October 24, 2012

Watching Out for the Cliff

by Kenneth Hoffman in Business Counsel, Tax Planning, Tax Counsel

Ordinarily, we use these posts to discuss fun items related to taxes and finances. We know that you can read the usual boring articles about the usual boring tax topics pretty much anywhere else. And most of you are happy to let us worry about "the details."

Every so often, though, we need to discuss more serious issues, even if it's just to let you know that we're on top of them. That's the case today with the so-called "fiscal cliff" -- Federal Reserve Chairman Ben Bernanke's clever term for what happens on January 1, when a bunch of current tax rules expire, and some new rules take effect. Here's a quick rundown of what to expect:

The Bush tax cuts expire. That means the top rates on ordinary income goes from 35% to 39.6%; the top rate on capital gains goes from 15% to 20%; and the top rate on qualified dividends jumps from 15% to 39.6%. Much of the debate over tax rates focuses on income at the top. But the expiration of the Bush tax cuts affects all of us. The lowest 10% rate will disappear entirely, and everyone who actually pays income tax will pay more.
The 2011-2012 payroll tax cuts expire. That means Social Security and self-employment taxes go up by 2% on all earned income up to $113,700. Two percent may not sound like a lot -- but it means higher taxes for about 163 million working Americans.
New taxes imposed by the 2010 "Obamacare" legislation take effect. The Medicare portion of Social Security and self-employment taxes goes up from 2.9% to 3.8% on earned income topping $200,000 ($250,000 for joint filers). And there's a new 3.8% "Unearned Income Medicare Contribution" (which sounds so much better than "tax') on "net investment income" (interest, dividends, capital gains, rents, royalties, and annuities) over those same amounts.
The Alternative Minimum Tax exemptions revert back to where they stood in 2000. Under current law, those exemptions aren't adjusted for inflation. So, every couple of years, Congress "patches" the system by temporarily raising the exemptions to where they would be if they were indexed for inflation. The AMT currently hits about 4½ million Americans -- but without the "patch," that number explodes to 33 million.
Oh, and don't think dying solves your tax problem. That's because estate taxes, which currently start at 45% on estates over $5 million, will jump to 55% on estates over just $1 million.

So, January 1 is our fiscal cliff, and we're hurtling towards it like Thelma and Louise. What can we do? Well, plenty of legislators have proposed extending part or all of the Bush tax cuts, extending the payroll tax cuts, patching the AMT, and raising the estate tax exemption. But actually passing anything will be a challenge -- Congress has passed just 132 bills this year, and 20% of those were to name post offices!

The partisan gridlock has many observers convinced that we'll actually go over that fiscal cliff. (Maybe it'll be like those old Road Runner cartoons, where the coyote runs off a cliff and keeps right on going, just fine, until he looks down. That's when he realizes he's standing in thin air, then plummets 1,000 feet to the bottom of the canyon.) If that winds up being the case, we may see Washington wait for the election results and pass something noncontroversial like the AMT patch before the end of the year. Then in 2013 they'll pass legislation extending at least part of the Bush tax cuts and make it retroactive to January 1.

We're not writing today to take sides on any of these issues, or tell you where taxes should go. But we want you to know that we're watching everything closely to help you make the most of your opportunities and avoid land mines where possible. And remember, we're here for your family, friend, and colleagues, too!

Kenneth Hoffman counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how I can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

October 16, 2012

ObamaCare Individual Overview

by Kenneth Hoffman in Health Care, Tax Planning, Tax Counsel

The Patient Protection and Affordable Care Act (PPACA) is getting a lot of press these days and I thought this would be a good time to review some of the provisions that could affect you. While some of the law's provisions have already taken effect, many of the provisions will begin taking effect in 2013, 2014, and later years. This is a summary of some of the more significant individual provisions that may be of interest to you.

