualifications standards every year, including "firing a handgun, entering a building with a firearm, and firing a weapon while wearing a bulletproof vest."

TIGTA looked at 597 Special Agents working out of the New York, Los Angeles, Chicago, and Washington D.C. field offices. They found that CI's firearms training and qualification requirements "generally met or exceeded those of other federal law enforcement agencies." That's certainly reassuring for those of us who think the only thing more terrifying than an IRS agent packing heat is an IRS agent with a gun he doesn't know how to use.

However, TIGTA found, some special agents don't actually meet those training and qualification requirements. Field office managers didn't always take consistent actions when special agents failed to meet the requirements. And there's no national-level review of firearms training to make sure all special agents meet their requirements. TIGTA recommended that CI either enforce the requirement that special agents who don't meet training requirements surrender their firearms, or modify the literal rules to reflect what actually happens in the field when an agent misses training requirements. TIGTA also recommended that CI establish a process to monitor and periodically review special agent firearms training and qualification records.

IRS Special Agents do some of the Service's most valuable work. Their efforts help keep everyone's taxes down, and keep us safe in other ways as well. We're confident none of you reading this will ever wind up on the wrong side of an IRS agent's gun. But if it ever did happen, wouldn't you want that agent to have a little experience?

Living the Tax Free Live

As the 2012 election draws near, and taxes take center stage in that election, politicians and pundits are weighing in on Republican nominee Mitt Romney's personal taxes. Will he release any of his returns for years before 2010? Did he really not pay any tax at all in some of those years? Is there something in those returns that he fears might jeopardize his campaign?

But Mitt Romney isn't the only candidate enjoying tax-advantaged income. President Barack Obama, like Presidents before him, enjoys tax-free benefits that would make most corporate CEOs drool with envy. And it's not a scandal — it's all out in the open for any voter to see.

Let's start with the basics. The President earns a $400,000 annual salary — barely enough, by itself, to put him in the much-vaunted "1%." He also gets a $50,000 annual entertainment allowance, which helps support those State Dinners.

But salary and allowance are just the tip of the President's compensation iceberg. For starters, there's a 55,000 square-foot house on 18 prime acres of Washington real estate that Zillow.com estimates would rent for $1,752,296 per month. (The tax alone on the value of that rent is $7.36 million per year.) There's also a rustic cottage just outside DC, staffed by the U.S. Navy and Marine Corps, that he uses as a vacation retreat.

Next, there's security. Plenty of CEOs and celebrities hire bodyguards to ward off real or imagined threats. And that security may be tax-deductible. (Hard for the IRS to collect tax on your income if you're not alive to earn it.) But the President's Secret Service protection is tax-free, and his guards are the best of the best. While the exact value of the President's protection is a closely-guarded secret, the House of Representatives voted $113 million in funding for the 2012 campaign.

Those of you travel often will probably agree that the President's most valuable perk is the privilege to fly without the usual TSA "perp walk." CEOs typically fly Gulfstreams, Bombardiers, and similar aircraft, with barely enough headroom to stand up straight. The President, on the other hand, enjoys not one, but two fully-loaded 747-200Bs, both equipped with executive stateroom, office, conference room, and state-of-the-art navigation and communications systems that let him conduct business in the air, even if the country is under attack. (The term "Air Force One" doesn't refer to a specific plane — it's the official air traffic control signal for any aircraft carrying the President.) Corporate jets typically carry a dozen passengers and cost $3,000 to $6,000 per hour to operate, while Air Force One carries 102 passengers and crew and costs a whopping $181,000 per hour.

Then there are the "little" perks that ease the stress of leading the free world. The fawning staff. The private chefs. The first-run movies, delivered straight to your own "media room." Fully tax-free, of course . . . who can even figure out how to tax them?

The perks won't stop when the President leaves office. As with all former Presidents, he'll enjoy a pension equal to a Cabinet-level salary (currently $199,700). He'll enjoy continued Secret Service protection, for himself and his family, for 10 years from the date he leaves office. He'll get reimbursed for staff, travel, and office expenses. And he'll be able to earn a small fortune writing memoirs and giving speeches — although that fortune will be fully taxable.

Most of us would agree that any President earns every dime we pay him, whether that income takes the form of salary or benefits. But you don't have to be President of the United States to profit from tax-free perks and benefits. Helping you make the most of those opportunities for your business is a big part of our business. Call us for a plan that makes the most of your opportunities!