Careful What You Wish For

It's 2020, and yet in today's Disneyfied America, little girls still dream of becoming princesses. Really, what's not to like about it? You get all the pomp and circumstance of the royal court without the inconvenient stress of actually running the country. You get to show off the crown jewels. You even get to lead the paparazzi everywhere you go, so they can compete to make snarky comments about your dress or snap a pic of you picking your nose.

Actress Meghan Markle got to live the dream when she married Prince Harry to become Her Royal Highness, the Duchess of Sussex. Apparently, though, princessing is a lot like Season Three of The Crown — it overpromises and underdelivers. Now she and Harry are giving up their "Royal Highness" titles, vacating the palace to become working blokes, and planning to spend more time in North America. Next stop, Canada: out with the Royal Philharmonic, polo and high tea, in with Nickelback, hockey, and poutine.

Naturally, the big move means big changes for the couple's finances. People like us spilled gallons of ink writing about how Megan's marriage would affect her taxes. So now that the Sussexes have announced "Megxit," you get to spend hours reading about them all over again. Spoiler alert: they're still going to be a royal pain in the arse.

The couple have been drawing 95% of their state income — estimated at around $2.5 million per year — from Prince Charles's Duchy of Cornwall income. They draw a few more quid from the tax-free Sovereign Grant, which the government pays the Queen for royal family operations. They also earn income from their own assets, estimated at $25 million for Harry (built on inheritances from the Queen Mum and Princess Di), and $5 million for Meghan (built on her acting career). The move will mean giving up their Sovereign Grant income, and possibly the Duchy as well.

So, off to work they go! Fortunately, they're expected to command six-figure speaking fees. As a U.S. citizen, Meghan will keep paying U.S. tax no matter where in the world she speaks. However, if she spends more than six months abroad, she can exclude $107,600 of foreign income from her U.S. tax. That may sound like a lot to us — but for a princess, it barely covers the ladies' maid and gas for the Bentley.

Meghan also needs to consider state taxes. (You probably thought princesses are too pretty to worry about that.) They were still deductible when she left, but now that deduction is capped at $10,000 per year (£7,665). She's already moved her company, Frim Fram Inc., from California to Delaware, where she'll avoid the Golden State's 8.84% corporate tax.

Harry remains a Brit, which gives him more ways to plan where he lives and works. His British income is taxed at 45% on anything over £150,000. If he spends enough time in Canada, he'll pay 33% on his Canadian income over $214,368. But if he spends too much time here, in the United States, everything becomes subject to our tax. (Don't get too used to the California sun!)

We realize you aren't making room in your family budget for tiaras and scepters. But you don't have to be a royal to take advantage of planning to pay less tax. That's where we come in. So count on us to help, without shipping you off to Canada! 

Shooting Down the "Snooki Subsidy"

New Jersey Governor Chris Christie must have felt like the Most Wanted Man in America as his fans clamored for him to join the 2012 presidential race. A year ago, he flatly ruled it out, declaring "Short of suicide, I don't really know what I'd have to do to convince you people that I'm not running." But since then, he appeared to be warming to the idea before finally closing the door for good earlier this week.

Film producers bring jobs, spending, and sometimes even a touch of glamour to the locations they choose. And who doesn't want to share a bit of that Hollywood spotlight? For those reasons, over half of all states now offer film tax credits to encourage in-state movie and television production. (Remember, a tax "credit" is a dollar-for-dollar cut in a taxpayer's actual tax bill, not just a deduction from that taxpayer's income.) New Jersey's program is typical, and gives production companies a credit equal to 20% of qualified expenses so long as they incur 60% of their costs in New Jersey. Fans of these programs argue that subsidized productions actually pay for themselves by creating jobs and increasing tourism. Skeptics respond that film credits just transfer existing jobs from one location to another and that they generate short-term, project-based jobs that leave specialized laborers out of work.

The show's producers reported spending $2.1 million in New Jersey to tape the first season. And officials in Seaside Heights, where the show was first set, agree that it's been a bonanza. That sounds like success, especially in today's tough economy. But not everyone is pleased with how Jersey Shore portrays its subjects. Critics object that it paints New Jerseyites and Italian-Americans as drunken, brawling louts, obsessed with their "GTL" (gym, tanning, and laundry, for those not in-the-know). Ironically, most of the cast isn't even from New Jersey - and not all are Italian, either.

