Aretha Franklin left this world with a musical legacy for the ages. The Queen of Soul started singing for her father's "gospel carnival tours" at 12, cut her first record at 18, and scored her first hit a year later. She went on to record 112 hit singles, including 20 #1s, and won 18 Grammies. She performed for presidents and even sang for a real queen (of England). When word broke of her death last month, many questioned who on earth could possibly sing at her funeral? (Answer: Stevie Wonder, Jennifer Hudson, and many more.)
Unfortunately, Franklin didn't leave behind a will. This is especially ironic considering how rock steady she was with her money during her life — even downright paranoid! She demanded payment on the spot, in cash, then kept a handbag with stacks of hundred-dollar bills with her security team, or even right on her piano where she could see it. She had seen colleagues like Ray Charles and B.B. King get ripped off, and she was not about to join them!
Franklin died in her longtime hometown of Detroit, and had been divorced since 1984. Michigan law holds that when an unmarried person dies "intestate," or without a will, their assets go equally to their children. Franklin's four sons have stepped forward as "interested parties" in court papers and nominated Franklin's niece as the natural woman to be the estate's personal representative. But that's no guarantee that a chain of fools won't show up with their hands out, especially with an estate valued at $80 million or more. (Not bad for a tenth-grade dropout, right?)
Franklin is hardly the only music icon to spend more time planning their next performance than their financial legacy. When Prince died intestate two years ago, the bitter fighting that erupted among his six heirs set the doves crying. Last year, the estate announced a distribution deal with Universal Music Group valued at $31 million. But five months later, a Minnesota judge let Universal back out after accusing the estate's representatives of fraud. The judge himself described the situation as "personal and corporate mayhem," which is something you never want to hear a judge say about you.
Estate planning may be more important for musicians because so many die young. When Doors frontman Jim Morrison reached the end at 27, he left his estate to his common-law wife, L.A. woman Pamela Courson. She died intestate three years later, so it went to her parents. But Morrison's parents argued his will was invalid because he wasn't competent to write it. (For some reason, they thought he was under the influence of drugs. How could that be?) Oh, and Morrison had married a previous girlfriend in a pagan ritual that included walking on fire and drinking each others' blood. Shouldn't that count for something?
Even proper planning can't guarantee preventing complications down the road. Michael Jackson left a valid will and revocable living trust. But his executors are locked in a Tax Court thriller, battling the IRS over how much to value his name and likeness. The estate pegged them at $2,105, reflecting the damage Jackson had done with his generally weird and scandalous public behavior. The IRS pegs those rights at $161 million because, well, he was the "King of Pop." At least he didn't leave it all to Bubbles the Chimp!
You may not earn your money performing for the Queen. But you probably still work hard for it. So show it some respect, and don't waste anything on taxes you don't have to pay. Call us for a plan to pay less, and we'll give you something to sing about!
This week's story is a briny chowder of petty vandalism, tax avoidance, partisan posturing, and flat-out misinformation. There's probably something in here to offend everyone. So buckle your seat belts and get ready for a ride!
Education Secretary Betsy DeVos has been one of Donald Trump's most controversial cabinet officials since barely surviving Senate confirmation thanks to the Vice-President's tie-breaker. It doesn't help that she's also one of Trump's wealthiest appointees. She and her husband Dick, son of Amway founder Richard DeVos, are worth an estimated $1.3 billion. And the DeVos clan, befitting their place on the Forbes 400 list, enjoy the usual collections of homes, jets, and ten (ten!) yachts that you would expect a family of billionaires to maintain.
Last month, news broke that someone had untied Betsy's 164-foot yacht Seaquest from its dock on Lake Erie. That's maybe newsworthy on its own — the vessel cost $40 million, which means damage could have been significant, and Lake Erie isn't exactly known for random drifting superyachts. But what really drew fire was the news that DeVos, who of course serves a President dedicated to "America First," was flying a Cayman Islands flag on her vessel. The partisan outrage machine instantly kicked into gear, howling that DeVos had avoided over $2 million in tax with the move.