Penalty for Not Maintaining Minimum Essential Coverage

The crux of PPACA is the requirement for almost all individuals to maintain minimum essential healthcare coverage (i.e., the individual mandate). Beginning in January 2014, non-exempt U.S. citizens and legal residents are required to maintain such coverage or be subject to a penalty. Once the penalty is fully phased in, individuals who fail to maintain minimum essential coverage are subject to a penalty equal to the greater of 2.5 percent of household income in excess of the taxpayer's household income for the tax year over the threshold amount of income required for income tax return filing for that taxpayer or $695 per uninsured adult in the household.

The per-adult annual penalty is phased in as follows: $95 for 2014; $325 for 2015; and $695 in 2016. The percentage of income is phased in as follows: 1 percent for 2014; 2 percent in 2015; and 2.5 percent beginning after 2015. If you file a joint return, you and your spouse are jointly liable for any penalty payment.

Premium Assistance Tax Credit

Effective for tax years ending after December 31, 2013, the law creates a refundable tax credit, called the premium assistance credit, for eligible individuals and families who purchase health insurance through an insurance exchange. The premium assistance credit is generally available for individuals (single or joint filers) with household incomes between 100 and 400 percent of the federal poverty level for the family size involved.

Additional Hospital Insurance Tax

Beginning in 2013, the employee portion of the hospital insurance portion of FICA taxes is increased by an additional tax of 0.9 percent on wages received in excess of the threshold amount. This additional tax is on the combined wages of the employee and the employee's spouse, in the case of a joint return. The threshold amount is $250,000 in the case of a joint return or surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.

Unearned Income Medicare Contribution Tax

Beginning in 2013, in the case of an individual, estate, or trust, an additional tax is imposed on income over a certain level. This tax is referred to as the "unearned income Medicare contribution tax." Others have referred to it as a tax on investment income, although it can apply to individuals, estates, and trusts that do not have investment income. For an individual, the tax is 3.8 percent of the lesser of net investment income or the excess of modified adjusted gross income over a threshold amount. The threshold amount is $250,000 in the case of taxpayers filing a joint return or a surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.

In the case of an estate or trust, the tax is 3.8 percent of the lesser of undistributed net investment income or the excess of adjusted gross income over the dollar amount at which the highest income tax bracket applicable to an estate or trust begins.

The new tax does not apply to items that are excludible from gross income under the tax rules, such as interest on tax-exempt bonds, veterans' benefits, and any gain excludible from income when you sell a principal residence.

Increase in Medical Expense Deduction Threshold

For 2013 and later years, the floor for taking a deduction for medical expenses is increased from 7.5 percent of adjusted gross income (AGI) to 10 percent of AGI. However, for any tax year ending before January 1, 2017, the floor will be 7.5 percent if the taxpayer or the taxpayer's spouse has reached age 65 before the end of that year.

FSA Limitation

Beginning in 2013, for a health flexible spending arrangement (FSA) to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee, the employee's dependents, and any other eligible beneficiaries with respect to the employee, under the health FSA for a plan year (or other 12-month coverage period) must not exceed $2,500.

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

October 16, 2012

ObamaCare Business Overview

by Kenneth Hoffman in Business Counsel, Tax Planning, Tax Counsel

The Patient Protection and Affordable Care Act (PPACA) has several provisions that will affect you as an employer. While some of the law's provisions have already taken effect, many of the provisions will begin taking effect in 2013, 2014, and later years. Below is a summary of some of the more significant provisions that may be of interest to you.

FSA Limitation

Beginning in 2013, for a health flexible spending arrangement (FSA) to be a qualified benefit under a cafeteria plan, the maximum amount available for reimbursement of incurred medical expenses of an employee, the employee's dependents, and any other eligible beneficiaries with respect to the employee, for a plan year (or other 12-month coverage period) is $2,500.

Employer Mandate

Under PPACA, an "applicable large employer" is subject to certain "shared responsibility" requirements. Under those requirements, an applicable large employer that (1) does not offer coverage for all its full-time employees, (2) offers minimum essential coverage that is unaffordable, or (3) offers minimum essential coverage that consists of a plan under which the plan's share of the total allowed cost of benefits is less than 60 percent, must pay a penalty if any full-time employee is certified to the employer as having purchased health insurance through a state exchange with respect to which a tax credit or cost-sharing reduction is allowed or paid to the employee.