So, it looks like Garden State taxpayers won't be subsidizing Snooki's bail the next time she's arrested. What do you think? Is Governor Christie right to stand up for New Jersey pride? Or should he just lighten up, grab a "blast in a glass," and join the fun?

Chicken Little Sells Her House

Hi!-

Life would be a lot easier for all of us if tax laws didn't change all the time. Every year, Washington writes new laws. The IRS writes new regulations interpreting those laws. The Tax Court issues new decisions interpreting those regulations. And the IRS issues enough revenue rulings, revenue procedures, private letter rulings, and similar proclamations to keep an army of accountants and attorneys gainfully employed.

Sometimes, in the midst of all that motion, facts get twisted and misinterpreted. Sometimes a rumor gets launched that takes on a life of its own. Right now, there's an email going around that has most of us tax professionals shaking our heads. It warns that, starting in 2013, the healthcare reform act imposes a 3.8% sales tax on home sales. If you sell your $400,000 home, you'll owe a $15,200 tax!

If you see it in an email, it must be true, right? The truth, as is often the case with taxes, is a little more complicated than that - and a lot less scary. First, let's take a look at how taxes are figured on home sales today:

• First, calculate "adjusted sale price." This is the sale price of the house, minus expenses of actually selling it (last-minute fixups, commissions, etc.).

• Next, subtract "adjusted basis." This is the price you paid for the house, plus closing costs, plus any improvements you make that add value, prolong its life, or give it a new or different use. "Adjusted sale price" minus "adjusted basis" equals "gross profit."

• If you've owned your home for more than two of the last five years and used it as your primary residence for more than two of the past five years, you can subtract a "Section 121 exclusion" of up to $250,000 if you file individually or $500,000 if you and your spouse file jointly. If you don't meet the two-year requirement, you can still take a pro-rated exclusion reflecting how long you did meet those requirements.

• "Gross profit" minus "allowable exclusion" equals taxable gain. If you hold your house longer than a year, it's taxed as long-term capital gain and capped at just 15%.

The bottom line here is that few home sales are taxable - especially in today's down market - because of that Section 121 exclusion. So, where does the new healthcare law come in? Well, it does impose a new "unearned income Medicare contribution," beginning in 2013, of 3.8% on capital gains, for individuals earning over $200,000 and families earning over $250,000. (Don't you love how the folks in Washington spin that 3.8% "unearned income Medicare contribution"? Wouldn't it just be easier to call it a "tax"?)

That means any gain on the sale of your home that isn't already sheltered by the $250,000 or $500,000 exclusion might be subject to the new tax if your adjusted gross income is over the $200,000 or $250,000 threshold. That's a pretty far cry from saying there's a new 3.8% sales tax on home sales!

But somewhere along the line, Chicken Little saw the new 3.8% tax, missed the rest of the process, and saw the sky starting to fall. Being a thoroughly modern chicken, she hopped on her computer to fire off an email telling all of us that the sky was falling - and that email spread faster than the latest news about Snooki or the Kardashians. So now here we are, setting the record straight.

The next time you get an email with a rumor that sounds too awful to be true, don't just run around like Chicken Little. Send it to us. We can tell you if it's something you really need to worry about - and if so, we'll help you craft a plan to avoid or minimize the threat!

Tax Inspiration from Warren Buffett

Last month, billionaire Warren Buffett wrote a piece for the New York Times arguing that it's time for our tax system to stop coddling the super-rich. Buffet reported that while he paid a healthy $6,938,744 in federal income and payroll taxes last year, that figure was just 17.4% of his taxable income — a lower percentage than was paid by any of the other 20 people in his office. The solution, Buffett proposed, is for Congress to raise rates immediately on the 236,883 taxpayers reporting income over $1 million, and raise them even further on the 8,274 earning more than $10 million. "My friends and I have been coddled long enough by a billionaire-friendly Congress," he concluded. "It’s time for our government to get serious about shared sacrifice."

