May 19

Self-Directed IRAs

Submitted by Chris Moss CPA

A self-directed IRA is just what the name implies, you as the investment manager of the IRA determine the investment strategy for the funds.  When will you most likely benefit from a self-directed IRA?  Perhaps you are 50 yrs. old and just left a job where you and have a 401 K with about $500k – $1M invested in a typical brokerage account well diversified into stocks and bonds.  Real estate has already hit bottom in your community and starting to rapidly appreciate in value. The stock market on the other hand is at an all-time high and you are concerned there is a major correction ahead.  If you were to roll your retirement  into a self-directed IRA and purchase for cash a $500k rental property then you could receive rental income tax-free.  Eventually three years later when you are 53, you sell the property for $1M and that gain would also be tax-free.  You now have converted $500,000 into a $1M tax-free asset.  You can now take that self-directed IRA and roll into a more traditional stock and bond brokerage account like you had before.

Another example would be for you to purchase an entire business with your IRA funds, like a fast food franchise or Car Wash for $1M.  The IRA would pay the bills of the business and receive the income from the business.  There would no tax on any profits of the business since the IRA owned the business.  In this example, 5 years later, the business is sold for twice what you paid or $2M.  There is no tax on the $1M profit since the investment was owned by the IRA.

You are now most likely asking this question:  How do you create this self-directed IRA?  There are many banks and financial institutions that will act as your custodian and create these accounts.  The entity of choice in 2013 is a single member LLC to hold the IRA assets and investments.  In my opinion this would also be best practices for tax professionals who structure these entities. In a typical LLC structure,  the IRA becomes the owner, you are the manager, and the financial institution is the custodian.  Structuring the LLC in this way allows for simple owner control. Funds flow easily to purchase the alternative assets like real estate and businesses as the single member LLC gives you what is called “checkbook control” of the IRA.  What that means is with this set-up, you make all investment decisions and carry them out at the LLC level.   As an added benefit, you avoid the transactional fees involved with running every investment decision through the custodian
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Sounds easy but not so fast. Beware of prohibited transactions as detailed in IRS Section 4975.    For example you cannot directly or indirectly personally benefit from any transaction nor can your family.  So if the business you purchased retained the services of one of your family that might cause the IRA to become taxable in the year of the prohibited transaction.   Or let’s say your rental property purchased by the IRA rents to one of your family.  That is a prohibited transaction and the entire investment becomes taxable that year.   Also prohibited via Section 408 is the purchase of collectables–art, stamps, coins, antiques, metal or gems as well as life insurance contracts.  Oh, one more prohibited transaction worth mentioning here, you can’t personally guarantee a loan, like a mortgage on behalf of the LLC.  In fact on May 8, 2013, the US Tax Court just issued an opinion supporting the IRS on this very issue.  For those who have some free time and want to read the 24 page opinion, I have included the following link:   www.ustaxcourt.gov/InOpHistoric/PeekandFleck.TC.WPD.pdf

There are quite a few of these prohibited transactions to stay clear of that we have not mentioned here in this blog, so it is important to review all your investment strategies with a tax professional such as a CPA or attorney.  Make sure to ask the professionals for a written opinion letter stating that the proposed investment is not a prohibited transaction as defined by the IRS Code.  As you could see from the above tax court case, failure to obtain the legal advice in writing assuring you that you are in compliance can be very costly indeed.

Thanks for visiting. Kindest regards from Chris Moss CPA your Tax and Financial ProfessionalsCPA

Mar 14

Payroll Audits

Routine Payroll audits are conducted each year by the IRS and State revenue agencies to primarily determine if independent contractors should be reclassified as employees.   But according to the Wall Street Journal not only is the IRS increasing their “crackdown” on small business, but “more small businesses are finding that independent contractors are essential to remaining competitive.”  WSJ March 14, 2013.

So how do you make sure the IRS will find your independent contractors to be “independent” of your control and not employees?

First and foremost, longer term independent contractors need to have Federal ID #, a business address with a business trade name and be issued a 1099.  That is not to say the Joe Smith the electrician who provides you with monthly maintenance service on your wiring has to go out and jump through all these hoops.  But it would sure make a more convincing argument to the IRS if you should be unlucky enough to be audited.  Also make sure Joe is licensed by the county or city.  It surprises me how many small business owners fail to get a copy of the independent contractor’s business license.  Go ahead and show the IRS Joe’s business license and watch the IRS agent smile saying very good.   The license is particularly helpful when the audit takes place years later and Joe has long since left the area and cannot be located.

