Back to top

March

Hidden pothole for stock market may lie in Republican tax plan

By Rich Miller

(Bloomberg) Tax reform may not be the unalloyed good that stock market investors seem to think it is.

 

Or so say tax policy wonks in Washington. In a complicated argument, they contend that a provision in the Republican tax plan that's designed to speed up economic growth paradoxically could put downward pressure on equity prices.

 

The relevant proposal would allow companies to immediately write off for tax purposes all their spending on machinery, computers and other capital investments. The aim: To coax firms into making more productivity-boosting outlays. It would be a big change from the current tax code, which requires that some items be written off gradually over time.

 

The shift to so-called full expensing would effectively enhance the value of companies with big future capital spending plans relative to those that already sunk a lot into their business. And that in turn could prompt investors to reassess how much they're willing to pay to own shares of established companies listed on the stock exchanges, experts in the tax field say.

 

"You'd rather invest in something new than purchase the old capital stock through the equity market," said former Congressional Budget Office Director Douglas Holtz-Eakin, who now heads the American Action Forum think tank in Washington. "To make them equally attractive again at the margin, the equity market has to go down."

 

To be sure, lawmakers have been preoccupied with healthcare reform and haven't even begun on their planned overhaul of taxes, so it may be months before this comes to the fore.

But it's well worth asking how much of an impact this particular proposal might have. And on first pass, it looks like it could be a lot.

 

The new corporate tax rate in the House Republican tax plan is 20 percent, down from 35 percent currently. That implies that equity prices need to decline that much to bring the value of old and new capital in line. Throw in estimates that debt comprises about a third of corporate capitalization and the impact on equities could be even larger.

 

There are good reasons though to think the hit won’t be anywhere near that big. For one thing, some capital is already eligible for full expensing, so the stock market has presumably already discounted that. For another, land and inventories are not subject to 100 percent write-offs under the Republican plan.

 

Put it all together and the knock to equities from the change in expensing probably will be less than 10 percent, experts say.

 

"Between the offsetting effect of the current treatment and the limits on the expensing treatment under the proposed treatment, I only get something around 6 percent," said Jane Gravelle, a senior specialist at the Congressional Research Service, who spoke for herself and not her organization.

 

Still, that's not insignificant—and it's something that stock market investors may be missing in their enthusiasm for tax reform.

 

 

 

The ‘very strange’ item on Trump’s 1040: alternative minimum tax

By Lynnley Browning

 (Bloomberg) Leaked pages of President Donald Trump’s 2005 tax return offer no new details about his foreign income and business dealings but highlight a tax he’s vowed to abolish.

 

The alternative minimum tax, or AMT, was responsible for 80 percent of Trump’s 2005 federal income tax bill of $38.4 million, on income of $152.7 million. That’s a “startlingly” large proportion, said Alexander Popovich, a wealth adviser at JPMorgan Chase & Co.’s private bank. “It’s very strange—usually, the AMT is not going to cause anywhere near such a difference,” Popovich said.

 

Trump has contravened 40 years of tradition by declining to release his tax returns, so the two pages of his 2005 return, which veteran tax journalist David Cay Johnston presented on MSNBC’s “The Rachel Maddow Show” Tuesday, offer a rare—but limited—peek into the president’s finances. Among the items on view: Trump got hit with a tax that in recent years has affected increasing numbers of well-off, but not necessarily wealthy, Americans.

 

The AMT was introduced to taxpayers in 1970 as a way to prevent high-earning households from winnowing down or zeroing out their federal income-tax bills. The tax works by taking away personal and dependent exemptions, as well as various itemized deductions, including those for state and local taxes. Other deductions are capped. It’s triggered by almost two dozen factors, including losses, depreciation, stock options and exemptions for children.

 

State Taxes

As inflation boosted incomes, the AMT has captured a larger number of taxpayers—including roughly 30 percent of households with cash income between $200,000 and $500,000, according to the Urban-Brookings Tax Policy Center, a Washington-based policy group. Higher state and local taxes in states like California, New York, New Jersey and Massachusetts—which can’t be deducted under the AMT—have helped stir complaints about the tax.

 

Trump and House Republicans have both formally called for abolishing it as part of their planned tax overhaul. The tax will raise about $35 billion this year, about 2.2 percent of all individual income tax revenue, according to the Tax Policy Center.

 

“The AMT created this incredibly complicated formula to try to compensate for all of the deductions that are built in on the other side of the tax piece,” Senator James Lankford, an Oklahoma Republican, said Wednesday.

 

Democrats are wary of scrapping it. “I’m an advocate of the AMT,” New York Senator Chuck Schumer, the Democratic leader, said.

