November 12, 2014

Deduct the Alamo!

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

In 1836, Mexican General Santa Anna and 1,500 troops laid seige against 182 Texans garrisoned at the Alamo, a Spanish mission designed to resist attack from native tribes. Thirteen days later, the Mexicans stormed the walls and killed every last man inside, including Commander William Travis and frontiersmen Davey Crockett and Jim Bowie. Santa Anna's cruelty inspired Texans to join their army to seek revenge, crying "Remember the Alamo!" on their way to crushing the Mexicans at the Battle of San Jacinto.

Remembering the Alamo has become a central part of Texas history. So, which Texas musician just offered a tax-planning lesson by donating his collection of Alamo artifacts to the Texas Land Office? Was it rock 'n' roll pioneer Roy Orbison, hailing from lonely Vernon near the Oklahoma border? Perhaps it was country legend Willie Nelson, born an hour south of Fort Worth? Wait, wait . . . was it Tejano accordionist Leonardo "Flaco" Jiménez from San Antonio? No, no, and no. The answer, of course, is English singer and drummer Phil Collins, hailing from the London suburb of Chiswick!

Collins fell in love with the Alamo legend at age 5, watching actor Fess Parker play the "King of the Wild Frontier" Davey Crockett. According to Texas Monthly, the rocker's collection includes hundreds of documents, "plus artifacts like uniforms and Brown Bess muskets that belonged to Mexican soldiers, a sword belt believed to have been worn by Travis when he died atop the northern wall, and a shot pouch that Crockett is thought to have given a Mexican soldier just before he was executed." For years, they sat in his basement in Switzerland. But last month, Collins donated over 200 of his pieces to go on display in a new Alamo Visitors' Center.

Collins grudgingly admits to spending "seven figures" building his collection. Today it's said to be worth as much as $15 million. That sort of appreciation would seem to invite attack from the troops at the IRS. (And collectibles like the Alamo artifacts are even subject to a special 28% rate, 8% higher than the regular 20% for regular long-term gains). But there's an easy way for donors like Collins to avoid that tax, and get an even bigger charitable deduction for their gifts.

Let's say you spend $5 million building a collection that grows to be worth $15 million. Then you decide you want it to go to a museum. If you sell it to the museum, you'll owe $2.8 million in capital gains tax, plus $380,000 in "net investment income tax" on your $10 million gain. That's probably not as bad as being overrun by 1,500 soldiers — but it still leaves you with just $6,820,000 of after-tax gain.

Now let's say that instead of selling your collection to the museum, you donate it. Now you won't pay any tax at all. (Why should you? You never really "realize" your gain.) And, because you're making a charitable gift, you get to take a charitable deduction for the full $15 million value of your donation!

That same strategy works for any sort of appreciated property. Let's say you paid $1 million for a piece of property, which is now worth $3 million. Now you want your alma mater to have that $3 million, even though you know they can't use the property itself. You could sell the property, donate the after-tax proceeds, and take a deduction for your after-tax gift. Or, you could just donate the property and let the school sell it. That would avoid the tax on the gain and give you a deduction for the full pre-tax value!

Tax planning couldn't save the Texans at the Alamo. But it can save you from the IRS artillery. So if your year-end plans include charitable gifts, call us. We can help you with ideas to make the most of those gifts, even if you're not deducting the Alamo.

Let's Talk! For a deeper conversation on our services, or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday for a no cost consultation, or drop me a note.

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. As a trusted senior advisor and counselor working closely with Entrepreneurs, Professionals and Select Individuals, Mr. Hoffman provides counsel to his clients who are navigating through the complexity of today's business, tax, and accounting challenges.

Click here to schedule an appointment with Kenneth Hoffman.

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October 8, 2014

What Do You Give The Man Who Has Everything?

by Kenneth Hoffman in Tax Planning

Last week, New York Yankee shortstop and future Hall-of-Famer Derek Jeter played his last Major League Baseball game. He chopped a single to third in the third inning to drive in a run, then took himself out for good. That final hit brings his total to 3,465 hits, along with a .310 batting average, five Gold Glove awards, and five World Series rings. Jeter was that rare player who stayed with a single club for his entire career. He's also untainted by so-called "performance enhancing drugs" plaguing the game (or, in the case of Jeter's teammate Alex Rodriguez, you can leave off "performance enhancing"). Jeter goes out a very popular guy — and that popularity is about to send him into extra innings with our friends at the IRS.

