2013 Year-End Outlook: Higher Taxes Are Here

2013 has been a big year for taxes.  Earlier in the year, Congress passed legislation averting the so-called "fiscal cliff," and many of the "Obamacare" changes have taken effect, or are about to.  While few of us who watched the process would consider it Washington's finest hour, we now have answers to many of the questions that have made proactive planning so difficult over the past few years.  And now, as the end of the year draws close, it's time to pull out the Magic Eight Ball and start to plan.

Here are the highlights:

 •  First, the Bush tax cuts are permanently extended for income up to $400,000 ($450,000 for joint filers).  Ordinary income above those thresholds is taxed at 39.6%, while qualified corporate dividends and long-term capital gains above those thresholds are taxed at 20%.

 •  Third, the Alternative Minimum Tax has finally been indexed for inflation.  This means Congress will no longer have to "patch" it every year to avoid entangling millions more taxpayers in its web.

Fund Your SIMPLE IRA

You can defer up to $12,000 of your salary to your SIMPLE IRA this year, plus $2,500 more if you're over age 50.  Maximizing your SIMPLE IRA contribution can help assure your retirement security as well as cut this year's tax.

Fund Your Employer's 401k Plan

You can defer up to $17,500 of your salary to your 401k this year, plus $5,500 more if you're over age 50.  Maximizing your 401k contribution can help assure your retirement security as well as cut this year's tax.  Alternatively, if your plan allows it, choosing a "Roth" deferral can provide tax-free income in retirement.

Fund Your SEP Plan

You can contribute up to 25% of pay or $51,000, whichever is greater, into a SEP-IRA.  (But beware; you'll also have to cover most employees.)  Maximizing your SEP contribution can help assure your retirement security as well as cut this year's tax.

Fund Your Business's 401k Plan

You can defer up to $17,500 of your salary to your 401k this year, plus $5,500 more if you're over age 50.  You can also make an employer matching or profit-sharing contribution of up to 25% of your pay or $33,500, whichever is greater.  Maximizing your 401k contribution can help assure your retirement security as well as cut this year's tax.  Alternatively, if your plan allows it, choosing a "Roth" deferral can provide tax-free income in retirement.

New Roth IRA Conversion Opportunity

New rules now let you convert your traditional IRA to a Roth IRA, regardless of your current income.  This is actually one of the bright spots of the of the current tax picture. 

Traditional tax planning holds that it makes sense to defer income into retirement accounts now, when you're in your peak earning years (and highest tax bracket) - then withdraw it later during retirement, when your income and tax bracket will presumably be lower.  However, tax rates are currently at historic lows, and it's entirely possible they will be higher when you're retired.  This suggests the smarter strategy may be to pay tax on retirement funds now in order to withdraw them tax-free when rates are higher.

New Tax on Interest Income

The healthcare reform act imposes a new "Unearned Income Medicare Contribution" of 3.8%, beginning on January 1, 2013, on interest income.  This tax may make municipal bonds and money market funds more attractive relative to fully taxable vehicles.  However, the recent economy has jeopardized state and local tax revenues, so there may be credit quality issues to consider.  You might also consider deferred annuities and permanent life insurance for fixed-income portions of your portfolio.

New Tax on Dividend Income

Tax on "qualified corporate dividends" is now capped at 20% for income exceeding $400,000 ($450,000 for joint filers).  The healthcare reform act also imposes a new "Unearned Income Medicare Contribution" of 3.8% on dividend income for individuals earning over $200,000 ($250,000 for joint filers).  Consider favoring stocks that pay little or no dividend in taxable accounts and holding stocks paying higher dividends in tax-deferred accounts.

Permanent Life Insurance for Tax-Free Income

As mentioned earlier, the healthcare reform act imposes a new "Unearned Income Medicare Contribution" of 3.8% on "investment income" (broadly defined to include interest, dividends, capital gains, rents, royalties, and annuity distributions) for individuals making over $200,000 ($250,000 for joint filers).  Permanent life insurance offers a variety of investment options for accumulating cash values, along with tax-free withdrawals and loans so long as you keep the policy in force.

New Tax on Real Estate Income

The healthcare reform act imposes an "unearned income Medicare contribution" of 3.8% on income from real estate investments and taxable gains from the sale of your primary residence, for individuals making over $200,000 ($250,000 for joint filers).  There are several strategies you can use to minimize taxable real estate income, including favoring tax-deductible "repairs" over depreciable "improvements" and cost segregation strategies to maximize depreciation deductions.

Higher Tax on Capital Gains

Tax on long-term capital gains (from sales of property you hold more than 12 months) is now capped at 20% for income exceeding $400,000 ($450,000 for joint filers).  The recent healthcare reform act also imposes a new "Unearned Income Medicare Contribution" of 3.8% on capital gains for individuals earning over $200,000 and families earning over $250,000.  When you plan to sell appreciated assets, check with us first, to discuss if you can use tax-free exchanges, installment sales, charitable trusts, or similar strategies to minimize or even eliminate tax on those sales.

Estate Tax Uncertainty Resolved

The estate tax has veered from zero (in 2010) to 35% on estates exceeding a $5 million "unified credit" (2011-2012).  The "fiscal cliff" bill keeps the unified credit at $5 million, indexes it for inflation (so the actual credit is $5.25 million for 2013), and raises the rate to 40% on assets above that threshold. This means that smart estate planning will still be a part of affluent families' financial plans.

Next Steps

We're sure you appreciate this brief outline of the recent tax changes.  While smart information is crucial, intelligence alone is useless without the right action.  If the changes we've discussed so far have you worried about your financial future, you owe it to yourself to take a more comprehensive look at your taxes and finances, so that we can determine exactly which concepts and strategies will work from here.  Give us a call! 

Sincerely,

Larry Stone

Larry@ColoradoTaxCoach.com

Any tax advice contained in the body of this presentation was not intended or written to be used, and cannot be used, by the recipient for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

What's In A Name?

In Shakespeare's most recognized tragedy, the star-crossed lover Juliet asks "What's in a name? That which we call a rose by any other name would smell as sweet." Now, that may have been true back in Juliet's day. But is it still true now in today's era of celebrity branding?

Here's the deal. Back in 2009, executors for the King of Pop, Michael Jackson, filed an estate tax return reporting the value of his assets at his death. Jackson had been famously extravagant during his life, blowing through hundreds of millions in earnings and borrowing hundreds of millions more. His 2,600-acre "Neverland" ranch in Santa Barbara that included two railroads, a petting zoo, and a Ferris wheel reportedly cost $2.5 million per month to maintain. He spent millions more on travel, entertainment, antiques, and paintings. And feeding "Bubbles," his pet chimpanzee, couldn't have been cheap, either.

You would expect his estate to be pretty impressive, right? So, what was his "final score" as reported on Form 706 "United States Estate (and Generation-Skipping Transfer) Tax Return"? A mere $7 million. What's even more incredible, the executors valued Jackson's name and likeness at just $2,105. (Where did the $5 come from, anyway? Why not $2,104, or $2,106?)

Now, that may not be as ridiculous as it first seems — "Jacko" was in debt up to his eyeballs for much of his life, and he may have owed as much as $500 million at his death. But $7 million still seems a little light for an estate that earned $160 million in 2012 alone. Jackson's estate has actually earned more since his death than any living entertainer during that same time!