Buffett's argument attracted immediate objectors. Some argue that taxing "the rich" can't raise enough revenue to close the deficit because there just aren't enough of them. Others pointed out that much of the income that Buffett says isn't taxed enough consists of "qualified corporate dividends," which are taxed at corporate rates ranging up to 35% before being paid out to individuals.

Now President Obama has weighed in — and it turns out, he likes Buffett's argument enough to adopt it as his own. On Monday, he proposed a $3 trillion deficit reduction package with several important tax provisions:

• First, he would let the Bush-era tax cuts expire, raising top rates on ordinary income from 35% to 39.6% and capital gains from 15% to 20%. This would raise $800 billion over the coming decade.

• Next, he would close corporate loopholes and cap the value of itemized deductions for individuals making more than $200,000 and joint filers making more than $250,000. This would raise another $700 billion.

• Finally, he would impose a special minimum tax, called "the Buffett Rule," on those earning more than $1 million. He didn't specify a rate, but said it should be no less than what the average middle-class taxpayer pays. The new rate would only apply to about 0.3% of taxpayers, and wouldn't raise significant revenue — but it sets a more populist tone for the debate and underscores Obama's assertion that "we can't cut our way out of this hole."

Polls show a majority of Americans favor higher taxes on top earners to help reduce the deficit. And Democrats generally favor this week's plan. In fact, some supporters don't think it goes far enough. Former Labor Secretary Robert Reich, for example, suggests raising taxes to 50% on income between $500,000 and $5 million, 60% on income between $5 million and $15 million, and 70% in income over $15 million.

Opponents, on the other hand, have already attacked the proposal as "class warfare" and "political games." Congressional Republicans have said they're willing to consider closing tax loopholes, so long as the resulting gains go towards lowering overall rates. But they've pledged to resist any net increase in revenue, and House Speaker John Boehner has declared tax hikes "off the table." That means this week's plan in general, and the Buffett Rule in particular, stand little chance of actually passing.

Obama's proposal is still worth paying attention to, even if Republicans don't pretend to take it seriously. It illustrates how the rising deficit is increasing pressure to raise taxes. And it signals where Obama might go if he wins next year's election — especially if Democrats retake the House of Representatives. Count on us to keep an eye out for you so that we're ready to keep your taxes as low as possible — no matter which proposals wind up passing into law!

Jobs and Taxes

Earlier this year, the men and women in what Donald Trump famously referred to as "Disneyland on the Potomac" battled it out over the debt ceiling, in a fight that turned largely over whether to include new taxes. Now the "Rock 'Em Sock 'Em Robots" in Washington are gearing up for another bout - and once again, taxes are taking center stage.

Last week, President Obama took to the airwaves to introduce his plan, which he presents as "recession insurance." Obama would extend the 2% payroll tax cut for employees (from 6.2% to 4.2%), currently in effect through the rest of this year, through 2012. He would cut the payroll tax on employers from 6.2% to 3.1% on their first $5 million of wages, and eliminate it entirely for any net increase in payroll up to $50 million. He would extend the current enhanced depreciation provisions scheduled to expire at the end of this year. And he would create a new "Returning Heroes" tax credit ranging up to $9,600 to encourage hiring unemployed veterans. (Come on, now . . . what heartless Scrooge could possibly oppose a "Returning Heroes" tax credit for veterans?)

Former Massachusetts Governor Mitt Romney argues that "the best course in the near term is to overhaul and to dramatically simplify the current tax code, eliminate taxes on savings for the middle class, and recognize that because we tax investment at both the corporate and individual level, we should align our combined rates with those of competing nations. Lower taxes and a simpler tax code will help families and create jobs." Romney's plan would maintain marginal rates at their current level, further reduce taxes on savings and investments, eliminate the estate tax, and cut the corporate tax to 25%.