Why would a Michigan billionaire, whose husband actually ran for Governor of that state, register her floating palace on a tiny flyspeck of an island 1,700 miles away? If she registers Seaquest in Michigan, she's potentially subject to the Wolverine State's 6% use tax, or $2.4 million. She's subject to U.S. safety and inspection standards. And her crew is subject to U.S. labor requirements. Registering the yacht in the Caymans lets her meet a considerably less-demanding set of standards. (Think "island time," but apply that concept to maritime rules and regulations.)
So DeVos is a high-class hypocrite, right, exploiting loopholes to save millions and cheat the kids she's sworn to serve? Well, if so, she's hardly alone. Sailing under a "flag of convenience" has a long and sometimes-even-honorable history. Early American merchantmen flew under the British flag to avoid Barbary pirates. And if you've ever taken a cruise, you've done it yourself. Take Royal Caribbean's brand-new $1.4 billion Symphony of the Seas. She's the world's largest cruise ship, with robot bartenders, 22 restaurants, 24 swimming pools. And she sails under a Bahamas flag.
What's more, it turns out the headlines blaming Betsy for registering "a fleet of yachts" outside the country are, to use a loaded term, fake news. For one thing, it turns out Seaquest isn't even Betsy's boat. It's actually owned by a company called R.D.V. International Marine, a subsidiary of the DeVos family office. And the family's other nine yachts — the Blue Sky, Quantum Racing, Delta Victor, Reflection, Attitude, Sterling, Windquest, Zorro, and De Lus — are registered to ports in Michigan, Delaware, and Florida.
What's our bottom line for this week? (Besides "don't believe everything you read"?) The DeVos family may be a little showy with their money. But they didn't get to be billionaires by wasting money on taxes they didn't have to pay. So call us when you're ready to start building your fleet, and see what we can help you buy!
Mother Nature knew exactly what she was doing when she made babies cute. In fact, evolutionary biologists at Oxford University recently concluded they evolved that way to survive by encouraging the rest of us to look after them. "This is the first evidence of its kind to show that cuteness helps infants to survive by eliciting care-giving, which cannot be reduced to simple, instinctual behaviours," says professor Morten Kringelbach. (And couldn't Oxford have found something less obvious to study?)
Half the fun of meeting a new baby is looking to see what features they inherit from their parents. Daddy's bright blue eyes? Mommy's adorable button-nose? (Hopefully not the next-door neighbor's goofy jug ears!) But did you know that some babies inherit more than their parents' physical features? In California, some babies inherit their parents' tax breaks!
Back in 1978, a group of Californians led by a cranky retired reporter named Howard Jarvis passed a ballot measure called Proposition 13. That law capped property taxes at 1% of a property's assessed value and limited increases to 2% per year — regardless of how much its value actually goes up — until the owner sells. The goal was to keep inflation from raising taxes so high that they pushed owners, especially retirees living on fixed incomes, out of their homes.
Eight years later, Proposition 58 juiced that break by letting parents pass along their valuations, along with their houses, to their kids. The goal was to make it possible for them to keep living in the family home. But since then, we've discovered some unintended consequences. Supreme Court Justice Harry Blackmun even said it's created "sort of a class of nobility in California." His colleague, Justice Stevens, said it “establishes a privilege of a medieval character: Two families with equal needs and equal resources are treated differently solely because of their different heritage.”
Last month, the Los Angeles Times reported how this can pay off for heirs who don't even live in their houses. In 2009, actors Jeff and Beau Bridges, along with their sister, inherited a Malibu house that their father Lloyd bought in the 1950s. And you can rent it today for the bargain price of $15,995/month! Yet the annual tax on the property, which Zillow estimates is worth $6.8 million, was just $5,700. The carryover valuation has saved the Bridges heirs more than $300,000 since they inherited it. In total, the Times reports it's cost Los Angeles County $280 million last year.
California is the only state that dangles that particular property tax goodie. But Uncle Sam offers a similar break when Mom and Dad move to that great nursing home in the sky. It's called "stepped-up basis." Let's say Mom and Dad paid $12,000 for a house in San Jose, back when you could do that. Now they're smack in the middle of Silicon Valley, and developers are salivating to pay $2 million for the place. If Mom and Dad sell today, they'll owe beaucoup tax on that gain. But if they hold it until death, you'll avoid tax on any of the run-up in value before you inherit.
