Should the Rich and Wealthy get something for paying all those taxes? (Humor)

Dividing Dollars I came across Top 10 'Bad Ideas' for Taxing the Rich and couldn't help but share it.

The premise, how to encourage the rich to pay more in taxes, in a tongue in cheek fashion.  Author Robert Frank summarized some of the "best" suggestions:

1–Naming Rights. Depending on your tax bill, you get naming rights for federal property such as highways, bridges, etc.

2–Frequent Flier Points. One reader wrote: “High income taxpayers would accumulate points based on their tax percentile, which could then be redeemed for the ultimate status symbols: merchandise frankly (yet discreetly) proclaiming the bearer’s high income bracket. Imagine, for example, a metallic Coach tote with a sterling ‘1%’ charm on the zipper, proclaiming that the woman carrying it is in the top 1% of US taxpayers. And what businessperson wouldn’t want the Montblanc half percent pen, with a simple ‘.5%’ engraved in the snowy tip of the pen? Those in the know would recognize and respect these symbols of achievement.”

3–A Parade. On April 15, rich people who paid more than $500,000 in taxes could march down Constitution Avenue and shake hands with the President and members of Congress at the end.

4–Tax the Foreign Rich. We should provide “expedited citizenship” to immigrants who will buy a home for a value of at least $300K-$400K. This will reduce our excess housing stock, bring capital into the country and probably bring in productive taxpayers.

5–Access Passes. The rich would get preferred access to public parks/national museums.

6–Exemption from jury duty.

7–The “Fat Tax.” Impose tax incentives tied to a person’s overall Body Mass Index (BMI), as well as a % change in BMI versus the prior tax year.

8–A telethon. A 24-hour live TV auction offering one-on-one experiences with 1,000 “A-List” Stars of entertainment, sports, business and politics with 100% of proceeds earmarked to help fund a specific U.S. Government program. Experiences might include lunch with the President, a concert with Lady Gaga and helicopter skiing with Will Smith. All proceeds would go to taxes and the stars would revel in the patriotism of helping the government.

9–Rent out paintings and other artifacts from the Smithsonian. “The Smithsonian provides 1,000 treasures that are each available for one-year (or more) rentals at $50+ million (plus shipping) annually to the highest (sealed) bidder,” one reader suggested.

10–Shame. Anyone who agrees to pay a higher tax rate will be exempt from having their names published in the local newspaper. Rich people, after all, hate adverse publicity.

I personally like 2, 4, 6 and 9 :)

Photo:  © Alexandr Denisenko | Dreamstime.com

 

Bagel with or without a schmeer of Tax?

New York City is justifiably known for its bagels - having lived in other parts of the country I can testify that it must be something in the water because they just can't get bagels right in Boston, Charlotte, Tampa or LA. What can't New York get right? How it taxes its famous bagels.

This a a true head scratcher. Buy an unsliced bagel - no sales tax. Buy a sliced bagel - sales tax. Now I know that everyone is looking for sales tax revenue, but seriously? What are they going to do, send in undercover bagel auditors to do a tally of sliced versus not? And what if the bagel is purchased wholesale pre-packed sliced with spread? Since you were not the perpetrator of the slice, are you subject to tax? Or if you offer a knife to your customers, do they need to pay for the privilege?

So if I buy a dozen unsliced bagels its $10.00. If I buy a dozed sliced it is $10.89 (the NYC sales tax is 8.875% made up of (1) City sales tax rate of 4.5%, (2) New York State sales tax of 4%, and (3) the Metropolitan Commuter Transportation District surcharge of 0.375% - making Jersey look like a good deal).

Tax laws are necessary and even good I daresay (I for one appreciate having roads, police, and the army), but smart and reasonable tax policy is needed. This is an example of the hair on the end of the tail of the dog wagging the whole canine.


Thanks to Steven Loeb in our Tax Department for bringing the absurdity to my attention.

