Welcome to the Desert of the Real

Twenty years ago, sci-fi fans geeked out to a new thriller called The Matrix following a dystopian vein established in Blade Runner, Total Recall, and The Terminator. It starred Keanu Reeves as "Neo" and Laurence Fishburne as "Morpheus": freedom fighters in a world where machines have trapped humanity in a computer-generated dreamscape called the Matrix, to distract their minds while sucking energy from their bodies and brains. (Their allies include another hacker named Trinity, famed for cracking the IRS database, but that's not what brings us here today.)

Early in Act One, Morpheus shows Neo two pills that look like ordinary cold medicine and presents him with a choice. "This is your last chance. After this, there is no turning back. You take the blue pill — the story ends, you wake up in your bed and believe whatever you want to believe. You take the red pill — you stay in Wonderland and I show you how deep the rabbit-hole goes." It wouldn't have been much of a movie if Neo had taken the blue pill — fortunately for viewers (and humanity), he picks red and challenges the machines to a future where "anything is possible."

The Matrix established the blue pill and red pill as cultural metaphors for two very different perspectives on the world. The blue pill represents, at its worst, basking in sheeplike submission and accepting an essentially dishonest illusion. The red pill, by contrast, represents the genuine freedom and opportunity that come from accepting harsh but liberating reality. The choice you make has consequences in every aspect of your life — including your taxes and your finances.

In our world, every competent tax professional works within the system. (The occasional crooks who cheat on behalf of their clients make headlines because they're so rare.) Most tax pros work the blue pill side of the line. They passively take the numbers their clients bring them, from their P&L statements, their W-2s, and 1099s. They feed the data into their computers to put the right numbers in the right boxes on the right forms. They do a great job telling clients how much they owe — and for most clients, the blue pill may be all they need.

But some tax pros do things a little differently. They work the red pill side of the line. They don't just take the numbers you give them and run them through "the Matrix" of IRS forms and procedures. They help you structure your business entities, your benefit plans, and perhaps even your investment portfolio to pay the minimum possible tax. They don't just accept the story the IRS writes for them. They work within the system to write you a happier ending.

You may not think choosing a tax advisor is quite as consequential as choosing between the red pill and the blue. But Neo didn't realize he was living in the Matrix, either, not until Morpheus welcomed him to the desert of the real. The good news is, at least as far as taxes are concerned, the red pill doesn't require you to outrun creepy agents of post-apocalyptic artificial intelligence or dodge bullets in a shadowy subway tunnel. It just takes opening your eyes to all the legal, ethical, and moral ways to pay less.

You don't have to be a sci-fi fan to appreciate that sort of success. And you don't have to follow the movies to appreciate the savings we create with the "red pill" approach. Just sit back and enjoy the show. And maybe next time you're feeling philosophical, ask yourself if the tax system we work in is real, or are we just trapped in some sort of twisted virtual reality? 

Champagne Wishes and Caviar Dreams

Just a couple of generations ago, it just wasn't polite to discuss money. We mostly knew who was rich and who wasn't. But it wasn't until about 1984, when crack investigative journalist Robin Leach launched Lifestyles of the Rich and Famous, that Americans began following celebrity houses, cars, and bank accounts with the same gusto as batting averages and quarterback ratings.

Today, of course, everything is different. The Forbes 400, along with local business papers, blow the whistle on executive salaries and net worths for everyone to see. Glassdoor.com lets you see how much your colleague in the next cubicle makes. And Zillow lets you (sometimes literally) peek into your neighbors' houses and see just how much their kitchen remodels added to their value. 

So, with tax season just getting off to a roll, we got to wondering how much tax professionals make? Last week, Forbes magazine dug up some data from the Bureau of Labor Statistics that show the average tax professional isn't rolling in the sort of rock star money everyone expects!

For 2017, the average tax preparers earned $38,730. That's actually less than the U.S. average of $44,564 for a 40-hour workweek. Of course, that figure covers a wide range, with the bottom 10% earning under $20,170 and the top 10% clearing over $81,740. Many tax preparers work seasonally, which drags down the overall average. (Fifteen years ago, "Jeopardy" champion Ken Jennings finally crashed and burned after 74 games when he couldn't name the company whose 70,000 seasonal white-collar employees work only four months per year. The answer? H&R Block.)

Unfortunately for those who do nothing but prepare returns, job prospects aren't especially bright. (And it's not because the taxes themselves are going away.) Technology, which used to help preparers do their job more efficiently, is now threatening to do their jobs for them. That's a real threat to the sort of storefront preparers who just record the history their customers bring them.

For the same period, the country's 1.24 million accountants and auditors, whose broader responsibilities include preparing financial statements and giving actual advice, earned an average of $77,920. The bottom 10% bring in under $43,020 and the top 10% over $122,220. State averages ranged from $95,430 in New York to $59,960 in Mississippi. 

Tax lawyers generally don't prepare many tax returns. They also make considerably more than preparers and accountants, according to the website Salary Expert, pulling in an average of $145,746.