An employer is an applicable large employer for any calendar year if it employed an average of at least 50 full-time employees during the preceding calendar year. An employer is not treated as employing more than 50 full-time employees if the employer's workforce exceeds 50 full-time employees for 120 days or fewer during the calendar year and the employees that cause the employer's workforce to exceed 50 full-time employees are seasonal workers. A seasonal worker is a worker who performs labor or services on a seasonal basis, including retail workers employed exclusively during the holiday season and workers whose employment is, ordinarily, the kind exclusively performed at certain seasons or periods of the year and which, from its nature, may not be continuous or carried on throughout the year.

The penalty for any month is an excise tax equal to the number of full-time employees over a 30-employee threshold during the applicable month multiplied by one-twelfth of $2,000. In the case of persons treated as a single employer under the provision, the 30-employee reduction in full-time employees is made from the total number of full-time employees (i.e., only one 30-person reduction is permitted per controlled group of employers) and is allocated among such persons in relation to the number of full-time employees employed by each such person.

For example, say that in 2014, you fail to offer minimum essential coverage and have 100 full-time employees, 10 of whom receive a tax credit for the year for enrolling in a state exchange-offered plan. For each employee over the 30-employee threshold, you would owe $2,000, for a total penalty of $140,000 ($2,000 multiplied by 70 ((100-30)). This penalty is assessed on a monthly basis. Thus, the monthly penalty would be one-twelfth of $140,000. For calendar years after 2014, the $2,000 dollar amount is increased by the percentage (if any) by which the average per capita premium for health insurance coverage in the United States for the preceding calendar year exceeds the average per capita premium for 2013.

Small Business Tax Credit

PPACA provides a tax credit for a qualified small employer for nonelective contributions to purchase health insurance for its employees. Although the credit took effect in 2011, the amount of the credit increases from 35 percent (25 percent for tax-exempt organizations) of eligible premium payments to 50 percent (35 percent for tax-exempt organizations) in 2014.

Excise Tax on High-Cost Employer-Sponsored Health Coverage

Beginning after December 31, 2017, PPACA imposes an excise tax on certain health insurance providers for any excess benefit provided by an employer to an employee with respect to employer-sponsored health coverage. The excise tax is imposed pro rata on the issuers of the insurance. In the case of a self-insured group health plan, a health FSA or a health reimbursement arrangement (HRA), the excise tax is paid by the entity that administers benefits under the plan or arrangement. Where the employer acts as plan administrator to a self-insured group health plan, a health FSA or an HRA, the excise tax is paid by the employer. Where an employer contributes to a health savings account (HSA) or an Archer MSA, the employer is responsible for payment of the excise tax, as the insurer.

Please call me at your convenience if you wish to discuss these provisions or any other issue regarding employee health insurance.

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

October 16, 2012

ObamaCare Individual Mandate

by Kenneth Hoffman in Tax Planning, Tax Counsel

The cornerstone of the Patient Protection and Affordable Care Act is the individual mandate. There have been a lot of questions and some misinformation about this provision. To help you better understand how this provision may affect you, I'm providing a plain-English explanation of what the individual mandate entails.

Beginning January, 2014, non-exempt U.S. citizens and legal residents are required to have health insurance. Under the law, they must maintain minimum essential coverage. Individuals are exempt from the requirement for months they are incarcerated, not legally present in the United States, or maintain religious exemptions. Those who are exempt from the requirement due to religious reasons must be members of a recognized religious sect exempting them from self employment taxes and adhere to tenets of the sect. Individuals living outside of the United States are deemed to maintain minimum essential coverage. If an individual is a dependent of another taxpayer, the other taxpayer is liable for any penalty payment with respect to the individual.

Minimum essential coverage includes government-sponsored programs, eligible employer-sponsored plans, plans in the individual market, grandfathered group health plans, and other coverage as recognized by the Secretary of HHS in coordination with the Secretary of the Treasury. Government-sponsored programs include Medicare, Medicaid, Children's Health Insurance Program, coverage for members of the U.S. military, veterans health care, and health care for Peace Corps volunteers. Eligible employer-sponsored plans include governmental plans, church plans, grandfathered plans, and other group health plans offered in the small or large group market within a state (e.g., a health insurance exchange).