Our friends at the IRS thought that valuation was (wait for it . . .) bad. On July 26, they told Jackson's executors that their number was $1.1 billion, including a whopping $434 million for his name alone. Since they don't stop 'til they get enough, the IRS promptly billed the estate for an additional $505.1 million in tax, and added a $196.9 million undervaluation penalty as well!

Not surprisingly, Jackson's estate told the IRS to beat it. A spokesman said the IRS's valuation was "based on speculative and erroneous assumptions unsupported by facts or law," and added that the estate had already paid over $100 million in income taxes. And now they wanna be starting something in the U.S. Tax Court. They've filed Estate of Michael J. Jackson, Deceased, John G. Branca, Co-Executor and John McClain, Co-Executor v. Commmissioner of Internal Revenue and set the stage for a legal thriller.

You may not have 26 American Music Awards, 13 number one singles, or the best-selling album of all time. But you're probably even more interested than Michael Jackson in keeping what you make. The answer, of course, is planning. But it's nearly Thanksgiving, and time is running out to save in 2013. So call us now to set up your appointment to get the savings you really want.

#Windfall

Psychologists agree that the ability to concentrate is key to achieving our goals. But today's high-tech world is full of distractions, from thousands of cable TV channels to millions of internet sites, with smart phones constantly within reach. Some experts say our attention span is actually shrinking. So should it be any surprise that Americans have fallen in love with Twitter, the online social networking and "microblogging" site that lets users send and read "tweets" limited to no more than 140 characters?

Twitter attracted confusion (and no small amount of scorn) when it debuted in 2006 — co-founder Jack Dorsey admitted that the service is "a short burst of inconsequential information." But there are now more than 200 million "monthly active users" posting more than 500 million tweets per day. Singer Katy Perry currently has the most followers, at 46.8 million. She's trailed by Justin Bieber (46.7 million), Lady Gaga (40.4 million), and Barack Obama (39.5 million). Twitter's ubiquitous "hashtag," the pound sign (#) that denotes keywords, appears everywhere, including at the Oscars, the Super Bowl, and the floor of the U.S. Senate.

Twitter still doesn't make any money. But that didn't stop them from going public last week. On Thursday, Twitter issued 70 million shares at $26 each. The price nearly doubled in early trading before closing at $41.65 on Friday. And it made a lot of people rich. Co-founders Evan Williams and Jack Dorsey are billionaires. CEO Dick Costello, whose 2012 cash salary was just $200,000, is worth $300 million. All told, about 1,600 investors and employees became millionaires last week. (If you planned on buying a house or a Porsche in Silicon Valley, plan on standing in line and paying more!)

What does that all mean for our friends at the IRS? It means a #windfall, that's what!

• Twitter has granted non-executive employees over 92 million "restricted stock units" which will essentially convert to stock over the next several years. Employees will owe regular income tax of up to 39.6% plus Medicare tax of up to 3.8% on the value of those shares. They'll owe an average of $420,000 each in federal tax!

• Uncle Sam won't be the only taxman with his hand out. The state of California can conservatively expect to collect another $300 million or more. (California is no stranger to big IPOs — Golden State officials calculated they would collect $2.5 billion over four years from Facebook's debut.)

• Not everyone is quite so happy. Two years ago, the city of San Francisco waived part of its payroll tax to keep Twitter headquartered downtown. City officials predicted the waiver would cost them $22 million over six years. Last week's windfall could mean leaving another $34 million on the table. Of course, the City by the Bay still collects millions more than if Twitter had bugged out for the suburbs.

• Who's not paying a dime in tax? That would be Twitter itself. Of course, that's because they haven't made a dime in profit. In fact, Twitter has over $100 million in "net operating loss carryforwards" it can use to offset tax on future profits.

Twitter's investors and employees have some big tax planning challenges ahead. They're going to need more than just 140 characters to take advantage of all the legal strategies available to pay less. It works the same for you, even if you're not America's newest billionaire. If you want to #keepwhatyoumake, you need a plan. So call us now before December 31, when you can still do something about it!

Death and Taxes and Zombies

Law reviews are scholarly journals focusing on legal issues, usually edited by students at a particular school. America's law schools currently crank out hundreds of different reviews, which means there aren't a lot of topics that haven't already been covered. (Chief Justice John Roberts once said "Pick up a copy of any law review that you see, and the first article is likely to be, you know, the influence of Immanuel Kant on evidentiary approaches in 18th Century Bulgaria, or something.”) But the Iowa Law Review has just published a new article on a crucial tax topic — and it's especially appropriate to discuss this week after Halloween. We're referring, of course, to 

"The United States stands on the precipice of a financial disaster, and Congress has done nothing but bicker. Of course, I refer to the coming day when the undead walk the earth, feasting upon the living. A zombie apocalypse will create an urgent need for significant government revenues to protect the living, while at the same time rendering a large portion of the taxpaying public dead or undead. The government’s failure to anticipate or plan for this eventuality could cripple its ability to respond effectively, putting us all at risk. This essay fills a glaring gap in the academic literature by examining how the estate and income tax laws apply to the undead."

Don't laugh. This is 25 pages of lively prose, with 124 scholarly footnotes citing authoritative sources like Harry Potter and the Sorceror's Stone, the noted gourmand Hannibal Lecter, and even "Slimer" from Ghostbusters. Chodorow isn't afraid to ask the scary questions that the rest of us shy away from:

• At what point does a zombie become a "decedent" for estate tax purposes? Currently, the legal definition of "death" varies from state to state, with some basing it on heart function and others on brain function. This means that zombies may not actually be "dead" in some states. Does someone who dies stay legally dead after being reanimated as a zombie?

• Could it ever make sense to die for tax reasons, then come back when income or assets will be taxed at a lower rate? If so, would the IRS attack those deaths as sham arrangements?

• Does someone remain married for tax purposes if they or their spouse become zombified?

• What about vampires? They're typically wealthy and sophisticated, which makes estate planning a must. And they live for centuries, which makes tax-deferred vehicles like IRAs and cash-value life insurance even more valuable.

• Finally, what about ghosts? Do phantoms owe tax on phantom income?

As you can see, there's a lot more to taxes and zombies than meets the eye. Chodorow urges Congress to create tax laws for them now, before members become zombies themselves.

Fortunately, the secret to navigating taxes in a land of walking dead is the same as navigating taxes now — it's planning. And speaking of acting now, before it turns too late, 2013 is quickly coming to an end. December 31 may not bring a zombie apocalypse, but it will drive a stake in the heart of some of your best planning strategies. So call us for the plan you need, before it's really too late!

Touchdown, IRS?

It's Week Nine of the 2013 football season, and millions of Americans are following every play. The Kansas City Chiefs are still undefeated. The New York Giants have finally won a couple of games. And playoff races are already starting to take shape. (Bengals, anyone?) So, what does any of this have to do with taxes?

Today's National Football League is the biggest spectacle since the Romans packed the Colliseum to watch the Christians take on the Lions. (Needless to say, the Lions were heavy favorites — and usually covered the spread.) Last year, the league generated $9.5 billion in revenue from a combination of TV rights, ticket sales, stadium concessions, and licensing agreements. The biggest part of that cash geyser goes to the players (who naturally pay tax on their salaries). More chunks go to the owners (who pay tax on theirs), and stadium vendors (who pay tax on all those eight-dollar beers).