 

It’s unclear what caused Trump to have to pay the AMT. The large bill “raises more questions than it answers,” said Leonard Burman, co-founder of the Tax Policy Center. “For the vast majority of people, the AMT is only a portion of their tax liability—just a supplement to their regular taxes.”

 

Trump’s Documents

The leaked documents show that Trump and his wife, Melania, paid $5.3 million in federal income tax and more than $31 million in AMT. The combined $38.4 million tax bill gave the Trumps a federal tax rate of about 25 percent. It’s not clear that absent the AMT, they would have paid only a 3.5 percent rate, because of differences in the way deductions are treated by the AMT and regular income tax.

 

It’s unusual that the Trumps were caught by a tax that predominantly hits earners in the $400,000 to $1.2 million gross income range, said Popovich of JPMorgan Chase. Far wealthier taxpayers can typically avoid its effects because capital gains income—a mainstay for the top 0.1 percent—largely escapes the AMT.

 

Chuck Collins, a scholar at the left-leaning Institute for Policy Studies, said he assumed that a reported loss of $103 million on Trump’s 2005 return, combined with depreciation for real estate, “probably” triggered the alternative levy. “The AMT tends to catch people who have paper losses,” he said.

 

Depreciation Cited

In a statement released Tuesday night before the MSNBC broadcast, the White House cited a “large-scale depreciation for construction,” but didn’t elaborate.

 

Burman said the loss may have been carried over from 1995, when Trump reported a $916 million loss on his New York state tax return, according to documents that were leaked to the New York Times last October.

 

Taxpayers are allowed to “carry forward” losses that they can’t fully use in a given year because they don’t have enough taxable income. Bloomberg reported in October that the $916 million loss probably stemmed from Trump’s use of a now-banished tax provision that allowed investors to turn canceled debt into personal losses for the purposes of reducing their federal tax bills.

 

“Whoever leaked the two pages didn’t release the supporting schedules to the return, which would show how and why the AMT was triggered,” Burman said. “There could be things on the full tax return that might tell us something about the nature and structure of his businesses and income that triggered the tax.”

 

Prior Year

However, the two pages from 2005 may well provide a clue about something else: Trump’s federal tax bill for 2004. The document lists estimated tax payments of $13,291,993 that Trump made in 2005—and under federal rules in place at the time, those payments had to total 110 percent of his 2004 tax liability.

 

That means Trump probably had a federal tax liability of roughly $12.1 million in 2004, according to Matthew Morris, a tax attorney at law firm Bowditch & Dewey LLP, who reviewed the 2005 document and made the calculations. It’s also possible that the estimated tax payments were overpayments, but that seems unlikely, Morris said.

 

- With assistance from Sahil Kapur

 

 

 

IRS still coping with identity theft and service problems

By Michael Cohn

The Internal Revenue Service is continuing to face challenges with identity theft and taxpayer service this tax season, although there have been some improvements since last year.

IRS deputy commissioner for services and enforcement John M. Dalrymple told lawmakers during a House oversight hearing last week the filing season has been relatively problem-free so far.

 

“I am pleased to report that the last several filing seasons have gone smoothly in terms of tax return processing,” he said, according to his prepared testimony. “Thus far the 2017 filing season has been no exception. As of February 24, the IRS received more than 52.3 million individual returns, on the way to a total of about 152 million. We have issued over 41.3 million refunds for more than $127 billion, with the average refund totaling approximately $3,071.”

 

Dalrymple noted, however, that the IRS was forced to rely on antiquated IT systems, with approximately 60 percent of the agency’s hardware and 28 percent of its software out of date and in need of an upgrade. “Continuing to rely on such outdated systems is costly and poses a risk of outages or failures,” he added.

 

He said the IRS has been making steady progress in combating identity theft. As a result of the PATH Act of 2015, the IRS is now required to give extra scrutiny to tax returns claiming the Earned Income Tax Credit or the Additional Child Tax Credit, and hold the tax refunds until February 15. “This change and another change accelerating the filing date of Forms W-2 have together helped the IRS improve its ability to spot incorrect or fraudulent returns,” he added.

Another PATH Act provision required Individual Taxpayer Identification Numbers to expire if they had been issued before 2013, or if the ITINs have not been used on a federal tax return for three years in a row. That too helped the IRS detect fraudulent returns, although the changes required significant resources to implement, Dalrymple noted.