Jeter earned over $265 million over the course of his 20-year career. And that's before his endorsement deals with Gatorade, Fleet Bank, Ford, VISA, Discover Card, Florsheim, Gillette, Skippy peanut butter, XM Satellite radio, and even his own Nike shoe. If ever there were a guy who could buy anything he wanted, it's "Captain Clutch."

But that didn't stop the baseball world from showering him with gifts upon his retirement. The Tampa Bay Devil Rays gave him a custom-painted kayak that cost more than $6,000. The Cincinnati Reds gave him framed autographed jerseys of fellow shortstops Dave Concepcion and Barry Larkin, along with three photos from the weekend in Cincinnati when Jeter was named captain of the Yankees. The Seattle Mariners gave him a seat from the Kingdome, where he made his major league debut on May 29, 1995. Even the lowly Chicago Cubs, which hosted Jeter for just five career games, honored him with a number from the hand-operated scoreboard. All told, the gifts are said to be worth about $33,000.

So, naturally, Jeter will owe another $16,000 or so in tax on those gifts. That includes 39.6% federal income tax, 3.8% Medicare tax, plus whatever state and local taxes apply where he receives the gifts.

Wait a minute. We're talking gifts here, right? How can Jeter owe income tax on gifts?

It all comes down to why the giver makes the gift. If a gift is made out of "detached and disinterested generosity," like when you give your children a birthday present, the officials in charge of collecting income tax generally turn a blind eye. (If the value of gifts to any single individual exceed $14,000 per year, the officials in charge of collecting gift taxes start getting interested.) But if the gift is really a marketing gesture in disguise — like when a team hosts a ceremony to present Jeter with his gift, then uses it as part of its marketing — that "gift" becomes taxable income.

What could Jeter do to avoid the tax? He could refuse the gifts, which wouldn't seem very sporting. Or he could request they go to his charitable foundation. But that would defeat the purpose of gifts like the Cincinnati shortstops' jerseys that are intended to be sentimental rather than valuable.

Jeter's final-season salary was $12 million, which works out to about $74,000 per game, or $8,230 per inning. So the good news is that the tax on the gifts should only eat up a couple of inning's worth of income.

Are your business associates planning to lavish you with gifts this holiday season? Call us. We know you won't be happy to pay tax on them, but at least we can help you with a plan to pay the least amount allowed. And remember, we're here for the rest of your teammates, too!

Let's Talk! For a deeper conversation on our services, or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday for a no cost consultation, or drop me a note.

Kenneth Hoffman of K.R. Hoffman & Co., LLC is a highly sought after tax and business counselor. As a trusted senior advisor and counselor working closely with Entrepreneurs, Professionals and Select Individuals, Mr. Hoffman provides counsel to his clients who are navigating through the complexity of today's business, tax, and accounting challenges.

Click here to schedule an appointment with Kenneth Hoffman.

September 24, 2014

Lipstick on a Pig?

by Kenneth Hoffman in Tax Counsel, Tax Planning

The personal finance website mint.com reports the average American woman spends $15,000 on makeup in her lifetime, including $3,770 on mascara, $2,750 on eyeshadow, and $1,780 on lipstick. Americans spent $33.3 billion on cosmetics and other beauty products in 2010 alone. ("Being a woman is easy and inexpensive," said no one, ever.)

Our friends at the Internal Revenue Service don't bat an eyelash at all that spending. Cosmetics companies pay billions in taxes. And the product they sell is a nondeductible personal item. But that doesn't stop people from trying — including, we now learn, former United States Senator Scott Brown.

Brown has always been an ambitious sort. In 2010, after a career as a lawyer and state legislator, he won a special election to replace the late Ted Kennedy, becoming the first Republican Senator from Massachusetts since 1972. Then, in 2012, he lost his reelection bid to former Harvard professor Elizabeth Warren. Following his defeat, he moved north to New Hampshire and announced plans to run from the Granite State.

But Brown has always had a bit of a vain streak, too. At age 22, while studying law at Boston College, he won Cosmopolitan's "Sexiest Man in America" contest, posing nude for the magazine's centerfold. So it can't have come as too much of a surprise when he made six years of tax returns available to reporters and revealed that he deducted $2,149 in 2010 and $1,401 in 2011 for "TV makeup and grooming" to help promote his memoirs.