The NFL's league office, which promotes the sport and organizes the teams, took in $255.3 million last year, mostly from team dues. That same year, the league spent $332.9 million, including $35.9 million to a construction company for new office space (who naturally paid tax on their share), $29.4 million in salary for Commissioner Roger Goodell (who of course paid tax on his share), and what must seem like a token $2.3 million in grants for community groups like the United Way.

So, it sure sounds like the receivers at Team IRS are catching their share, right? Well, while the team owners, the players, the t-shirt sellers, and beer vendors are all in it for the money, would you believe the league office itself is a "not-for-profit" entity? That makes it sort of like the American Red Cross — if the Red Cross were in the business of giving concussions instead of treating them. (Technically, the Red Cross is a "501(c)(3)" public charity, while the NFL is a "501(c)(6)" trade association.) And that means the league office itself could earn $100 million or more per year without paying a dime in federal income tax. Talk about an end run around the IRS!

Last month, Senator Tom Coburn (R-OK) introduced the PRO Sports Act to revoke the tax exemption for professional sports leagues earning more than $10 million. This would of course affect the NFL, along with the National Hockey League, the Professional Golf Association, and other pro sports groups. Coburn is joined by 275,000 Americans who have signed a Change.org petition to strip the league of their nonprofit ball. Senator Coburn alleges unsportsmanlike conduct, saying that "working Americans are paying artificially high rates in order to subsidize special breaks for sports leagues," and estimates that his bill could generate at least $91 million of new revenue every year from the NFL and NHL alone. (So far, Coburn hasn't found any co-sponsors. Do you think he would be so bitter if Oklahoma City had a team?)

There's certainly no reason a league office needs a tax exemption to operate. Major League Baseball gave up theirs in 2007, partly to avoid the salary disclosures that come with tax-exempt status. The National Basketball Association has always been a for-profit entity owned by the various teams.

And if the NFL does lose their tax-exempt status, they can still avoid paying any tax. How can they do that? Through smart planning, of course — the same sort of planning we use to minimize your tax. But the clock is counting down for 2013, and there are no overtimes in this contest. So call now for your game plan!

 photo courtesy nydailynews.com

Voting With Your Feet

It's safe to say that people don't like paying taxes. America was born out of a tax rebellion, and Americans have resisted every variety of tax ever since. Some of them even go as far as renouncing their American citizenship to avoid the tax man.

Expatriation sounds like an awfully big step just to pay less tax. But more and more Americans are doing it. In 1994, Campbell's Soup heir John T. "Ippy" Dorrance III saw greener pastures in Ireland, trading what was then a 55% estate tax for Ireland's 2%. And just last year, Facebook founder Eduardo Saverin "defriended" Uncle Sam and the IRS after moving to Singapore, potentially saving hundreds of millions in tax.

Americans who give up their citizenship pony up an "exit tax" on the value of their assets when they leave, essentially paying as if they had sold everything the day before surrendering their passport. But that doesn't stop the determined from leaving — in the second quarter of this year, 1,131 Americans bid bon voyage to their citizenship.

Americans aren't the only ones who say "enough" to their home countries' taxes. Sir Richard Branson, the British billionaire and founder of Virgin Group, revealed this month that he has sold his 200-acre Oxfordshire estate and moved full-time to Necker Island, his retreat in the British Virgin Islands. Now Britain's Sunday Times has accused him of doing it to save taxes.

Branson responds that "I have not left Britain for tax reasons, but for my love of the beautiful British Virgin Islands and in particular Necker Island . . . . We feel it gives me and my wife Joan the best chance to live another productive few decades. We can also look after our health." He adds that "I have been very fortunate to accumulate so much wealth in my career, more than I need in my lifetime, and would not live somewhere I don't want to for tax reasons."

Necker sounds like a pleasant-enough exile. The Balinese-inspired "Great House" boasts nine bedrooms, including a 1,500-square-foot master suite. There are six one-bedroom "Bali houses" for guests scattered about the grounds. And there are two swimming pools and two tennis courts. The island is even home to an endangered species, the Virgin Islands dwarf gecko. When Branson isn't in residence kitesurfing or playing tennis, you can rent the whole 74 acres for the bargain rate of just £275,800, or roughly $450,000, per week. Famous guests have included Princess Diana and actress Kate Winslet, who was credited with saving Branson's 90-year-old mother from a fire in 2011.

But Branson is clearly no dummy. (Forbes magazine ranks him the sixth-richest man in Britain, with an estimated $4.6 billion fortune.) It can't have escaped his notice that the top income tax rate in the islands is 45 percentage points lower than it is in Britain. If you're thinking "wait a minute, the top rate in Britain is 45%, so that means he's paying nothing in the islands," you're right.

What do you think? Does Branson just prefer gentle Caribbean trade winds over dreary English winters? Or is the sunny tax climate the real lure?

Fortunately, there's an easier way for you to pay less tax — even if you can't afford Necker Island's tropical paradise. Call us for a plan. We'll show you if the new Obamacare and "fiscal cliff" taxes threaten your wallet, and show you how to protect yourself without standing in line for a new passport.

photo coutesy theguardian.com

Story Problems for Grownups

Back in grade school, you did all sorts of math problems. You started out with drills to learn your basic addition, subtraction, and multiplication. You learned long division (ugh). You moved on to fractions. And all along the way, as part of your teachers' efforts to convince you that it all matters here in the "real world," you did "story problems." Remember those?

Well, now you're all grown up, so here's a grownup story problem to ponder:

You're an IRS auditor, toiling away to protect the government's revenue base. Then you decide to leave "the dark side" and start your own practice. Things start off great, but you want more. So you mock up some fake tax returns, tell some clients they owe $11 million, and have them make payments into a bogus "trust account." Then you take the money for yourself, make some home improvements, buy a beach house in Mexico, pay to use a private plane, pay $2 million on your personal credit cards and loans, and make some investments. It's good to be rich, isn't it? But now there's a teensy-weensy little problem. The IRS is on to you, your clients are hopping mad, and two of them are scheduled to testify against you! What do you do?

Well, if you're Steven Martinez of Ramona, California, you send your limousine driver (!) to offer a hit man $100,000 to take out the clients. But you don't just whisper some names in his ear and slink back home. Oh, no. Because you're an accountant, you're thorough. Right? So you surveil the victims and watch them to document their habits. You give the hit man packets with photos of the victims and their homes and detailed instructions and information about them. (How else do you think an accountant would go about whacking his clients?)

Unfortunately, Martinez should have followed his hit man, too. Then Martinez would have seen him scurrying straight to the FBI. (Oops.) It's tough to deny the charges when the Feds have you on video, "cool and calculating," telling your killer to buy two guns — and a silencer! (Try explaining that when it hits Youtube and goes viral!)

Last year, Martinez pled guilty to charges including murder-for-hire, witness tampering involving attempted murder, solicitation of a crime of violence, mail fraud, filing false returns, Social Security fraud, aggravated identity theft, and money laundering. (You've got to wonder, if he had jaywalked to meet with the hit man, would they have charged him with that, too?) On April 12, 2013, District Court Judge William Q. Hayes pretty much threw the book at him, sentencing him to 286 months in prison (plus five years supervised release if he ever makes it out) and ordering him to pay more than $14 million in restitution. Let's see what sort of "home improvements" Martinez can make with the 11 cents/hour he makes stamping license plates!