 

He said the IRS has been making progress in deterring identity theft in recent years, thanks to the collaborative efforts of the Security Summit, which involves a partnership between the IRS, state tax authorities, tax software companies, and tax preparation chains. They have added extra authentication procedures, filters and information sharing to block criminals. But identity thieves are still trying to steal tax refunds. One CPA recently called Accounting Today and reported that several of his clients received notices this tax season from the IRS informing them their tax refunds had been claimed by someone else.

 

Dalrymple acknowledged that identity thieves are still trying to capture the refunds. “Even with this progress, the fraud filters in our processing systems are still catching a large number of false returns, which shows that identity theft continues to be a major threat to tax administration–a threat that receives our sustained vigilance and the continuous strengthening of our defenses against this crime,” he said.

 

During fiscal year 2016, Dalrymple noted that the IRS’s systems stopped more than $6.5 billion in fraudulent refunds on 969,000 tax returns confirmed to have been filed by identity thieves.

 

Taxpayer Service

He said the IRS has also been making progress in helping victims of identity theft. Several years ago, it took an average of 300 days to close a case, but more recently the IRS has been meeting its goal of closing a case in an average of 120 days or less. The case inventory for identity theft victims has also declined from about 95,000 at the end of fiscal year 2015 to 28,900 last month.

 

The IRS has also been improving its telephone service for taxpayers. Last year, it used $178 million of the additional funding it received from Congress to hire an extra 1,000 temporary employees. As a result, the average level of service on the IRS’s toll-free phone lines during the 2016 tax season exceeded 70 percent, compared to a dismal average of 37 percent during the 2015 filing season. However, when the temporary employees went off the rolls at the end of last tax season, the phone level of service dropped again and ended up with an average of 53 percent for fiscal year 2016, but that was still better than 2015. So far, for the 2017 filing season, Dalrymple reported improved phone service, and he predicts the average phone level of service for the filing season as a whole will be about 75 percent.

 

GAO Report

report from the Government Accountability Office released on the day of the hearing also found the IRS provided better telephone service to callers during the 2016 filing season compared to 2015. However, the GAO noted that the IRS’s performance during the full fiscal year remained low. The GAO report also acknowledged that the IRS has improved some aspects of its service for identity theft victims, but still found some lingering problems.

 

“However, inefficiencies contribute to delays, and potentially weak internal controls may lead to the release of fraudulent refunds,” said the GAO. “In turn, this limits [the] IRS’s ability to serve taxpayers and protect federal dollars.”

 

The GAO recommended the IRS improve its file retrieval and scanning processes to speed up help to victims of identity theft. The GAO also sees problems with the IRS’s internal control processes that could lead to the IRS paying refunds to fraudsters. In discussion groups with the GAO, IRS assistors and managers said some of the assistors may release refunds even if indicators on the account show that the tax return is under review for identity theft, or two returns have been filed for that taxpayer. “Some participants said assistors answering telephone calls can release these holds because they do not understand the codes on the taxpayer's account,” said the report. “IRS officials said that these errors are not widespread and provided data to support their position.”

 

However, the GAO said it identified weaknesses in the data, which the IRS officials acknowledged. In response to the GAO’s report, IRS officials provided the GAO with another analysis in January of IRS data that they said showed this type of error does occur but may not be as widespread as its own staff and managers suggested. The GAO said it would continue to work with the IRS to determine if the additional data is enough to address its recommendations.

Another problem the GAO found is the IRS does not notify taxpayers when a dependent’s identity appears on a fraudulent return.

 

“According to IRS officials, the agency does not consider a dependent to be a victim if his or her Social Security number had been used as a dependent on a fraudulent return,” said the report. “However, [the] IRS has previously provided guidance to taxpayers when a dependent was a victim of identity theft. After one data breach in 2015, [the] IRS notified taxpayers and provided information on actions that parents could take to protect a minor's identity when their dependents were also victims. By not notifying taxpayers that their dependents' information may have been used to commit fraud, [the] IRS is limiting taxpayers' ability to take action to protect their dependents' identity.”

 

Russell P. Martin, assistant inspector general for audit at the Treasury Inspector General for Tax Administration, also presented a report at last Wednesday’s hearing, which found some continuing problems with how the IRS is handling identity theft victims. TIGTA’s previous reviews from 2015 have identified long delays in case resolution and account errors, and that not all identity-theft victims receive Identity Protection Personal Identification Numbers, or IP PINs, he noted. Not all of those problems have been resolved in follow-up reports.

 

TIGTA is also concerned about the IRS’s increasing reliance on technology-based assistance to make up for cuts in face-to-face service. “The risk of unauthorized access to tax accounts increases as the IRS expands its focus on delivering online tools,” said the report. “The increasing number of data breaches in the private and public sectors means more personal information than ever before is available to unscrupulous individuals. Many of these data are detailed enough to enable circumvention of most authentication processes.”