And how do prospects look for the rest of the tax industry? The Wall Street Journal recently published a report on the Tax Cuts and Jobs Act, and reported that, "many of the jobs it is creating, it turns out, are in the tax industry." Firms are fighting for qualified employees. The paper quoted one executive as saying "There's no doubt that the talent wars in tax have definitely heated up." (Can you imagine talent wars in tax!)

So what should we conclude from our nosy snoop through tax salaries? It looks to us like the real news is tax pros who tell you how much you owe earn a decent income — but those who help you pay less are worth more. And in the end, isn't paying less what you really want? So call us when you're ready to save, and see just how valuable we can really be!

Do Androids Dream of Electric Audits?

In 1982, the movie Blade Runner presented a technologically advanced vision of the year 2019. There were flying cop cars. (What grim dystopian movie doesn't feature flying cars?) There was commercial space travel. There were bioengineered androids, known as "replicants," that drove the story. The film even predicted voice-controlled video phones to communicate with our offices!

Today's reality isn't quite so exciting. We've got the voice-activated video phones! But we're not using them to summon flying cars or book trips to the Moon. No, we're using them to waste time checking Facebook, Twitter, and Instagram. We pick up our phone every 12 minutes on average, and spend three hours and 35 minutes per day with our heads buried in our screens. Psychiatrists have even identified "internet addiction disorder" as a "condition for further study."

Well, if you can't beat 'em, join 'em. The IRS manages several Twitter feeds for taxpayers and professionals that are worth following. But now they're looking to get even more involved. We're not talking about auditors posting pictures of their dogs (although we'd totally follow that, too). Instead, they want to investigate whether social media can help them collect taxes.

Current IRS rules generally prohibit employees from using any social media at work. They specifically can't create fake accounts to "friend" you and snoop on your finances. But the IRS knows that people post enormous amounts of information online, information they can use to help with collections. So last month, the IRS issued a request for information and product demonstrations from electronic research vendors. They're hoping to find a vendor who can:

• "Provide a product that is easily explainable in court."

• "Provide real time, customizable reports of publicly available social media information (provided or advertised by businesses), such as new products, current sales, and new locations."

• "Provide reports showing that a taxpayer participated in an online chat room, blog, or forum, and reports showing the chat room or blog conversation threads."

• "Provide available biometric data, such as photos, current address, or changes to marital status."

• "Provide access for at least 25,000 concurrent users."

Show of hands here: who wants any part of the government tracking your profile photos, status alerts, or chat room conversations? The good news is that, at least for now, the IRS would use their new super power for good, not evil. "Such a tool would not be used to search the internet or social media sites for purposes of identifying or initiating new tax audits." Of course, that doesn't mean the IRS won't get more aggressive down the road, using predictive analytics and social media as part of a broader effort to target specific taxpayers for extra attention.

The IRS's move towards harnessing social media is part of a broader movement to put "Big Data" to work for various goals. But data isn't always bad. Here at our firm, we're using it to help clients like you pay less tax. So call us when you're ready to join the future. Someday your savings might pay for your own flying car!

Tiny Violins for Very Large Men

2019 is here, and it's almost time to file your first tax return under the new law. But you probably sat around watching sports all weekend instead of talking taxes, didn't you. (Did Santa bring a new TV?) So, as we ring in the New Year, let's take a look at how the new tax bill affects some of those athletes you've been watching.

Washington sold the Tax Cuts and Jobs Act as "tax simplification." And really, who can't raise a toast to that? Lower rates! Higher standard deductions! A 1040 you can fill out on a postcard! But many taxpayers, especially those in high-tax states like New York and California, can be forgiven if they feel like they woke up with a massive hangover. Deductions for state and local income and property taxes are now capped at $10,000, regardless of income. And employee business deductions are nixed entirely. That's going to be pricey for the Very Large Men we mentioned in the title.

Take 6'8" NBA superstar Lebron James. He's played in Cleveland, where state and local taxes total 7.5%. He's played in tax-free Miami. And now he's playing in Los Angeles, where he pays 13.3%. (13.3% going to California sure sounds like a technical foul.) Under the old rules, he could deduct whatever he actually paid. Now the refs limit him to the same $10,000 as the rookies earning the league minimum. Granted, that minimum is $838,464. But doesn't it make sense to let a guy paying tax on 43 times that amount actually deduct 43 times as much?

Income taxes won't be the only expense to bite King James under the new rules. He owns a $9 million house in his hometown of Akron (where $9 million buys a lot of house), a $21 million house in Brentwood (where $21 million still buys a pretty nice crib), and a $23 million house in Brentwood. (Not a typo.) Property taxes on those homes reach well into six figures, if not seven. But now he'll watch those deductions bounce off the rim and rebound into IRS hands.

Even athletes who play in states with no income tax used to be able to deduct non-employee business expenses: agents' and managers' fees, health club and training expenses, travel expenses, and players' union dues. But now those are gone, too. Agents typically take 10% of a client athlete's salary and endorsement income, which means losing that deduction alone can eliminate the benefit of lower overall rates.