There's good news here for everyone, even if you didn't inherit a house on Malibu Beach. The federal and state tax laws are full of similar deductions, credits, loopholes, and strategies to pay less. You just have to go out and find them. That's where we come in. So call us today, while there's still time to plan for 2018, and see how much you're overpaying. Than start planning for your next beach vacation!
The Infinite Monkey Theorem holds that if you sit an infinite number of monkeys down at an infinite number of typewriters, eventually one of them will bang out the complete works of William Shakespeare — or, at the very least, Hamlet. But do you know what those monkeys are banging out when they're not banging out Shakespeare? The Internal Revenue Code, of course! (Sadly, the Infinite Monkey Theorem will probably never be more than just a theorem. For starters, can you imagine the smell in that room?)
The tax code may look like 70,000-odd pages of monkey-banging gibberish. But there really is a twisted logic to it. Think of it as a series of red lights and green lights. Red lights, like Section 1 (setting out rates), Section 1401 (imposing the net investment income tax), and Section 1432 (imposing employment taxes) make you stop and pay tax. Green lights, like Section 105 (making employer health benefits tax-free), Section 162 (making "ordinary and necessary" business expenses deductible), and Section 170 (making charitable gifts deductible) let you go without paying tax.
Last year's Tax Cuts and Jobs Act added a new red light. Specifically, it capped deductions for state and local tax deductions at $10,000 per year. That's an obvious blow to the states that reach the deepest into their residents' pockets. In New York, for example, one-third of taxpayers claimed the deduction, averaging more than $20,000. In Alabama, just one-fourth claimed it, averaging just $6,000.
But the new limit hits taxpayers all over the country. Microsoft founder Bill Gates lives in Seattle, where there's no state income tax. (Washington has one of the highest sales taxes in the country.) But last year, he paid $1,024,292.55 in property tax on his 66,000-square-foot mansion, "Xanadu 2.0." It used to be that Uncle Sam picked up 39.6% of that bill. Now Gates has to cover it all himself.
Of course, human nature being what it is, we don't always want to stop at those red lights. So society has developed an entire profession, called "the law," dedicated to finding ways around them. (Even Pope Francis, when he announced the church's opposition to capital punishment, left exceptions for people who drive the speed limit in the left-hand lane or bring Popeye's fried chicken on an airplane.)
So it shouldn't surprise you to learn that officials in some states are working to let residents turn right on that red light. New York and New Jersey have set up so-called "charitable" funds to pay for essential services like schools, then authorized dollar-for-dollar credits against their own taxes for contributions to those funds. Just like magic, your state tax bill transforms into a charitable contribution, not subject to the new limit. (We think Harry Potter would call this spell a "sketchius loopholius.")
Of course, our friends back in the Home Office in Washington aren't stupid. Last week, the Treasury Department issued proposed regulations effectively eliminating charitable deductions for gifts tied to state tax credits. But will that be the end of the story? Not if the states have their way, and they're sure to take the Treasury to court. Round and round it goes . . . and now you know why tax lawyers drive Jaguars!
Bottom line? Most tax professionals focus on the red lights. That's important, because blowing through them gets you in trouble. But that's also where most tax pros stop. We're different. We focus on finding the green lights that can save you thousands. So call us when you're ready to go, and we'll help take your foot off the brake!
Parenting is full of all sorts of milestones. Some of them are precious, like your child's first steps, their first words, and their first day of school. Some of them are less welcome, like a first broken bone, or a visit from the law. But there's one milestone that takes some parents by surprise, and that's the day they realize they can't help their kid with math homework anymore. This is especially jarring when the kids come home insisting their teacher taught them 2+2=5. The "new" math can't be that different from the "old" math? It's still just math, right?
Last week, a California lawsuit involving Monsanto Corporation's flagship product, Roundup weed killer, reveals how the new math of last year's tax law changes the rules. A San Francisco-area school groundskeeper named Dewayne Johnson, who sprayed up to 150 gallons of the pesticide at a time, sued Monsanto, claiming it gave him cancer. The jury agreed and awarded him $289 million, including $39 million in compensatory damages and $250 million in punitive damages.