Opposing Views on the Estate Tax / Death Tax

USA Today has two stories running today - one Our view on death and taxes: Loopy estate tax policy highlights D.C. dysfunction, and the other Opposing view on death and taxes: End the 'death tax'.  Both totally miss the point that there is a tax as a result of death no matter which way you lean - an estate tax would be assessed immediately, or there will be capital gains taxes to pay for decades to come.

In the first article, they quote a US Senator: "Sen. Jim Bunning, R-Ky., bluntly put it, [George] Steinbrenner "was smart enough to die in 2010."  Really?   Smart enough to die this year?  I am sure Mr. Steinbrenner's family and friends appreciate your comments on their loss.  USA Today then describes why there is no estate tax in 2010, including the recent political battles, and supports an estate tax by saying:

It makes sense to tax inherited wealth, derived simply by having the right parents, at a higher rate than money acquired through hard work or investment. Advocates of repeal rarely say where else they'd get the money to make up the lost revenue, because the inevitable answer is it would come from taxpayers of lesser means.

Ahh, the famous "he who has more must share" argument.

On the flip side, in the second article Rep. Louie Gohmert, R-Texas, takes the position "[t]ime to end the death tax permanently.":

For anyone to reach his hand into a deceased person's pocket and steal is despicable. But, when someone dies and the government steals from the deceased, our laws legalize the theft.

He goes on to tell the story of the family farm that had to be sold to pay taxes.  

Ahh, the famous "how dare they" argument.

How how about a few actual facts to consider.

  • The estate tax impacts around 2% or less of the entire US population (for in depth factual information about who pays the estate tax and how generated look at  the Tax Policy Center "Tax Policy Briefing Book" chapter on Wealth Transfer Taxes).  So for the other 98% of US taxpayers, consider the estate tax  a source of revenue to the federal government that you don't actually have to contribute to. 
  • In 2009, an estimated less than 100 estates with family farms and small businesses were subject to tax - just 1.9% of all taxable estates.  There are current laws to defer taxation of farms and better ones have been proposed (see Family Farms to be Exempted from Estate Tax?)
  • Estate taxes were estimate to generate $13.8 billion in 2009.  The federal government spends $x each year - if estate taxes don't generate part of the income, other taxes will.
  • For more facts, look at Truths about the Estate Tax - Debunking the Popular Myths

And the most important, and most glaringly overlooked fact of all in BOTH USA Today articles - if there is no estate tax there is STILL a tax on inherited wealth.  That tax is the capital gains tax. Let's thing - if there is no estate tax all that appreciation on assets that has disappeared for 98% US taxpayers on a person's death will now potentially be subject to tax on the sale of assets.  An while an estate tax may seem harsh in light of the death of a loved one, consider the nightmare of finding proof of cost basis for assets purchased decades earlier.  For more information about the real realities of no federal estate tax, look at Federal Estate Tax "Death" in 2010 Creates Capital Gains Trap.

A thought - let's abandon rhetoric and look at creating good tax policy.

The Progressive Underpinnings of the Estate Tax

Why is there an estate tax at all?  An interesting article in The Nation "The Plutocracy Prevention Act" explores the ideological underpinnings of the enactment of the federal estate tax in 1916.

A century ago this summer, Theodore Roosevelt gave his remarkable "New Nationalism" speech about the dangers of concentrated wealth and corporate power. After witnessing a decade of financial corruption and corporate malfeasance, Roosevelt called on the nation to "effectively control the mighty commercial forces which they have themselves called into being."

 Hmm, dangers of a "decade of financial corruption and corporate malfeasance" - sound familiar at all?  Madoff and BP come to my mind.

 The article goes on to provide why the estate tax was structured as it was:

Part of his vision was a "graduated inheritance tax on big fortunes, properly safeguarded against evasion and increasing rapidly in amount with the size of the estate." Congress instituted an estate tax in 1916 that was in place until last January. For most of the last century, the estate tax was a single tax rate. A person with $5 million was taxed at the same rate as someone with $5 billion.