The new law does give LeBron one potentially important break. Charitable deductions used to be capped at 50% of adjusted gross income. The new law raises that limit to 60%. LeBron is famously charitable, especially for educational causes, and may appreciate that change someday.

As for that postcard-sized tax return? Well, yes, the IRS has released a new Form 1040. And yes, you can print it on a postcard. But don't get too excited. They've just stripped out half of the information from the old 1040 and dumped it into six pages of Schedules. Have capital gains to report, or student loan interest to deduct? You'll have to file Schedule 1. Owe AMT? Schedule 2 is just four lines . . . but there goes your postcard. Need to pay self-employment tax? Welcome to Schedule 4. And who wants to report their income where the mailman can see it on its way to the IRS, anyway?

This New Year, millions of Americans will pick cliched resolutions like eating less, exercising more, crying less, or smoking more. (Possibly a typo.) We'd like to suggest something a little more profitable: minimizing the bite that taxes take out of your year. Call us to save, and make 2019 your best year ever!

Holiday Tax Advice From Epidemiologists

Holiday season is in full swing, and millions of Americans are celebrating with their favorite libations. Breweries are rolling out their winter brews. Wine stores are stocking up on champagne. And somewhere in a gentrifying warehouse district near you, a hipster bartender in a flannel shirt and man bun is crafting his favorite seasonal cocktail.

But alcohol can be a mixed blessing. Alcoholism is a disease; public intoxication is a crime; and drunk driving is epidemic. If a plucky Silicon Valley startup invented a new product called "Booz" or "Hüch," the Food and Drug Administration would surely shoot it down.

So, could taxes play a role in helping Americans drink more responsibly? Last week, Vox analyzed the issue from a public health perspective, and came to some pretty sobering conclusions. (No lawyers and lobbyists spinning loopholes here!)

First, some perspective. Uncle Sam collected about $9.7 billion in alcohol taxes in 2017. These generally run $16 per barrel of beer (with a special rate for your friendly neighborhood brewpub), $1.07-3.40 per gallon of wine, and $13.50 per "proof gallon" of hard liquor. State governments add their own taxes, ranging from 2 cents/gallon of beer in Wyoming to $35.22/gallon of the hard stuff in Washington.

Epidemiologists have concluded that boosting those taxes by 10% — about 50 cents for a six-pack of Bud Light — would cut deaths from alcohol-related diseases by 2,000-6,000 per year. Raising taxes would also cut deaths from car crashes, violence, crime, and STDs. Professor Mark Kleiman of New York University says, "The single most effective thing you can to reduce crime right away is to raise the price of alcohol." It wouldn't even mean hiring new cops or building new prisons.

What about the argument that raising alcohol taxes punishes responsible drinkers? The American Journal of Preventative Medicine reports that "higher-risk drinkers would pay nearly 83% of an effective tax increase of 25 cents per drink." And responsible drinkers would benefit from reducing the crime, drunk driving, and health problems they're already paying for without a higher tax.

Of course, raising taxes requires political will — a quality that seems to be in short supply in Washington. 63% of Americans drink. Licensed beverage establishments employ millions of Americans. It's hard to see Congress shunning beverage lobbyists just to satisfy a bunch of lab rats.

There's one way to avoid booze taxes entirely, and that's to just quit drinking. Rolling Stones guitarist Keith Richards, who turned 75 this week but appears likely to live until the sun explodes, just announced that he's given it up. Richards has a long history of enjoying controlled substances, so the alcohol he consumed faced a crowded pharmaceutical environment anyway. But now he's down to just coffee and cigarettes. (Of course, with the pickling effect gone, will everyday diseases of aging realize Richards's body is a safe space for them now?)

We wish you and your family all the best this holiday season. So enjoy your favorite adult beverage in moderation. Because what's the point of calling us to cut your taxes if you aren't around to enjoy the savings?

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!

Over-the-Top Thanks For This Tax "Break"

Wall Streeters have a lot to give thanks for this holiday season. Earnings are up, so bonuses are up. And that, in turn, means taxes are up, too. The New York Post just reported that Wall Street Bankers Are Throwing Excessive Parties To Dodge Taxes. But will the wining and dining actually put money back in their pockets? Or is the tax angle just a convenient excuse to party up a storm on the company tab?

Wall Street culture rewards bankers for results. They generally start out with low fixed salaries, at least as a percentage of their overall pay. Then, around this time of year, the bosses get together to count their profits, and shower producers with whatever bonuses it takes to keep them from jumping ship to the competition. In 2017, Wall Street pay jumped 13% to average $422,500 per head. And one consultant predicts sales and trading pros could see 20% more this year in their stockings.

