Wall Streeters have a lot to give thanks for this holiday season. Earnings are up, so bonuses are up. And that, in turn, means taxes are up, too. The New York Post just reported that Wall Street Bankers Are Throwing Excessive Parties To Dodge Taxes. But will the wining and dining actually put money back in their pockets? Or is the tax angle just a convenient excuse to party up a storm on the company tab?
Wall Street culture rewards bankers for results. They generally start out with low fixed salaries, at least as a percentage of their overall pay. Then, around this time of year, the bosses get together to count their profits, and shower producers with whatever bonuses it takes to keep them from jumping ship to the competition. In 2017, Wall Street pay jumped 13% to average $422,500 per head. And one consultant predicts sales and trading pros could see 20% more this year in their stockings.
Here's the problem for all those Masters of the Universe glamming it up in their Manhattan condos. Last year's tax bill cut the top federal rate from 39.6% to 37%. However, it also capped deductions for state and local taxes to a flat $10,000. That's a real punch in the gut for Manhattanites paying 13% to the state and city. Throw in 3.8% more for Medicare, and that brings the total skim up to 54%. That's not as bad as the "one for you, nineteen for me" the Beatles sang about in Taxman. But it's hard to get rich if tax collectors are taking home more than you do!
And so, concludes the Post, "Bankers and traders will be celebrating the prospect of massive, multimillion dollar payouts — and they'll use the mega-expenses of year-end blowouts as write-offs for their inflated tax bills, according to industry sources."
It turns out, though, writing off a pricey dinner isn't a very tasty tax shelter. Let's say you treat yourself and three colleagues to the $795/person "white truffle" extravaganza at Daniel, an Upper East Side mainstay. (Relax, your wine pairings are already included in that price!) $3,200 sounds like a lot to shell out for dinner. But after you deduct 50% and multiply it by the 54% tax you save, Uncle Sam covers $864 of that bill.
Now, $864 might cover the sales tax and tip. But in the end, it's a subsidy, not a savings. Nobody puts money in their pocket by splurging on Florida frog leg mousseline with porcini mushrooms in a white truffle white wine sauce. It's delicious, if you're into that sort of thing, and it looks great in your Instagram feed. But you can't retire on it (unless you're the celebrity chef selling it.) You'd think seven-figure financial wizards would be smart enough to figure that out! (Or maybe they're making so much it doesn't really matter?)
While bankers are out celebrating, they should raise a toast to a different blessing. The law that capped deductions for state and local taxes also eliminated them altogether for business entertainment. But Washington did such a clumsy job writing it that tax pros across the country worried it might have killed writeoffs for meals, too. Last month, the IRS clarified that meals are still deductible, so long as they're not "lavish or extravagant." So you tell us — does $795 for five courses of white truffles pass the test?
Nobody likes paying more tax than they have to, especially when they're paying 54%. But we understand the best tax plans are the ones that help you accomplish financial goals beyond a night out on the town. So call us when you're ready to save, and we'll give you something to celebrate!
If you were coaching your kid's basketball team, you wouldn't win many games if you told them to aim for the backboard. Your opponents might love you, but there would be at least one dad in the stands screaming at you the entire time. So why have some tax collectors given up aiming for the hoop and settled for rebounds?
At first glance, the tax code looks like 70,000+ pages of incomprehensible gobbledygook. (Sometimes you really can judge a book by its cover.) But scratch the surface hard enough and you'll find a semblance of order. Add up total income from various sources. Subtract adjustments to gross income and standard or itemized deductions. Calculate the tax based on the remaining net income. Finally, subtract any available credits for doing things Washington is willing to subsidize, like having kids, sending them to college, or driving your kids to college in an electric car.
Easy peasy, right? (Yeah, sure.) In practice, of course, it's a lot harder, and leads to complications like "partnership capital account revaluations," "tentative alternative minimum taxable income," and "auditors crawling up your you-know-what for a week and asking for every Staples receipt from the last three years."
The lane to the net can be even twistier on the corporate side. Multinational corporations have crafted strategies like the "double Irish with a Dutch sandwich" (yes, that's really a thing) to shift income from high-tax countries like the U.S. (35%), to low-tax countries like Ireland (12.5%). Clever lawyers save their clients millions of dollars with these sorts of gyrations, which explains why they wear antique Swiss watches and drive pricey German sports cars.