Unfortunately for Johnson, he's not going to get to keep anywhere near that whole $289 million. He's going to run into some new math and wonder if maybe 2+2 doesn't somehow equal just one.
Here's the first problem: legal fees. Lots of attorneys go to law school because there's no math. But there's one calculation any ambulance chaser can do in his sleep, and that's take a third off the top. (The next time you meet one at a party, throw out an 11-digit prime number, and be amazed how fast you get back a response. Try it, it's fun!) We'll assume for this discussion that Johnson's lawyers take 40% in fees and expenses, or $115.6 million. That leaves him with $23.4 million net compensatory damages and $150 million in punitives.
That leads to the second problem: taxes. Compensatory damages are tax-free, so Johnson keeps his full $23.4 million there. And under the "old math," he could deduct the remaining $100 million in legal fees before paying tax on his $250 million in punitive damages. He'll be in the top 37% tax rate, meaning $55.5 million goes Uncle Sam. As a California resident, another $18 million goes to Sacramento. That leaves $95 million. That's a lot less than $289 million, of course. But it's still a pretty nice result, although we're guessing Johnson would rather get to "live" than "be rich."
Now here's where the "new math" upends those numbers. Last year's Tax Cuts and Jobs Act eliminates the deduction for legal fees related to punitive damages. So now Johnson pays the same $100 million to his lawyers, but still pays tax on it. That launches his tax bill up to $122.5 million and leaves him with just $50.9 million — less than 18% of the original award!
Of course, the IRS is delighted. They get to collect tax on that $100 million in legal fees for the punitive damages twice: once from Johnson who wins them and again from the lawyers who earn them. What's not to like from their perspective?
Now finally, here's the good part, at least for you. You don't have to know the first thing about new math to pay less tax. Our tax planning service gives you a pesticide that eliminates wasted taxes, with no unpleasant side effects. So call us when you're ready to save, and we'll see how "green" your garden grows!
The best marriages, so they say, age like fine wine. They gain richness, and color, and depth. They ripen and mellow as experience piles upon experience, bonding the couple and deepening the intimacy as husband and wife (Or Husband and Husband or Wife and Wife - this stuff applies to us now too you know) stroll hand-in-hand through the majestic tapestry of life. (Cue the rainbows, and unicorns, and George Harrison lyrics.)
Remy and Lara Trafelet didn't have that kind of marriage. Their union aged more like milk. No, scratch that. Imagine strapping a toddler into his car seat to go see Grandma on a hot summer day. You hand him a sippy cup of milk to keep him pacified for the drive. Halfway there, he drops the cup and it rolls under the front seat — but you forget it's there. Three weeks later, when you can't ignore the smell, you find the results. What is it? Some mutant strain of . . . cottage cheese, maybe? Something even worse? That's what happened to Remy and Lara's marriage.
Ordinarily, the IRS wouldn't care about a couple of feuding spouses. But Remy is one of Wall Street's fatter cats, a hedge fund manager who did well enough before the recession to treat 100 of his employees to a long weekend at Venice's five-star Hotel Bauer. He's struggled a bit since then but he's still worth $200 million or so. That's enough to give the IRS a stake in the fight — although maybe not what you think.
From the outside, the Trafelets lived an enviable life. They split their days between a $15 million Park Avenue apartment, a $10 million Long Island house, a grouse-hunting estate in Scotland, a quail-hunting estate in Georgia, and two morehouses. (Seriously, did they really shoot so many birds they needed two estates for it?) They supported a personal trainer, a chauffeur, a private chef, and a 16-seat jet. Apparently, though, all that money failed to buy happiness, and the couple filed for divorce in 2015.
Lara may not have loved her husband anymore. But she still loved the money. So, she hired a squad of accounting ninjas to "kick him between his legs and bring him to his knees." And the ninjas were happy to oblige, working "around the clock" to sort through Remy's "multi-layered complex web of business entities." They even set up a dedicated conference area called the "War Room" for Lara to use. That effort helped convince a judge to bump her interim alimony from $17,000 to $45,000 per month.
