Estate Planning - the New Way?

But, what about the issue of income tax on capital gains, while still living? With the new higher capital gains tax rates, federally, effective Jan 1, 2013 of 20%, plus the new ACA/Medicare surtax of 3.8% if one’s taxable income is greater than $400,000 (single) or $450,000 (married filing joint). Further, if one lives in California, under newly passed Proposition 30, after $1,000,000 in capital gains this state’s tax rate can be as high as 13.3%. Before deduction of state income tax paid from federal taxable income, if you are fully able to,, the total capital gains tax rate for a California resident with more than $1 million in capital gain is now 37.1%. For low tax basis property, this will be a larger number than most of us have paid in a long time. It amounts to a combined 41% increase in total capital gains taxes for federal and California.

Isn’t it also the task of good estate planning to reduce income tax while the client is still alive? All realized capital gains are forgiven at the moment of death. How do we plan to “do this,” and also have the same assets then receive a “stepped-up tax basis” at the moment of death?

IRC Code Section 1031 is still alive and well. It allows a “tax-deferred exchange” for sales of real estate and other property, held for use in a trade or business, or for investment. Not easy to do, but feasible with good strategic deal planning and proper tax planning. The time allowed to nominate up to (generally) three replacement properties is very tight. The problem is the taxpayer’s inability to do proper due diligence on any nominee property before they are in contract, and comfortable nominating the property. Defects or misrepresentations, are always found later. The Seller knows you are in an exchange and is unwilling to renegotiate the purchase contract.

And last: IRC Section 1031 is mandatory. There may be a loss, which could be deducted, depending on the tax basis. Some people do a 1031 exchange without realizing that they are; like when they trade in one car, for another.

We can work with you to resolve these problems. Please contact us and we can show you how.

Ayn Rand, Paul Ryan, Self-Reliance, And Taxes

Much has been in the news since Paul Ryan was chosen as Romney’s VP candidate about Ayn Rand, whom Mr. Ryan is known to have highly regarded. As one familiar with much of what Ms. Rand wrote, I have been disappointed in how her views are being represented by the liberal side of thought in such a negative and condemning manner.

See reviews on Google Books

Ryan has of late - abandoned his admiration of Rand’s views, for reasons not very clear. Interestingly, the characteristic of Ryan most have commented on in favorable terms, is Paul Ryan’s self-reliance. This is the essence of what Ayn Rand stood for, and how she herself, lived her own life.

Self-reliance is the soul of American character and life. It is the key of our democracy. In the words of Rand, it is based upon an individual’s own “motive power”.  We are a country of immigrants: the hardiest stock of all, and founded in individualism.

The power; shall we say, the “self-power” of the individual is what Ayn Rand was trying to point out in her novel Atlas Shrugged. In this book of larger than life personalities, she showed us the power of each individual to define their life as a “producer” or as a “looter”.

How does this connect to taxes, meaning income or estate taxes? Well, we all have the power, and the right - to keep our taxes to the lowest cost possible. To do so is self-reliant: it is up to you.

I think Ms. Rand said many ridiculous things, in addition to being a beautiful writer and novelist. She is reported to have been an adulterer, atheist, to not believe in families, to think all people should live as she said they should. I do not think this is representative of her core beliefs, though many of reported comments appear to be true.

What matters in life is not what we have, or what we get. What matters is what we do. In this sense, both Paul Ryan and Ayn Rand have very much in common: they both made the best of difficult life circumstances from a young age. And they share the virtue of self-reliance.

The above is not in support of Ryan’s political views; I am a centrist.

The Romney Tax Rate

I want the Romney Tax Rate. I want it for myself, and I want it for my firm’s clients. But we cannot have it because we have too much “earned income”. Romney did not, and does not. I will discuss this further in another post.

An excellent piece written by Michael Graetz, Mitt Romney’s Financial Mysteries, published last week by the New York Times, highlights the areas where Romney has perhaps advantaged himself at the cost of other US citizens. The author, a former Bush Administration tax official and current tax law professor, knows what he is talking about: that by investing probable severely undervalued assets into his IRA account, these assets later “bloomed” within the Romney IRA. There is no other way to have an IRA account of over $100 million, because the Internal Revenue Code annual contribution limits are simply too small. 

The annual limit on IRA contributions in general, set by statute, has never been more than at the most, $50,000 per year. Assuming Mr. Romney contributed for 20 years; at up to $50K per year, this would $1 million in total contributions.  For a fund to grow to $101 million over 20 years, assuming the funds came in over time, (meaning not all at once as most IRA funds do), would be a financial performance beyond compare. A more likely explanation is the one given in the article; that of undervalued assets being contributed to a self-directed IRA, which then, magically become worth much more than they were worth when contributed. A private equity fund carried interest is one of the few asset types capable of this level of performance. While this is not per se illegal, it is a tax avoidance device. If so, we would think it could be discussed openly, for someone seeking to be President. Being accountable for one’s actions, goes with this territory.

Romney is being asked to release his tax returns by a growing chorus within his own party. They feel his refusal is becoming a liability to him being elected. Romney’s refusal to release his income tax returns, not to mention the off-shore holding of his family assets says he doesn’t think he has to. It may also say that he can’t… it would be too explosive. People would be outraged to know what this “common man” has done. The methodology is politically suspect and may even be legally suspect; another (very) good reason for not releasing. Romney was recently quoted as also saying he “had been audited, too”. One wonders what the result of that was.

Read the piece. It renders clarity in an area confusing to most.

Amazon VS the Sales Tax

The time for great face-off of brick and mortar retailing vs the online retail industry has begun! Jeff Bezos of Amazon last week said he hopes there will be a federal solution to the matter of whether the online retail industry should collect local sales taxes in the various states Amazon and its affiliates sell merchandise in. Bear in mind that retailers do not pay the tax; they merely collect and remit it to the various states they do business in. However, Amazon, in a demonstration of defiance of the new California law requiring online sellers of Amazon's size, begin to charge the sales tax to California residents and remit monthly like any other retailer in this state - has refused to do so, and is not collecting the tax from its CA customers. This means they are openly running the risk that they may be forced to pay the sales tax they should have collected, if the CA courts later determine they should indeed have followed the law.

This is no small matter. The cost to Amazon will eat into their low gross margins: the heart of their business plan. Further it is a blatant violation of the new CA law. Why is it fine for one of the largest US corporations to disobey a tax law, but a US citizen will do this at the peril of being sent to prison for tax evasion?

Amazon yesterday said it would support a referendum which it hopes to have on the CA ballot in February to impede and overturn this new law. What do you think abou Amazon's cheekiness in not collecting the sales tax in the first place, and now, openly funding a referendum in a state where they claim they have no "nexus" (basically sufficient business presence to warrant  a claim they are operating a "trade or business" there)?

We look forward to your thoughts....

welcome!

I'm starting this blog to share my knowledge about tax issues. Stay tuned!