How to Beat Your State's Estate Tax

The New York Times recently reported the effect of state estate taxes on the superrich. I hope Gov. Murphy wasn’t reading that article. According to the Times, if Jeff Bezos of Amazon were to die a resident of the State of Washington which apparently has an estate tax the State of Washington would be enriched by about $12 billion. That is pretty impressive considering that Washington State’s entire budget for two years is a meager 52 billion dollars. You can almost imagine state tax assessors counting down the days for the rich and famous to kick the bucket. Now in fairness to the wealthy a simple planning technique can deny states like Washington billions of dollars. With all that loot the wealthy can simply… move. That is not to say that living in Seattle would be the same as living in Naples, Florida especially for one not used to seeing the sun on a regular basis. But the wealthy are not alone in making this transition. For us in New Jersey it’s the income tax that drives out many people to places like Florida. If your income is fat enough the New Jersey income tax, if avoided, could be large enough to pay your real estate taxes and green fees on that Naples golf course condo. All that’s required is a set of Florida license plates and being able to count to 181. Perhaps some sophisticated auditing technique used by the state can determine whether or not you are in fact a resident of Florida when you return to New Jersey for “vacation” when eggs are being cooked on Florida sidewalks. But with facial recognition be careful. When your face starts showing up at the local Costco when you are supposed to be in Florida, your tax planning may go up in smoke. BTW the Prez himself has declared he is now a Florida resident. You see it really works...just move!

Tax the Rich?

As can be expected the presidential race is underway. Now Senators Warren and Sanders are calling for a massive change to the tax code. Their objective is to create a total redistribution of wealth. The plan is to end the Golden or Gilded age of American entrepreneurs. In other words they see no reason for individuals to be worth billions of dollars. The answer for them is a wealth tax which would half the value of their holdings with the intent that such money be redistributed in social programs that benefit everyone. This is a nice idea but it shows that these candidates have no idea how tax laws are passed. Neither the House nor the Senate would have the guts to take on such an idea. Surely no one knows what the effect would be on a global economy where entrepreneurs here in the United States were given a disincentive to be so extremely successful. Isn’t it piling up all that money that gets them out of bed in the morning?

Cuba's Secret Weapon

   I went to Cuba to see for myself what all the fuss was about. It was during the tiny window provided by the Obama administration in an attempt to assuage relationships with that terrible, awful, despicable, communist country sitting a mere 90 miles from Key West. Fortunately, Trump has tightened travel there for us Americans and has thereby refused our supporting such an awful place (though the rest of the world is having a ball down there). By the way I found none of those things to be true and I still wonder about a country as great as ours being fearful that we citizens may be polluted by the Communist style of life nearly lapping at our shores. You may remember that I wrote a piece about the Cuban tax system which since 2012 is looking more and more like the mess we have here in the United States but at the same time stimulating that dirty word “capitalism.” So it is with great interest that I have followed the story of the “secret weapon” used by the Cubans to mess with the brains of our diplomats and their staff right in the middle of old Havana. A recent article in the New York Times said that a study reported “trauma in brains” of diplomats. Apparently in 2016 dozens of United States diplomats working in Cuba began reporting mental symptoms: persistent headaches, vertigo, blurred vision and hearing phantom sounds. Since then, according to the Times, scientists and commentators have groped for plausible explanations. What could it be? Deliberate physical attacks involving microwaves or such other technology or were psychological factors subconscious yet mind-altering the more likely the cause? How silly. Anyone who was been to Cuba and spent any time at all there knows exactly what is going on with these diplomats. It’s a three letter word. No not that one. Cubans are fond of saying they do not have a drug problem not because the Cuban people are happier than we Americans but because they have found an alternate route to Nirvana. RUM. Now the brew you can get in Cuba is not regulated as it is here in the United States. One glass with some Coca-Cola can give you a pleasant buzz. The next glass from a different bottle could send you into the stratosphere and with it will certainly eventually go a doozy of a headache, vertigo, blurred vision and plenty of phantom sounds. So with all due respect to the ailing diplomats for which partying is a way of life I suggest there is no secret weapon in Cuba except the one found right under their nose at least when a good chilled glass is being tipped there. I am amazed that all those really smart scientists doing their “studies” didn’t come up with the same conclusion. But then again they’ve never been to Cuba and perhaps suggesting a chronic hangover instead of a “secret weapon” wouldn’t do much to scare the US population.