As tax professionals ourselves, we're appalled at how Steven Martinez betrayed his clients. We're proud to affirm our commitment to helping you save tax within the bounds of the law — because we know just how many legitimate opportunities there are to save. We're pleased to offer you the plan that helps you save taxes and sleep soundly at night. So call us for that plan!

photo courtesy salon.com

Try Looking in the Couch Cushions

People lose things all the time. Usually it's no big deal. We misplace our phone, keys, or sunglasses — then they show up an hour or a day later, or we replace them. Sometimes it's more serious. We lose money in a stock or a mutual fund — then we make it back over time. But every so often, someone loses big. We just hope it's not our public officials doing the losing!

Last month, the Treasury Inspector General for Tax Administration ("TIGTA"), an IRS watchdog, released a report titled "Affordable Care Act: Tracking of Health Insurance Reform Implementation Fund Costs Could Be Improved." That report reveals the the IRS can't account for $67 million set aside to administer the law better known as Obamacare. Now, we're not here to take sides in the ongoing debate over the new law. But we think even those who oppose the law would agree that the agency responsible for administering all the new taxes under that law should be able to track what it spends to do that job!

One of Obamacare's lesser-known provisions established the Health Insurance Reform Implementation Fund ("HIRIF") to pay administrative expenses to carry out the law. From 2010 through 2012, the IRS spent $488 million from the fund to implement the Affordable Care Act, hiring 1,272 full-time equivalent employees. TIGTA audited that spending "to determine whether the IRS has an adequate process to accurately account for and report selected ACA implementation costs charged to the HIRIF." And what did they find?

• Some costs were inaccurate or not tracked, and supporting documentation wasn't always kept. "Specifically, the IRS did not account for or attempt to quantify approximately $67 million of indirect ACA costs incurred for FYs 2010 through 2012."

• Charges to the HIRIF were sometimes inaccurate and "not always substantiated by reliable supporting documentation."

• Finally, the IRS didn't even bother tracking indirect costs, like rent, communications, and information technology support for employees involved in implementing the new law. "For example, while the IRS may have been able to place most new employees hired for the ACA in existing leased space, it still had to pay rent on this space, could not use the space for other purposes, and could not consider the space for inclusion in its ongoing space reduction efforts."

TIGTA made several specific recommendations. Mind-blowing ideas, too, like cross-checking travel records against employee hours to make sure the travel is related to the purpose of the fund, keeping better records to substantiate direct labor costs, and including indirect expenses in the total cost. The IRS didn't really have much of a defense, so they agreed with all of those recommendations. Unfortunately, the HIRIF money is all gone, so that promise doesn't mean much!

If you're fortunate enough to have $67 million in the first place, you're going to want help keeping it. That's where we come in. We give you the plan you need so you don't lose anything to unnecessary taxes. But time is running out to get that plan before the end of the year — and if you wait too long, you'll be losing money just like the IRS! So call us, now.

Photo courtesy of furniture fashion.com

Horsing Around With Tax Preparers

This is a big week for taxes and technology. State "insurance exchanges" are scheduled to open for business under the Affordable Care Act, which lets consumers sign up for tax-subsidized individual health insurance. The White House has already announced that technological glitches will delay online enrollment on the small business ("SHOP") and Spanish-language sites. That's a decidedly 21st-century, "first world" problem. So, why on earth is the IRS lassoing an 1884 law dealing with lost Civil War horses to regulate tax preparers?

Right now, there are no industry-wide rules governing tax preparers. So, back in 2011, the IRS announced their new "Return Preparer Initiative," which required preparers to register with the IRS, pass a competency test, and take continuing education classes. The new rules apply to any tax preparer who isn't already regulated as an attorney, Certified Public Accountant (CPA), or Enrolled Agent (EA).

In 2012, a group of preparers sued to stop the program, arguing that the IRS lacked congressional authority to enforce it. Earlier this year, Judge James Boasberg agreed, shutting down the program. Naturally, the IRS appealed. And that brings us to our horses.

After the Civil War, thousands of Americans who had lost horses in the conflict brought war loss claims against the government. A whole stable full of agents emerged to press claims for the victims, usually for a piece of the recovery. Would you be shocked to learn that some of those claims were bogus, with greedy agents representing broken-down old nags as "Sea Biscuit"-class steeds? So the government passed the "Enabling Act of 1884" — also referred to as "the Horse Act of 1884" — to grant the Treasury Department permission to regulate them. (You remember all of this from high-school history, right? OK, neither did we.)

Well, last week, the IRS took their appeal to court, and saddled their argument on the Horse Law. Gil Rothenberg, who argued the government's case, said "I hate to beat a dead horse, especially one from the Civil War." But he argued that tax preparers represent clients just like 19th-century "enrolled agents" represented theirs. Therefore, he says, the 1884 law gives the Treasury the same authority to regulate today's tax preparers.

"Hold your horses," say the tax preparers who filed the case! Today's tax preparers merely provide a service to their clients. They don't actually "represent" them before the government the same way attorneys, CPAs, and EAs all do. That makes the 19th-century law a horse of a different color, with no binding authority to today's case.

Tax experts who observed the oral arguments report the judges sounded skeptical of the IRS's argument. We should know sometime early next year what the final decision will be. Of course, if Congress doesn't like the results, they can simply saddle up new legislation to hobble the Court.

We think the real question isn't who regulates your tax professionals. We think the real question is what sort of attitude a tax professional brings to the table. Are they content to put the right numbers in the right boxes on the right forms, then call it a day? Or do they give you the plan you need to create the savings you really want? So call us for that plan. And remember, we're here for your whole herd!

photo coutesy oldpicture.com

When the IRS Comes a-Knockin'

If you get an IRS audit notice, you probably expect to spend hours responding to endless document requests, visiting bland government offices, and meeting with faceless bureaucrats. You might hope you get lucky and find yourself assigned to a pleasant, friendly examiner, one who acknowledges how intrusive and annoying the audit process can be. But you certainly wouldn't expect to wind up in bed with the auditor!

Vincent Burroughs is a 40ish contractor and amateur motorcycle racer in Fall Creek, Oregon. When the economy collapsed in 2008, his business suffered and he got behind on his taxes. In 2011, the IRS came calling. The auditor, Dora Abrahamson, recognized him from his motorcycle racing, and apparently liked what she saw. Burroughs claims Abrahamson started flirting with him over the telephone and by text message ("[I] need a hug badly, do you have one?"), offered him massages, and even sent him a "selfie" in a revealing pose!

Burroughs figured he had a friend at the IRS, so he didn't stop the flirting. In September 2011, Abrahamson visited him at his house to give him a hand with his papers. She showed up "provocatively attired," he says. She told him she could impose no penalty, or a 40 percent penalty. And she said if he would give her what she wanted, she would give him what he needed. After an awkward series of events that we don't need to detail here, the two wound up in bed. Shortly thereafter, Abrahamson stepped down from the case due to a conflict of interest, and the new auditor told Burroughs he owed $69,000.