Here's the problem for all those Masters of the Universe glamming it up in their Manhattan condos. Last year's tax bill cut the top federal rate from 39.6% to 37%. However, it also capped deductions for state and local taxes to a flat $10,000. That's a real punch in the gut for Manhattanites paying 13% to the state and city. Throw in 3.8% more for Medicare, and that brings the total skim up to 54%. That's not as bad as the "one for you, nineteen for me" the Beatles sang about in Taxman. But it's hard to get rich if tax collectors are taking home more than you do!

And so, concludes the Post, "Bankers and traders will be celebrating the prospect of massive, multimillion dollar payouts — and they'll use the mega-expenses of year-end blowouts as write-offs for their inflated tax bills, according to industry sources."

It turns out, though, writing off a pricey dinner isn't a very tasty tax shelter. Let's say you treat yourself and three colleagues to the $795/person "white truffle" extravaganza at Daniel, an Upper East Side mainstay. (Relax, your wine pairings are already included in that price!) $3,200 sounds like a lot to shell out for dinner. But after you deduct 50% and multiply it by the 54% tax you save, Uncle Sam covers $864 of that bill. 

Now, $864 might cover the sales tax and tip. But in the end, it's a subsidy, not a savings. Nobody puts money in their pocket by splurging on Florida frog leg mousseline with porcini mushrooms in a white truffle white wine sauce. It's delicious, if you're into that sort of thing, and it looks great in your Instagram feed. But you can't retire on it (unless you're the celebrity chef selling it.) You'd think seven-figure financial wizards would be smart enough to figure that out! (Or maybe they're making so much it doesn't really matter?)

While bankers are out celebrating, they should raise a toast to a different blessing. The law that capped deductions for state and local taxes also eliminated them altogether for business entertainment. But Washington did such a clumsy job writing it that tax pros across the country worried it might have killed writeoffs for meals, too. Last month, the IRS clarified that meals are still deductible, so long as they're not "lavish or extravagant." So you tell us — does $795 for five courses of white truffles pass the test?

Nobody likes paying more tax than they have to, especially when they're paying 54%. But we understand the best tax plans are the ones that help you accomplish financial goals beyond a night out on the town. So call us when you're ready to save, and we'll give you something to celebrate!

A Scary Disconnect

 Legend holds that in 1494, an Italian friar named Luca Pacioli was sitting under an apple tree when an apple bounced off his head. In a flash of insight, he invented the "double-entry bookkeeping" system where each entry has a corresponding and opposite entry to a different account. Those entries, called debits and credits, help accountants avoid headaches — if the debits and credits don't balance, there's a mistake somewhere. (Some of you may be thinking that was Sir Isaac Newton with the apple inventing gravity, but this is our story and we're sticking to it.)

Double-entry bookkeeping has ruled accounting for over 500 years. We see it everywhere today, including in our tax code. Revenue flows in, balanced by expenses flowing out. Anything left over eventually winds up in the "taxable income" account.

Sometimes, with taxes, that balance breaks down, and many of those disconnects spell opportunity. Real estate investors, for example, can depreciate the price of their properties over time. (We can help you with "cost segregation" strategies to do it even faster.) In the IRS's ideal world, you'll repay those breaks by "recapturing" them as income when you sell. But with tax-free exchanges, stepped-up basis, and other strategies to avoid that reckoning, most of those depreciation deductions never get recaptured at all.

Now it's Halloween: America's second-favorite, and second-priciest, holiday. The National Retail Federation reports we dropped $9.1 billion on the spooky season last year, including $2.7 billion on candy. (Fun fact: Halloween candy is cheapest exactly four days before the 31st.) How does all that fit into Luca Pacioli's neat little boxes? Well, it gets scary the minute the greedy little trick-or-treater on the other side of your door goes running down your sidewalk with their loot!

Here's the disconnect. The candy company sells sweets to a retailer. That's a taxable transaction. The retailer sells them to you. That's another taxable transaction. But then you just give it to the little goblins, pirates, and princesses on your porch. No deduction for you, no income for them, no 1099s for the IRS. (Ugh. Can you imagine the 1099s?) That removes everything from the IRS's world of debits and credits. Seriously, if the IRS taxed kids on their Halloween candy, they could collect millions of dollars to cover free dental care for everyone.

It's all very ironic because, as any parent knows, Halloween is an exercise in managing the waste of assets. Your kids come home with bulging bags of candy and dreams of sugar highs lasting until Thanksgiving. But pretty soon the good stuff is gone. No more Kit-Kats or Snickers! They're left with a couple of "fun-size" Milky Ways, some of those Jolly Ranchers nobody really likes, and a few stale candy corns. At that point, you "charge off the goodwill" by throwing out the dregs while they're at school and hoping the kids don't even notice.

Today, your average accountant or tax professional focuses their effort on making sure the debits match the credits. But we don't just stop there. We take the time to look for those tax "disconnects" that can rescue thousands in taxes. There's nothing scary about it at all. So call us when you're ready to pay less. You'll think the savings are pretty sweet!

Don't Let These Guys Catch You Paying Taxes!