But financial samurai don't come cheap, and when they sent Lara a bill for $4.2 million, she freaked. Now she's fighting them in court, too! (Honestly, it sounds like it sucks to be Lara.) Here's where our friends at the IRS come in. The good news is, legal fees for arranging alimony are deductible. So Lara should be able to write off at least part of her bill. The bad news is, the rules are about to change, and starting in January, alimony won't figure into taxes anymore. So she better hope she can wrap things up fast!
Now, lots of us have a painful breakup or two under our belt. But we've never had to put our accountants' kids through college to sort it out!
Fortunately, not all accounting ninjas bill millions. Take us, for example. We can help make sure you aren't paying more tax than you legally owe. And we promise not to bill you seven figures unless we save you millions more. So call us when you're tired of overpaying, and we'll even let you decide how to share it with your spouse!
When Mark Zuckerberg was 19 years old, he launched Facebook from his Harvard University dorm room. (Some cynics might say "stole" is a better word than "launched," but who wants to start that debate?) Since then, he's made Facebook one of the internet's most valuable brands. And as he's done it, his net worth has climbed as high as $81.6 billion, making him the world's third-wealthiest man behind Amazon founder Jeff Bezos and Microsoft co-founder Bill Gates.
At least, that was the case until July 25. That day, just after the market closed, Facebook released its second-quarter earnings. Revenue was up — but not as much as investors had hoped. When the market opened the next morning, investors unfriended the stock big-time. Zuckerberg saw $16.8 billion of his stash evaporate in the first hour of trading. (Shareholders as a group lost $120 billion.) That's roughly the total salaries of all 1,696 players in the National Football League. (Not a football fan? It's also enough to buy the Yankees, Dodgers, Cubs, Giants, and Red Sox combined.)
So at this point, Zuckerberg is hardly even rich anymore. But while he and his wife are tightening their belts, scrounging for change in the couch cushions, and debating whether to keep the HBO, we got to wondering what our friends at the IRS think of the news. The answer, not surprisingly: "it's complicated."
Zuckerberg owes tax on his regular income as soon as he earns it. But his salary is just a dollar a year, which doesn't leave much for Uncle Sam. Of course, he also gets some nice perks. Facebook spent $7.3 million on Zuckerberg's security last year. (Fortune 500 companies can't just hire a bunch of knuckle-dragging goons to trail their CEOs. Top bodyguards, who come from federal agencies like the State Department or FBI, command six-figure salaries, and Facebook's security chief served on former Vice-President Joe Biden's Secret Service detail.) That protection is taxable, too.
But the real action, for a tech entrepreneur like Zuckerberg, is in the stock. Facebook announced last September that Zuckerberg plans to sell 35 to 75 million shares — worth between $6 billion and $12.5 billion — to finance his charitable limited liability company. He'll owe tax on those sales, but he'll get corresponding deductions for much of the cash he donates. In fact, last year's Tax Cuts and Jobs Act made those gifts even more valuable, raising the deduction limit from 50% to 60% of his adjusted gross income.
The IRS gets another whack at the rest of Zuckerberg's stock at his death. Considering he's just 34, that probably won't be for a while. But at that point, at least under current law, they'll download 40% of his taxable estate over $11.18 million. Now, unless Facebook implodes like MySpace, Zuckerberg should still be worth billions at his death. But — Zuckerberg and his wife have announced plans to leave 99% of their fortune to charity. Charitable bequests aren't subject to that 40% tax, which leaves the IRS scrounging for crumbs from whatever table scraps the pair leave for their kids.
The bottom line here is that the IRS had no reason to regret Zuckerberg's terrible, horrible, no good, very bad day, because his smart tax-planning means they wouldn't have gotten into a relationship with the stock anyway. The good news for you is that you can put the same sort of planning to work for yourself. And you don't even have to lose $16 billion in a day to do it! Just direct-message us when you're tired of paying more than you have to. We're sure you'll "like" the savings!
Classic rock fans celebrated a milestone birthday on July 26: Rolling Stones front man and rock legend Mick Jagger turned 75! If that doesn't make you feel old, try these on for size: Aerosmith's Steven Tyler is old enough to collect maximum Social Security benefits. Cyndi Lauper still just wants to have fun, but now she's on Medicare. And 80s icon Madonna can finally take money from her IRA without paying a 10% penalty on early withdrawals.