While the author is using this history lesson to underscore their support for the newest estate tax legislation (see prior post "Estate Tax News From Washington") where there is a "billionaire surcharge" I find it interesting that the facts and circumstances that gave rise to the estate tax almost a century ago are so similar to those facing us today.

A conversation with Mike Huckabee on Tax Policy

Mike Huckabee Today former Arkansas Governor and Presidential Candidate Mike Huckabee spoke at the Morris County Chamber of Commerce Annual Meeting.  During a round-table session with Chamber's Board of Directors I had the opportunity to ask Governor Huckabee about his thoughts on our current tax system.   Now, I am a self-admitted tax junkie - I am totally fascinated by how the tax system influences the economy and behavior and how little critical thought politicians on both sides of the aisle seem to give to it.  So, I thought to myself, here is an opportunity to see what a former (?) politician would say about tax policy. 

To paraphrase my question:

Governor Huckabee, here in New Jersey we are in the most expensive state to live in and the most expensive state to do business in from a tax perspective.  How is it that the government's share in our work could be productive to our businesses instead of having a dampening effect?

Gov. Huckabee's first answer was to first invite me to move to Arkansas - apparently the tax environment is much friendlier.  But all joking aside, he made some very insightful comments, which I thought I would summarize here:

  • Corporate Tax does not exist. He expressed amazement of the fundamental lack of understanding in the American populations that corporations do not pay tax, they collect tax.  Think about it - when there is a new tax on oil companies, gas prices go up; on food companies, food prices go up; on banks, bank fees go up.  Taxes are a cost of doing business that is passed along to the ultimate consumers of good and services - you and me.  
  • A FAIR tax would jumpstart the economy.  Gov. Huckabee said that he used to advocate a flat tax, but now advocates a FAIR tax.  I have to say I am not a flat tax proponent (it is regressive - affects poorer people more as they must spend dollars on necessities - and anything to address the regressiveness takes away from from the simplicity of a flat tax) and I knew nothing about the FAIR tax until today.  Gov. Huckabee explained it as a tax on consumption - you buy gas, you pay tax; you buy oil to make gas, you pay tax.  It changes the tax from on productivity to one on consumption.  He inspired me to go out and learn more - so more posts will be had on this subject.  I will be visiting the FAIR Tax website today and reading The Fair Tax Book that Gov. Huckabee recommended.
  • Eliminate tax penalties for bringing offshore dollars into the US as an immediate solution to our fiscal crisis.  Right now, if you make money outside the US, you are taxed when you bring it into the US and potentially subject to penalties of 50% or more if you haven't previously reported the dollars.  Gov. Huckabee estimated 130 billion in offshore dollars that US companies and taxpayers won't bring back into our economy because it costs too much.  Eliminate those taxes and billions will flow into the economy from sources other than the US taxpayers pocket.

Gov. Huckabee shared that when he discussed the fair tax with his accountant he thought the accountant would dismiss the idea because it would put him out of work.  The accountant replied that he would like the idea where he could spend his time helping companies build their businesses instead of figuring out what their fair share of tax is. I will read more on the subject and see if I agree.

No Estate Tax in 2010 - What Opportunities Might there be?

 My two prior posts have been about the  federal tax impact for single individuals who die in 2010, and the federal tax impact for married individuals.  In summary the results for singles were not good, and for marrieds were worse – the "death" of the estate tax creates a capital gains "trap" for survivors.  While all this will be moot if Congress does as they have promised and create an estate tax retroactive to January 1, 2010, they haven’t acted yet, and as of January 1, this is the law.

What planning can be done in this environment?

Can you just say “whoo-hoo”; I’ll give everything to my children.  Hold on there – the federal estate tax is repealed in 2010, not the federal gift tax.  Each person still has a lifetime exemption of $1,000,000 – if you make gifts in excess of that in 2010, you will be subject to the federal gift tax at a rate of 35%.