 

The IRS isn't the only federal agency struggling to control identity theft. On Wednesday, members of the House Ways and Means Committee introduced two pieces of bipartisan legislation to protect Americans from identity theft. One bill would prevent the Social Security Administration from mailing any document containing a full Social Security number unless it is necessary. The other bill would require the Social Security Administration to issue a new Social Security number to any children under the age of 14 who have had their Social Security card stolen after it was mailed by the SSA.

 

 

 

Trump's counties lose out to Clinton's in GOP health tax cuts

By Bloomberg News

The very first individual tax cuts officially endorsed by President Donald Trump don’t offer great news for most of his supporters: Counties that backed him would get less than a third of the relief that would go to counties where Democrat Hillary Clinton won.

 

The two individual tax cuts contained in the Republican plan to replace Obamacare apply only to high-earning workers and investors, roughly those with incomes of at least $200,000 for individuals and $250,000 for married couples.

 

Taxpayers in counties that backed Trump would see an annual windfall of about $6.6 billion, a Bloomberg analysis of Internal Revenue Service data shows. In counties that backed Clinton, it’d be about $21.9 billion.

 

That disparity runs counter to Trump’s calls for “massive tax relief for the middle class” and offers comparatively little benefit in the so-called Rust Belt that stretches from Pennsylvania to Wisconsin, states critical to the success of his populist campaign last year.

 

Two White House spokeswomen didn’t respond to an email seeking comment. Administration officials have promised those lower down the income ladder will eventually get their turn for tax cuts, and Trump has said a full tax overhaul will come after the health-care legislation is approved.

 

In the short term, though, the health legislation would end two individual taxes that were imposed by the Affordable Care Act: a 0.9 percent additional Medicare tax on wages and 3.8 percent surtax on investment income that both apply to people at the top end of the income scale.

 

Frustrated but Supportive

Trump voters in Rust Belt states expressed some frustration about the potential cuts for the wealthy, even as they remain supportive of the president.

 

“It pisses me off, but my wife pisses me off, too, and we’re still married,” said Dan Peuschold, 62, as he shared a $13 pitcher of beer with friends Saturday afternoon at the Hiawatha Bar & Grill in the Wisconsin village of Sturtevant.

 

Peuschold lives in Racine County, where Trump beat Clinton 49.8 percent to 45.4 percent. Trump’s number there was about two percentage points higher than Republican nominee Mitt Romney’s in 2012, when former President Barack Obama won the county with 51.4 percent.

South of Milwaukee and with a mix of agriculture and manufacturing, the county is in the heart of the congressional district represented by House Speaker Paul Ryan, the top congressional champion for the Obamacare replacement bill.

 

The county had 95,040 tax filers in 2015—the most recent data available—and 1,060, or 1.1 percent, paid the additional Medicare tax. That’s about one in every 90. Slightly more Racine County filers paid investment income tax, about one in every 74. By contrast, in New York County, which includes Manhattan and where Clinton won with 87.2 percent of the vote, more than one out of every 10 filers paid the Medicare tax, and one out of every nine paid the investment income tax.

 

California Counties

Peuschold, who owns a cabinet-making shop and purchases insurance for his 15 employees, said he doesn’t earn enough to qualify for either proposed tax cut. The wealthy could afford to keep paying the levies, he said.

 

“I don’t like the cut because it’s pocket change for them,” he said. “Us guys that work all the time don’t have the deep pockets. It’s us people who are in the middle class who are the backbone of this country.”

 

In addition to New York County, two counties in California ranked at the top for people who paid the additional Medicare tax: In Marin, north of San Francisco, 9.8 percent of filers paid it. In Santa Clara, which includes Silicon Valley, 9 percent did. Clinton won both counties with more than 70 percent of the vote.

 

Falls Church, a “county equivalent” in Virginia, had a slightly higher share of tax filers—11.2 percent—who paid the added Medicare tax, the data shows. Located within commuting distance of Washington, the suburb is known for its upscale homes and neighborhoods. Clinton won 75.8 percent of its vote.

 

‘Sizable’ Benefits

“The repeal of the Affordable Care Act is going to deliver sizable tax benefits to those high-income households,” said Scott Greenberg, an analyst at the politically conservative Tax Foundation.

 

Money from the two taxes has been a key ingredient in financing the 2010 health-care law and Democrats have criticized the proposed cuts, saying they’ll increase the economic gap between the most affluent and everyone else.