Streaming TV services like Netflix have changed how we watch television, dropping an entire season of a series at once for us to binge on. They've even breathed new life into "quality television," a phrase that used to provoke laughs from that insufferably smug type of person who used to brag that they didn't even own what we all used to call the "idiot box."

Netflix has mined TV gold from all sorts of settings. Orange is the New Black explores life inside a women's prison. Stranger Things is a love letter to classic 1980s sci-fi/horror films. And Bojack Horseman takes us inside the world of a half-man, half-horse, has-been TV star who drinks too much. It was only a matter of time before we'd see inside the upside-down world where the IRS unleashes investigators to chase business owners for . . . wait for it . . . paying their taxes.

Ozark introduces us to Marty Byrde, a frugal Chicago-area financial advisor and family man who drives a 10-year-old Honda and resists moving his firm to flashy new downtown offices. (Prudent, right?) One night, he takes an emergency meeting with his partner, where we discover his real business is laundering cash for a Mexican drug cartel. Then Marty learns his associates have stolen millions (spoiler alert: bad move) and watches the boss's sicarios slaughter them and nonchalantly stuff their bodies in barrels.

Marty, played by the always-slightly-oily Jason Bateman, survives by promising to repay what his partners stole and launder another $500 million. He moves his family to Missouri's Lake of the Ozarks, meets a colorful cast of local characters, and searches for businesses he can use to ply his trade. Meanwhile, investigators have found the bodies from the massacre and connected them to the partner who split town. Adventure and hilarity ensue for 20 episodes, and just like that, your entire weekend is gone.

As for the IRS, they don't get all judge-y about how you make your money. They just want their slice of the pie. (Pie is delicious.) But they do get judge-y when you try to pass off cherry pie as apple. That's a real problem for drug cartels. Their business generates cash, and lots of it. They can't just take suitcases full of Benjamins to the bank without raising red flags. They need to turn that dirty cash into legitimate funds they can use to buy things like jet planes, islands, and tigers on a gold leash.

That's where financial alchemists like Marty earn their keep. They find legit businesses (like a struggling restaurant and a skeevy "gentlemen's club") to hide behind. They run the cash through the legit business's books and deposit it in the legit business's bank. They even pay tax on it. Presto, no more narcodollars! It may not be the kind of business they teach in fancy MBA programs. There aren't any glitzy national conferences, or PR-minded professional associations with continuing education and ethics requirements. But hey, it's a living. (Until suddenly one day it's not.)

IRS agents who target Marty and his ilk are experts in following the money. They partner with agencies like the FBI and DEA to stop crooks from hiding their loot, even when "hiding" means paying taxes on it like anyone else.

Sadly, we can't help if you get mixed up with a Mexican cartel. But we can help you stop wasting money on taxes you don't have to pay. So call us when you're ready for a plan, and have fun binging on the savings!

IRS Loves "New" Math

  Parenting is full of all sorts of milestones. Some of them are precious, like your child's first steps, their first words, and their first day of school. Some of them are less welcome, like a first broken bone, or a visit from the law. But there's one milestone that takes some parents by surprise, and that's the day they realize they can't help their kid with math homework anymore. This is especially jarring when the kids come home insisting their teacher taught them 2+2=5. The "new" math can't be that different from the "old" math? It's still just math, right?

  Last week, a California lawsuit involving Monsanto Corporation's flagship product, Roundup weed killer, reveals how the new math of last year's tax law changes the rules. A San Francisco-area school groundskeeper named Dewayne Johnson, who sprayed up to 150 gallons of the pesticide at a time, sued Monsanto, claiming it gave him cancer. The jury agreed and awarded him $289 million, including $39 million in compensatory damages and $250 million in punitive damages. 

  Unfortunately for Johnson, he's not going to get to keep anywhere near that whole $289 million. He's going to run into some new math and wonder if maybe 2+2 doesn't somehow equal just one. 

   Here's the first problem: legal fees. Lots of attorneys go to law school because there's no math. But there's one calculation any ambulance chaser can do in his sleep, and that's take a third off the top. (The next time you meet one at a party, throw out an 11-digit prime number, and be amazed how fast you get back a response. Try it, it's fun!) We'll assume for this discussion that Johnson's lawyers take 40% in fees and expenses, or $115.6 million. That leaves him with $23.4 million net compensatory damages and $150 million in punitives. 

   That leads to the second problem: taxes. Compensatory damages are tax-free, so Johnson keeps his full $23.4 million there. And under the "old math," he could deduct the remaining $100 million in legal fees before paying tax on his $250 million in punitive damages. He'll be in the top 37% tax rate, meaning $55.5 million goes Uncle Sam. As a California resident, another $18 million goes to Sacramento. That leaves $95 million. That's a lot less than $289 million, of course. But it's still a pretty nice result, although we're guessing Johnson would rather get to "live" than "be rich." 

   Now here's where the "new math" upends those numbers. Last year's Tax Cuts and Jobs Act eliminates the deduction for legal fees related to punitive damages. So now Johnson pays the same $100 million to his lawyers, but still pays tax on it. That launches his tax bill up to $122.5 million and leaves him with just $50.9 million — less than 18% of the original award! 