Furthermore, it sure helps your cause with the IRS if the independent contractor is not paid every two weeks with the same amount just like your payroll pays your employees.  Require Joe to invoice you monthly just like all the other vendors on his stationery.  Pay Joe the same time you pay all other vendors and issue the check payable to the business name and business address.  Do not provide Joe a place to work, a desk or office space without a lease for space.  In fact all independent contractors should ideally have written agreements with you the customer stating the scope of work, how they will be paid, and that the work is being performed by an independent contractor not an employee.  There should be a paragraph in the contract that states the independent contractor has adequate insurance for his car, truck, equipment as well as liability insurance.  In addition, if workers comp is required by state and Federal law, the independent contractor should provide evidence that he is covered and has covered any of his employees or workers.  Finally keep a list of some of Joe’s present and past customers to prove to the IRS that your independent contractor was not earning all his income solely from you. 
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Unfortunately, even if the IRS gives you a clean bill of health, if a state taxing authority audits after the IRS finishes up, there could be a very rapid change for the worse.  That is due in many cases to unemployment compensation issues at the State level.  For example, you have five long-term independent contractors working for you.  One of your independents Martha suddenly gives you 30 days’ notice as required by the contract that you both signed.   After the IRS cleared all your independents in a recent payroll audit you get a friendly state auditor knock on your door claiming that Martha had made a claim for unemployment insurance which you only now begin to remember.  You had opposed the claim stating that Martha was not an employee, but states are sometimes inclined to give unemployment compensation to an independent who appears to have had a long-term relationship with the company and was under a certain degree of control. So in this case Martha was granted unemployment compensation.   Sorry to say, unemployment compensation trumps everything.  Now for the really sad part, the IRS then comes back and reclassified everyone performing similar duties based on this one unemployment case and the degree of control that you exercised over Martha.

Needless to say, this is a very complex area of law.  Consult your CPA/Attorney for further advice, but don’t delay on this one.  The IRS is charged with collecting tax revenue and they do a very good job at it.  Be prepared and be ready.

 

Feb 01

WW II vs Form W2

The Humble W2

Days after President Roosevelt signed into law the “Current Tax Payment Act of 1943” 60 million Americans were instantly introduced to withholding on wages. Forced withholding was sold to the American people as a war-time emergency, a temporary radical loss of freedom to collect maximum revenue from the maximum number of taxpayers.  How dramatic was the effect of this new law requiring withholding on wages?  From 1943 to 1945, in just two years United States revenue collection increased from 7 Billion to 43 Billion with 60 Million new taxpayers all receiving  that strange new tax form called the W2.

Fast forward to 2016.  The major costs of government is now domestic entitlements.  Wars are not expensive.  Yes you heard correctly.  Wars are not expensive.   If you hear from anyone that the cost of wars is the reasons for our ever expanding National Debt have them look at the numbers below.

Costs of Major U.S. Wars, 1775-2013     In todays dollars    % of GDP

American Revolution 1775-1783    2 Billion    N/A

War of 1812 1812-1815      2 Billion    2

Mexican War 1846-1849   2 Billion  1

Civil War: Union 1861-1865  60 Billion  11

Civil War: Confederacy 1861-1865  20 Billion  N/A

Spanish-American War 1898-1899  9 Billion   1

World War I 1917-1921  334 Billion 13

World War II 1941-1945  4 Trillion    36

Korea 1950-1953   341 Billion    4

Vietnam 1965-1975   738 Billion   2

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Iraq 2003-2010    784 Billion  1

Afghanistan 2001-2010  1 Trillion    1                                 

In todays dollars only WW II was a significant cost as a percent of GDP.  The Government back then borrowed the money to pay for the war.  But then paid back that borrowed money with increased tax revenue.  You might say the W2 form in 1943 saved the day back in the day and ushered in a rapid pace of growth, prosperity and American prestige around the globe as the nation headed into the 21st century.

What will save us now in 2016?  With annual trillion-dollar deficits and national debt approaching unthinkable $20 trillion this year, how is the US Government going to “collect “ more funds from a shrinking tax paying base to pay back all the borrowed money the Government used to pay for the entitlements. Is there another W2 type of scheme waiting in the wings?  I believe there is.

Imagine a time soon in the not too distant future, where all income will be subject to “forced wtihholding” through the use of a SUPER W2.  The SUPER W2 will not just be a form, but will be imbedded electronically with all sorts of information unique to each American taxpayer.  Income subject to withholding on this SUPER W2 will include royalties, interest, dividends, capital gains, passive and active K-1 income and any other type of miscellaneous income imaginable.   Who will get hit with the SUPER W2?  Some folks will have automatic withholding because they were on bad boy lists of American taxpayers who previously had been audited.  Others will be wrongly fingered into the withholding pool of high risk taxpayers.  Millions of Americans will be subjected to arbitrary forced withholding simply because these Americans might live in a certain demographic area deemed to be high risk.   At the end of the day, almost every American will be forced on the SUPER W2.   While a few years ago this kind of Orwellian scene would have been unthinkable, the SUPER W2 scheme will be sold to Americans as an emergency measure to allow the nation to survive well into the 21st century and beyond.  Many Americans will be told it is the only way to preserve the freedoms that millions of Americans in the past have died to give us.  The government sponsored ads will say  “the least you all can do is to pay more tax  by volunteering for SUPER W2.”