 

Those in the top 0.1 percent of incomes would get an average tax cut of about $197,000, raising their after-tax incomes by 2.6 percent, according to the Tax Policy Center, a joint venture of the Urban Institute and Brookings Institution. Those totals include both the Medicare and investment taxes.

 

“It seems to be pretty much a giveaway to the well-off,” said David Albouy, an economics professor at the University of Illinois who studies geographic tax inequality.

 

Awaiting Cuts

Other Trump voters in Racine County say they don’t like that the wealthy may be first to secure a tax cut, but they’re giving the new president the benefit of the doubt that they’ll eventually see lower taxes, too.

 

“You would think they would be more for the lower-income people,” said David Fiskum, 62, a retired small business owner dining at a hamburger restaurant in the city of Racine. “I wish they had a better bill than what they’ve proposed.”

 

The western Michigan county of Manistee, which gave Trump 54.9 percent of the vote, also reflects the potential disparity. Of 11,440 returns filed in 2015, only 50 (0.4 percent) had incomes high enough to pay the 0.9 percent Medicare tax.

 

The county, which Obama won in 2012 with 52.2 percent of the vote, was one of those that helped Trump win Michigan as he became the first Republican to do so since 1988.

 

Ray Franz, the Manistee County Republican Party chairman and a former state representative, said he’s “disappointed in the Republican Party and Republican leadership” for the health-care bill that’s been put forward.

 

‘Significant Impact’

“I’m not a big fan of seeing this become financially unstable again, and I think that’s what this could end up as,” he said. “Eliminating those taxes will only contribute to that.”

 

Franz, who said he “voted against Clinton,” hasn’t lost hope that Trump and the Republicans in Congress will take some kind of action that will help taxpayers in his county of about 24,000 people.

 

“He’s looking at significant changes in capital gains and some of the other taxes, which could help and have a significant impact for a lot of our professionals,” he said. “If Trump can do tax reform and deregulation that will stimulate economic activity, Michigan is in a wonderful position to be able to take advantage of that.”

 

Overall, preliminary IRS data from returns filed in 2016 show the additional Medicare tax collected $8.6 billion in 2015, and the investment income tax collected $18.3 billion.

 

Comparing the county and national data isn’t perfect because the IRS, for privacy reasons, excludes from release items with fewer than 20 returns from a given county. Also, some Americans who live outside the U.S. and must pay taxes may not be associated with a particular county.

 

Ken Brown, 55, a Wisconsin Republican who runs a designer eyeglass shop a few blocks from where Trump spoke in downtown Racine in April 2016, said he doesn’t begrudge higher-income people who might get the first round of tax cuts.

 

“They are the first ones who are going to return to where they were before Obamacare,” he said. “I don’t think we should call it a tax cut. It’s canceling a tax increase.”

 

 

 

Americans aren’t filing their taxes this year

By Bloomberg News

Are millions of Americans just forgetting to file their taxes this year?

 

More than halfway through the 2017 filing season, the U.S. Internal Revenue Service reported receiving 5.7 million fewer individual returns than at a comparable point last year. That’s an 8.5 percent drop.

 

Tax professionals often discuss tax seasons the same way live performers talk about audiences. Each one is different, they say, with its own mood, rhythm, and political undercurrents.

The vibe for 2017? Slow and sluggish.

 

There are several possible explanations for why taxpayers aren’t filing.

 

Theory No. 1: Plain Old Procrastination

“Customers waiting longer to file their returns is a trend we have observed for the last four years, although it’s more pronounced this year,” said Sanjay Baskaran, president of online tax preparer TaxAct.

 

More and more people who used to file in January and February are waiting until the last minute. Last year, IRS data on April 15—the traditional tax deadline—showed individual filings running 5.8 percent behind the previous year. But the deadline was April 18 in 2016, which gave taxpayers an additional three days to file. In the week following April 15, a whopping 12 million tax returns came in, and filings ended up 1.7 percent higher than in the previous year.

 

Theory No. 2: You-Know-Who

The political rhetoric of President Donald Trump may be scaring some taxpayers. With the Republican promising to crack down on illegal immigration, undocumented immigrants may be afraid to create a paper trail with the government by claiming tax refunds.

 

John Hewitt, chairman and chief executive of Liberty Tax, raised the possibility in a call with analysts March 8. Undocumented immigrants often use individual taxpayer identification numbers (ITINs) rather than Social Security numbers to file. “Those ITIN filers are filing at a reduced level this year,” Hewitt said. They’re “probably fearful of the Trump initiatives.”