  Of course, the IRS is delighted. They get to collect tax on that $100 million in legal fees for the punitive damages twice: once from Johnson who wins them and again from the lawyers who earn them. What's not to like from their perspective? 

  Now finally, here's the good part, at least for you. You don't have to know the first thing about new math to pay less tax. Our tax planning service gives you a pesticide that eliminates wasted taxes, with no unpleasant side effects. So call us when you're ready to save, and we'll see how "green" your garden grows

Holy Taxes, Batman!

On July 23, Batman turned 75! Everyone knows how the billionaire industrialist Bruce Wayne dons a bat-like costume to protect Gotham City from supervillains like The Joker, The Penguin, and The Riddler. But did you know that he's just as resourceful when it comes to fighting The Tax Man, too? Let's use the occasion of the DC Comics character's Diamond Anniversary to see what bat-deductions he can bring to the fight:

• Batman may be a brilliant detective and master martial artist, but he can't protect Gotham all by himself. Dick Grayson was the youngest member of the "flying Graysons" acrobat troupe when a mafia boss killed his parents. Batman took Grayson in as his legal ward, and soon Grayson became "Robin." Claiming Robin as a dependent gives Batman a personal exemption, which would reduce his taxable income by $3,950 this year if Batman's high income didn't phase out most of that deduction. But more important, it lets Batman file his taxes using more advantageous "head of household" rates!

• Batman and Robin live at stately Wayne Manor, an enormous fortress outside Gotham City. Batman's family has owned the home for generations, which means Batman isn't likely to be paying tax-deductible interest on a mortgage. However, he can deduct an unlimited amount of property tax he pays on the home and grounds, including the Batcave. Oh, and the solar panels Batman installed after the mansion was damaged in an earthquake qualify for a 30% solar investment tax credit.

• Alfred Pennyworth is a British actor and former intelligence agent who serves as Batman's butler and best friend. Alfred manages Wayne Manor and cares for the Batcave below. It's not a business relationship, so Batman can't write off Alfred's salary. However, it seems evident that Alfred is required to live on the premises as a condition of his employment — which at least makes his room and board tax-free to him.

• When Robin left for college, Batman decided Wayne Manor was a bit too stately for just Alfred and him. So they decamped to a penthouse high atop the Wayne Foundation building in Gotham City. Naturally, the penthouse includes a secret elevator, leading to a secret Batcave, in a secret sub-basement deep under the building. But there's no need to hide anything from the IRS — it also qualifies as a second home, meaning Batman can deduct interest on up to $1 million of "acquisition indebtedness" on the property, plus an unlimited amount of property tax as well.

• Batman is one of those rare comic book superheroes without actual superpowers. He can't fly, like Superman, or breathe underwater like Aquaman, or transform himself into an invulnerable green humanoid like The Incredible Hulk. (He can't even make plants grow like the Clorophyll Kid!) But he can harness an arsenal of specially-designed bat-themed gadgets and tools. This includes the fleet of vehicles we all love — the Batmobile, Batplane, Batboat, Bat-sub, and Bat-cycle. And it includes a special utility belt to carry the "batarangs" he uses in lieu of firearms (because a gun killed his parents). Batman's "toys" naturally help him fight crime. But they also help him fight taxes — inventing and producing them qualifies for lucrative Research & Development tax credits and Domestic Production Activity deductions!

Billionaire Bruce Wayne understands that smart tax planning doesn't have to mean revealing his secret identity. We can be sure he uses at least part of the savings to fund his fight against the supervillains! But you don't have to be a millionaire crime-fighting playboy to benefit like he does. Activate your bat-signal — or just pick up your batphone and call us — and we'll give you the plan you need to fight taxes you just don't have to pay.

And the Gold Goes To . . . !

If you're like most of us, you've spent at least some time over the past couple of weeks watching the games of the 22nd Winter Olympiad. Who cares if the host city Sochi, a Black Sea beach resort, is warmer than Miami, Florida? 2,800 athletes from 88 countries have traveled to compete in 98 events, and the world is a better place for the fellowship.

Olympic games are famous for sports we don't usually see anywhere else. In the summer games, we get rhythmic gymnastics (dancing with a ribbon), dressage (dancing with a horse), and trampoline (dancing on a trampoline). In the winter games, it's ice dancing (to give you your dancing fix), biathlon mixed relay (dancing on cross-country skis with guns), and curling. (You don't have to appreciate dancing to enjoy curling, but it does help to be Canadian.)

So, in that same vein, what if nations competed for taxes we don't usually see? These would be our picks for medalists in the coveted "weird tax rule" event:

• Bronze: Tethered Hot Air Balloons in Kansas. Kansas levies a sales tax on "any place providing amusement, entertainment, or recreation services." That sounds straightforward enough. But the federal Anti-Head Tax Act prohibits state and local governments from taxing airlines or airport users. How does Kansas apply that law to hot-air balloon rides? Well, if the balloon stays tethered to the ground and doesn't actually go anywhere, it's a taxable amusement. But if it actually flies somewhere, you're off the hook for the tax!