In conclusion, due to out of control Government spending on domestic entitlements there is the possibility that in the not too distant future the humble W2 may grow and morph into  a universal SUPER W2 on all income no matter what the source.  This SUPER W2  could be perhaps the most invasive intrusion by the US Government into the private financial affairs of its citizens in our two hundred fifty year history.

 

 

 

 

 

 

 

 

Jan 01

State Income Tax Reform

There has been a lot of discussion by State revenue departments lately about how income tax reform at the Federal level will have uneven and unpredictable effects at the State level.  However, some savvy proactive States have dramatically lowered income tax or eliminated income tax entirely. These tax-free States are years ahead of the Federal tax reformers  and are sending a wakeup call to the rest of the States to move forward with their own tax reform as soon as possible.

Many States are just starting to see that Federal income tax reform will cause havoc on state revenue collection.  For example, some of the Federal reformers want to eliminate certain write-offs.   If mortgage interest and charity deductions were not tax-deductible at the Federal level, States that allow these deductions to taxpayers would be in a bind.  Politics aside, a State that disagreed with the Federal elimination of mortgage interest and charity deductions would have logistical nightmares to convert the Federal AGI and Net Income to State net taxable income.  California for example uses Federal itemized deductions to compute net taxable California income.  If California would follow these proposed changes in Federal law, taxpayers who live in California will be hit with both Federal and State tax increases.

There are many folks in California far from wealthy, who would get particularly hard hit with Federal tax reform.  Lets take Mr and Mrs Smith and their three dependent children. The  Smiths make $100,000 per year W2 income and have $20,000 of interest on a mortgage and give $5000 to charity.  In 2012 they pay to the IRS $4,361 and to CA $1,357.    If Congress eliminates the mortgage and charitable deduction, the Smith Family pays $6,499 to IRS and $2,692 to CA.  This is a 49% increase in Federal tax .  However California increases Smith’s tax by 98%. Go around the country and each State will be somewhat different, from no effect at all to dramatic increases.

Anais Brasileiros buy viagra italy view for more info now de Dermatologia. 85(3):355-60, 2010 7. It does this by permitting a more prominent blood stream into the penis when a man is not ready to accomplish suitable erection in the genital part while making physical association viagra online from india with his accomplice. It adversely hampers price of viagra tablet the prominent synchronization of the mind, body & soul. If your symptoms do not improve or if low priced cialis they become sensitive to light, they tend to lie in a quiet dark room which is also away from sounds. Would California change their entire tax infrastructure to “add back” mortgage interest and charity donations, even though the IRS now excludes these  deductions?  How many years would the California legislators take to fix this problem?  Other States that “piggyback” on exactly the Federal taxable income would be in even a worse predicament.  Would those States change all their tax laws and computer programs to in effect ignore federal tax reform?  No one can answer that question with certainty.

Another question to ask: Would Congress lower tax rates sufficiently to offset the charity and mortgage write-offs?  Again no one really knows.  However, if history is any guide, once deductions are eliminated, tax rates will always over time creep back up.  This is exactly what happened back in the 1980s during the Reagan tax reform movement.  The Tax Reform Act of 1986 lowered most income tax to a top rate of 28% in exchange for eliminating a lot of tax loopholes.  But guess what?  Loopholes are back, and tax rates keep rising possibly to 39% or more in 2013.

In conclusion I believe the American income tax infrastructure is so riddled with inefficiency and loopholes that the income tax Code as it stands now needs to be totally scrapped.   A new more efficient tax collection infrastructure needs to be implemented to collect larger tax revenue streams. Real tax reform would look to a national sales tax, a flat tax on income, and perhaps a value added tax on production.   Anything less at the Federal level would cause a political and logistical nightmare for the States. Finally, States that do collect income tax should take note of the very healthy economy of Texas and other tax-free States that have eliminated income tax.  Perhaps true tax reform may need to begin at the State level after all?

Dec 02

Cost Segregation

Cost Segregation is a tax savings strategy that in my view defies logic. The underlying theory supporting Cost Segregation is at best a stretch of the truth, and at worst, an outright deception.  Yet the US Tax Court decided in a 116 page July 27, 1997 opinion that Cost Segregation is legal.  For those who want read the case, here is the link:

http://www.ustaxcourt.gov/InOpHistoric/HCA6.TC.WPD.pdf

So what is Cost Segregation and how can applying it to commercial real estate lower your income tax bill?  The concept started in the early 1970s with the very popular investment tax credit.  You purchase qualified property and you got the credit.  Special accelerated depreciation  rules were  enacted for this investment tax credit property and treasury regulations created a classification for real property called  “structural components”   The more structural components of a building you had, the larger the ITC and depreciation you could take.  Put a mortgage on the whole deal, put little of your own money down, and write off the interest as well.  It was a great deal while it lasted.