Law School May be Dangerous to Your Health!

    I have a file for recommendations to law school. It’s done on a fancy form now a lot more sophisticated than the old days, but in many ways it asks the same questions. How do you know this candidate? Is there anything that makes them particularly suited to study the law? And on and on and so forth. What it does not ask is whether the person making the recommendation has set the candidate down and read them the Riot Act. Not so much about how difficult it will be to find a rewarding position and the magnitude of the debt that may be facing them when they are finally out of law school, but one more basic. When my old college roommate’s daughter decided to go to law school I gave her this advice: If you become a lawyer you will never be the same. Let me tell you what I meant. Last week friends invited me to go with them to see a new movie that had made some top billings at film festivals out West. It was called “The Biggest Little Farm.”  Now to non-lawyers, it is a sweet film about overcoming obstacles and realizing an almost unobtainable dream. In this case going from being evicted from their apartment because of their loving dog Todd (An expressive rescue doe eyed canine) in Los Angeles to acquiring a 200 acre farm an hour north and turning it into a sustainable, organic piece of paradise. I could hear sobs from some of the people in the audience. I will confess that some of the scenes including the one involving the birth of seventeen piglets were touching and Kleenex worthy. But as I sat there my two law degrees and 45 years of practice including a stint with the Internal Revenue Service began to surface. The chief characters John and Molly both had incomes of a sort. He being a photographer and she owning her own small business. The eviction was not because they were broke, but because of their dog. But still how could these young people swing owning 200 acres north of Los Angeles? The movie off offhandedly mentions the word “investors.” That did it for me. It brought back memories of tax shelters from the 1970's where investors were eager to pony up their money even if they lost their investment because they were more than covered with beneficent tax deductions. In the most egregious examples with a multiple of their original purchase price. My mind wandered to my days in the US Tax Court where movies were the schemes upon which tax shelters were built as well as oil wells, silver mines, cattle, Caribbean yachts and the like. Instead of paying attention to the human side of what I was viewing, I was picturing the prospectus that had been prepared by some fancy law firm in Los Angeles chock full of tax law promises. Further, I was intrigued by whether or not this activity would be considered active or passive for the many rules disallowing real estate deductions. Could IRS challenge any tax deductions because this was a hobby venture with little potential for profit? This was never my field and I was considering at the time calling one of my colleagues the next day and reviewing those very rules. John and Molly in the movie had stars in their eyes; they used their talents coupled with hard work to make the farm a reality. You can see it for yourself, it’s called “Apricot Lanes Farm” in California. I did some research when I got home and concluded none of what I had legally fantasized was probably true. I guess if you are a real estate lawyer you would be intrigued by the various riparian rights issues. If divorce and family law is your game you would be questioning why these young people have not entered into well advised pre-or post-nuptial agreements. Injury lawyers would be gasping at some of the farm tractor antics. Land use, animal rights practitioners, civil rights lawyers and gun-control advocates would find elements here to also be concerned for. I think you get the point by now. We lawyers are a strange group; our brains permanently reorganized to consider facts critically and to weigh rights and liabilities. Normal people don’t do that. They just go to a movie and enjoy the show. I can’t help but wonder if we lawyers can be reprogrammed perhaps at retirement. I thought about writing the law school admission people to suggest that their law school application should contain a warning perhaps from the Surgeon General: Law School May Be Dangerous to Your Health and Attitude.

