Happy Halloween...Can I write off candy I hand out?

Full moon, terrible storm ravaging the Northeast, election day rapidly approaching...what could go wrong?

The real question on this all Hallow's Eve is:

Can I get a tax deduction for the candy I give out?

Actually, yes.

If you are an individual, no, not at your front door. If you are a business, yes, if you link it to advertising/ordinary and reasonable business marketing type expenses.

However, you can also just be lazy at home, and send your leftovers to our troops. Apparently this DOES count as a tax write off for an individual. Learn how here.

Whatever you do, stay safe out there. And just for fun, send some well wishes to this poor little girl.

(video scouted by L. Stocker)

FLPs and the Keller Case

FLP= Family Limited Partnership. It is a normal Limited Partnership, except most or all of the members are in the same family. Straight forward enough, right?

People make FLP's for many "business reasons," because in the eyes of the government, you have to have a "business reason" for them to recognize the FLP. The real reason most people make an FLP is that you can use it to discount the value of your assets, keep them in the family, and easily and effectively transfer these to your next generation.

Here is the basic model:

The Smith family are farmers. Simple folk, but they have done well, and own their own 10000 acre farm with a thriving cattle and ranching business on it. It's now worth $100 million, and Ole' man Smith is on his last legs. Ole' man Smith transfers the business into an FLP. Nothing changes, it is a non-event for tax purposes. He now does not own the farm though: the FLP does. He owns 100% of the FLP. Now we can go to work. Ole' man Smith transfers 40% to his spouse, Granny Smith. No tax, as it is between spouses.  Then, he uses he and Granny's gift tax lifetime exclusion amount  (~$10 million) to transfer an additional 10% each to his children, Steve and Kevin Smith.

If Ole' man Smith died now, what did he own? A $100 million farm? Well yes, obviously, right? Wrong. He had a 40% interest in a FLP. That's it. What's that worth? Good question, to which the government lets you ask more questions: could he sell it? Did he have control? Was there a market for this type of thing? The answer to all of those before the FLP was yes, and if he died he would have paid tax on a $100 million business. Now, after the FLP, the answers have changed. He can't really sell it, he doesn't own it all. He can only sell what he owns. No, he doesn't have control, he has less than half. Is there a market for partial interests in partnerships? I don't know of one. All of these add up to a $100 thing now being worth something a lot less, usually around 30% less.

And that is just the valuation discount for the underlying assets. Further, each gift of a "percentage" of the FLP is discounted in and of itself, so that 10% gift to the kids is really worth 30% more than a straight cash gift would have been, allowing you to leverage your gift tax credit and annual exclusion amounts.

So a couple pieces of paper just saved Ole' man Smith's estate millions, you can use the FLP to legally and easily transfer more to the kids, and as a plan for the business in the future. Easy right?

It gets better. The 5th Circuit Court of Appeals just upheld a case, Keller v. United States (S.D. Tex. 2009), where a wealthy Texas widow who formed a FLP but failed to fund it with the $250 million in corporate bonds she owned before she died. Her estate then paid $147 million in taxes. Big hit. A wise advisor then attended a Continuing Legal Education course, where they learned that intent to fund is enough to show evidence of a completed FLP. The estate then funded the FLP, and took out a "loan" to pay the taxes, and sued for a refund.

At trial, the court held that the intent to form and fund the FLP effectively established the partnership, as intent is good enough under Texas law. It also found she created the FLP for business purposes, not just for tax and valuation uses. Here is where it gets really good: the court upheld a total  of 47.5% in discounts on the value of the FLP assets. 47.5%! They also got a refund for the interest they had to pay out on their "loan."

Take away: FLP's can be amazing things. They are one of the last, great, IRS approved vehicles to use to your advantage. However, they can and will be disallowed if you do not do it right.

Grading the Presidential Candidate's Tax Plans: Romney Part II

In an earlier post, I highlighted how MittRomney.com did not have a comprehensive explanation of the Governor's proposed tax agenda. Well, now it does, so we can evaluate it more fully.

If you happen to be in the 47% of people who now, as if there was any doubt before, are definitely not voting for Romney, then read feel free to skim this and find something better to do. But if you are still on the fence, lets press on.

Romney's plan begins with a quote:

"The best course in the near term is to overhaul and to dramatically simplify the current tax code, eliminate taxes on savings for the middle class, and recognize that because we tax investment at both the corporate and individual level, we should align our combined rates with those of competing nations. Lower taxes and a simpler tax code will help families and create jobs."

(Mitt Romney, no apology)
Why the need for "no apology," I'm not sure. Sorry to the IRS employees who will be out of work in a new, "simpler" tax environment? I doubt it.