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Let’s take a look at an example of how this works.  Let’s say you all purchase a commercial property for $30M (not including land) which has already been leased with triple net tenants prior to completion.  Without the benefit of a Cost Segregation analysis, you would be required to depreciate this baby over 39 1/2 years or approximately $759,494 a year as a write off.  However with Cost Segregation, you are able to write off some of the asset at a much faster rate which could save you millions in taxes over the life of the building.  How much you can write off at the rapid rate and how much tax you can save depends on how sophisticated an engineering analysis you can provide to the IRS.

What are my thoughts?  Congress should simply enact legislation to allow for rapid depreciation of a certain percentage of real property and do away with all this “cost segregation”.  For example, Congress could estimate the average tax savings at the national level of cost segregation.  Then all taxpayers could elect a safe harbor percentage of their newly purchased building for rapid depreciation.   Or in the alternative, Congress could change 39 years of misery into a very acceptable 20 year happy deal.   Very simple, very easy; but that would be too easy and too simple.  And as we all know, there is nothing easy or simple about the United States Income Tax Code.  And one more thing please:  Due to the complex nature of cost segregation analysis consult your tax professional before trying this on your own.

Nov 01

Economics of Tax

Have you been concerned over the rising national debt, now over $16 trillion? Sadly, our children are not as well off as we were. In fact, it appears the 20th century may be on its way to be the Golden Age of American democracy and economic strength. Many politicians say we must cut spending to solve our massive 21st century deficits. But an equal number of economists know that draconian cuts in spending may not be the answer. Republican presidential candidate Mitt Romney has just proposed a massive income tax reform, but tax reform on income tax may not be the answer either. The answer in my view is deeply embedded in “economics of tax,” a quantifiable theory of tax elasticity. Elasticity is simply how a tax behaves once Congress enacts the tax. Analyzing the elasticity of tax can assist the U.S. government to quickly analyze its tax infrastructure, the physical operation set up by Congress to create or abolish a tax, to collect, enforce and adjudicate the collection of a tax and to measure its effectiveness.

Let’s take income tax as an example of how economics of tax works. Americans have always been taxed, but income tax is a relatively new type of tax. In our 236-year history income tax has only been around since the early 20th century. Indeed, excise and sales taxes were the only taxes we had for a hundred years. Economics of tax asks: Is it possible that the culprit in our increasing national debt is the income tax?

If we take the income tax as a percent of GDP we will see that after World War II, tax collections for the last 60 years have been constant. However, as GDP rises so should tax revenue. If GDP rises with tax collections we have an “elastic” tax.  When GDP rises and tax collections remain constant, than we have what I call an inelastic tax. If the current income tax is inelastic, tax collections will not increase with GDP, causing massive annual deficits as we are experiencing now. Income tax has a very low elasticity score. On the other end of the spectrum a national sales tax has a very high elasticity score. Therefore, if Congress developed infrastructure to support different types of taxes perhaps tax collections would  rise  with GDP.  For example, let’s take a more flat and lower income tax of say 10%  and combine that with a national sales tax of say 10%.   I believe this combination of taxes would raise sufficient revenue to begin to wipe out the deficit and keep our current spending levels within annual balanced budgets. Even the national debt could begin to be over time paid down with a national sales tax supplementing a reformed income tax.

To those critics who contend that we would then sacrifice tax fairness, I ask this question: Are we as a nation willing to sacrifice a progressive rate structure of taxation in order to allow for continued high spending levels for entitlements and dramatically higher tax collections while wiping out annual trillion-dollar deficits?  Like it or not, history shows there was never any fairness of tax in America. In the late 18th century and for almost another 100 years, the only taxes we had were sales and excise taxes. American taxes are not constitutionally mandated to be fair and economics of tax theory finds no basis for a progressive rate structure once the tax in question becomes inelastic.

In conclusion, short of dramatic immediate cuts in government spending, Congress must consider changing  our national tax infrastructure to allow for collection of different types of elastic taxes to increase annual revenue collections and to raise sufficient funds to better fit the 21st century American lifestyle. We must do this or face the possibility of a national financial disaster of such magnitude that our nation may never attain again the Golden Age of the 20th century.
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Oct 01

Income Tax Planning and Restructure Analysis

“Restructure Analysis” comes into play during routine individual income tax planning throughout the year. It could involve review of a specific tax position or may include review of multiple tax positions involving interrelated returns over a period of many years.  The goal of Restructure Analysis is to rebuild or restructure a tax position to legally reduce tax liability and at the same time bullet proof the strategy from harm in the event of an IRS audit.  To give you an idea of how Restructure Analysis works let’s take for example, a hypothetical common tax position and find through structure analysis a tax strategy to help reduce tax liability.  For example, your tax professional determines you have lots of nondeductible passive losses from real estate rentals.   Your CPA then commences a restructure analysis regarding nondeductible passive losses.  The analysis shows you that investing in some businesses that generates passive income and positive cash flow may be just what you need to offset those losses.