The Business Gambler James from Jeopardy

James the guy on Jeopardy had just crossed winning $2 million. He gives his occupation as a professional gambler. You have to like somebody who is proud that they make their living gambling. It’s a profession the IRS approves of. Well maybe not the slots or the craps table or betting on sports or horses. But the IRS wants you to gamble… on business and the stock market. The poor hard working wage earner is scorned by the tax laws. He has no wiggle room on his tax return and these days loses even some of his former precious deductions. But to be a gambler like James the Jeopardy guy casting fate to the wind investing your last red cent in a business where the odds of failure are about 75% or on an IPO that is destined to flop makes the IRS happy. Where would we be if we were simply a country of drones trudging off to some citified cubicle trading one’s precious life for an hourly or weekly wage. The innovators, the doers and the shakers that’s what the tax law loves. Just take a look at all of the juicy tax deductions on an individual schedule C for an unincorporated business or a corporate tax return of any variety or how capital assets get breaks when you win or lose in the stock market.. That’s where the gold be, Jim Hawkins! And the best part of it is while you gamble those drones are covering your losses. As long as the working class never gets to understand just how bad they have it under our tax laws the racket for “business” people will continue. So what have you gambled on lately?

Student Debt Vanishes?

So the kids at Morehouse College went off to their graduation ceremony like college students everywhere in the United States, broke, but hopeful. If they’ve been on the law school treadmill they can owe perhaps $250,000. It’s like having a mortgage debt with no house. But the students at Morehouse had wisely selected Robert F. Smith as their commencement speaker. Smith founded Vista Equity Partners (see item #2) and became the richest black man in America. Right in the middle of his commencement speech Smith announced that he is going to pay off the entire debt of the graduating class no matter what their intent is and job or career they seek. Smith said: “We’re going to put a little fuel in your bus.” Student debt across the country has reached $1.5 trillion and some contenders for the White House say that it’s time to make student debt cancellation a reality. I can’t help but wonder whether Smith realizes he cannot get a tax deduction for his charitable act since it benefits individuals. Additionally, those students who have their debt canceled may find themselves with an income tax bill of one kind or another for such cancellation, unless IRS rules otherwise. Then again, it could be held as a massive nontaxable gift which stems from disinterested generosity with nothing expected in return. (I assume here Smith is not running for President, yet). It remains to be seen whether Smith makes good on his “promise.” As our Prez has found there is a real danger going “off-script.” It must have been a hell of speech. Parents who scrimped to send their kids to school and kept the kids college debt free may have learned their lesson.

The Tax Withholding Game

    I’m starting to think that all of these newsletters and bulletins are simply annoying. Lawyers, doctors and Indian chiefs all seem to have a newsletter that shows up in my email just like this one does in yours. I know most of you have the good sense to delete it without even casting a single glance at it. You should be comforted by the fact that I do the same thing. But I will admit that every now and then a notice of some kind arises that is worth repeating. This one was from a friend of mine who is an accountant. He was very straightforward. Being an accountant he knows facts and figures. He said the year 2019 is half over. I frankly had not given much thought to that spinning of the earth around the sun but realized that he was right. Before you know it, 2019 will be history. Now here is the point he made. If you are fortunate (or perhaps unfortunate) to be working for a wage where your employer is withholding taxes for your next year’s tax return you may want to visit your company’s accountant for a test drive of what your tax situation may look like for next April. This past April was a disaster for many, my accountant friend says, because they were happy that their net pay went up but did not realize that their state and local tax deductions went down. That left them in the lurch and short some to the IRS at tax time. So wise is the employee who makes an effort to increase his withholding to our friends in the Internal Revenue Service. Or does it? You are smart enough to know, I am sure, withholding means you are making an interest-free loan to the United States. It may be patriotic but makes little real financial sense. The best position a person could be in is owing taxes and not incurring an estimated tax penalty for failure to cough up enough during the year. That is making your interest-free loan to the United States as small as possible. But that of course would remove the joy of receiving a refund check next May or June when who have learned that you have “overpaid” your taxes. To ensure that you get the withholding calculation correct the tax law provides an estimated tax penalty (sort of like a non-deductable interest charge) which you can also review with your accountant. The other piece of information that my friend supplied was that withholding is treated as being spread equally over the entire tax year. So if you have a bunch of withholding toward the end of the year it will be treated as if it came in during the year saving you from that ugly estimated tax penalty and also thereby reducing the period you are in the interest-free-loan-business to the USA. So there, you decide whether that was a useless annoying bulletin or not. But it won’t matter anyway if you deleted this before you read it. I’ll never know.