Minimum essential coverage does not include coverage that consists of certain HIPAA excepted benefits. Thus, if your only coverage is a supplement to liability insurance or is workers' compensation or other similar insurance, you are not considered to have minimum essential coverage. Other HIPAA excepted benefits that do not constitute minimum essential coverage if offered under a separate policy, certificate or contract of insurance include long term care, limited scope dental and vision benefits, coverage for a disease or specified illness, hospital indemnity or other fixed indemnity insurance, or Medicare supplemental health insurance.

If you fail to maintain minimum essential coverage, you are subject to a penalty. The amount of the penalty is phased in from 2014 thru 2016. In 2016, when fully phased in, the penalty is equal to the greater of: (1) 2.5 percent of your household income in excess of an amount equal to your household income for the tax year over the threshold amount of income required for filing an income tax return (for example, in 2011, this amount was $19,000 for under 65 and married filing jointly), or (2) $695 per uninsured adult in the household. The fee for an uninsured individual under age 18 is one-half of the adult fee. The total household penalty may not exceed 300 percent of the per-adult penalty ($2,085). The total annual household payment may not exceed the national average annual premium for a bronze level health plan offered through a health insurance exchange that year for the household size.

As part of the phase in, the per-adult annual penalty is $95 for 2014 and $325 for 2015. The percentage of income is 1 percent for 2014 and 2 percent in 2015. If you file a joint return, you and your spouse are jointly liable for any penalty payment.

The penalty applies to any period minimum essential coverage is not maintained and is determined monthly. The penalty is an excise tax and is assessable and collectible under the Internal Revenue Code and is reported on an individual's income tax return. However, IRS collection procedures (e.g., liens, levies, etc.) do not apply to this excise tax. In addition, there are no criminal penalties for non-compliance with the requirement to maintain minimum essential coverage. However, the authority to offset refunds or credits is not limited by this provision.

Individuals who cannot afford coverage because their required contribution for employer-sponsored coverage or the lowest cost bronze plan in the local health exchange exceeds 8 percent of household income for the year are exempt from the penalty. In years after 2014, the 8 percent exemption is increased by the amount by which premium growth exceeds income growth.

For employees, and individuals who are eligible for minimum essential coverage through an employer by reason of a relationship to an employee, the determination of whether coverage is affordable to the employee and any such individual is made by looking at the required contribution of the employee for self-only coverage. Individuals are liable for penalties imposed with respect to their dependents and their spouse, if filing a joint return.

Taxpayers with income below the income tax filing threshold, as well as members of Indian tribes, are exempt from the penalty for failure to maintain minimum essential coverage.

No penalty is assessed on individuals who do not maintain health insurance for a period of three months or less during the tax year. If an individual exceeds the three-month maximum during the tax year, the penalty for the full duration of the gap during the year is applied. If there are multiple gaps in coverage during a calendar year, the exemption from penalty applies only to the first such gap in coverage. Individuals may also apply for a hardship exemption. Residents of U.S. possessions are treated as being covered by acceptable coverage. Family size is equal to the number of individuals for whom the taxpayer is allowed a personal exemption. Household income is the sum of the modified adjusted gross incomes of the taxpayer and all individuals accounted for in the family size required to file a tax return for that year. Modified adjusted gross income means adjusted gross income increased by all tax-exempt interest and foreign earned income.

I know this is a lot of information to absorb, so if you have any questions please feel free to contact me so we can review your individual situation and how this individual mandate may affect you.

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

October 16, 2012

ObamaCare Expanded Medicare Contribution Tax

by Kenneth Hoffman in Business Counsel, Tax Planning, Tax Counsel

Beginning in 2013, as part of the Patient Protection and Affordable Care Act (PPACA), an additional tax is imposed on income over a certain level in the case of an individual, estate, or trust. This tax is referred to as the "unearned income Medicare contribution tax." Others have referred to it as a tax on investment income, although it can apply to individuals, estates, and trusts that do not have investment income.