However, the generation skipping tax (“GST tax”) is repealed in 2010.  The GST Tax essentially says that you can only leave up to $3.5 million to grandchildren without paying a separate tax of 55%.  The theory behind the GST Tax is that the government should share in the wealth at each generation.  If grandma leaves everything to granddaughter, the IRS might need to wait 75 years until tax can be collected again.  If assets go the children, the IRS might only have to wait 30 years to tax again.  So, in 2009 you could leave up to $3.5 million to grandchildren without GST tax. In 2010, you can leave everything to grandchildren without an additional tax.  For wealthy families, this could mean a huge amount passing to lineal descendants with the only tax cost(s) being capital gains (click here for an explanation of the 2010 capital gains tax trap for estates).

The estate plan you had in 2009 and will need again in 2011 won’t really make sense in 2010 unless they make the estate tax retroactive.  Do you need to go out and totally revise your plan? Not necessarily.  If you have a terminal situation however, it definitely bears looking at your current plan to make sure it addresses how to plan to minimize capital gains taxes instead of estate taxes.

Gifts to grandchildren may be a winning strategy in early 2010.  Also, for anyone who is terminally ill, a change of an estate plan to leave assets to grandchildren may be a winner as well (although if the estate plan isn’t changed, disclaimers may be able to be employed by the children to a similar effect).  And it will bear looking at the estate plan of anyone who is terminally ill.

 

Image: Danilo Rizzuti / FreeDigitalPhotos.net

"Death" of Estate Tax in 2010 creates Tax Trap for Spouses

My prior post was about the federal tax impact for single individuals who die in 2010 (unless Congress does as they have promised and create an estate tax retroactive to January 1, 2010 – we will have to wait and see if that happens and how it is constructed).

The news for single folks was not good. Mom dying with a $3.5 million estate in 2009 could leave it to son tax free. Mom dying with that same $3.5 million dollar estate, assuming the basis of her assets is $350,000, now creates a  federal capital gains tax of $277,500 for son (or $416,250 if he is in NJ).

The news for married folks is worse. In 2009 mom could leave $100 million (or whatever amount) to dad with no taxes whatsoever – there is an unlimited marital deduction from estate taxes (so long as your spouse is a US citizen). In 2010 only $4,300,000 will pass tax free to the surviving spouse.

The "death" of the estate tax creates a capital gains "trap" - and the “trap" catches assets passing to a surviving spouse that were never subject to tax under the estate tax.

What??? you say. How is it possible that by eliminating the estate tax you are creating a tax for widows and widowers? As I noted, due to the magic of Internal Revenue Code Section 1014, capital gains taxes disappear at death under the 2009 law. Section 1014 creates a “step-up in basis” by stating that when an estate is subject to estate taxes, the cost basis of inherited assets is the date of death value.  For example, mom bought stock for $10, and when she dies it is worth $100.  Dad  inherits stock and sells for $100.  His capital gains is $0 ($100 of value - $100 of basis =0).

However, in 2010 there will be no estate tax, and therefore no “step-up in basis”.  Instead, per Section 1022, Dad can apply $1,300,000 million plus $3,000,000 to add basis to the assets that mom has. How might this work? Let’s say mom has a $6 million estate, made up mostly of the family business she and dad still work in and some real estate. Assume mom has a $500,000 basis in the assets – all that appreciation has been due to increases in value over the years. If mom died in 2009, dad would get $6 million tax free. If mom dies in 2010, and dad sells everything since he doesn’t want to work without his life partner, he only has a basis of $4,800,000  ($500,000 of mom’s basis + $4,300,000 of allocated basis). Since he sold for $6 million, he has $1,200,000 of capital gains. He will owe the federal government $180,000, and if he lives in New Jersey, he will also owe the Garden State $90,000, for a total of $270,000. Remember, had mom died in 2009 when there was an estate tax in place, dad would have owed $0.

It bears repeating that all other concerns aside, this new tax regime where you need to track cost basis over a life time is a nightmare. How do you prove mom’s basis before she died was $500,000? Was every improvement tracked? What documentation will the IRS accept as proof? Will you have that documentation 30, 40, 50 years later?

My next post will address some planning opportunities (every cloud has a silver lining after all) that might exist in this new tax environment.