The Trump Tax Return Revealed!

The other day scientists released the first images of what they say is a “black hole.” Simply put it’s a place so dark, dangerous and powerful that matter is sucked into it never to be seen again. I could’ve saved these researchers a great deal of time and simply told them that Washington  has been by this definition a black hole for at least the last half century right in plain view. But I was glad to see that we are getting closer to the explanation of where the heck we are in this massive thing called the universe. But as of the date of this writing the other black hole known as Pres. Trump’s tax return remains undiscovered. But there is no reason to be in the dark any longer. After forty five years in practice and being a former IRS agent and IRS lawyer I can tell you exactly what is in those tax returns. First, let’s say the tax return itself is huge, probably thirty or more pages long. It carries an almost innumerable number of schedules cross referenced to each other making the most serious inquiry of no real value. Entries refer to other corporations, partnerships and entities which no one has ever heard of. Any attempt to pursue any of these leads, called in the business a “daisy chain,” will only result in more paper, more schedules, and more cross-references that lead nowhere. While the tax return may in fact be prepared by some accounting firm those other entities, corporations and partnerships have their own mathematical accounting wizards who dream up the numbers and schedules that they file. This type of tax return does not in any way provide a complete and honest picture of anyone’s financial situation. It is filled with tax “positions.” By having numerous chefs making the soup, you see, no one can be held accountable least of all the President of the United States who I can guarantee you could not explain the entries on the tax return at all, even if he wanted to. Therefore it would be a waste of time to even ask him. If this massive document was in fact released it would be of no use to the Congress or anyone else. Ordinary taxpayers think that releasing the president’s tax return will reveal some dark secrets in his present or past. That it will confirm their suspicions. They are thinking that his tax return is like the lowly document they themselves have filed. Any IRS agent with ten minutes experience or training can tell you a great deal about the ordinary taxpayer’s financial life looking at their tax return: a job, some interest, a few dividends, real estate taxes, mortgage interest, and a contribution that he most likely cannot verify. There are no complicated cross-references or schedules. There are no esoteric partnerships, corporations or other entities from places unheard of in the world. There are no tax “positions.” So I think we must relax about this issue of getting this tax return. Why even waste the energy? Whether tax returns are made public or not in cases like Donald Trump they will tell no story other that in a tax system like ours people with abundant wealth and vast business dealings make a mockery of the entire system of tax administration at the expense of everyone else and that should come as news to no one.

2019 Tax Rates

           The tax rates will change again for 2019 getting somewhat wider. You remember all the talk about having almost a flat tax. Forget it. There are seven tax brackets for each of the various individual tax statuses. There are a couple of notable changes. The new and improved anti blue state standard deduction will rise to $12,200 for single taxpayers and $24,400 for married couples. For tax years 2017 and 2018 medical expenses were deductible which exceeded 7.5% of the taxpayer’s adjusted gross income. Starting in 2019 the uninsured medical deduction will only be allowed to the extent that it exceeds 10% of AGI. The Social Security annual wage base will jump to $132,900. The lifetime estate and gift tax exemption will increase to $11,400,000 for single taxpayers and twice that amount for couples if portability is elected. The annual gift tax exclusion will increase to $15,000 per donee. The federal tax law provides a special rule for the exclusion of gain on the sale of a principal residence. If you have owned your residence for at least two of the five years ending on the date of sale a single taxpayer can exclude $250,000 of gain and a married taxpayer $500,000. However, recognizing perhaps that we baby boomers are getting older, if a taxpayer is moving to a nursing home, the use requirement is reduced to one out of five years preceding the date of sale.  

Race the Tax Crooks

On your mark, get set…GO. The race is about to begin between you and the computer crooks who are intent on stealing both your identity and any tax refunds you may be entitled to. The Super Bowl for these cheats and scoundrels has already begun. While most Americans think of April 15 as a tax filing deadline a true hacker sees the very start of tax filing season as an opportunity to grab what he or she can as soon as possible. The game gets played this way: hackers will attempt to file tax returns for you using the identity information they have stolen. The object is to get a refund way before you do. So how then to cross the finish line 1^st? IRS councils that the best way is to file early. If you are able to beat the scoundrels there is a good chance that your refund will find its way to you. At the time of the writing of this bulletin the government, including the IRS, may in fact be closed again. With that closing may go your opportunity to get in the game at all. It will also give tax crooks more time to implement their strategies. No sense trying to call IRS…the phones won’t work in shutdown.