At first blush, deducting makeup might seem perfectly appropriate. Brown probably wouldn't wear it if he hadn't been promoting his book. The problem here is that the rules say that's not enough. IRS Publication 529 reports that you can deduct the cost of work clothes if: 1) "you must wear them as a condition of your employment" and 2) "the clothes are not suitable for everyday wear." Courts have extended this foundation to grooming expenses, holding that they're inherently personal and nondeductible.

Most recently, the Tax Court reviewed the case of Anietra Hamper, who worked as a morning and noon news anchor for WNBS-TV in Columbus. Her station's Women's Wardrobe Guidelines required her to maintain her hair in a neat and professional cut and keep her fingernails at a reasonable length, finished with conservatively colored polish. Yet the Court smeared off thousands in deductions she took for contact lenses, makeup, haircuts, manicures, and teeth whitening.

Last week, a Democratic watchdog group by the name of the American Democracy Legal Fund sent a letter asking the IRS to investigate Brown's deductions and citing a litany of cases holding that personal grooming and makeup expenses are nondeductible. Brown's campaign glossed over the letter as a partisan attack. But Brown is polling about four points behind incumbent Jeanne Shaheen, in a close election that will help determine which party controls the Senate for the final two years of President Obama's administration. This sort of negative publicity can't help Brown's chances. And it does nothing to conceal the stereotype of politicians as slick, blow-dried phonies.

Only time will tell if the IRS takes up Brown's case, or if the controversy affects his election. In the meantime, call us if you're worried about blemishes in your finances. We'll give you the plan you need to look flawless under the hottest lights!

September 17, 2014

Can We Talk?

by Kenneth Hoffman in Tax Planning, Tax Counsel

The world of comedy lost a giant this month. Joan Rivers may have topped out at just 5'2" and weighed 110 pounds soaking wet, but when it comes to influence, she towered above her peers. Rivers established that women can be just as funny as men and paved the way for the Sarah Silvermans and Tina Feys of today. She could alienate people with sometimes-offensive takes on her fellow celebrities. ("Is Elizabeth Taylor fat? Her favorite food is seconds.") But she was never afraid to turn her wit on herself. ("I've had so much plastic surgery, when I die, they will donate my body to Tupperware.")

Rivers hated Washington, and considered herself apolitical. But it's hard to go 50 years in the public eye without having something to say, especially when it comes to taxes. So here are three quick observations:

Money was important to Rivers. ("People say that money is not the key to happiness, but I always figured if you have enough money, you can have a key made.") She worked hard to make it and worked hard to keep it. Back in 2012, she criticized President Obama's proposal to raise taxes: "If I work very hard, I should be able to gather the fruits of my labor." Of course, this was a woman who also said "I'm definitely in favor of a monarchy because they're there, they look good, and always have good gift shops when you leave the palace." So, you might want to take her specific policy recommendations with a grain of salt!
Rivers wasn't afraid to take on the jokers at the IRS. Back in 1993, she lost a Tax Court case involving disability insurance premiums. The dispute established the rule that a corporation can't deduct those premiums on an employee unless there's a contractually binding obligation to pay the benefits to the employee. (We'll skip the details because they're so boring and technical that even she couldn't make them amusing.)
Rivers will get a pretty nice final tax break from the IRS, even though it comes too late for her to enjoy it. Code Section 2053 says that when it comes time to calculating estate tax, you can deduct funeral expenses. And Rivers made it clear that she wanted to go out in style. Here's what she said in her 2012 book, I Hate Everyone . . . Starting with Me:
"When I die, I want my funeral to be a huge showbiz affair with lights, cameras, action. I want Craft services, I want paparazzi and I want publicists making a scene! I want it to be Hollywood all the way. I don’t want some rabbi rambling on; I want Meryl Streep crying, in five different accents. I don’t want a eulogy; I want Bobby Vinton to pick up my head and sing 'Mr. Lonely.' I want to look gorgeous, better dead than I do alive. I want to be buried in a Valentino gown and I want Harry Winston to make me a toe tag. And I want a wind machine so that even in the casket my hair is blowing just like Beyoncé’s."

She may not have gotten the funeral she joked about. But she did get a pack of celebrities, a troupe of bagpipes, and a celebration of a life well lived.

Joan Rivers entertained millions over the course of her career. But there's nothing entertaining about wasting money on taxes you don't have to pay. And you'll get the last laugh if you know you've done everything you can to keep what you make. So call us for a plan to pay less, before the comics at the IRS throw out the punch line for you!