But before you go out and invest your money, your tax attorney discusses with you as to what passive income is not.  Passive income is not dividends, interest, royalties and capital gains.   Passive income is not W2 or 1099 earnings and it is not 1099R retirement earnings.  Passive income is also not partnership guaranteed payments and it is certainly not gambling winnings.  Passive income is only one type of income:  It is income earned by you the taxpayer with no “material participation” in the business that pays you.

Most taxpayers at this point become very interested in this kind of business that generates real cash, offsets rental losses and requires no work at all to earn this money.  Unfortunately, a small number of taxpayers out there over the years have attempted to “create” passive income in order to trigger passive losses” and have not quite followed the rules.   As a result of these bad boys, the IRS looks closely at passive income to determine if the taxpayer truly did not materially participate in the business.  And this brings us to the key question:  What is material participation in a business?   Your tax preparer will present to you a checklist of questions for you to answer to help you decide whether or not you materially participate in the business.  The checklist will include questions like the following:

  1. How many hours during the year did you work in the business?  500 or more.  You are toast.

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  2. Did you work more than 100 hours and no one else worked more than you?  You are burnt toast.
  3. Did you do most of the work?  For example if you are sole proprietor with no employees you are not a passive activity even if you only worked 45 minutes the whole year.

There are more questions and more answers so you need to have your CPA go over with you totally bulletproofing your tax return by answering all the checklist questions before you file and sign that return.  To give you an idea how critical bulletproofing is, the IRS routinely Goggles you during an audit to see what the internet says about you regarding material participation.

Are there any safe harbors? As a matter of fact most limited partners or LLC limited members are viewed by the IRS as passive investors.  Ironically, many of the K-1s I have seen from these kinds of partnerships tend to show losses.  If you have some of those investments or plan to acquire in interest in them, then you should structure the investment so that the K-1s shows plenty of passive income, not losses.  With this structure and a fully completed check list prior to filing the tax return,  there would be absolutely no doubt that this income qualifies as the passive income we have been searching for.  As a result of this relatively simply restructure analysis of a common tax position, you have created a legal tax strategy allowing you to receive tax-free income for years to come until your losses are fully offset.  More importantly you can sleep at night knowing that the tax strategy you have chosen has been fully bulletproofed prior to filing your tax return.  By the way, since each taxpayer’s tax positions are unique to their situation and circumstances, please consult your tax professional as to your specific tax position and strategy before attempting restructure analysis on your own.

Sep 01

US Income Tax Code Obsolete

After almost 100 years US income tax collection has evolved into a complex set of laws that very few of us understand.   How did this happen?  Generally speaking the United States had no permanent income tax until the early 20th century.   Collection of the tax was a simple matter and so was the tax law.   In those days every American knew that tax collected was to pay for World War I.  The National Debt would rise and the tax collected by the government was then used to pay down the National Debt.  But there have been a lot of wars since World War I coupled with a lot of growth in the government bureaucracy and entitlements.   As the government raised tax rates to collect more revenue, tax law would change as well, with hundreds, if not thousands, of pages of new tax laws being created annually as each administration would add and delete tax law provisions in the code.

Fast forward to 2012.  Now a days when we file our tax return and pay our tax, nobody has a clue where the money goes.   All we hear about from each new administration is the need for “tax reform”.  The sad truth today is that no matter how much the tax code changes the system has become corrupted beyond repair.  As a result, revenue collected by the government has been unable to keep up with the costs of running the government. By the way, there is continuous talk about cutting our spending.  That will certainly help.   But as long as Americans have grown accustomed to a life style that the US Tax Code can not accommodate, there will always be annual deficits and a mind-boggling National Debt.  The US Tax Code has in effect become obsolete.

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What is the solution?   Eliminate the credits, exemptions, deduction and subsidies from the behavior-subsidy tax code, reduce the top income tax rate to about 15 percent for everyone and create once again a true income tax system.  Add to that true income tax system a National Sales Tax of  about 5 percent and a Value Added Tax of about 5 percent, eliminate the corporate income tax altogether and we might start to generate enough money to pay our bills.   A brand new recipe for financial stability is going to take bold and dramatic change.   If you agree the income tax as it presently is being administered by the government is obsolete, you can make a difference; Let your elected officials hear from you, the sooner the better.

Aug 03

Accounting Shutdown

Would you invest 30% of your income each year in the stock market without you or your broker reviewing financial statements of the businesses you are investing in?  But that is exactly what you do when you file your annual Federal income tax return and pay tribute to the US Treasury. You send money to the IRS  but never receive audited financial statements back from the government explaining how your tax  contribution was spent.