Federal Estate Tax "Death" in 2010 Creates Capital Gains Trap

Sigh ... I was really, really hoping I would not have to post about what happens to those who die in 2010 from a federal tax perspective.  However, since Congress couldn't seem to get its act together, here is the current 2010 landscape (with the caveat that Congress can act in 2010 and have a retroactive estate tax - but, we will have to see what happens when it happens).

Did you know that the "death" of the estate tax creates a capital gains "trap"?  And that "trap" catches the smaller estates, the ones that under current tax laws have no federal tax consequences on death. 

Assume you are single person with a $3.5 million estate (I will post separately about married couples).  Had you died in 2009, there would have been no federal tax consequences to your death.  If you die in 2010,  there will no federal estate taxes (same as 2009).  However, your heirs will have to pay capital gains taxes (see, there is always a catch).

What??? you say.  I thought death was tax free in 2010.  It is estate tax free, there won't be a federal estate tax.  There will, however, be federal and state capital gains taxes for deaths in 2010. Why??? you ask.  Well, there is a pesky little section of the Internal Revenue Code (1014) that says, essentially - when an estate is subject to estate taxes, the cost basis of inherited assets is the date of death value.  For example, mom bought stock for $10, when she dies it is worth $100.  Son inherits stock and sells for $100.  His capital gains is $0 ($100 of value - $100 of basis =0).  Section 1014 is a neat magic trick - it makes capital gains taxes disappear.  In tax parlance we call this a "step-up in basis".

However, in 2010 there will be no estate tax, and therefore no step-up in basis.  Let's take the same example where mom bought stock for $10, and when she dies it is worth $100.  Son inherits stock and sells for $100.  He now has a capital gain of $90 subject to tax ($100 of value - $10 of basis = $90).  He must pay federal capital gains tax on this amount (15%) and state capital gains tax (7.5% in New Jersey) for a total tax of $20.25 if he is in NJ - or $15 if he is in FL or another state without a state estate tax.  

Notice that when mom died in 2009 with an estate tax in place, son netted $100.  However, when mom dies in 2010 with no estate tax in place, son only nets $79.75. Lets add some zeros - son nets $1,000,000 if mom dies in 2009, but only $797,500 if she dies in 2010.  Now you see how no estate tax is not necessarily a good thing?!

The above is over-simplistic, but it makes the point that the "death" of the estate tax creates a capital gains trap.

One point of "relief" - your estate will be able to allocate $1.3 million to add basis to inherited assets (different rules apply for a surviving spouse) per code Section 1022.  To continue our example, mom's entire $3.5 million estate consists of stock she bought for $10 a share and is now valued at $100 a share.  Her cost basis in her estate is $350,000.  She dies, and the estate has an additional $1.3 million of basis - so the stock now has a total basis of $1,650,000.  Son sells the stock for $3.5 million, creating a capital gain of $1,850,000, which in return has son paying a federal capital gains tax of $277,500 (or $416,250 if he is in NJ).  Remember now, if mom had died in 2009 when there was a federal estate tax, son would have paid $0 in tax.

But the the so called "relief" is a trap too - how are you going to prove basis?  How do you know what mom paid for each stock share?  And if you do know, what about splits, mergers, stock dividends - what is her cost basis in all those?  Tracking basis for assets acquired over a person's lifetime, particularly when the person is now dead, is a nightmare.

Congress has "promised" to reinstate the estate tax to January 1, 2010 - and I think we all know what weight to give to Congresses promises.

My next post will address what happens if mom dies in 2010 survived by dad  (a spouse) - and the picture isn't rosy there either.

More Tax Provisions than the Estate Tax Expiring December 31

Interior US Capitol Building Derek Jensen of Jensen Law Offices reminds us in his blog that the Estate Tax is not the only federal tax provision expiring on December 31 due to Congressional inaction this year.