July 31, 2014

Holy Taxes, Batman!

by Kenneth Hoffman in Tax Counsel, Tax Planning

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

Batman may be a brilliant detective and master martial artist, but he can't protect Gotham all by himself. Dick Grayson was the youngest member of the "flying Graysons" acrobat troupe when a mafia boss killed his parents. Batman took Grayson in as his legal ward, and soon Grayson became "Robin." Claiming Robin as a dependent gives Batman a personal exemption, which would reduce his taxable income by $3,950 this year if Batman's high income didn't phase out most of that deduction. But more important, it lets Batman file his taxes using more advantageous "head of household" rates!
Batman and Robin live at stately Wayne Manor, an enormous fortress outside Gotham City. Batman's family has owned the home for generations, which means Batman isn't likely to be paying tax-deductible interest on a mortgage. However, he can deduct an unlimited amount of property tax he pays on the home and grounds, including the Batcave. Oh, and the solar panels Batman installed after the mansion was damaged in an earthquake qualify for a 30% solar investment tax credit.
Alfred Pennyworth is a British actor and former intelligence agent who serves as Batman's butler and best friend. Alfred manages Wayne Manor and cares for the Batcave below. It's not a business relationship, so Batman can't write off Alfred's salary. However, it seems evident that Alfred is required to live on the premises as a condition of his employment — which at least makes his room and board tax-free to him.
When Robin left for college, Batman decided Wayne Manor was a bit too stately for just Alfred and him. So they decamped to a penthouse high atop the Wayne Foundation building in Gotham City. Naturally, the penthouse includes a secret elevator, leading to a secret Batcave, in a secret sub-basement deep under the building. But there's no need to hide anything from the IRS — it also qualifies as a second home, meaning Batman can deduct interest on up to $1 million of "acquisition indebtedness" on the property, plus an unlimited amount of property tax as well.
Batman is one of those rare comic book superheroes without actual superpowers. He can't fly, like Superman, or breathe underwater like Aquaman, or transform himself into an invulnerable green humanoid like The Incredible Hulk. (He can't even make plants grow like the Clorophyll Kid!) But he can harness an arsenal of specially-designed bat-themed gadgets and tools. This includes the fleet of vehicles we all love — the Batmobile, Batplane, Batboat, Bat-sub, and Bat-cycle. And it includes a special utility belt to carry the "batarangs" he uses in lieu of firearms (because a gun killed his parents). Batman's "toys" naturally help him fight crime. But they also help him fight taxes — inventing and producing them qualifies for lucrative Research & Development tax credits and Domestic Production Activity deductions!

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

July 23, 2014

Berkshire Giveaway

by Kenneth Hoffman in Charitable Contributions, Tax Counsel, Tax Planning

Someday, the financial wizards who run things on Wall Street will realize there's "paper to be stacked" opening an Investor Hall of Fame. (Hey, the Rock and Roll Hall makes $40 million a year, and it's in Cleveland.) And when they do, they'll have to dedicate an entire wing to Warren Buffett. The so-called "Oracle of Omaha" has become a rock star among money managers. His chart-topping net worth soared by $37 million per day last year. And his annual Berkshire Hathaway shareholder meeting attracted 40,000 attendees this spring, making it the Burning Man Festival for the cocktail set.

Buffett affects a folksy style, posing for photos with a ukelele and quipping that Wall Street is the only place where people drive Rolls-Royces to get advice from people who ride the subway. But he didn't get to be #2 on the Forbes 400 by being dumb — and this is true with taxes, too. Buffett has made headlines criticizing the carnival of confusion that passes for the "Internal Revenue Code" for taxing his secretary at a higher rate than it taxes him. But his actions show a keen grasp of the power of smart tax planning.

Let's take a look at Buffett's charitable giving. Now, there's no doubt that his motives are sincere — he's pledged to give a whopping 99% of his fortune to charity. But his generosity may have the side benefit of saving him $30 billion or more in tax.

So far this year, Buffett has donated $2.8 billion, including $2.1 billion to the Gates Foundation, $215 million to the Susan Thompson Buffett Foundation, and $150 million each to the Howard G. Buffett Foundation, the Sherwood Foundation, and the NoVo Foundation. But those gifts didn't really "cost" him $2.8 billion. That's because he didn't give cash — he gave Berkshire Hathaway stock. Donating appreciated stock lets Buffett deduct the fair market value of that stock at the time of the gift, even though his "cost basis" — or actual investment in it — is likely to be far, far less. Giving away appreciated stock also lets him avoid tax on the appreciation in that stock.