I believe it is reasonable and prudent for taxpayers to require the Government to produce audited financial statements for each of the major federal agencies that are funded with taxpayers money.   But no such statements exist. I actual found the screenplay for this mystery thriller entitled “Accounting Shutdown” with a Top Secret classification.  So if you all can keep a secret it goes something like this:

The plot begins with the passage of Government Management Reform act of 1994.  This act required Federal agencies to produce audited financial statements by 1997.  No such statements could ever be found.  The scene shifts to the House Congressional hearing in March of 1999.  The Committee of Government Reform chaired by Dan Burton of Indiana reports that of the 24 largest Federal agencies only two received an A grade in their accounting systems.  With billions of dollars missing and unaccounted for many of the Federal agencies received Ds and Fs in their accounting systems.

Now fast forward to December 21, 2010.  Gene Dodaro, Acting Comptroller of the US Government Accountability Office says he cannot render an opinion on the 2010 consolidated financial statements of the federal government, because of widespread material internal control weaknesses, significant uncertainties, and other limitations.  Mr. Dodaro went on to say that 19 of 24 major agencies did not get clean opinions on all their statements and billions of dollars were missing or unaccounted for.
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One only can wonder why is it that over ten years after the passage of legislation requiring audited financial statements for Federal Government agencies we still cannot produce them.   Many will say that the Government is too big or too complex to account for all the money it spends.

But in my view, there is a more sinister twist to this story:  Many if not all of these Federal agencies have taken a life of their own, independent of the nation’s citizen stockholders, and have in effect become unaccountable to the American people.  Playback to a few years earlier:  David Walker, CEO of the Peter Peterson Foundation and former Controller General of the United States makes a surprise cameo appearance on the set.  His one line:  “Unfortunately, once federal programs or agencies are created, the tendency is to fund them in perpetuity.”

And then the surprise ending: A lone American taxpayer says, as she fades in the sunset: “Unless we can review and analyze the financial condition of the various Federal agencies, we will never be able to assess whether an agency is cost-effective and warrants continued funding.  Let’s avert the “Accounting Shutdown” and have full accountability in each Federal agency that is being funded with our tax dollars.”

Jul 01

Alternative Minimum Tax Nightmare

The Alternative Minimum Tax is never fun.  It is, therefore, ironic that the AMT was never thought of by Congress as “not fun”. In fact, the AMT was nothing more than a fun tax the rich scheme back in the day; not all the rich mind you, just a few hundred rich folks that legally paid no tax.  It was a feel good kind of tax that most of us would appreciate back in 1969.   But today in 2012,  you are rather shocked; You wonder why Congress would punish wealthy people for tax planning successfully?   Yes indeed, the legislative history shows that AMT was an attempt to neutralize superior tax planning by a very few wealth individuals enabling them to make lots of money and pay no tax.

But that’s not how the Joint Committee on Taxation saw it during a presentation in 2007 to the Senate Finance Committee.  The JCT says the AMT evolved from the Tax Equity and Fiscal Responsibility Act  of 1982.  That is simply not true.  A very basic “minimum tax” was created in the Tax Reform Act of 1969 when Congress discovered a few folks who made over $200,000 a year (a lot of money back then) paid no tax.  That tax was repealed in 1982 and replaced with a new set of rules that somewhat resembles what we have today.  The key point is that in 1982, unlike 1969,  Congress changed the law from a tax on a few hundred to a tax on potentially millions of Americans, many of them not so rich.  And that is not a fun tax at all, that is a tax nightmare.

The Reasons behind a Man’s Inability to gain and sustain an erectionduring sexual stimulation. look what i found sample generic viagra If it is just rain, then it is tadalafil 10mg uk a different story. The age-old ayurvedic medicine for premature ejaculation, shilajit gold has astounding effects and naturally cialis levitra online cures male sexual dysfunctions. But the sacrifice is free sildenafil samples worth it if it saves your time as well as energy. But in your case you feel you are not even close to being rich?  So what is to worry about?  You are solid middle class.  You make about $100,000 a year working as an engineer for a local contracting company and your wife makes another $100,000 working for a local college as a college professor.  You have 3 kids and a nice house with a second beach home in a high tax state.  You have a lot of expense that you incur for which you are not reimbursed by your boss and have the obligatory 3 cars that incur personal property tax.   And now for the bad news: Unless Congress creates what they call a “patch”, the AMT is going to hit you big time.    In its wisdom of insanity,  Congress says that if you have kids, pay real estate tax on homes, cars and boats, make hard earned wages and incur expense in your job you are not reimbursed for, you have been chosen by your elected officials to get hit with AMT.  On the other hand if you have no kids, pay no state income tax, rent and do not own homes, and make all your money in dividends,  even if  over $20,000,000 (Twenty Million) from investments, then Congress in its wisdom of insanity says you are exempt from AMT.