THE BASICS:

Romney's plan is the basic republican platform of late: cut income taxes, kill the death tax!, make us competitive with other nations so we quit losing corporate tax dollars to overseas havens, simplify the code. Ok, sure. Built in are jabs at the President's system: that we don't need to raise taxes if we cut government, and he will cut spending too.

 

 

ANALYSIS:

 

Income tax:

 

I don't have an answer for raising/lowering taxes, except I am anti-national deficit, and we need to raise money somehow. If that means cutting government spending, great. If that means paying more taxes, fine. Both, so be it. I hope whoever gets elected knows what they are doing, because we are in trouble. Taking tax increases off the table entirely, however, I think is very narrow minded thinking.

 

Mitt wants to repeal the AMT, and I agree. Mainly because no one understands the AMT.

 

Estate/death tax:

 

As an estate planning attorney, I love to hear candidate's position on the estate or "DEATH" tax. Here is Mitt's:

 

"Government should not tax the same income over and over again. The federal estate tax, also known as the "death tax," does exactly that by taxing the wealth that Americans have been able to accumulate after already paying taxes throughout their working lives. This tax also creates a series of perverse incentives that encourages the most complicated and convoluted tax-avoidance schemes at tremendous cost to all involved. Finally, it can have catastrophic effects when a small family-owned business, in the course of passing to the next generation, creates tax liabilities that the family cannot meet without breaking up the business itself. "

 

You know who pays the death tax? Next to no one. Yes, it can hurt the small family business, or the rancher/farmer. But a simple call to me (or other estate planner who is worth their salt) can fix that, and it has nothing to do with tax-avoidance schemes with tremendous costs. You know what are tax avoidance schemes, with tremendous costs? Stowing money in Luxembourg, or the Cayman Islands.

Don't get me wrong, under the current system, in today's world, I'm all about offshore tax havens. If I had $30 million plus, you bet I would park some of it somewhere else, just in case. But, you also have to disclose this stuff, and there are ways to do it right. Nothing illegal there. However, if you have $100 million plus, which Romney passes by without flinching, no estate tax means your family are kings for generations. No one can touch you, because you have all the money.

If you want to know why I believe in the estate tax, I'll send you the paper I wrote about it in law school. Email me. But here is the basic point:  If there is no estate tax, the rich get richer, and the gap between the classes never gets closer. Further, it is why so many of the mega-rich donate to charity: they want to choose where the money goes instead of just giving it to the government, and its a tax write off. Starting to make sense? Sure, Warren Buffett has pledged billions to the Gates Foundation, but has he written the check yet? No. Why? I have a sinking suspicion it involves the fact that if there is no estate tax, the Buffett's could buy most of Eastern Europe, build a big wall, and live till the end of time. The estate tax chops it in half, or more, at every generation. Not enough to bankrupt you, but enough to spread it around.

But that's not fair! That's socialism/communism/somethingism that is NOT capitalism! Maybe, but I strongly feel, until someone convinces me otherwise, that an estate tax is a good thing, at a reasonable, say $10 million, level.

Corporate tax:

Cut rates, make us competitive again, quit losing jobs overseas. Romney does have an interesting point, that the US is still on a "worldwide" corporate tax system, which causes re-patriated (money earned abroad back into the US) to pay a secondary tax above wherever it was taxed originally, and this is why some companies are parking their headquarters overseas. That way, the money never has to go back to the US, and pay the tax penalty. I agree, this needs to be fixed. We will see if he can get it done.

But "corporations are people, my friend"! Yes, true. But they are not the people most of us see in the mirror. They are Bain Capital, they are Apple, the are Sun Microsystems. At the end of Romney's website pamphlet, Former Sun Microsystems CEO and founder Scott McNealy attempts to defend Romney's statement, and makes good points. Yes, we need corporations to keep jobs in the US, and to do that, tax rates must be competitive. But lets get one thing straight: corporations pay a pittance of our national tax revenue, and take the lion's share of the profits. Where? To people, indeed, but only a few people. Shareholders? Not really, its the founders and top executives, and that is where the profits stay. And stay, and stay some more, and even when an executive retires or leaves Google for Apple, they still get sucked out of shareholder's hands in the form of golden parachutes. Read the financial disclosures for the big oil companies, or whatever blue chip stock you might own: see how many of the highest compensated individuals are not on the payroll anymore. It's scary.

How many workers is a CEO worth? 2? 10? 500?
Source: Economic Policy Institute. 2011. ^[12] 

  Remember dividends? Yeah, me either. Where do all those profits go? "Investments, infrastructure." Not buying that. How many dividends has Apple issued? Exactly 1, for the last 17 years. Either way, executive compensation seems a little out of whack. Something to revisit at a later date.