In 1969, Jagger and the Stones scored one of their biggest hits with "Gimme Shelter," a bleak, brooding meditation on the war and violence that characterized the late 60s. But did you know that "Gimme Shelter" describes the band's philosophy on taxes, too?
The Stones' troubles with taxes go back nearly as far as their troubles with the police. Starting in 1968, British authorities had accused the bandmates of taking a certain laissez-faire attitude to controlled substances laws. Later, reports surfaced that they had taken a similarly lax approach to tax laws, too. As Jagger recalls, "So after working for eight years I discovered at the end that nobody had ever paid my taxes and I owed a fortune. So then you have to leave the country. So I said &@#& it, and left the country."
At that point, guitarist Keith Richards paid $2,500/month for the 16-room Belle Époque-style Villa Nellcôte overlooking the Mediterranean on the French Côte D'Azur. (He should have bought it — in 2005, a Russian oligarch dropped $128 million for the place.) There, the band hosted a summer of legendary debauchery: drinking, smoking, snorting, and injecting anything that didn't move. Somehow along the way, they also managed to record Exile on Main Street in a makeshift basement studio they had soundproofed with cheap carpet and (probably) more drugs.
Running from the law has a wonderful way of concentrating the mind, and the Stones vowed not to repeat their financial mistakes. (The drugs were another story.) Jagger put his London School of Economics education to work, and the band started jamming with some top-notch tax planners. They eventually set up a series of Dutch corporations and trusts which helped them pay just 1.6% in tax over the last 20-odd years. More recently, they established a pair of private Dutch foundations to avoid estate taxes at their deaths.
"Mick would come and visit me occasionally in Switzerland and talk about 'economic restructuring,'" Richards wrote in his 2010 autobiography, Life. "We're sitting around half the time talking about tax lawyers! The intricacies of Dutch tax law vis-à-vis the English tax law and the French tax law. All of these tax thieves were snapping at our heels . . . Mick picked up the slack; I picked up the smack." (It's worth mentioning that Richards — now heroin-free for 40 years — makes his home in decidedly unglamorous, but, relatively speaking, low-taxed Connecticut.)
As for us, we may not be able to make beautiful music. But our tax planning rocks. And we think paying less beats fleeing the country. So call us for when you're ready to pay less and see how much you're wasting right now. We're here for you, and your bandmates too!
Earlier this month, archaeologists digging in Egypt unearthed a 2,000-year-old black granite sarcophagus 16 feet below the surface. Pretty cool, right? But then they announced they were going to open it. What a terrible idea! Have they never seen The Mummy? When the lid came off, they found three skeletons rotting in some dirty water that had probably leaked in from a nearby sewage trench. But that doesn't necessarily mean an ancient undead presence didn't manage to escape, too. It's not like they could actually see it!
Egyptologists aren't the only ones facing an ancient spirit that refuses to die. The tax world has one, too, though not as evil. We're talking about the eternal promise of the tax you can file on a postcard. (Yes, we know, this is a really lame transition to a tax column. Hey, you try finding topics to make taxes entertaining 52 weeks a year!)
Back in 1972, the IRS released a Form 1040A that would fit on both sides of a postcard. There were 27 lines, plus the usual spaces for names, addresses, social security numbers, and signatures. Unfortunately, you couldn't use it if you ran your own business, or made more than $200 in interest or dividends, or itemized deductions. On the bright side, you could take a credit of $12.50 for political contributions ($25 for joint filers), which seems downright quaint in today's era of seven-figure gifts and dark money PACs.
Politicians since then have paid lip service to the idea of a postcard-sized form, even as they've made the actual preparation harder. Last year's Tax Cuts and Jobs Act added several new twists for business owners. But these days, everything has to be sold as "simplification." So IRS officials gamely pledged to play along. And last month, they trotted out a draft of a single form designed to replace the current 1040-EZ (14 lines), 1040A (51 lines) and 1040 (79 lines).