What can you do now?  Use the Chris Moss now or later philosophy.  If you have a choice, pay tax later rather than now.  Because you just never know what the future may bring.  So make sure you plan to pay that state tax perhaps in 2013 rather than have it withheld from your paycheck now.  Perhaps pay that late fee on your real estate tax so that you pay it late in 2013 not 2012,  Keep deferring the dreaded AMT until later years hoping Congress will create the patch to fix the AMT.  Paying tax later is always better than paying tax now, especially when we know the Alternative Minimum Tax Nightmare is headed our way,

Jun 01

IRA to ROTH?

I have a very simple mantra when it comes to paying taxes:  If you can chose to pay tax now or later, always choose later.

For example, if you own a rental property with a low basis, take advantage of Section 1031 and transfer the potential tax liability to an unknown future date by exchanging this property for a new one under Section 1031. I would advise you to just keep doing that as long as you can do it because in life you just never know what is going to happen in 20 years from now. You just never know.

The Mantra is not absolute but just about any tax is better to pay later than now.  So I just have trouble understanding why so many taxpayers convert their IRA to Roth or the 401k to 401k Roth.   Conversions to pay tax now rather than later seem to very problematic and counter intuitive.  Not only does this conversion reverse the Mantra, but the tax savings benefit that is hoped for may not materialize until twenty years down the road at retirement or perhaps never. I explain as follows:

You are 35 years old married two children making $400,000 annually with mostly W2 income and a few LLC startups which could evolve into FLPs (family limited partnerships). Your financial advisor says convert your $100,000 IRA now while you are young to a Roth because then all the tax-free growth will be after tax dollars. You convert. When you go to your tax preparer, you find out on a $100,000 conversion you pay $40,000 in tax. Ouch! But then you start feeling better knowing all those tax-free accumulations will be withdrawn someday, let’s say 20 years from now after tax. You sigh relief knowing you made right choice by paying tax now to avoid paying tax later.
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I am the same age and I didn’t do that conversion because I believe in the Mantra. I kept my money in that IRA or my office 401k because I believe it is always better to pay tax later than now.  How can anyone know what the tax rate will be twenty years from now?   I can tell you that laws change all the time.  Who ever thought that itemized deductions would be phase out free in 2011?  So phase outs, rates, and all the other laws you can throw at me will absolutely change if not every year than every few years as new Administrations come and go.   An IRA deduction gives me, an immediate tax deduction at a rate I can compute here and now, with an immediate tax savings. So for the next twenty (20) years I get annual tax deductions, you don’t.  By the way, I took the $40,000 in tax that you paid to the IRS when you converted and I invested that $40,000 in real estate. During the next 20 years that real estate doubles in value. You have nothing since you gave your $40,000 to the IRS.

20 years from now I have $1,000,000 in my IRA; you have $900,000 in the ROTH. Assuming we both invested equally, I have more because I had more to contribute since I didn’t get phased out as much as you.  But most important I took that $40,000 in extra money I had in my pocket because I deferred the tax to later, and I invested that money in Real Estate.   But you don’t care because you smell the taste of victory. I have to pay taxes on every dollar I draw out, you pay no tax. You win, I lose.

You victory is guaranteed; or so it would seem. Because there is one more thing that I almost forgot to tell you: One year before our retirement 19 years from now Congress voted and the President signed legislation to abolish the income tax and replaced income tax with a national sales tax.  You victory vanishes and the Mantra wins.

May 02

IRS Audits Are Easy To Survive

IRS Audits are easy to survive.  Ok, before you all shoot me, I want to prevent you from being shot.  Let’s go over a few basics about the need for good books and records you prepare prior to filing a tax return so you can wear a bulletproof vest and see for yourself how easy it is to survive an IRS audit.

If you think of an IRS audit as an attempt to shoot through your bullet proof vest, you will understand how important good books and records become for you and your family to shield you from harm.  Good books and records extemporaneously prepared prior to filing a tax return are essential to have during an IRS audit.   In fact, I promise you that IRS agents will be impressed and pleasantly surprised if you provide the government good books and records.    It is only with good books and records that you can wear a bullet proof vest with confidence. As an example of how easy and effective bulletproofing is during an IRS audit, we are going to take two very common deductions that cause all sorts of trouble unless there is adequate bulletproofing  before the tax return is filed.