Abrahamson's conduct caused Burroughs "to be agitated, depressed, and unable to sleep." It also made his girlfriend unhappy. (Uh oh.) So Burroughs sued Abrahamson and the IRS, seeking unspecified punitive damages. He claimed the IRS failed to properly supervise Abrahamson for, among other things, "permitting her carnal desires to overcome her judgment that it was inappropriate to pursue a sexual relationship with a taxpayer she was auditing," "failing to seek and follow through on getting help for her psychological problems," and "failing to sufficiently train Defendant Abrahamson on how to avoid situations which could lead to the appearance or actuality of sexual conduct with taxpayers being audited or investigated."

Unfortunately for Burroughs, the Federal Tort Claims Act waives immunity for government employees only when the injuries they cause take place within the scope of the employment. U.S. Magistrate Thomas Coffin ruled that Abrahamson's conduct did not occur substantially within the time and space limits authorized by her employment, was not motivated by a purpose to serve the employer, and was not of a kind that she was hired to perform. Therefore, it did not occur within the scope of her employment — so the IRS is off the hook! (News reports are less clear on whether Burroughs is off the hook with his girlfriend.)

The case has naturally attracted all sorts of press. Burroughs appeared on ABC's 20/20. And we thank Tonight Show host Jay Leno for making the obvious IRS joke so we don't have to!

What other lessons can we draw from this week's sad story? Well, if you do ever get an audit notice, call us before you try and handle it yourself! We'll make sure you get all the professional assistance you need to defend your financial interests and even your dignity.

When 20 > 20.1

Labor Day has come and gone, and, while fall isn't "officially" here, it's time to put away those summer whites. Never mind that the mercury is still hitting 100 degrees in parts of the country; forget about those pennant races still heating up in the AL West and NL Central. This weekend, the National Football League kicks off regular season play! This week's season opener is just the first step on the road to Super Bowl XLVII, to be played outdoors on February 2, 2014, at the Meadowlands in New Jersey. (If you look hard enough on ESPN, you can find pre-game coverage starting early next week.)

Earlier this year, Baltimore quarterback Joe Flacco won MVP honors in Super Bowl XLVII and signed a new six-year contract worth $120.6 million. It makes him the highest-paid player in the game, just ahead of New Orleans quarterback Drew Brees. But in a surprise twist that NFL statisticians would love, Brees will actually take home more money than Flacco.

How can that be? Taxes, of course — why else would we be talking about it?

Here's how it all works. Flacco plays his home games at M&T Bank Stadium in Baltimore, with his new contract paying him $20.1 million per year. According to Americans for Tax Reform, the IRS will intercept $8.72 million of that paycheck. Maryland and Baltimore County will pick off $1.72 million more, for a total combined tax bill of $10.44 million, or 51.98%. Flacco will also pay a "jock tax" for several of his away games — for example, when he plays the Cincinnati Bengals on November 10, he'll owe Cincinnati's 2.1% earnings tax on his pay for that game. And he'll pay even more tax on his bonuses, endorsements, and other income. It would be hard to blame Flacco for thinking the tax man roughs him up worse than any team's defensive line!

Now, Flacco could take home far more by playing for a team in one of the nine states that don't levy income taxes. The Jacksonville Jaguars (2-14 for 2012) would love a Super Bowl MVP at their helm. So would the 8-8 Dallas Cowboys. Neither Florida nor Texas tackle players with state or local income tax, which means Flacco would have taken home that $1.72 million sack.

Meanwhile, Drew Brees plays his home games at the New Orleans Superdome, with a contract paying him "only" $20 million per year. That's $100,000 less than Flacco makes in Baltimore. Brees pays the same 39.6% income tax and 3.8% Medicare tax as Flacco. But Louisiana's top tax rate is just 6% (on income over $50,000), compared to Maryland's 6.25% (on income over $1 million). That difference might not seem like a lot. But bring out the chains, and it means Brees actually keeps $470,000 more per year than Flacco.

As for the rest of us, this week doesn't just mark the start of football season. It also marks the start of tax-planning season! No NFL team would take the field without a game plan. So why would you think you can beat the IRS without a plan? If you don't have one, the clock is counting down to December 31, with no overtime. And remember, we're here for your teammates, too!

Hit 'Em Where It Hurts

When people misbehave — badly enough — they go to jail. But when corporations misbehave, they can't go to jail. So they pay fines instead. Recent years have brought a wave of enforcement actions for various corporate offenses, from banks ripping off customers, to investment managers trading on inside information, to drug companies poisoning patients, to energy producers polluting public waters.

Corporations usually find a little bit of silver lining in those monster settlements. They get to deduct the payments on their taxes! You like that? You and I get to help pay the freight for their cheating!

Now, Section 162(f) of the Internal Revenue Code states that "no deduction shall be allowed . . . for any fine or similar penalty paid to a government for the violation of any law." But defining a "fine or penalty" isn't as obvious as you might think (and it gives corporate tax lawyers the chance to bill a lot of hours arguing about it). Few of those settlements, especially in the Wall Street arena, require offenders to admit wrongdoing, and most include some form of restitution or disgorgement of profit. Those amounts aren't considered a fine or penalty, so they remain deductible.

What does that mean for our friends at the IRS? Well, when Exxon-Mobil paid $1.1 billion to settle claims over an oil spill in Alaska, it actually cost them just $524 million after tax. When Bank of America agreed to pay $335 million to settle charges that they had discriminated against black and hispanic borrowers, they got back up to $117 million of it in tax savings. Similarly, when credit card giant Capital One paid $210 million to resolve charges that they had duped customers into paying for credit monitoring and other add-on services, they saved millions in tax.

But now it looks like Uncle Sam is getting fed up with subsidizing the settlements by cutting off those juicy tax breaks. Now he's working to hit 'em where it really hurts!

• Back in November, oil producer BP agreed to pay $4 billion to settle the Deepwater Horizon spill. Ordinarily, that might have meant a fat tax deduction to cushion the blow. But no such luck this time — the settlement included language explicitly defining the damages as "punitive," which prohibits BP from deducting any of that amount from their U.S. taxes.

• Earlier this month, Swiss bank UBS paid $500 million to settle charges they manipulated the "LIBOR" interest-rate benchmark. Again, that settlement prevents UBS from deducting the penalty on their taxes.

• Most recently, hedge fund manager Philip Falcone agreed to admit wrongdoing, accept a five-year ban from the securities industry, and pay an $18 million nondeductible penalty. Denying a tax deduction seems especially appropriate in Falcone's case, since federal regulators said his actions "read like the final exam in a graduate school course in how to operate a hedge fund unlawfully."

Tax policy questions like these can sometimes sound boring and pointless. But this one has real consequences. On the one hand, some experts argue that letting miscreants deduct settlements on their taxes encourages companies to settle out of court and avoids ongoing litigation. On the other hand, consumer advocates respond that tax-deductible settlements are a slap in the face to taxpayers, who wind up footing 35% of the tab. What do you think? Do the tax deductions still serve a legitimate purpose? Or should Washington keep up the new hard line?

Photo coutersy treehugger.com

Are You Sitting Down?

Let's start by saying that no one likes getting audited. But the average income tax audit isn't the end of the world. For tax year 2012, the IRS audited just 1,481,966 returns out of over 143 million filed, or barely one in a hundred. And according to the IRS Databook, the average "deficiency notice" demanding more tax was just $10,331. That's nobody's idea of a party, of course. But it shouldn't bankrupt anyone who makes enough to owe that much extra tax.