For an individual, the tax is 3.8 percent of the lesser of net investment income or the excess of modified adjusted gross income over a threshold amount. The threshold amount is $250,000 in the case of taxpayers filing a joint return or a surviving spouse, $125,000 in the case of a married individual filing a separate return, and $200,000 in any other case.

Modified adjusted gross income is adjusted gross income increased by any amount excluded from income as foreign earned income (net of the deductions and exclusions disallowed with respect to the foreign earned income).

The tax is subject to the individual estimated tax provisions and is not deductible in computing any income tax. Thus, for example, there is no deduction allowed for this tax when calculating the self-employment tax.

For purposes of the unearned income Medicare contribution tax, net investment income is investment income reduced by the deductions properly allocable to such income. Investment income is the sum of:

(1) gross income from interest, dividends, annuities, royalties, and rents (other than income derived in the ordinary course of any trade or business to which the tax does not apply);

(2) other gross income derived from any trade or business to which the tax applies; and

(3) net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property other than property held in a trade or business to which the tax does not apply.

Investment income does not include distributions from a qualified retirement plan or amounts subject to self-employment tax.

In the case of a trade or business, the tax applies if the trade or business is a passive activity with respect to the taxpayer, or the trade or business consists of trading financial instruments or commodities. The tax does not apply to other trades or businesses. Income, gain, or loss on working capital is not treated as derived from a trade or business.

Net investment income DOES NOT INCLUDE items that are excludible from gross income under the tax rules, such as interest on tax-exempt bonds, veterans' benefits, and any gain excludible from income when you sell a principal residence.

This law could affect you if you dispose of a partnership interest or stock in an S corporation. In such cases, gain or loss is taken into account to the extent gain or loss would be taken into account by a partner or shareholder if the entity had sold all its properties for fair market value immediately before the disposition.

The unearned income Medicare contribution tax does not apply to a nonresident alien; a trust, all the unexpired interests in which are devoted to charitable purposes; a trust that is exempt from tax under Code Sec. 501; or a charitable remainder trust exempt from tax.

If you believe you may owe this tax, we will need to prepare estimated taxes in order to avoid a penalty. Please call me at your convenience if you wish to discuss this further or have any other questions regarding health insurance.

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. If your referral retains our services, we will send you a $25 gift card and your referral will receive a $25 discount on their first invoice.

October 10, 2012

Are You Missing Valuable Year-End Tax Breaks?

by Kenneth Hoffman in Tax Tips, Business Counsel, Tax Planning, Tax Counsel

December 31 is approaching fast. And while you may not associate December 31 with taxes, it’s the deadline to take advantage of some of the most valuable planning opportunities. And proactive tax planning is the key to minimizing your tax.

Here’s a quick quiz to help see if you need year-end planning. This year, did you or will you:

Marry or divorce
Have a baby (or adopt)
Change jobs or retire
Earn income from stock options or employer stock
Buy or sell your home
Make gifts of more than $13,000 to any one person
Start or invest in a new business
Close or sell a business
Hire contractors or employees for your business
Start using your home for business
Start using your car for business (other than driving to or from work)
Increase or decrease your business income
Buy or lease a new car/truck for business
Buy or lease business equipment
Sell business assets
Start receiving IRA or retirement plan distributions
Reach age 70½
Buy or sell stocks, bonds, or mutual funds
Buy, sell, or exchange investment real estate

Did you answer “yes” to any of the questions? If so, you can probably profit from year-end tax planning. Call us at 954.591.8290 for a free analysis. We’ll find the mistakes and missed opportunities that may be costing you thousands, and show you how we can fix them.

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. To start the conversation or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

If you found this article helpful, I invite you to leave a commit and please share it on twitter, facebook or your favorite social media site and with your friends, family and colleagues. Thank you.