The first is “charity deductions”.  For the taxpayer who has W2 earnings and who itemizes on their annual 1040 tax return, a simple accounting system like QuickBooks or Quicken will be very helpful.   For example, the taxpayer can prior to the audit prepare a profit and loss statement for her personal tax return for the year in question.   When the IRS agent asks the taxpayer for back up for charity deductions, one double-click of that category on the P&L and every charitable deduction will be listed for the year in date order.  The taxpayer then attaches all the letters from the charitable organizations he has received prior to filing his tax return to the print out and simply hands this package to the IRS agent.   The taxpayer is fully bulletproofed and can relax!
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A second example for a similarly situated taxpayer of a deduction that always causes trouble during an audit is “unreimbursed business expense”. But this deduction is also easy to bulletproof as follows:  Simply double-click that category on the P&L and every unreimbursed expense will appear.  Attach to that print out a letter from your boss on company stationery received by you prior to filing your tax return certifying that all these specific expenses were necessary as a condition of employment AND were not reimbursed by your employer.   You can lighten up, you are fully bulletproofed.

For those of you who say “I’ll just wait to get audited and then I will deal with it then….perhaps I will never get audited” I say to you don’t play the audit lottery.  Many audits commence years after the return is filed.   It is much easier to bullet proof your family with a sound structure of extemporaneously prepared books and records before you file that tax return.  Without good books and records you will lose more than sleep if you should get audited, as there are substantial penalties and interest for any deductions that are disallowed.   So do yourself a favor and make sure you bulletproof your family with a good financial structure before that tax return is filed.  Make sure you are bulletproofed for each expense you deduct on your tax return BEFORE your return is filed. Well prepared and bulletproofed you will soon realize that an IRS audit is indeed easy to survive.

Apr 17

Tax Reform Magic Act of 2012

 

As another Tax Day April 17, 2012 rolls by I am always amazed at how complex the United States Tax Code has become. And yes, the Presidential candidates still talk about tax reform in 2012, but can you really take tax reform in 2012 seriously?  Some of you may remember the historic Reagan 1986 tax reform era.  I actually believed in Tax Reform back then.   House Ways and Means Dan Rostenkowski, and Senate Finance Bob Packwood told me that the 1986 Act would be the last major tax reform act ever needed.  They were wrong. Since 1986 seven major tax acts have been enacted under President Clinton, Bush and Obama and the tax code has become bigger and more complex than ever.
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Tax reform in 2012 seems to be the latest color in the fashion world of politics.  It is almost as if the illusion of tax reform is enough to blind us to the grim reality of trillion-dollar annual deficits, $16 Trillion of National Debt and the Trillions of dollars of government entitlements that cause us to live beyond our means as a nation.   Whether we end up with a flat tax, simple tax, low rate or high rate, the Tax Reform Magic Act of 2012 is just an illusion unless we first reform an annual trillion-dollar deficit of entitlement programs we can no longer afford.

Dec 15

Cut Government Not Social Security

Did you all know that the most profitable tax the United States has ever had is the social security tax.  So much so that in the 1990s President Clinton, with the help of an accounting loophole, borrowed Trillions of dollars of your Social Security money to help balance the budget and create artificial surpluses in those years.

Yet Congress is debating as the article is being written whether or not to extend payroll tax cuts for a few more months.  Social Security is broke because the Government took the surplus money from Social Security and now Congress is creating a smokescreen with payroll tax cut extensions.  Nothing could be leading Congress further away from the truth, in fact three truths to be exact:

What are these three truths?

  1. The United States Government has a legal and moral obligation to pay back the money it took from Social Security.
  2. Reducing the size of the Government would save Trillions allowing Social Security to regain full funding and good health.
  3. It will be almost impossible to kill a government agency because the closest thing to immortality we will ever experience is a government agency  ((Ronald Reagan).

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I further speculate that wise politicians who see these three truths are keeping quiet because they don’t want to rock the boat of all the lobby groups and special interest groups who owe their existence to the government running full steam ahead burning a Trillion or so each year in deficit.

But what about a part-time government?  I believe that a part-time government with a full-time military might just be the answer to allowing Social Security to be available to all Americans for many years to come and at the same time dramatically reduce or even eliminate the annual deficit.

But even slowing down government rather than killing it is a lot harder than it looks.  To give you an idea of how hard this will be, ask yourself these questions:   Can you fire yourself? Can you terminate your own existence in the workplace?  If you can, perhaps you can write to your elected officials and the White House asking them to do the same.  Good luck.

 

Nov 07

The Tax Code Is Not the Problem

 

Jenny Sanford’s thoughtful Ed/Op points out correctly that our tax code is complex.  But while the complexity of the tax code can and should be reformed, that is a mere distraction from a true fact that no one seems to want to talk about:

Wars and entitlements are very expensive and we have too much of both regardless of what tax system we end up with.  The fact is that Americans cannot afford the lifestyle to which they have become accustomed.  Peace and frugality are the two easiest steps we can take to balance the budget and restore confidence of the American people in our government.  Once the Federal government stops borrowing money to fund the biggest shopping spree in American history, we can then all hang out at the House Ways and Means and Senate Finance Committee and reform the tax code.  Good luck!

 

 

 

 

 

 

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