Things are a little different when it comes to estate taxes. For starters, the tax applies to the value of your assets, not the income they produce. It doesn't kick in until your taxable estate after all deductions tops $5.25 million ($10.5 million per couple). But the tax itself is 40%, which is higher than the top income tax rate. With so much more at stake, the estate-tax audit percentage is naturally far higher than the percentage for income tax — for 2012, the IRS audited 3,762 out of 12,582 estate tax returns filed, or nearly one in three. As for the average deficiency, well, here's hoping you're sitting down — it's a whopping $305,529!

Of course, that's just the average. Half of those 3,762 deficiency notices are mercifully lower. And half of them are higher — some far, far higher.

Which brings us to William Davidson. A Detroit native, Davidson grew Guardian Industries into one of the world's top manufacturers of architectural glass, automotive, and building products. He also owned the NBA's Detroit Pistons, the WNBA's Detroit Shock, and the NHL's Tampa Bay Lightning. Davidson died on March 13, 2009, at age 86, with a net worth estimated at $5.5 billion.

Now, Davidson didn't make his fortune by being stupid. As a former attorney, he knew the IRS would take a close look at his estate-tax return. He and his lawyers took careful steps to protect his heirs from the worst of the tax. So you can only imagine their surprise in May, when the IRS sent them a bill for 2.8 billion dollars!

Davidson's case involves three main issues. First, how much was the privately-held stock worth, which he transferred into trusts for his children and grandchildren? The IRS says Davidson undervalued it by as much as $1,500 per share. Davidson's lawyers say that automotive and construction stocks were tanking in late 2008 and 2009, and it was entirely foreseeable at that time that the company's sales and profits would plunge. Second, how much should the trusts have paid for the stock? Davidson used a "self-canceling installment note," or SCIN, which meant the trusts would make payments to Davidson for that stock while he lived, but the debt would expire at Davidson's death. The IRS has no problem with the SCIN strategy itself, but says the payments should have been higher based on Davidson's life expectancy when he made the transfer. And third, they argue, Davidson owes extra tax on gifts he made to his family as far back as 2005.

Needless to say, Davidson's lawyers aren't taking the $2.8 billion bill lying down. Last week, they filed a petition in U.S. Tax Court telling the IRS to take a hike. Experts say that the strategies he used aren't the issue — it's the scale that makes the case so juicy. But it's one of the biggest estate-tax fights ever, so we can probably expect a long and difficult battle.

We realize you don't have $2.8 billion for the IRS to claim. But that doesn't make you any less important. Proper planning is the key to making the most of your legacy too, no matter how much you have to leave. So call us with your questions. And take at least a little comfort in knowing that the IRS gets to audit your estate tax return only once!

Sentencing Reform

Back in 2007, a Los Angeles judge sentenced actress Lindsay Lohan to one day in jail for misdemeanor drunk driving and cocaine charges. California's prisons are notoriously crowded, so Lohan walked out of the joint after just 84 grueling minutes. She didn't even have time to change into an orange jumpsuit. Lohan's "sentence" drew headlines as an example of lax justice. But now comes news that a judge has sentenced a 79-year-old widow to less than one minute of probation — for tax evasion, no less. Can the punishment possibly suit the crime?

First, a little background. The Justice Department has made cracking down on secret foreign bank accounts a top priority. Those efforts got a huge boost when Bradley Birkenfeld, a banker for Zurich-based UBS, blew the whistle on the bank's efforts to help U.S. depositors avoid tax on their accounts. UBS settled the case by paying a record 780 million dollar fine and turning over information on nearly 5,000 U.S. depositors.

Around that same time, the IRS offered an amnesty program for taxpayers who had concealed their accounts to avoid prosecution by 'fessing up, paying back taxes and fines, and fingering the advisors who helped them hide their assets from the government. Since then, over 38,000 taxpayers have entered the program, paying $5.5 billion and pledging $5 billion more to make good.

Now, back to our story. In 2000, money manager Mortimer Curran died in Palm Beach. Curran left his wife Mary an account at UBS, which he himself had inherited from an aunt in Monte Carlo. Mary, who has no college education and hasn't worked outside the home in over 50 years, took the bank's advice and left the money in the account. She continued to live modestly in the same house with green and white formica countertops that she and Mortimer had bought in 1982. (OK, next door to Bernard Madoff — but still, green and white formica countertops.) And she devoted most of her time to volunteer work on behalf of the Opportunity Inc. Early Childhood Center and the Rehabilitation Center for Children and Adults.

In 2009, after the account had grown to $43 million, she contacted a lawyer. Together, they decided to report her account. Unfortunately, he didn't file the disclosure paperwork until three weeks after UBS had "ratted her out" as part of its own settlement. That meant she couldn't join the program. Uh oh.

Last November, the Justice Department indicted Mrs. Curran. In January, she pled guilty to two counts of tax evasion, paying $667,700 in back tax and a $26.6 million civil penalty. And on April 13, Curran appeared before U.S. District Court Judge Kenneth Ryskamp for sentencing. She still faced up to 37 months for the crimes she had admitted. Would she serve hard time? Get a jailhouse tattoo? Maybe join a prison gang?

No, no, and, thank goodness, no. Ryskamp sentenced the "unsophisticated" Curran to a year of probation — then immediately revoked it. He said "this really is a tragic situation," and "the government should have used a little more discretion." He even urged Curran's attorney to seek a presidential pardon for his client — then told the prosecutors it would be "spiteful" for them to oppose it!

Mary Curran's five seconds of probation may seem like the lightest possible slap on the wrist. But that $26 million penalty hurts. Too bad the Currans didn't understand that they didn't have to risk so much to pay less tax. They just needed a better plan. If you're ready to pay less tax — without risking even five seconds of probation to do it — call us for the plan that helps you do just that!

Can You Keep A Secret?

Benjamin Franklin famously said that "three may keep a secret, if two of them are dead." And that was before the National Security Agency and other government agencies could track your phone calls, browsing history and even your driving habits. Keeping secrets is especially hard in politics — just ask Carlos Danger or Client Number Nine! But now a couple of Senators think they've found a way to rewrite the entire tax code behind closed doors. What could possibly go wrong?

Senate Finance Committee chair Max Baucus (D-MT) wants to pass a tax reform bill before he leaves office at the end of next year. He and ranking minority member Orrin Hatch (R-UT) recognize that the actual rate you pay doesn't matter much if you use special preferences and loopholes to avoid reporting taxable income in the first place. So they've boldly decided to start with a "blank slate," wiping out a trillion dollars' worth of deductions, credits, loopholes, and strategies off the books. Then their colleagues can propose adding back goodies like tax-free health benefits, education credits, and tax-deductible charitable contributions and justify why they belong in the new Code.

Sounds great in theory, right? The problem, of course, is that tax reform is an intensely political process. K Street lobbyists circle Washington like Predator drones, waiting to fire on any member who dares challenge their clients' pet interests. Any senator who proposes dropping the mortgage-interest deduction, for example, guarantees immediate fire from any group that benefits from home ownership. (This includes obvious constituencies like banks, builders, and real estate agents, but also less-obvious folks like Home Depot, Martha Stewart, and Bob Vila). So, Baucus and Hatch came up with a plan to cover their colleagues' vulnerable rear ends from the inevitable backlash. How likely do you think it is to work?