The "Fake" Bar Bulletin for February 2019

1)      Taking a lead from Great Britain it should come as no surprise that New Jersey, New York and California have decided to secede from the union. Governors in each of those states have gotten together to create a new country which permits the deduction of real estate taxes as well as other state and local income taxes. The governors believe that making their constituents happy will result in further productivity and increased tax revenues. Gov. Murphy from New Jersey declared: “New Jersey has it all. Mountains, lakes and the seashore. What need does it have for Washington DC.?” Murphy also declared that the state flag would be changed to read:” I’ll have a pork roll, egg and cheese” with an Art Deco version of the Bendix diner in its center. It should be noted that California has never really considered itself part of the United States anyway and it’s lost to the union is of little consequence especially since tech giants have decided to take their money and tax revenues elsewhere recently. Pres. Trump stated: “We don’t want California anyway. It’s a tinderbox. It’s Blue and just not nice.” He also noted enthusiastically that “Florida had better weather in the winter than does all of California.” And added “that he had no intention whatsoever of building any hotels in California or Russia.” Gov. Cuomo stated that New York’s proximity to Canada makes his state the “best choice for liberals” who hope to sneak their way across Canadian borders or who may wish to seek political asylum depending on the outcome of the 2020 presidential election. New York State he said will also do better courting tech giants with massive tax give-a- ways much sweeter than California. Pres. Trump on Fox news stated that he believes “Shrinking the country is a lot like shrinking the government… It’s got to be a good thing.” Other states continue to flirt with the idea following in the footsteps of New Jersey, New York and California. Some states have even suggested building a 35 foot tall border wall around their new country made of clear plastic so those less fortunate could look through and see how well they are doing.

       

2)      It would seem that investors in stocks on Wall Street are no longer of the “True Grit” variety. Without any provocation whatsoever (except for the trade wars with China and the rest of the world, climactic disasters everywhere, a federal deficit completely out of control and a President who could find himself indicted, impeached or worse) those scaredy cats sent the stock market down more than 1000 points in a single day which could be one of the worst recorded events in stock market history. Fortunately, the Secretary of the Treasury was quick to go on national news telling investors there was nothing to worry about. He told reporters that this was but a tiny blip in the overall healthy American economy. He said that the Republicans in Congress believe that America’s giant corporations would not let investors down even if it meant cutting wages by 50% to bolster profits. “It’s what these companies are used to doing anyway, .If that doesn’t work we can cut taxes again and again until we get it right.” When asked what his plans are when Pres. Trump fires him, as he has most other cabinet holders, he spoke confidently of his plans to start a hedge fund in a country just north of China specializing in foreign securities. He also spoke of his alternate plan to star in a sitcom to be called “The Last Big Bang Theory” about his days in the White House.

3)       It’s hard to believe that this February bar bulletin is actually being written in January due to time constraints and a pressing vacation schedule. It’s also hard to imagine that a good chunk of the federal government is closed and shuttered. In a surprise announcement Bill Gates told CNN reporters that it is his intention to buy the entire government. “When a business is on the skids, it’s the best time to buy”, Gates proclaimed. “We have a government that is closed and boarded up, deeply in debt and a dysfunctional Congress. What could this mess be worth?” The White House was stunned but quick to immediately begin negotiations. “I was sent to Washington to shake things up. What better way than to sell the entire government to one of its great entrepreneurial geniuses.” The President said. “Just look how great Bill Gates made Microsoft. I think he can do the same thing for us.” He also told reporters “that unless he takes Nancy Pelosi as part of the purchase, there will be no deal.” The plan needs Justice Department approval, but it, like the IRS was closed for comment.

Readers, forgive me. There is just too much nonsense going on these days to write another “real” bar bulletin.  Hope you enjoy the diversion. If you need any real updates…ask Alexa.