 

It’s also possible that the overall political atmosphere could be affecting filing. The Trump administration is enforcing the health insurance mandate differently this tax season, while Congress moves quickly to gut the Affordable Care Act, and Trump has promised massive tax cuts. Although no tax code changes would affect what you currently owe, Julie Miller, a spokeswoman for TurboTax owner Intuit Inc., speculated that “there could just be confusion, or [people are] waiting for the dust to settle.”

 

Theory No. 3: Delayed Refunds

In an effort to crack down on fraud, Congress passed the PATH Act , which requires the IRS to increase scrutiny of certain tax credits often claimed by low-income households. As a result, the agency warned it wouldn’t issue refunds this year until Feb. 15 for the millions of returns claiming the earned income tax credit or the additional child tax credit.

 

That delay could be a big factor affecting millions of taxpayers who haven’t filed yet, several analysts and tax company executives said. While issues with undocumented immigrant returns may be a “fringe factor,” the PATH act is the main reason for the delay, said Piper Jaffray analyst George Tong.

 

“A lot of early season filers want their money and want their money fast,” Tong said. If filings are delayed, “it throws a wrench into consumer behavior.” Liberty’s Hewitt seemed to agree that the refund delays are a larger issue. “The PATH Act has created a massive change in the industry,” he said.

 

Theory No. 4: Confused Taxpayers

The PATH Act affects taxpayers claiming the earned income and additional child tax credits–about 27 million people claimed the EITC last year–but other taxpayers may wrongly think the rule changes affect them, sowing confusion. “Many people assumed this was the holding of refunds until [mid-February] for everyone,” said Michael Millman of Millman Research Associates.

 

H&R Block Chief Executive Officer Bill Cobb cited this “uncertainty” as a factor in delayed filings. “Taxpayers who typically file in January and early February appear to be less motivated to file quickly, given that their refunds may be delayed,” Cobb said in an earnings call on March 7.

 

Delay all you want—until April 18, that is, when your filing is due—but you’ll pay for that procrastination: Tax prep companies punish late filers by hiking their prices as the tax deadline approaches.

 

 

Seven ways to boost your retirement IQ

Increase your retirement knowledge with a few easy tips.

 

When it comes to Americans’ knowledge about finances and retirement, there’s good news and bad. Results from the Fidelity Investments Retirement IQ Survey* revealed a somewhat limited understanding of several important retirement concepts—on everything from Social Security and Medicare options to savings strategies and outliving retirement savings.

The good news: Boosting your retirement knowledge is easy. Here are the seven questions (along with answers and tips) that can help you stay on track for your retirement.

 

1.

How much do I need to save for retirement?

When we asked, “Roughly how much do many financial professionals suggest people save by the time they retire?” two-thirds of our survey respondents underestimated how much they need to save for retirement.

 

Correct answer: Fidelity defines this savings target as an amount equal to ten times your final salary by the time you retire. Read Viewpoints: “How much do I need to save for retirement?

To get there, Fidelity believes that investors should save 15% of their income each year until retirement. While 15% may seem like a lot, if you have a 401(k) or other workplace retirement account, any employer match or profit-sharing contribution should be counted as part of this annual savings rate goal.

 

Of course, 15% is just a guideline. The appropriate annual savings rate for your situation may be higher or lower, depending on when you want to retire, how you invest, and how you want to live in retirement. Read Viewpoints: “How much should I save each year?

 

Tip: Answering six simple questions from the Fidelity Retirement ScoreSM will help you measure what portion of your expenses1—particularly estimated essential expenses —you are on track to cover in retirement.

 

2.

Can saving an additional $50/month really add up?

If you were able to set aside $50 each month into your retirement savings, how much could that end up growing to in 25 years?

 

Correct answer: About $40,000 including interest, if it grew at the historical market average of 7%.2 Of our preretiree survey respondents, aged 55–65, nearly half (48%) underestimated the power that a small incremental savings lift could mean to their retirement, while about one quarter (24%) overestimated the impact. Only 14% got it right.

 

While it’s never too late to save more, the younger you start the better. Even small savings amounts can have a big impact if you start early.

 

Tip: Think about saving just 1% more and see how it can add up. Read Viewpoints: “Just 1% more can make a big difference.”

 

3.

How much do most people receive every month from Social Security?

You may have friends or family members getting Social Security, but asking how much they get in Social Security benefits is not usually something that comes up naturally in ordinary conversation. We asked.

 

Correct answer: The average monthly Social Security benefit paid in 2016 was about $1,300 per month. About half of preretirees got it right. Some 30% believe they will receive less than average and 20% overestimated how much they would collect from Social Security each month.