The new form is two half-sized pages, so it could theoretically fit on a postcard (if you didn't need room for a stamp). But calling it a "return" may be fake news. If you have more than two kids, you'll need to add another page to list them. If you report income from a business or real estate, you'll need to attach Schedule 1. If you itemize, you'll need to attach Schedule A. If you owe "other taxes" like AMT, you'll need to attach Schedule 4. Pretty soon that so-called postcard starts to look a bit like a phone book!
While we're at it, let's add another dose of cold reality to the whole "postcard" plan. Who wants their mailman gossiping about how much they make? How do you attach a check to the postcard if you owe? And hasn't the whole idea of "electronic filing" rendered the size of the paper form pretty much irrelevant?
The push for postcard taxes, along with the push for a so-called "flat tax," are steps towards a bigger goal to eliminate the IRS entirely. But here's some more uncomfortable reality. Even if we did have a postcard-sized flat-tax form we'd still need someone in Washington to administer it. We'd still need collections officers to chase down the people who don't pay it. And we'd still need tax cops to catch the people who cheat on it. Much as we love to hate the IRS, it's not going anywhere soon.
Here's something even scarier than unleashing an ancient mummy's curse: wasting money on taxes you don't have to pay! Fortunately, you don't need to dig 16 feet down to discover the solution. All you need is a plan. So call us when you're ready to stop running from the undead beast, and see how much you can save!
When Congress raises the hood on the tax code, they're usually working to raise money to pay for government. But sometimes they're more interested in nudging us to behave in ways they can't legislate directly. Take the mortgage interest deduction, for example, which "cost" the Treasury $69.7 billion in 2013. That deduction encourages millions of Americans to spend billions of dollars buying homes, building homes, renovating money pits, and keeping their homes looking spiffy — all of which returns billions more through our overall economy.
Last week, the House Ways and Means Committee passed another one of those "we-know-we-can't-make-you-do-this-but-we-can-still-give-you-a-tax-break-for-it" laws. The Personal Health Investment Today ("PHIT") Act would let you take medical deductions for general fitness expenses: gym memberships, exercise classes and personal trainers, sports and fitness equipment, and even pay-to-play school sports fees and race registration fees. (That's right, your local Thanksgiving "Turkey Trot" 10k will be deductible!) The bill caps the new deduction at $500 for individuals and $1,000 for joint filers.
Here's the catch. Everyone knows that medical and dental expenses are "deductible." But look a little closer and you'll see that code section 213 lets you deduct them only if you itemize, which leaves about 90% of Americans sitting on the bench. And even if you itemize, you can only deduct the amount of expenses over 7.5% of your adjusted gross income. So, on its face, the new deduction won't mean much.
It turns out, however, that millions of Americans who can't itemize can still benefit from tax-advantaged flexible spending accounts, medical expense reimbursement plans, and health savings accounts. The bill lets you reimburse PHIT expenses from those accounts.
The Congressional Budget Office estimates the bill would (cost the Treasury) save taxpayers $3.5 billion over the next decade. That's enough to get special interests interested. The Wall Street Journal reports that "Fitbit, Inc., the American Heart Association and the American Sports and Fitness Association have all lobbied for the bill." And Planet Fitness stock climbed more than 4% the day the bill passed.
Of course it wouldn't be a tax law without a few, ah, provisos, and a couple of quid pro quos. Sorry, golfers . . . hitting the links doesn't count as "exercise." Same for hunting, sailing, and horseback riding. And couch potatoes need not apply . . . "qualified sports and fitness expenses" won't include instructional videos, books, or similar materials.
You'd think a bill attacking America's expanding waistline would be universally popular. Even potato chip companies can back a law designed to work off calories after they're eaten. But not everyone is enthusiastic. Leonard Burnham, a former Clinton administration tax official and (apparently) a world-class buzzkill, told the Journal that the benefit would mostly go to high-income families that are already buying gym memberships anyway, and "Every principle of tax policy is violated by this."
Fortunately for the rest of us, you don't need to be taking advantage of good policy to save money on taxes. You just need a trainer and a plan. So find some time between trips to the gym to call us, and put your tax bill on an exercise plan!
Fall is Planning Season
John Leidy, EA
DIY Books Coach
It was the third day of the very first income tax course when I realized that it will become my mission to help people understand their taxes better to be able to make better decisions and STOP wasting money on taxes they should not have to pay.