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.