Social Security is a key part of retirement income for most Americans. But it’s complicated— there are over 75 claiming options. In general, it can pay to delay claiming your benefit until age 70. Consider how long you may live and your financial capacity to defer benefits as you develop your own strategy.

 

Tip: Read the Viewpoints Special Report: “How to get the most from Social Security?

 

4.

How much monthly income can my retirement savings generate?

According to government estimates3, the average head of household, aged 55–64, had a median retirement savings of $104,000. We asked how much could be generated by converting this into a guaranteed stream of monthly income.

 

Correct answer: $310 per month. The results were mixed. Only 23% of preretirees got it right. More than half of those surveyed overestimated the monthly income from the median retirement savings. An overly optimistic 13% thought the monthly income generated from an annuity would be nearly three times the correct amount.

 

Some new retirees make the mistake of withdrawing too much too fast. We suggest covering essential expenses with guaranteed income sources (like Social Security, pensions, and annuities), and paying for “nice-to-haves” (like travel or gifts to loved ones) with withdrawals from your investment portfolio.

 

As a rule of thumb, Fidelity research suggests holding portfolio withdrawals to no more than 4% to 5% of your initial retirement assets, adjusted each year for inflation, over the course of your retirement horizon. Of course, your particular withdrawal rate will depend on a variety of factors, including your anticipated life span, your asset allocation, and market performance.

 

Tip: Read Viewpoints: “How to build a diversified income plan” and “How can I make my savings last?

 

5.

What is the single biggest expense for most people in retirement?

If you are like most Americans, housing, health care, and transportation are typically your largest expenses in retirement. But which of those three is the largest? An overwhelming majority of respondents (81%) thought that health care would be their largest expense in retirement.

 

Correct answer: Housing. Only 13% of preretirees said that housing would be their single biggest expense in retirement. Trailing the pack behind health care were taxes, food, and discretionary expenses, which the survey described as transportation and entertainment-related expenses.

 

According to the Bureau of Labor StatisticsOpens in a new window., housing is the greatest expense in dollar amount and as a share of total expenditures for households with a person age 55 and older.

 

Further, when we asked what they are “most worried” about being able to afford in retirement, 63% of preretirees said “health care,” 17% picked “housing,” and 12% answered “discretionary expenses.”

 

Whether or not to downsize or relocate is a huge decision for many preretirees. If you plan to move, make sure you also consider how that will impact your cost of living, access to health care, and, if you have your eyes on another state, your tax obligations. If you plan to stay put, you'll want to consider how your home equity factors into your plans.

 

Tip: Consider ways that you can manage your larger expenses in retirement, and ask yourself five key questions. Read Viewpoints: “Retirement countdown.”

 

6.

At what age are most people eligible for Medicare?

When can you join the ranks of some 56 million Americans4 and enroll in Medicare?

 

Correct answer: Age 65. Of all the survey questions, this one was answered correctly by the highest percentage. However, 2% thought you could tap into Medicare as early as age 55 and another 2% said Medicare benefits would not kick in until age 60.

 

Having the right Medicare coverage is a key part of your retirement plan. There are many options to explore, so be thorough. Remember, you can enroll in Medicare only for single coverage. Your spouse or partner will not be covered by your plan and is required to enroll on his or her own.

 

Tip: Among the many factors to consider in your Medicare decision: health status, cost, coverage, and amount of travel you have planned, and access to existing or preferred doctors and hospitals. Watch the webcast, “Are you getting the most out of Medicare?” and read Viewpoints: “Six key Medicare questions.”

 

7.

How much will a couple retiring at age 65 spend on out-of-pocket costs for health care over the course of retirement?

If you are like many Americans, health care is expected to be one of your largest expenses in retirement. But just how much will you need to set aside just to pay for non-Medicare health care expenses?

 

Correct answer: $260,000 per couple. Fidelity has been tracking this issue for many years and estimates that the average 65-year-old couple retiring in 2016 will spend $260,000 to pay for out-of-pocket health care expenses over the course of their retirement.5 Only 21% of preretirees answered correctly, while 16% overestimated how much they would spend on health care by about $100,000.

 

Tip: Although an individual’s or couple’s actual spending can deviate significantly from this average value, it is vital that you plan well in advance for the considerable cost of health care by adding it into your overall retirement planning discussions. Read Viewpoints: “How to plan for rising health care costs.”

 

Summary

You may not have been able to correctly answer some of these survey questions, but by brushing up on your retirement education, and taking time to map out your retirement (with or without an advisor), Fidelity can help you boost your retirement IQ and put you on a path to living the life you want in retirement.