• Silver: Cereal Toys in Canada. Cereal companies know that kids really just want the cheap throwaway toy at the bottom of the box. (Cracker Jack knew that a century ago!) But in Canada, cereal makers have even more reason to add toys to their sugary goodness. That's because they can avoid the usual tax on cereal by throwing a toy in the box — so long as the toy doesn't qualify as "beer, liquor, or wine." (Now that might be a way to sell cereal to grownups!)

• Gold: Cow Flatulence in Europe. When you think of global pollution, you probably blame coal-fired electric plants or smoggy freeways. But the United Nations Food and Agriculture organization estimates that methane from slow-digesting cows accounts for up to 18% of Europe's production of greenhouse gases. (We understand not everyone is a fan of the United Nations, but just trust them on this one — and don't ask for details.) Several European Union nations have enacted taxes on their cows to help keep those gases in check. They range from $18 per cow in Ireland all the way up to $110 per cow in Denmark!

The world is full of unique and sometimes silly taxes. But there's nothing silly about paying more tax than you have to. And that is one competition where you do not want to settle for the bronze! Fortunately, you don't have to train for years to bring home a medal. You just need a plan. So call us now for some world-class savings. And remember, we're here for your fellow teammates, too!

Green Apples

Green Apple

For 20 years now, Apple has blazed a reputation for stylish design and innovative products, creating a near-cult following among fans. Apple's computers appeal to the artists and designers who set so many of today's trends. Their iPod has helped change how the world listens to music. Their iPad has made online content available nearly anywhere. And their iPhone is helping change the way we communicate with friends, family, and colleagues. (Just a few years ago, your mother-in-law didn't have a cell phone. Now she sends text messages and "checks in" on Facebook.)

Apple may be the most successful company on earth. At one point last year, they had more cash on hand ($76.2 billion) than the United States government ($73.8 billion). And Apple is currently the most valuable company on the planet, with a "market cap" (total value of tradeable shares) that topped $590 billion dollars on April 10. (That's right . . . those iTunes you casually download for a buck each have created a company worth over half a trillion dollars.) In fact, Apple's current market cap is more than the gross domestic products of Iraq, North Korea, Vietnam, Puerto Rico, and New Zealand -- combined.

But Apple's most recent annual report reveals the company's genius for creating successful marketing strategies also extends to successful tax strategies. How else would you describe a strategy that lets Apple earn billions and pays less than 10% of their taxable income in tax?

How do they do it? Largely by keeping the money they earn outside the United States, outside the United States. Apple owns subsidiaries in tax havens like Ireland, the Netherlands, Luxembourg, and the British Virgin islands. They helped pioneer the "Double Irish with a Dutch Sandwich" strategy that hundreds of other multinational companies have imitated. Apple even maintains a subsidiary in tax-free Nevada -- the blandly-named "Braeburn Capital" -- to manage that enormous cash haul without paying tax in its home state of California. For 2011, the company paid a worldwide tax of $3.3 billion on $34.2 billion of profit. But one study concludes that Apple would have paid $2.4 billion more without these rules.

Now Apple has become part of the political debate. At the risk of grossly oversimplifying a pretty complicated discussion, Democrats in Washington scoff that taking an extra $2.4 billion in tax last year would have squelched Apple's creativity. Republicans reply that using the cash to grow the business or distribute more dividends to shareholders will grow the economy faster than if it goes to the IRS. Both President Obama and presumed Republican nominee Mitt Romney have called for eliminating corporate tax loopholes in order to pay for lower rates (28% in President Obama's plan, 25% in Governor Romney's). Either way, Apple is likely to become one of the stories -- like Warren Buffett paying a higher tax rate than his secretary -- that come to define this year's campaign.

Taxes always play a part in Presidential races. But this time, with the economy still struggling and the Bush tax cuts scheduled to expire in a few short months, taxes will be even more important than usual. Our job, as November approaches, includes helping you understand just what the candidates' proposals mean for your bottom line. So keep up with these emails -- and if you're curious how any of the proposals you hear about would affect your plan, call us!

2012 Tax Outlook: "Campaign Heats Up"

2012 Tax Outlook: "Campaign Heats Up"

The 2012 presidential election already seems like it's been on for years.  President Obama has proposed to raise taxes on those earning above $200,000 ($250,000 for joint filers), including a new surtax on incomes over a million.  Republicans have pledged to cut taxes in hopes of stimulating the economy.  And regardless of who wins in November, the Bush tax cuts are scheduled to automatically expire at the end of this year.

Since taking office, Obama has offered a variety of cuts for lower- and middle-income Americans.  These include new credits for working individuals, expanded breaks for higher education, extended breaks for homebuyers, and even a temporary sales-tax deduction for new car purchases.  While these changes have made taxes more complicated, they've done nothing to stall future tax hikes for higher incomes. 