But what if we didn't have to jump through all those hoops? What if we could just bounce the ball off the backboard and call it good? It turns out that some governments are finding ways to do just that.
In London, Treasury chief Phillip Hammond is proposing a "digital services tax" of 2% of gross revenue on U.S. companies like Google, Amazon, and Facebook. The new levy would raise £400 million per year, regardless of where those companies ultimately send their net to be taxed. The European Union and Spain have proposed similar taxes of 3%, and several more countries are eyeing that bandwagon. Those small percentages may not sound like much. But applying them over a broader base can quickly mean enormous revenue for those countries.
Here in the U.S., several states impose revenue-based taxes instead of traditional corporate income taxes. In Texas, businesses pay 1% of gross receipts over $1 million, or 0.575% over $10 million. In California, LLCs pay a fee of up to $11,790 depending on gross revenue. And in Ohio, businesses pay a flat Commercial Activity Tax of 0.26% on Ohio gross receipts over $1 million. Those amounts may look like small potatoes, but they add up fast. Plus, it's easier for businesses to calculate revenue-based taxes and for auditors to verify them.
The good news is that our old-school income tax raised about half of our federal revenue last year. It would take a Herculean effort to change that system, especially when Mitch McConnell and Chuck Schumer can't even agree on naming a post office. And that means all your favorite tax breaks are still safe, at least for now. So call us to make sure you're not missing out on any free throws!
Reality television has introduced us all to the joy of the "big reveal." HGTV specializes in this sort of story. The perky couple, handsome brothers, or plucky first-time homeowners spend most of an episode covered in plaster dust and paint. Then after the final commercial break, they pull back the curtain on the dream interior so viewers can feel inadequate about their own homes. (VH1's Dating Naked did things a little backwards, with the "big reveal" up front, but still managed to wring some drama out of the format.)
In Finland, tucked between the Baltic Sea and the Arctic Circle, they do things a little differently. For starters, they love reindeer sausage! They play host every year to the World Wife-Carrying Championship, where whoever crosses the Finnish line first takes home his wife's weight in beer. But on a more sober note, the Finns have decided to discourage the sort of income inequality that's growing across the world. So, in the interest of transparency, they publish everyone's income tax returns!
The Finnish Tax Administration schedules their big reveal for 8:00 AM on November 1. The New York Times calls it "National Jealousy Day," which seems appropriate, and Finnish newspapers assign up to half of their staff to covering the event. This year, taxpayers reported earning a total of €140 billion and paying €46.8 billion in tax, making Finland one of the highest-taxed countries in the world. But of course the real fun lies in snooping through the individual returns: your bosses, your neighbors, and your friends and family.
Back in 2013, a pair of video game developers named Ilkka Paananen and Miko Kodisoja set the record for the highest capital gains. That's the year they sold 51% of their company Supercell, which makes games for mobile phones. The $62 million they paid on the gains from that sale boosted the entire country's capital gain total by 20%. And they became folk heroes for not taking advantage of any planning strategies to pay less.
Two years later, one reporter discovered that several executives had relocated to Portugal to avoid tax on their pensions. It's hard to blame them for wanting someplace warmer, of course, even if it means leaving the reindeer sausage behind. But the story caused such an uproar that Finland rewrote its tax treaty with Portugal to close that particular loophole.
Last year, Supercell's Paananen and Kodisoja took home the gold and silver at €65.2 million and €57.5 million, respectively. (That sounds even better than winning your wife's weight in beer, right?) Aleksander Hanhikoski, founder of a real-time payments company, picked up the bronze with €24.6 million. Three more Supercell execs helped round out the top ten. There were 12 women among the top 100, with Ulla Riitta Sjöström ringing the bell at number 28 after selling her family's civilian shelter equipment business.
Revealing everyone's income isn't the only way Finns use tax returns. If you get caught speeding, your fine is based on your income. In 2015, the polissi clocked hotelier Reima Kuisla doing 64 in a 50-mph zone. They looked up his income right on the spot, and issued a ticket for roughly $62,000! (Kuisla's car probably has the latest charcoal scrubber system to filter out the smell of poverty, but that $62,000 still had to stink!)
What do you think would happen if our IRS revealed everyone's income? Would you be willing to pay more tax to impress your neighbors? If not, then call us to help you fly under the radar. We bet we'll save you enough for all the reindeer sausage you can eat!
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