September 26, 2012

Don Draper on Taxes

by Kenneth Hoffman in Tax Planning, Tax Counsel

Earlier this week, the Academy of Television Arts and Sciences handed out their 64th Primetime Emmy Awards. Showtime's political drama "Homeland" was the big winner -- stars Damian Lewis and Clare Danes won Best Actor and Best Actress, and the series itself won Best Drama. AMC's period drama "Mad Men" was the big loser, failing to win the Best Drama award after four previous victories. And Mad Men's brooding star Jon Hamm lost again for Best Actor, for the fifth year in a row.

Hamm's character, Don Draper, is an advertising genius who creates campaigns for clients as diverse as Lucky Strike cigarettes, Mohawk Airlines, Menkens Department Store, and Utz potato chips. Don uses all sorts of psychological triggers to promote his clients' products. But one trigger he he hasn't used -- at least, not yet -- is everyone's dislike of paying taxes. So, as Hamm leaves the Emmys empty-handed again, we had to ask: which real-world advertisers have used taxes to promote their products?

"You must pay taxes. But there's no law that says you've gotta leave a tip."
Morgan Stanley
"You'd be surprised at the frivolous things people spend their money on. Taxes, for example."
Nuveen Investments (tax-free bond funds)
"Cheerios can lower cholesterol 4% in 6 weeks. To appreciate that number, give the IRS an extra 4%."
General Mills
"There is an inherent hypocrisy in increasing taxes on consumers to discourage smoking, while simultaneously relying on that revenue to fund the increasing cost of children's healthcare."
Lorillard Tobacco
"The Higher the Tax Bracket, the Better the View."
Florida Real Estate Developer
"Nowhere on any tax form does it say you can't be crafty."
Nuveen Investments

It's certainly no surprise seeing financial firms like Morgan Stanley and Nuveen Investments in this list. But cigarette makers and luxury homebuilders are a bit of a surprise. And if the makers of Cheerios can advertise "against" taxes, well, anyone can!

At our firm, we've known all along what these advertisers have discovered, too: you don't want to pay any more tax than you have to. That's why we focus on planning to pay less tax, legally. That's the kind of "can't miss" campaign that ought to finally win Don Draper an Emmy!

September 21, 2012

Election Day and Taxmageddon

by Kenneth Hoffman in Tax Counsel, Tax Planning

Election Day is almost here, and taxes are taking center stage in this campaign. We're not here to tell you how to vote. But we want you to know that we're following the race with an eagle eye. Our goal is to help you make the most of whatever changes eventually come with the next administration.

Several important tax changes are scheduled to take effect on January 1, and we're paying close attention to all of them:

The Bush tax cuts are scheduled to expire. This will mean higher tax rates for everyone, along with a higher top rate of 39.6% for the highest-earning taxpayers.
Top rates for long-term capital gains and qualified corporate dividends climb back from 15% to 20%.
The employee portion of Social Security and self-employment tax goes back up from 4.2% to 6.2%.
The Medicare tax will go up by 0.9% for individuals earning over $200,000 ($250,000 for joint filers, $125,000 for married individuals filing separately).
Finally, there will be a new "Unearned Income Medicare Contribution" of 3.8% on investment income of those earning more than $200,000 ($250,000 for joint filers).

Below is our 2012 Campaign Tax Comparison to help you compare the current law with the Obama and Romney proposals. We'll be following the campaign carefully in order to help make the most of your opportunities, no matter who wins. And of course, if you have any questions, don't hesitate to call us at 954-591-8290.