The estate tax isn't the only tax provision expiring on Dec. 31. Due to congressional inaction 50 tax provisions will expire. Including the annual AMT patch, the deduction for state and local sales taxes, the $4,000 deduction for college tuition, a provision that allows taxpayers age 70-and-a-half or older to transfer up to $100,000 directly from an IRA to charity, the business R&D credit, and a biodiesel tax credit. Many of these provisions require action every year and they are likely to be extended again, but retroactively this year.

As a tax professional I find in mindboggling that Congress, whose constitutional mandate (Article 1, Section 7)is to make and pass tax laws "All bills for raising revenue shall originate in the House of Representatives; but the Senate may propose or concur with amendments as on other Bills" can't bring themselves to do their jobs.  

I know there is a lot going on in Washington, but these tax provisions all have a 1 year life, and Congress knows that they therefore must act on them every year.  It is not as if the tax code is a small deal - it is only the means by which the federal government makes the money they spend.  It is lazy to say "we'll do it next year and make it retroactive" because what if you don't?  How can a person or business plan how to allocate their dollars when the tax laws that share in those dollars are in limbo?  How can a business plan to invest in new research when they can't budget what it will cost them because they don't know if the Research and Development credits will exist? Why should 23 million more American's have to worry if the AMT may catch them this year (or just be surprised by it) because our elected representatives can't get around to passing the annual patch that resets the income levels?

All of us are working harder, doing more to meet our responsibilities - Congress should be held responsible to to make the time to meet their responsibilities and this nonchalance about doing their jobs should not be ignored (like they are doing to the tax code). 
 

 

Tax Deduction for Dependent Pets?

I love animals - I have 2 large and happy labs, and have had a host of cats, dogs, fish, rabbits, guinea pigs and mice over the years.  My dogs are truly family members and I am not sure they don't think they are children with furry coats.

Apparently U.S. Rep. Thaddeus McCotter, R-Mich., also loves pets, because he has sponsored the The Humanity and Pets Partnered through the Years (HAPPY) Act, which would permit an income tax deduction of up to $3500 a year.  Seriously - this legislation is being put before Congress.  As an opinion piece from the Press of Atlantic City points out "With 62 percent of American homes owning a pet, that bill could cost a lot of tax money at a time when the federal government can least afford it."

A pet owner who can't care for his or her pet is heartbreaking - the op-ed piece shares the story of an elderly couple who had to turn in their German Shepherd for adoption because they couldn't care for him.

Unfortunately our tax woes go beyond our pets. It saddens me that congressmen waste their time issuing legislation that has no chance of going anywhere instead of looking at the real fact that our government spends more money then it takes in.  As in small business owner will tell you, that is a recipe for disaster. 

So Congress, get real and spend your time on legislation that addresses the fact that the elderly couple above couldn't afford to feed themselves, much less their dogs.

And for you pet lovers out there like me, take a page from the Atlantic City Press and donate pet food to a local food bank - Fido, Fifi and their owners will thank you (woof).

Image: freedigitalphotos.net

Obama Needs to Turn to Taxes

Tax Forms for ConcernIn reviewing the Obama administration's first 200 days, CNN Money correctly predicts that the next 200 days will bring and shift to taxes.  Regardless of where we end up on health care, where is all the money going to come from for all the hundreds of billions ($X00,000,000.00's) that have already been spent?
 

Some thoughts:

  • New Health Care cost related taxes will be in the works - somebody will need to pay.  Could be reduction in itemized deductions for certain income earners, surcharge to income earners, additional taxes to insurers, or reduction of the tax free nature of employer provided benefits.
  • Extend the estate tax for at least one year at the current levels of $3.5 million exemption per person and 45% maximum bracket.  They won't let the estate tax expire in 2010.  The question is if they will push one year, or just make it permanent at existing levels to not have to address again in 2010.
  • Closing "Corporate Tax Loopholes" - This may be combined with a rate reduction.  The thought is the certain provisions make it less expensive to operate offshore.  The goal would be to make it more expensive to operate offshore, but create an incentive to operate, and thereby employ in the US, so the tax revenue effect may be flat.