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!
"10 Most Expensive Tax Mistakes That Cost You Thousands"
"5 Things You Forgot About with Your Small Business That Are Costing You Money"
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.