The Verdict:

I don't love it, but it has some minor points that shine. The code does need simplification. Ditch the AMT. Romney is a business man, so maybe he would be good for our economy, and making America attractive to corporations again. However, straight out refusing to raise taxes is silly. I hope we do not have to, but we might, and he needs to accept that. Also, repealing the estate tax is not the solution, per se. If you kill that revenue stream and the societal benefits it brings, you better have a good plan to replace them. Overall, I give Romney's plan a C, for a small amount of good and new ideas, and a large dose of the same old Republican rhetoric that got us into this mess in the first place.
 

The Hidden Tax of the Affordable Care Act

Google Images

Maybe we didn't look close enough.

As of now, we still have the Affordable Care Act (AKA Obamacare). The Supreme Court upheld it, and most likely it is going to be a long-term reality. Let’s get used to it.

Now that we are passed the politics, we must look deeper. Healthcare does not pay for itself, so buried deep within the legislation (here, to be exact, or more specifically, H. R. 4872—33 Chapter 2A, Sec. 1411) is a bump in the taxes for earned income, and a 3.8% Medicare contribution tax on unearned income.

What it means:

• Starting in 2013, high-income individuals will pay another 0.9 percentage points on earned income over $200,000 ($250,000 if married). The current rate is 2.9%.
• Starting in 2012, those same individuals, estates, and trusts will pay a 3.8% Medicare contribution tax on UNearned income above the same threshold amounts.

Analysis:

You can get stuck with both, or one or the other. If you’re an individual taxpayer, the tax is 3.8 % of the lesser of the excess of modified adjusted gross income over the $200k/$250k threshold amounts, or net investment income.

For estates and trusts, the tax is 3.8% of the lesser of excess of adjusted gross income over the highest income tax bracket for an estate/trust or the undistributed net investment income.

Confusing? It is. Just know if you make over $200k or $250k jointly, and have investments, you’re gonna pay more than you would have this year.

This may seem like it will only affect the wealthy, but it is much more broadly reaching than that. Say you normally make $100k, and your spouse $100k. Good, right? What if you sell your house? What if you  sell some stocks, or have a good year with rental properties?

The UNearned (capitalized for hyperbole) income tax hits on more things than you think. The tax covers  nonbusiness income from dividends, royalties, rents, and interest, except municipal-bond interest; short- and long-term capital gains (think stocks, sales of land, etc.); the taxable portion of annuity payments; income from the sale of a principal home above the $250,000/$500,000 exclusion; a net gain from the sale of a second home; and passive income from real estate and investments in which a taxpayer doesn't materially participate, such as a partnership.

That is a really comprehensive list.

Examples:

Let’s try some examples.

1. Example: A married couple filing jointly has $400k of adjusted gross income--$240k of wages plus $160k of investment income composed of interest, dividends and net gains from the sale of real estate. Because they have $150k of investment income above the $250k threshold, they would owe an extra 3.8% of that amount, or $5,700, in tax.
2. Example: A trust with a $100k of undistributed net investment income would pay the 3.8 percent surtax on $88k as this amount that exceeds the threshold amount of $12k, yielding $3,344 in surtax.
3.  Example: A trust has $50k in net investment income and needs to make $60k in distributions. The trust has two beneficiaries, poor guy and rich guy. Rich guy will get tagged with the extra tax, poor guy will not. One way to beat the system is distribute more out to poor guy, assuming both parties agree, and prevent the tax hit.

Take away:

We are in a deficit. We have a multitude of government entitlement programs, welfare systems, new healthcare initiatives, and are paying for wars on multiple fronts in the wake of an extended global recession, the likes not seen since the big one. Taxes are going to go up, they just have to unless something crazy happens. This is one of the taxes that will go up. It is a tough one, but it does not mean you cannot minimize the impact it has on your bottom line.

Medicaid and Medicare: A Basic Primer and Asset Protection Strategies

Found at http://www.andreolilaw.com/tag/cartoon/ ,
No author cited.

What, exactly, is Medicaid?

• Medicaid is the name of a joint federal and state needs-based health care program. Medicaid was designed to help the needy have a means of health care coverage, and it also provides assistance with long-term care and nursing home stays.

What, exactly, is Medicare?

• Medicare is a federal health insurance entitlement program for those 65 and over (with a few exceptions for the disabled and seriously ill) that is funded through taxes and payroll deductions, and provides coverage for doctors visits, outpatient services, and even prescription drugs. It will not, however, pay for nursing home stays past 100 days.

Why, exactly, do I care about any of this?

Hopefully, you and all your loved ones will live long, full, healthy, fully independent lives and never have to pay out-of-pocket expenses for care or medical issues, and never require assistance outside the family unit until your ultimate demise. Sadly, for most people, this is not the case. Be it a serious disability, illness, or lack of loved ones with the time, expertise, and patience to care for the elderly members of our families, taking care of a growing elderly population is a serious issue.  And it is expensive. Really expensive.