• They'll start by giving each Senator's written proposal a unique identifying number, a confidential seal, and a special encryption. Then they'll archive the files on a special password-protected server and keep paper copies in locked safes. (Of course, there's no guarantee that hackers won't come along and leak the files all over the internet.)

• Only Senators Baucus and Hatch, along with 10 handpicked staffers, can get their curious little fingers on the proposals. (If Ben Franklin didn't think three could keep a secret, what do you think he would make of a dozen? Might as well just splash the proposals on the front page of Politico! And what happens when those 10 staffers inevitably leave "the Hill" for well-paid lobbying gigs of their own?)

• The National Archive will keep the proposals under seal until December 31, 2064. (The goal, obviously, is to protect them until all of the current members have left office. But with Senators serving longer and longer terms, there's no guarantee it will happen. South Carolina's Strom Thurmond took office shortly after the Civil War and served until long after his hair had turned the color of Tang.)

• Finally, Harry Potter will cover each proposal with an invisibility cloak until He-Who-Must-Not-Be-Named is defeated. (Ok, we admit we just made that one up. But it's about the only idea with any chance of success.)

Here at our office, we understand the real secret to paying less tax isn't a secret at all — it's proactive tax planning. That's why we don't just settle for helping you record history — we help you write it, with a complete menu of court-tested, IRS-approved strategies. Come to us for a plan, and you won't need to wait for Congress to act!

Putting for Dough

August is almost here, and golf season is in full swing. Duffers are filling the air with curses as colorful as their outfits. Tiger Woods is taking a break from romancing pancake-house waitresses to work on his game. And Phil Mickelson is the latest man of the hour. Earlier this month, he took a one-hole playoff to win the Scottish Open at Inverness. Just one week later, he posted a 3-under 281 to take the British Open at Muirfield. Mickelson's £1,445,000 in winnings translates into almost 2.2 million in U.S. dollars.

So, he's got that going for him, which is nice. But how much will he actually get to keep?

Mickelson has already told the world how he feels about paying taxes. Back in January, he said he might leave his home state of California because of recent hikes in federal and state taxes. These include 39.6% for Uncle Sam (up from 36%), 3.8% for Medicare (up from 2.9%), and 12.3% for the Golden State (up from 9.3%). "If you add up all the federal and you look at the disability and the unemployment and the Social Security and the state, my tax rate's 62, 63 percent," he was quoted as saying in Yahoo Sports. "So I've got to make some decisions on what I'm going to do." Mickelson's remarks landed him some deep rough, and he wound up comparing them to a botched drive that cost him the 2006 U.S. Open.

But Phil's U.S. taxes may look pretty reasonable when you consider what he'll pay on his recent Scottish winnings:

• For starters, he'll pay the United Kingdom a wee bit over 44% on his tournament purses.

• The U.K. will take a divot out of any bonuses he receives for winning those tournaments. Plus they'll take a chip of the bonuses he gets at the end of the year for his overall tour ranking.

• It gets even better from there. The U.K. won't just tax Mickelson on his tournament winnings. It also taxes him on part of his endorsement income for the two weeks he spent in-country. Forbes estimates he earned $44 million from Callaway, Barclay's, KPMG, Exxon Mobil, Rolex, and others last year, so that extra endorsement tax may leave him wanting a mulligan.

• He'll get a credit against his U.S. tax for everything he pays abroad. But there's no credit for the extra Medicare tax he'll pay. And don't forget, California takes a penalty stroke, too.

All in all, Mickelson will pay about 61% tax on his British earnings. That's after his considerable expenses, including travel, meals, agent fees on endorsement income, and 10% to his caddy.

We realize that keeping $800,000 or so for a couple of weeks' work isn't bad — especially when that "work" involves playing two of the most storied courses in all of golf. Still, Mickelson's story emphasizes that it really is what you keep that counts.

If you're a golfer, you've certainly heard the saying "drive for show, putt for dough." Well, our proactive planning service is the tax equivalent of putting for dough. That's because top-line revenue is impressive — but if your short game isn't up to par, those big drives may not actually matter. If you don't have a plan, call us for help sinking that long putt across the IRS green. And remember, we're here for the rest of your foursome, too!

What's Not to "Like"?

Let's imagine, just for a minute, that you decided on a new line of work: ripping off the IRS. How do you think you  so if U think indicting me will B easy it won't, I promise you!

Wilson is a 27-year-old mother of three in Tampa, a seventh-grade dropout with 40 previous arrests under her belt. She recruited friends and family to steal Social Security numbers and file false tax returns, directing the very real refunds to reloadable debit cards. She stole so much that authorities dubbed their investigation "Operation Rain Maker" because of all the cash raining down on the suspects' mailboxes. Even more incredibly, they first caught wind of her scam in 2010 when they noticed a drop in illegal drug dealing in the area. Their theory, which proved correct, was that Wilson's henchmen had abandoned their previous careers trading agricultural commodities and switched to an easier and more lucrative enterprise. (And really, who wouldn't want to trade standing on a hot Tampa street corner for a cushy, air-conditioned indoor gig?)

Wilson treated herself to just the sort of lavish lifestyle you'd expect from the queen of tax fraud. She spent $30,000 on a party to celebrate her son's first birthday (including carnival rides for guests to play on). She spent $90,000 for an Audi A8L sedan. And she filled her house with pricey purses, shoes, and flat-screen TVs.

But the party came to an end at the hands of a joint task force involving the Tampa Police Department, IRS Criminal Investigations unit, the U.S. Secret Service, the U.S. Postal Inspectors, and the Hillsborough County Sheriff's Office. In April, Wilson pled guilty to wire fraud and aggravated identity theft. Last week, a federal judge sentenced her to 21 years in prison and ordered her to pay $3.1 million in restitution. But authorities believe she and her gang actually stole more than $20 million in all.

We can all assume that since Wilson made her money stealing from the IRS (and, by extension, from you and me), she wasn't reporting her income to the IRS. Fortunately, our proactive planning service lets you beat the IRS without risking 21 years behind bars. And we're so proud of the work we do, we love when you brag about it on Facebook. So if we've done a plan for you, why not go and tell your friends about it now? And if not, what are you waiting for — call us now and let's set it up!

Hotties and Notties

Junior high school is a difficult time for parents as well as students. It's a time when boys start to discover girls, and girls start to discover boys. (Reports differ on exactly which group discovers the other first, but it's equally terrifying for most parents.) One of the very first things junior high boys and girls start doing when they discover each other is rating each other — usually on a scale of 1-10. The 9s and 10s form cliques to congratulate each other on their good fortune, while the 3s and 4s learn to tell jokes, plan on making money, or learn to get by with a "great personality." (In case you've forgotten, junior high school can be really cruel.)

It turns out, though, that junior high kids aren't the only ones rating the world around them. Now comes news that two German economics professors have rated the attractiveness of 100 different countries' corporate tax systems. Their paper, "Measuring Tax Attractiveness Across Countries", develops a new measure, which they call the Tax Attractiveness Index, "reflecting the attractiveness of a country's tax environment and the tax planning opportunities that are offered." And the results aren't nearly as obvious as that cutie you spotted across the locker hall that first day of eighth grade.