Former Utah Governor and Ambassador to China John Huntsman released his "Time to Compete" jobs plan. Huntsman's plan would take an opposite approach from the President's plan by eliminating all deductions, credits, and loopholes. He would then introduce three rates of 8%, 14%, and 23%, eliminate the dreaded alternative minimum tax, eliminate tax on capital gains and dividends, and lower the corporate rate to 25%. Huntsman's plan has won praise from the usual flat-tax suspects - but unfortunately for them, most observers think Huntsman has as much chance of winning the Republican nomination as Lady Gaga.

Finally, former Godfather's Pizza CEO and radio host Herman Cain has released an even more radical plan that would eliminate payroll taxes completely, cut corporate and personal taxes to 9%, and impose a 9% national sales tax.

The current debate reminds us of the role taxes play in so many seemingly unrelated issues. In today's political climate, when Washington wants to spend money on anything - whether it be healthcare reform, job stimulus, or even disaster relief - someone has to pay for it. Taxes are clearly at the heart of the job debate. And the candidates' job proposals, centered on taxes as they are, remind us why we need to pay attention to all the news coming out of Washington. What do you think? Are the candidates sincerely working to create new jobs? Or are they mainly interested in preserving their own?

Tax Thoughts For Labor Day

Labor Day is almost here, and soon summer will be "officially" over. If that's got you down, here's a collection of tax quotes to brighten your day.

Morgan Stanley advertisement

Steve Forbes"The income tax has made liars out of more Americans than golf."

Fred Allen"Hating the Yankees is as American as pizza pie, unwed mothers, and cheating on your income tax."

plan to pay less tax, call us today. And remember, we're here for your family, friends, and colleagues too!

Really?

Why did Willie Sutton rob banks? Because that's where the money is, of course. Why does the IRS focus its attention on income taxes? Same reason! For fiscal 2014, they expect to collect $3 trillion in taxes: $1.4 trillion in individual income taxes, $1.0 trillion in Social Security and Medicare, $332.7 billion in corporate income tax, $154 billion in transportation and excise taxes, and "just" $15 billion in gift & estate taxes. Three trillion dollars sounds like it ought to be enough to finance the government. But of course it's not. So our friends in Washington are constantly searching for more change in the national couch cushions. (Value-added tax, anyone? Carbon tax?) And now it looks like they may have found the mother lode. Would you believe they're finally coming after your frequent flyer miles?

The first frequent-flyer program took off back in 1972. Since then, nearly every airline has launched one, and hotel chains have climbed aboard, too. Loyalty programs are so popular that over half of all credit card purchases made in the U.S. are made with cards tied to loyalty programs. That's especially astonishing when you consider how cramped the airlines have made their seats and how many "junk fees" they've loaded up on — for checked bags, overhead bin space, curbside check-in . . . the list goes on and on. (Michael O'Leary, head of Ireland's Ryanair, actually proposed charging to use the loo.)

The IRS recognizes six kinds of frequent flyer miles, and taxes them according to how you receive them. These include:

1. Miles awarded for travel (nontaxable)

2. Miles awarded for credit card use (nontaxable)

3. Miles awarded in connection with business travel (nontaxable but mainly because it would be too hard to track)

4. Miles awarded for opening an account (taxable)

5. Miles awarded for putting money in a mutual fund (which reduces your tax basis in the fund)

6. Miles awarded as prizes (taxable)

For the most part, those rules make sense. (Would it really be worth the hassle to require business travelers to report the value of frequent-flyer points they redeem for personal travel?) But now it appears that change is on the radar. Last August, the Service released its 2013-2014 "Priority Guidance Plan" that included a project modifying the accounting rules for loyalty programs. And last month, a group of four major travel associations sent a letter to Treasury Secretary Jack Lew urging him to reject any changes to those rules.

It may be that changing the way the IRS treats loyalty programs at the airline level doesn't necessarily mean taxing the awards they grant their members. But does anyone doubt that airlines — who now charge for luxuries like pillows and blankets — will pass any new tax costs through to passengers? (If we're lucky, the new tax will arrive as late as your last flight did!)

We realize the prospect of taxing your frequent flyer miles doesn't keep you awake at night. But make no mistake about it, Washington is looking for new ways to pay for government. Pilots never take off without filing a flight plan — so why would you try to manage your finances without a tax plan? Call us for that plan, and you might be upgrading your next seat to first class!