Without getting into the politics of Medi-anything, or debating if it will be there in ten years, lets just talk about the problems that can arise. The main issue clients find is that it can be difficult to qualify for Medicaid. The best thing you can do is to plan, starting yesterday. So start now.

Medicaid Planning.

Elderly people fall into 3 categories: rich enough not to worry, moderate means enough to easily qualify, and everybody else. Most of us fall into the latter of the two categories. Lets start at the top.

Rich enough not to worry:  Assuming you have $1 million or more in assets, you are probably safe to not worry about medicaid. You could give all your money away and qualify for medicaid, but why? You could pay for long-term care insurance, but it is really expensive. You could give some money away, and have medicaid as a backup plan. Still probably not worth it, but it could be prudent. Enjoy your golden years. If you get really sick, then lets talk.

Moderate Means: You still likely will be above the limits, but planning will not be difficult. Get someone qualified to help you though, you can always find ways to save a few dollars than don't have to be thrown away. Read on.

Everybody Else: To qualify for medicaid, there are two tests: the asset test and the income test. If you bust on either, you don't get qualified. The limits are exceptionally low: $2,094 a month in income, and $2,000 in assets. Think you can game the system?  You can, sort of, but the ways to do it are getting more difficult, and the government knows about all of them, so its not really gaming the system anymore. I'll explain.

Income: If you make more than $2,094 a month, you can set up a "Miller Trust" or a Qualified Income Trust (QIT). This is a trust that you sign over  all your social security and pensions and annuities over to, and everything in excess of the $2,094 limit stays in there. The kicker is that when the Medicaid recipient passes away, whatever is left in the trust goes to pay back the government for footing the bill. It is a bummer, but its fair.

Assets: Easy, just give it all away, right? You can trust your kids to use the money to take care of you. Not so fast. The government caught on to this one quickly, and set up penalty periods or "look back" periods of 6 months, a year, and now 5 years. When applying for Medicaid, you have to disclose any gifts made over the last 5 YEARS. That is significant, and why you must plan early. If you can get it out of your name before you need to qualify, great. But you better hope you trust your kids, or whomever you decide to park the money with. Remember, insurance policies (cash value), retirement funds, land that is not your primary residence, all counts against you.

How it works: You disclose everything you have given away on the application, and they divide the number by $142.92. The resulting number is the number of days you will be "penalized" and not allowed to start your medicaid eligibility. They used to do it by the month, now its by the day. The number comes from the average cost of a private care facility.

For some, this is fine. Get it out anyway you can. Better to the kids than the government. For others, this won't fly. You need care now. Medicaid counts certain assets as exempt: your house (if you truly are going to try and return home), a car, household furnishings, and you can pay loved ones for the time they spend taking care of you. $80,000 over the limit? Go buy a Porsche. Why not? You earned it. I foresee the day when there will be hard limits, but everytime I talk with the medicaid caseworkers, they still assure me they are not denying coverage to Porsche owners.  Or fix your roof, and add on a gameroom. This will not penalize you. If you are married, there are special exemptions for your spouse as well. It is tricky, but there are ways to let your spouse (assuming they do not need to qualify) to retain significant assets and income. This is high-level stuff, so talk to an attorney.

Ok, we are ready to apply. You have reduced your income and assets. You get qualified. You can rest soundly knowing that your Porsche and your house will go to the kids. Wrong.

On March 1, 2005, Texas enacted the Medicaid Estate Recovery Program, or MERP. Read more about it here. What this means is that if you die and Medicaid had to pay your bills, they are going to bill your estate. If you have more than $10,000 in your estate, they can make a claim. What's left? That's right, your house. And Porsche. They got on you the back end. There is a way around this, for now.

In the past, you were limited to gifting your house and car away, or placing them in a special trust. Now, the Department of Health and Human Services has officially recognized a special type of deed called a "Ladybird Deed," or more commonly an Enhanced Life Estate Deed. Allegedly named after the former first lady (debatable), the enhanced life estate deed is essentially a Payable on Death designation for your home similar to what you can use on a bank account. You keep everything like it is: you live there, you own it, you can sell it, you can swap it, but if and when you die, it goes to someone else.

Why? If the house is not in your name anymore, and it is not, as the LadyBird Deed transferred it at the second of your death, it is not in your estate. IF it is not in your estate, then the Texas MERP program cannot go after it to pay your debts. There is a similar process for your vehicle as well. Now you keep what was yours.

Your estate will still likely get a letter from MERP, but you just kindly write them back and tell them there is not anything there. Sorry, MERP.

Take away:

Medicaid and Medicare can be good things. They can help you when you need it. They are not for everyone, and they were not designed to be. It can be difficult to qualify for Medicaid, but it is doable. There are also ways to qualify without spending yourself under the poverty line. This, however, is difficult, so get the best help you can. It is money well spent.