The professors identified 16 relevant components of corporate tax systems. They started with obvious factors like statutory tax rates, taxation of dividends and capital gains, and withholding taxes. Then they added more esoteric factors like group taxation regime, loss offset provisions, double tax treaty networks, thin capitalization rules, and controlled foreign company rules. (That's the stuff you pay us to worry about.) Next, they developed methods to quantify each factor from zero (signifying the least favorable conditions, such as high statutory tax rates) to one (signifying the most favorable conditions, such as tax-free capital gains). Finally, they added the values for each condition and divided each country's total score by 16 to yield the final rankings.

Whew! So, what do the results show? Which countries are the hotties and which countries are the notties? Well, generally, Caribbean tax havens like Bermuda and the Bahamas (tied for #1), the Cayman Islands (#3), and British Virgin islands (#4), ranked highest. European nations also fared well, especially European Union nations benefiting from the Parent-Subsidiary Directive and Interest and Royalty Directive abolishing intra-EU withholding taxes.

And what about Uncle Sam? Is he flirting with the "mean girls," or is he waiting to get picked last for kickball? Well, the United States scored 0.2342 out of a possible 1.000. That placed Uncle Sam 94th out of 100 countries. We're trailing Egypt, Japan, and Zimbabwe. But we're still beating the Philippines, Indonesia, Peru, South Korea, Venezuela, and last-place Argentina!

So now you know — tax-wise, at least, Uncle Sam's a dud, averting his eyes from hotties like Bermuda. We confess we don't know the first thing about Cayman Island group taxation regimes or Zimbabwean thin capitalization rules. But we do know the most expensive tax mistake you can make, in this or any country, and that's failing to plan. So call us if you're ready to start saving, whether you want more dollars, euros, shekels, pesos, or yen. And remember, we're here for your family, friends, and colleagues, too!

Bada-Ching!

The acting world lost one of its brightest lights when Sopranos star James Gandolfini died of a sudden heart attack while touring Italy with his family last month. Gandolfini was the iconic face of HBO's acclaimed drama, which made cable television, rather than the movies, the place for serious actors to "make their bones." Gandolfini himself became the model for a new breed of anti-heroes like Breaking Bad's Walter White and Mad Men's Don Draper. Few critics would dispute The Sopranos place as one of the greatest dramas in TV history.

Hollywood stars have always been famous for bringing home the big bucks, and Gandolfini was no exception. He fought as hard as a real mobster to maximize his pay. But he was legendarily generous, too. Co-star Steve Schirripa, who played Bobby Baccalieri on The Sopranos, recalled that in Season Four, Gandolfini gave each of his co-stars $33,000 for "sticking by him." And after holding up filming on Season Five over a pay dispute — which reportedly doubled his own salary to more than $800,000 per episode — Gandolfini included a clause in his deal making sure everyone else who worked on the show got paid retroactively for what they missed during the standoff. Not just a "goodfella" — a good guy.

Apparently, though, Gandolfini never had that all-important sit-down with his consiglieres about estate taxes. That means the capos at the IRS are about to give his heirs a shakedown that would make Salvatore "Big Pussy" Bonpensiero gulp in disbelief.

If you know nothing about estate taxes, remember this. You can bequeath as many millions as you like to your spouse, completely tax-free. Anything else above a "unified credit exemption amount" (currently $5.25 million per person) is subject to a 40% tax. That's a cut approaching mob-level "protection."

So, early reports suggest that Gandolfini's estate was worth in the neighborhood of $70 million. (That's a lot of gabagool for the son of a bricklayer and high-school lunch lady!) He left 80% to his sisters, his 13-year-old son, and his nine-month-old daughter. Tax on those bequests could reach up to $30 million. He left the remaining 20%, after taxes, to his wife Deborah Lin. That means she could wind up with 20% of just $40 million, rather than 20% of $70 million she could have enjoyed with better planning. In case you're like Paulie Walnuts and math ain't your strong suit, that's a six million dollar mistake. No wonder New York estate-planning attorney William Zabel (author of The Rich Die Richer and You Can Too), called Gandolfini's will a "disaster" and a "catastrophe"!

What's worse, the tax itself is due nine months from Gandolfini's June 16th death. And, in another eerie similarity to the Mob, the kneebusters at the IRS want "cash." (They'll take a payment plan if they have to, but they won't be very happy about it.) That means Gandolfini's heirs may be forced to sell assets, perhaps at fire-sale prices, to come up with the money, making the loss even worse.

We realize you may not have to worry about the IRS pinching $30 million from your estate. But James Gandolfini's untimely passing reminds us just how important proactive planning can be to your family's future. So here's an offer you can't refuse: call us now for the plan you need before the IRS takes a whack at you. And if you already have the plan you need, is there someone just like you who could use the same savings? We're here for them, too!

(photo courtesy wikimedia.org)

The IRS at the Wedding

You've all heard that April showers bring May flowers. That's fine and all, and it doesn't leave anything for the IRS unless you're a farmer or a florist. But June brings brides — young brides, old brides, blushing brides, even bridezillas. Now the IRS pays attention, because now the IRS gets to reach out for all sorts of extra taxes from the happy couple.

So, Mike and Sarah meet in college, fall in love, and get married. Maybe they host the big day at their college chapel. Maybe they get creative with the reception and throw a barbecue in a barn. What will the IRS think?

The classic "marriage penalty" occurs when two spouses, earning roughly equal amounts, earn enough together to push their taxable income into the 28% bracket for joint filers. For 2012, that bracket started at $142,700. So if Mike and Sarah each reported $100,000 in 2012 taxable income before the wedding, they each owed $21,454 in tax. But if they got married any time before the end of the year and reported $200,000 in joint income, they would owe $43,779 together. Do you think it will bug them to send the IRS an extra $871?

It gets worse when kids are involved. If Sarah has a qualifying child, she gets a $1,000 child tax credit, so long as her income is under $75,000. But when she and Mike get married and file together, that threshold doesn't double. It goes up just $45,000. That's barely half again what Mike would get on his own.

Those obvious examples are just a starting point. There are plenty of other marriage penalties scattered like icebergs throughout the tax code. For example, the Affordable Care Act imposes a 0.9% Medicare surtax, starting this year, on earned income over $200,000 for single filers and $250,000 for joint filers. If Mike and Sarah each report $200,000 in earned income singly, no surtax. But if our newlyweds report the same $400,000 total as husband and wife, Uncle Sam gets an extra $1,350. Wait a minute . . . shouldn't your uncle be giving wedding presents instead of taking them?

Maybe Mike owns a rental property. Like most rental properties, it loses money "on paper." There's a special "rental real estate loss allowance" that lets him deduct up to $25,000 of rental loss against his other income — so long as that income doesn't top $150,000. When Mike gets married, he and Sarah can still take that same $25,000 loss — so long as their combined income doesn't top that same $150,000! Oh, and that's only if they file jointly. If they file separately, and lived apart for the year, they get just $12,500 each. If they file separately and lived together during the year, the allowance is zero. Who wants to raise a toast to that?

There's still time for you to throw rice (or birdseed) at a wedding or two this month. So if someone you know is getting married, have them call us. We'll see if we can keep a a marriage "penalty" from turning into a marriage "surprise." And don't forget to save some cake for the IRS!