2012 Election Tax Outlook

	Current Law	Obama Plan	Romney Plan
Top Marginal Rate – Ordinary Income	35%	39.6%	28%¹
Top Marginal Rate – Capital Gains	15%	20% (plus 3.8%²)	15%³
Top Marginal Rate – Qualified Dividends	15%	39.6% (plus 3.8%²)	15%³
Top Marginal Rate – Corporations	35%	28%	25%
Payroll Tax	13.3%⁴	Increase top rate from 2.9% to 3.8%	No Change
Alternative Minimum Tax	26-28%	30%⁵ (incomes >$1 million)	None
Estate Tax Unified Credit	$5 million⁶	$3.5 million	None
Estate Tax Rate	45%⁶	45%	None
¹Romney’s plan would extend current rates for 2013. Ultimately, he would lower rates by 20% across the board, and replace lost revenue by eliminating unspecified “loopholes and exclusions” ²Beginning on January 1, 2013, the Patient Protection and Affordable Care Act imposes a new “Unearned Income Medicare Contribution” applies on investment income for taxpayers with incomes over $200,000 ($250,000 for joint filers) ³Romney has proposed to eliminate all tax on capital gains, dividends, and interest for taxpayers earning under $200,000 ⁴Currently, FICA and self-employment taxes total 13.3% on incomes up to the Social Security wage base, plus 2.9% Medicare tax on earned income above that figure. ⁵Obama has proposed to replace the current AMT with a “Buffet tax” of 30% on incomes above $1 million ⁶Estate taxes are scheduled to revert to a $1 million unified credit and 55% rate on January 1, 2013

September 19, 2012

Turns Out Crime DOES Pay

by Kenneth Hoffman in Business Counsel, Tax Counsel, Tax Planning

Back when you were a little kid, Mom and Dad warned you that crime doesn't pay. (They also told you it was the tooth fairy leaving that money under your pillow.) But it turns out that crime does pay -- at least for one felon-turned-whistleblower.

Bradley Birkenfeld grew up in suburban Boston before moving to Switzerland to pursue a career in banking. In 2001, he started work at Switzerland's biggest bank, UBS. His job was to solicit American depositors, 90% of whom he said were trying to evade taxes. His main duties included schmoozing clients at UBS-sponsored events like yacht races in Newport or the Art Basel festival in Miami Beach. But he also helped clients create shell companies to hide ownership of their accounts, shredded documents recording transactions in their accounts, and once even smuggled a pair of diamonds through U.S. Customs in a tube of toothpaste. (Doesn't everyone carry their diamonds in their toothpaste?)

By 2005, Birkenfeld reports, he suffered a crippling attack of conscience. He approached his superiors at the bank to complain about "unfair and deceptive" business practices. When those complaints went nowhere, he took his story to the U.S. government. He originally sought immunity for his own role in any crimes, but wound up pleading guilty to a single count of conspiracy to defraud the United States. He spent 2½ years in prison before moving to a halfway house, and he's scheduled to be released for good on November 29.

Now Birkenfeld is getting ready to "re-enter society." But he leaves the Big House with parting gifts that most felons don't enjoy. He'll have $104 million dollars waiting for him, courtesy of none other than -- you guessed it -- the IRS! That works out to $4,600 for every hour he spent behind bars. Of course, Birkenfeld doesn't get to keep all those millions. His lawyers get a cut, and the rest is fully taxable. But some of you reading these words might consider taking the same deal for yourself!

Birkenfeld wasn't the first guy to tell the IRS that rich Americans were using Swiss banks to cheat on their taxes. But he was the first to document it so devastatingly, and he was the first to offer evidence that the bank itself encouraged illegal behavior. The IRS said, "While the IRS was aware of tax compliance issues related to secret bank accounts in Switzerland and elsewhere, the information provided by the whistleblower formed the basis for unprecedented actions against UBS."

How much was Birkenfeld's help worth? Well, UBS itself paid $780 million in fines and ratted out their 4,700 biggest American clients. But that's just the tip of the iceberg. Nearly 35,000 Americans have taken advantage of special IRS amnesty programs and have collectively paid more than $5 billion in back taxes. And Birkenfeld's bars-to-riches story, which included an appearance on 60 Minutes, has spurred a gold rush of whistleblower claims. In some cases, enterprising hedge funds have actually "invested" in those claims, paying whistleblowers up front in exchange for a share of any future awards.

The irony here is that none of the cheaters who sent their money on an alpine vacation had to cheat to pay less tax. They just needed to plan to take advantage of perfectly legal concepts and strategies. We give you the plan you need to pay less tax, legally, so you can spend your time in Switzerland visiting chocolate factories and cuckoo clocks -- not your hidden bank accounts!