Let's say Buffett's basis in this year's gift stock was an even billion dollars. (It's probably even less, but who's counting?) If Buffet had sold the stock at a $1.8 billion gain, then given cash, he would have had to pay $712,800,000 in regular tax, plus another $68,400,000 in "net investment income tax." Giving appreciated stock directly, then letting the charities sell it, boosts his largesse by nearly $800 million — money that Buffett evidently thinks his charities can spend better than the folks in Washington.

Buffett probably won't ever "retire" in the go-fishing-in-Florida-and-eat-dinner-at-4 sense of the word. But at some point, he'll get promoted to that great boardroom in the sky. That's when his charity will really sidestep our friends at the IRS. Buffett could set up his heirs for generations to come. But with a 40% estate tax, leaving his current net worth of $58.5 billion to family would cost $23.4 billion in tax. Leaving his wealth to charity avoids that hit. And it spares the rest of us decades of reality TV about spoiled, dissolute heirs — their gilded lifestyles, their trips to rehab, and their endless Paris Hilton-esque shenanigans.

We realize you don't have billions to give like Buffett. But if you're one of the millions of Americans who admire his business wisdom, take a lesson from his tax wisdom as well. And call us before you make any sort of major gift, to your church, your college, or your community. We'll help you structure it to squeeze out the maximum advantage. You can be sure Warren Buffett would approve!

June 18, 2014

Wanna Bet?

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

If you're a golfer, you've surely heard of "Long John" Daly, renowned for his distance off the tee. In 1991, he roared onto the scene by winning the PGA Championship as the ninth alternate. In 1997, he became the first PGA player to average more than 300 yards per drive over a full season. Daly can probably hit the ball farther with a shovel or a rake than we can hit it with Callaway's newest and highest-tech driver. He hasn't won a tournament since 2004, but his legion of fans still love him for his bad-boy, "non-country club" appearance and attitude. And who knows how he might "grip it and rip it" when he becomes eligible for the Senior Tour in 2016?

Daly is a man of many appetites. He's designed golf courses, licensed his own "Loud Mouth" line of clothing, owned a winery, and even recorded an album of his own songs. He's a legendary boozer with seven trips to rehab under his belt — in fact, he's even got a drink named after him. (Take a classic "Arnold Palmer" mix of iced tea and lemonade, add liquor of your choice, and voila, you've got a John Daly.) But his greatest vice may be his gambling. And that's where our friends at the IRS come in.

Daly loves, loves, loves to gamble. He told the gossip site TMZ that it was more about the adrenaline than the money . . . he really just loved the action. He would take out million-dollar markers to hit the blackjack tables, then play seven hands at a time for $15,000 each. In 2006, he lost a playoff to Tiger Woods, drove straight from the tournament in San Francisco to Las Vegas, and dropped $1.65 million in five hours on a $5,000 slot machine. (Hey, we've all been there, right? No?)

The news wasn't all bad. Daly kept detailed records so that when it came time to file his taxes, he could deduct his losses from his wins. So how did he do? Well, according to Daly, he won $35 million from 1991 through 2007. That's pretty good, considering his lifetime tour winnings total just $10,116,306.

There's just one problem. Over that same period, he lost $90 million. Ninety million dollars. For those of you who dropped math as soon as you could, that's a $55 million hole! It took him 10 years to pay off gambling debts, with sponsorship income, hustling appearance money, and "running myself ragged doing corporate outings instead of spending time with my family and working on my game."

And how did Daly come up with those figures? Combing through his tax records, of course! Gambling losses are deductible, sure — but only up to your amount of gambling winnings. That means if you go home a winner, Uncle Sam will be happy to take a cut — but if you've lost, you're on your own. (That's an even better deal than being the casino!)

Daly still loves the action and adrenaline. But, he says, "Now if I gamble, I play the $25 slots. If I hit something, I might move up to $100. But I don't do what I used to do anymore."