The new healthcare reform law actually makes it harder to deduct healthcare costs, and imposes significant new taxes on investment income.  With the federal budget deficit topping $1 trillion per year, many observers see the new healthcare taxes as the tip of a looming iceberg. 

This report summarizes some of the future tax hikes we can expect and offers suggestions for avoiding them where possible.  We look forward to discussing these threats and helping craft the appropriate response!  Email me at Larry@ColoradoTaxCoach.com.

Tax Brackets Stable - For Now!

Washington has extended the Bush tax cuts, effective for two years through 2012, and Congress shows little appetite for raising rates on middle-income earners. This means that tax on ordinary income is currently capped at 33% and 35% for taxpayers in the highest brackets, and taxes on capital gains and qualified corporate dividends remain capped at 15%.  However, budget deficits continue to balloon out of control, and if Congress can't agree to extend cuts, rates will rise automatically in 2013.

If you expect your 2013 income to be significantly more or less than in 2012 (as may be the case if you retire, buy or sell a business, or sell significant investments), consider timing income and deductions for maximum tax advantage.

If you expect your income to go DOWN in 2013, consider delaying income (to subject it to tax at next year's lower rate) and paying deductible expenses this year, to the extent possible.

If you expect your income to go UP in 2013, consider accelerating income from commissions, bonuses, and qualified plan withdrawals (to subject it to tax at this year's lower rate), and delaying deductible expenses until next year.

Itemized Deductions Going Down?

President Obama has proposed limiting the value of itemized deductions to just 28%, even for taxpayers in higher brackets.  This would amount to a "stealth" tax increase and cut the value of deductions for medical expenses, state and local taxes, mortgage interest, and even charitable gifts.

Tax Strategies for Healthcare Costs

Paying for medical care becomes harder every year.  The recent healthcare reform act improves coverage and extends it to more Americans, but actually makes it harder to deduct unreimbursed expenses.  (Under current law, you can deduct medical expenses exceeding 7.5% of your Adjusted Gross Income.  Under the new law, starting in 2013, that floor rises to 10%.)  It also limits contributions to employer-sponsored flexible spending plans to $2,500/year.  

If you're free to select your own coverage, consider choosing a "high-deductible health plan"  and opening a Health Savings Account.  These arrangements bring down premium costs and use pre-tax dollars for out-of-pocket costs, bypassing the floor on AGI.  

If you're self-employed, consider establishing a Medical Expense Reimbursement Plan, or MERP.  These plans let you pay family medical expenses with pre-tax business dollars.  They may even help you avoid self-employment tax.

Audit Odds Still Low

IRS audit odds are increasing, from 1 in 200 returns for 2000 to 1 in 100 for 2009. But your chance of getting audited is still minimal. Don't take low audit rates as an invitation to cheat! But don't let fear of an audit stop you from taking every legitimate deduction you're entitled to.

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, for taxpayers reporting more than $200,000 ($250,000 for joint filers).  This tax may make municipal bonds and money market funds more attractive relative to fully taxable vehicles.  However, the recession 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 currently capped at 15%, even for taxpayers in the highest brackets.  However, beginning in 2013, the healthcare reform act 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%, beginning on January 1, 2013, 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%, effective starting in 2013, 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 property you hold more than 12 months) is currently capped at 15%, even if your regular tax rate is higher.  However, the recent healthcare reform act also imposes a new "unearned income medicare contribution", beginning in 2013, of 3.8% on capital gains for individuals earning over $200,000 ($250,000 for joint filers).  If you have appreciated assets such as securities, real estate, or a business you'd like to sell, consider doing so before new rates become effective.  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.

Uncertainty on Estate Tax

The estate tax actually "died" for 2010.  Washington brought it back to life, with a 35% tax applying on estates over $5.12 million per person.  However, the new system applies only for 2011-2012.  If Washington doesn't act to extend it, the tax reverts to 55% on estates over $1.0 million, beginning January 1, 2013.  This means that smart, flexible estate planning will still be part of most affluent families' plans.

Next Steps

We're sure you appreciate this brief outline of upcoming tax threats.  While smart intelligence is crucial, intelligence alone is useless without the right action.  If the threats 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. Should you have any questions, please email me at 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.

Secrets of a Tax Free Life

I'm so excited to share this news with you!  Several months ago, I was asked to collaborate with some of the top Certified Tax Coaches from all around the country, assembling our best strategies for legally planning for and minimizing your tax burden.

We've all been hard at work writing "Secrets of a Tax Free Life, Surprising Write-Off Strategies Most Business Owners Miss!"  

Would you please consider marking your calendar to buy the book during the third week of January 2012? I'll send you a link as the date gets closer to help you remember.   

Your support would mean a lot to me and help me in my efforts to become a  best-selling author!  

I appreciate your support!   

Thanks!

 Larry Stone

P.S. - We've put together a bonus package for those of you who help us launch the book that day. Stay tuned for details!