Carrots Versus Sticks

Take a look at our Internal Revenue Code. No, really, take a good look. (You can buy it on Amazon for just $161.89: two thick paperbacks totaling 4,968 pages. You even get free Prime shipping!) At first glance, it's all about the revenue. For FY 2019, federal income taxes should hit nearly $1.7 trillion. Payroll taxes will top $1.2 trillion. Corporate taxes, $225 billion. And estate taxes will generate somewhere around $20 billion, depending on how many billionaires die (#dropinthebucket).

But taxes aren't just about the revenue. Washington loves to use taxes to accomplish goals they can't legislate directly. This generally takes the form of "tax expenditures" — special deductions, credits, or other rules designed to benefit specific favored activities or taxpayers.

The mortgage interest deduction may be the most famous of these carrots. For most people, homeownership is a cornerstone of the American Dream. But Congress would be hard-pressed to pass legislation requiring it, or even directly rewarding it. (Buy a home! Get a free $5,000 Target gift card!) So instead, they use taxes to subsidize it. For 2018, homeowners saved $68.1 billion by deducting mortgage interest on their taxes. 

But every so often, the government uses taxes as a stick . . . or at least they try to. Last week, the Wall Street Journal published an editorial blowing the whistle on one such effort that may violate the First Amendment. Specifically, it accuses the IRS of punishing nonprofit organizations that advocate for legal marijuana:

"The innocuously named Revenue Procedure 2018-5 contains a well-hidden provision enabling the Service to withhold tax-exempt status from organizations seeking to improve 'business conditions . . . relating to an activity involving controlled substances (within the meaning of Schedule I and II of the Controlled Substances Act) which is prohibited by federal law.' That means that to obtain tax-exempt status under any provision of the Internal Revenue Code's Section 501 — whether as a charity, social-welfare advocacy group or other type of nonprofit — an organization may not advocate for altering the legal regime applicable to any Schedule I or II substance."

Bottom line, according to the authors: "The IRS seeks to control independent policy advocacy. That's something the federal government may not do." If they can't prohibit the speech directly, they can't use the tax system to do it indirectly. 

Yes, "the devil's lettuce" is still prohibited under federal law. But 33 states have passed laws legalizing it in some form or another. It says a lot that the buttoned-down stiffs at the Wall Street Journal could publish the same editorial as the stoners at High Times magazine. So why would the IRS choose to wield this particular stick? And is it really the IRS's job to make those sorts of decisions anyway? Isn't the IRS just supposed to be the government's bill collector?

As far as we're concerned, we don't care what motivates you more, carrots or sticks. We just want to make sure you get all the breaks the law allows. But we can't do it if you don't ask us. So pick up the phone before time runs out to save in 2018, and lets see how we can put the rules to work for you!

The Taxpayer Who Never Was

Life is full of ups and downs, and sometimes the downs can be so low that it doesn't feel like there's ever going to be an up again. How many people have dreamed of faking their own death and disappearing under a new identity, never to return to their problems again? It's called "pseudocide," and it's popular enough that novelists have a field day writing thrillers about it. John Grisham pulls some variation of that stunt in half a dozen books, and J.K Rowling, Tom Clancy, and Gillian Flynn (Gone Girl) have all joined him in that theme.

Faking your death doesn't always work. In sixteenth-century Verona, a young nobleman named Romeo tried it with a deathlike potion, and we all know what happened to him. But that doesn't keep the occasional scammer from trying. Most famously, rock-and-roll legend Elvis Presley faked his death, and supported himself by entering Elvis impersonator contests. (He always laughed when he didn't win.) And if you have really valuable information on a really bad guy, the witness protection program will even establish your new identity for you!

There's no law that says you can't fake your death to go ride off into the sunset. But we got to wondering . . . what would our friends at the IRS think about that plan?

Let's start with your life insurance benefits. Code Section 101 says gross income doesn't include amounts your beneficiaries receive "if such amounts are paid by reason of the death of the insured." We're splitting hairs here, but wouldn't they still owe the tax if you aren't really dead? Or would they be safe because the insurance company paid them by reason of your death, even if you're not? (You can be sure that somewhere in America, there's an underemployed lawyer ready to bill by the hour to answer that question!)

Next, let's look at estate tax. Assuming your gross estate is over $11.18 million, and the rest of the world really believes you're dead, at some point your executor will file a return and pay 40% of the taxable amount above that threshold. What's for the IRS to complain about? But come on, folks. While it's true that money can't buy happiness, it can solve a lot of the problems that cause unhappiness. So how many people with $11.18 million are really going to fake their own death in the first place?

(While we're on the topic of estate taxes, it's worth mentioning that the current threshold means that the IRS gets only a couple thousand returns per year now anyway. As recently as 1997, when the threshold was just $600,000, they got 90,000 of them. That's one perk of working in the trusts and estates field: just because the client dies doesn't mean you have to stop billing them.) 

Finally, let's talk about anything you make after you pull your David Copperfield act. You'll earn it under a new name and social security number . . . but as long as you've set up your new identity properly, the IRS should be happy getting their usual share. Of course, there's that whole "identity fraud" problem. But hey, nobody said this would be easy!

Look, if life throws you a beanball, we understand the temptation to start fresh. But you will wind up crossing the line into fraud at some point. So if you're having a really bad day, can we suggest an easier (and perfectly legal) alternative? Come to us for a plan to pay less tax, and see if we can give you more reasons to enjoy the life you already have!