You probably won't ever need to check your tax returns to count how much you've lost at the casino. But your tax return is a great source of information on your overall financial health. And penalties for signing an incorrect tax return are lot greater than signing an incorrect scorecard! That's why you can't just file your taxes every year and call it a day. You need a plan to make the most of all your available deductions, credits, and strategies. So call us — we'll keep your taxes out of the rough, and help you avoid those tax bogeys that cost you thousands!

June 4, 2014

Really?

by Kenneth Hoffman in Charitable Contributions, Tax Counsel, Tax Planning

Why did Willie Sutton rob banks? Because that's where the money is, of course. Why does the IRS focus its attention on income taxes? Same reason! For fiscal 2014, they expect to collect $3 trillion in taxes: $1.4 trillion in individual income taxes, $1.0 trillion in Social Security and Medicare, $332.7 billion in corporate income tax, $154 billion in transportation and excise taxes, and "just" $15 billion in gift & estate taxes. Three trillion dollars sounds like it ought to be enough to finance the government. But of course it's not. So our friends in Washington are constantly searching for more change in the national couch cushions. (Value-added tax, anyone? Carbon tax?) And now it looks like they may have found the mother lode. Would you believe they're finally coming after your frequent flyer miles?

The first frequent-flyer program took off back in 1972. Since then, nearly every airline has launched one, and hotel chains have climbed aboard, too. Loyalty programs are so popular that over half of all credit card purchases made in the U.S. are made with cards tied to loyalty programs. That's especially astonishing when you consider how cramped the airlines have made their seats and how many "junk fees" they've loaded up on — for checked bags, overhead bin space, curbside check-in . . . the list goes on and on. (Michael O'Leary, head of Ireland's Ryanair, actually proposed charging to use the loo.)

The IRS recognizes six kinds of frequent flyer miles, and taxes them according to how you receive them. These include:

Miles awarded for travel (nontaxable)
Miles awarded for credit card use (nontaxable)
Miles awarded in connection with business travel (nontaxable but mainly because it would be too hard to track)
Miles awarded for opening an account (taxable)
Miles awarded for putting money in a mutual fund (which reduces your tax basis in the fund)
Miles awarded as prizes (taxable)

For the most part, those rules make sense. (Would it really be worth the hassle to require business travelers to report the value of frequent-flyer points they redeem for personal travel?) But now it appears that change is on the radar. Last August, the Service released its 2013-2014 "Priority Guidance Plan" that included a project modifying the accounting rules for loyalty programs. And last month, a group of four major travel associations sent a letter to Treasury Secretary Jack Lew urging him to reject any changes to those rules.

It may be that changing the way the IRS treats loyalty programs at the airline level doesn't necessarily mean taxing the awards they grant their members. But does anyone doubt that airlines — who now charge for luxuries like pillows and blankets — will pass any new tax costs through to passengers? (If we're lucky, the new tax will arrive as late as your last flight did!)

We realize the prospect of taxing your frequent flyer miles doesn't keep you awake at night. But make no mistake about it, Washington is looking for new ways to pay for government. Pilots never take off without filing a flight plan — so why would you try to manage your finances without a tax plan? Call us for that plan, and you might be upgrading your next seat to first class!

Let's Talk! For a deeper conversation on our services, or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday for a no cost consultation, or drop me a note.

May 28, 2014

Tax Man Asks "What's On the Grill?"

by Kenneth Hoffman in Tax Planning, Tax Counsel

If you're like millions of Americans, you spent last weekend welcoming the unofficial start of summer. (Time to start wearing white again!) You might have enjoyed a day at the pool, a game of tennis, or a round of golf. You may have even hosted a backyard barbecue. If so, you probably didn't realize that serving fancy fare like lobster or crabcakes would impress the tax man as well as your guests — at least, if you live in England.

Across "the pond," Her Majesty's Revenue & Customs is the equivalent of our IRS, charged with collecting the taxes that pay for royal kibble for the Queen's royal corgis. And just as here in the former colonies, there's a "tax gap" between what officials believe they should be collecting and what they actually get. In England's case, that difference is about £35 billion (a spot under $60 billion depending on the exchange rate).

HMRC has already drawn heat for going all "Big Brother" in their efforts to ferret out tax evaders. Last year, they announced a new program to use credit checks to find suspected tax cheats. The goal is to cross-check what people report on their tax returns against they actually spend. Officials started with a pilot program involving 20,000 people — and they expect to expand it to as many as two million. (Blimey!)