K.R. Hoffman & Co., LLC, counsels Entrepreneurs, Professionals and Select Individuals in taking control of their taxes, and businesses. Discover how we can help you overcome your tax and business challenges. For more information or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday from 8:30 a.m. to 1:00 p.m. for a no cost consultation, or drop me a note.

I truly value your business and I appreciate your referrals. Refer your family, friends, acquaintances, and business colleagues to KR Hoffman & Co., LLC. If your referral retains our services, we will send you a $25 gift card and your referral will receive a $25 discount on their first invoice.

September 12, 2012

Gentlemen Prefer Tax-Free

by Kenneth Hoffman in Tax Planning

Fifty years after her mysterious death, Marilyn Monroe's image remains as profitable as ever. In 1999, the dress she wore to sing "Happy Birthday, Mr. President" to John F. Kennedy sold at auction for $1.26 million. Forbes magazine lists her as #3 on their "Top-Earning Dead Celebrities" list (topped only by Michael Jackson and Elvis Presley). And In 2009, a Japanese man paid $4.6 million for the crypt directly above hers at Westwood Village Memorial Park Cemetery in Los Angeles. (Some people really do have too much money.)

Now Marilyn is in the news again, this time for the financial consequences of her tax planning. If Hollywood made the story into a movie, nobody would believe it.

When Marilyn died in 1962, she left $40,000 to her secretary, 25% of her estate to her psychiatrist, and the remaining 75% of her estate, including the "residuary," to her friend and acting coach, Lee Strasberg. The estate sat in probate for 41 years before finally settling, with the bulk of the assets eventually passing to an entity called Monroe, LLC, a Delaware limited liability company managed by Strasberg's widow. (It might be worth mentioning here that Alexander the Great took just ten years to conquer the entire civilized world.)

Marilyn died at her home in California. However, she executed her Last Will and Testament in New York -- where she owned an apartment at 444 E. 57th Street -- and named a New York attorney, Aaron Frosch, as her executor. Frosch consistently treated Marilyn as a New York resident in order to avoid California estate taxes. And it worked -- her estate paid just $777.63 in inheritance taxes there.

Fast forward to 2005. That year, the new LLC set up to manage the estate's assets sued the heirs of several photographers who had taken pictures of Marilyn while she was still alive, heirs who were licensing those images for commercial use. Marilyn's estate argued that this violated her "right of publicity," which included their rights to control the commercial use of Marilyn's name, her image, her likeness, and other aspects of her identity. The heirs, in turn, countersued, arguing that Monroe, LLC didn't own the star's right to publicity.

A district court in California declared that at the time of her death, the state didn't recognize any such right of publicity, and ruled in favor of the photographers' heirs. Just one month after that decision, California passed a law creating a posthumous right to publicity that would be transferable to Marilyn's estate. Armed with the new law, the estate's attorneys went back to court to overturn their previous decision. Not so fast, the Court said. Yes, the California law would let Marilyn's estate inherit her right to publicity, if she had been a California resident at her death. But she didn't die a California resident, she died a New York resident -- and New York doesn't recognize a right to publicity.

Last month, the U.S. Circuit Court for the Ninth District issued what should hopefully be the last word, just over 50 years after her death. "We conclude that because Monroe's executors consistently represented during the probate proceedings and elsewhere that she was domiciled in New York at her death to avoid payment of California estate taxes, among other things, appellants are judicially estopped from asserting California's posthumous right of publicity." In other words, go pound sand.

Here's the lesson. Sometimes, avoiding tax shouldn't be our most important goal. Sometimes, focusing on taxes means letting the tail wag the dog. And sometimes, our job is to help you put taxes in the right perspective. In Marilyn Monroe's case, her executor made a smart decision to treat her as a New York resident, and succeeded in avoiding California tax. He certainly couldn't have foreseen the development of any right to publicity, and he can't be said to have done anything wrong. But focusing solely on taxes did cost Marilyn's estate big in the end. So call us when you've got big decisions to make -- we'll help you avoid making similar mistakes!