But now they're going even farther. Now they're using images from Google Earth and Google Street View (for that all-important "kerbside" look) to literally spy on homes to trap suspected tax cheats! Are you paying proper tax on your home improvements as you've described them on tax forms? Are you paying enough tax on all the cars parked in your driveway? Presumably, if the images of your lawn party are detailed enough to distinguish between ordinary bangers and high-end potted shrimp, they'll use that against you too!

And what are they doing with those images? Four years ago, they dropped £50 million on a supercomputer named "Connect" to help decide who to investigate. According to the Daily Mail, it already holds more than a billion records, including "tax payment records, interest on bank accounts, details of any properties owned, loans, job history and electoral records." Bragging about your new car or your "trip of a lifetime" on Facebook can also trigger unwelcome attention.

Back here in the states, our National Security Agency's wholesale snooping in the name of fighting terrorism ignited a row of protest — and that was nothing compared to what HMRC freely admits doing, just in the pursuit of a few bloody quid. Can you imagine the outcry if, say, the reporters who helped break the Edward Snowden story discovered the IRS was analyzing credit scores and voting records to help decide who to audit?
(In related news, the latest trend among the Russian oligarchs, Arab sheiks, and ordinary billionaires who have made London the world's hottest real-estate market is excavating luxury basements with swimming pools, ballrooms, and gymnasiums. They say they're going underground because there's just no place else to build — but avoiding the tax man's probing electronic eye can't hurt, either!)

Well, old chap, what should we make of all this? The happy news is that you don't need to hide from satellites if paying tax isn't your cup of tea. You just need a plan — and it's our job to give you that plan. Call us now, and we'll have it in place before you put away the whites on Labour Day!

May 21, 2014

Ooops!

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

Politicians in Iowa, like politicians everywhere, want to encourage their local economy to grow. (Happy voters lead directly to reelection, of course.) But back in 2008, construction in Iowa, like construction everywhere, had slowed because of the recession. So the Hawkeye state's legislators did what they thought was a smart thing. As part of an overall reform that raised the sales tax rate from 5% to 6%, they streamlined the rules regarding heavy construction equipment. Specifically, they said that sales would be subject to the equipment excise tax — but rentals and leases would not. Makes sense, right? Why make construction more expensive by imposing a sales tax on folks who aren't actually buying the equipment they use?

Since then, the Iowa Department of Revenue has collected more than $20 million in tax on equipment sales. Nobody paid any special attention to the new rules — at least, until last summer. That's when a curious attorney for an equipment buyer contacted the Department with the unwelcome news that the legislature had streamlined the tax a little too well. In fact, the language of that legislation had accidentally repealed it entirely!

And nobody noticed. Not the staffers who wrote the law. Not the legislators who introduced it into the statehouse, marked it up, and passed it. Not the governor who signed it. Not the 185 or so equipment vendors who mistakenly collected the tax on behalf of the state. And certainly not the Department of Revenue who happily took the vendors' deposits, year after year after year.

Oops. "I think you call that a mess," said Rep. Tom Sands, Chair of the Iowa House Ways & Means Committee.

What could Iowa do? Honoring the mistake would mean paying back $20-30 million in taxes and interest, plus giving up $7 million more every year going forward. That may sound like a drop in the bucket compared to the state's overall $15 billion budget. But in today's tight economy, every bit counts.

The legislators who accidentally repealed the tax probably would have preferred to ignore the whole thing and hope that nobody noticed. (Insert your own joke about political cover-ups here.) But once that lawyer discovered their goof, the game was up. So they did something any golfer understands. They took a mulligan! On March 10, the Iowa House voted 95-0 to pass a "technical administration" bill reinstating the tax, retroactive all the way back to 2008. On March 27, the state Senate concurred, 26-21. And on April 10, Governor Branstad signed it into law.

So, does it count as "raising taxes" to pass a bill retroactively reinstating a tax you never meant to repeal in the first place?

When a tree falls in the forest and no one is around to hear it, does it make a sound?

You probably shouldn't hold your breath waiting for Congress to accidentally repeal the Internal Revenue Code. Fortunately, you don't need that sort of foulup to pay less. You just need a plan — a blueprint for taking advantage of all the deductions, credits, loopholes, and strategies you're legally entitled to. So call us when you're ready for that plan, and see what we can construct for you!

Let's Talk! For a deeper conversation on our services, or to become a client, call Kenneth Hoffman at (954) 591-8290 Monday - Friday for a no cost consultation, or drop me a note.