 

 

 

Bitcoin tax fight brewing as digital chamber set to battle IRS

By Bloomberg News

 (Bloomberg) Users of virtual currencies like bitcoin are backing an industry group to oppose tax authorities’ efforts to collect detailed information about the customers of a popular digital currency exchange.

 

The tax group was formed because the Chamber of Digital Commerce believes a U.S. government summons for broad user information against Coinbase Inc. would, if successful, set a terrible precedent, said Perianne Boring, president of Washington D.C.-based CDC. Members of the Digital Assets Tax Policy Coalition are so worried, Boring said that they don’t want to be publicly named as participants for fear of being targeted by the Internal Revenue Service.

 

“The companies are very afraid to speak out, so the chamber will be the face of this,” Boring said.

 

The IRS in 2014 classified all virtual currencies as property for tax purposes, meaning the assets —much like a home—can be sold at a profit and trigger tax implications. In November the agency served a summons against Coinbase, seeking details about customers who traded digital currencies from 2013 to 2015. If the government has its way, it could open the door for similar actions against the rest of the industry, said Boring.

 

Matthew Leas, an IRS spokesman, declined to comment on the issue, citing the agency’s litigation against Coinbase.

 

Bitcoin has grown into the largest digital currency in the world, with a market value of about $20 billion. Like ether and other virtual currencies, bitcoin is made possible by a blockchain, a type of software that works as an account ledger on computers all over the world.

 

The ledger tracks, verifies and records every use of a bitcoin to ensure the coins are valid and makes it almost impossible to change a past transaction. Bitcoin users are difficult to trace as the entire network, including their identities, is encrypted with no central authority keeping track of who’s who.

 

Coinbase, based in San Francisco, said in a January post on its blog that it agrees with the IRS that users of digital currencies need to pay their taxes, and noted that the exchange has in the past responded to the agency’s subpoenas for specific customers.

 

“Their most recent subpoena asks us to turn over records on all customers (including transaction history, IP addresses, transcripts with customer support, etc.),” Brian Armstrong, co-founder and CEO of Coinbase, said in the blog post. “We feel the IRS’s subpoena is overly broad and incorrectly implies that all users of virtual currency are evading taxes.”

 

The company has filed procedural motions in the case, David Farmer, a director, said in an email. The timing of enforcement proceedings has yet to be determined and is outside Coinbase’s control, he said.

 

John Does

The IRS action against Coinbase was in the form of a John Does summons. While the tax authority said at the time that Coinbase was not being accused of wrongdoing, “the IRS uses John Doe summonses to obtain information about possible violations of internal revenue laws by individuals whose identities are unknown,” the agency said in a November statement.

 

The CDC is using Steptoe & Johnson LLP as a legal adviser for the tax group, according to an announcement on Wednesday.

 

 “Tax solutions that allow the IRS to do its job without resorting to actions such as a John Doe summons will be of benefit to all,” Jason Weinstein, a partner at Steptoe and co-chair of its blockchain and digital currency practice, said in the announcement.

—Matthew Leising, with assistance from Lynnley Browning

 

 

 

The tax implications of the GOP health plan

By Roger Russell

House Republicans released a bill, the American Health Care Act, on Monday night to begin making good on their promise to repeal and replace the Affordable Care Act.

 

The ACA repeal bill proposed in the House on Monday would immediately repeal the individual and employer mandates, and modifies the current premium tax credit for 2018 and 2019 before replacing it with a new tax credit in 2020, according to Nicole Elliot, former IRS senior director of operations for the Affordable Care Act and current partner with law firm Holland & Knight.

 

“The bill repeals the individual mandate and provides a retroactive break for those impacted in 2016,” she explained. “If you thought you owed a penalty for 2016 and paid it, if this bill goes through, you won’t owe it, and can get a refund.”

 

“That’s a significant change,” she said. “It also repeals a lot of the other ACA taxes, so starting in 2018 it repeals the medical device excise tax, the tanning tax, the Medicare tax increase as well as the net investment income tax of 3.8 percent.

 

 “The biggest thing is that it makes some changes to the current premium tax credit. It modifies the credit for several years, and then in 2020 it repeals the premium tax credit and replaces it with a new credit. Under the bill an individual will now be able to get the premium tax credit in 2018 and 2019 for non-exchange coverage, which is significant. The amount of the credit is modified based on age in addition to income and premiums. The new credit in 2020 is an age-adjustable tax credit.”

 

The bill released on Monday contains the entire proposal, according to Jeff Martin, senior manager in Grant Thornton’s Washington National Tax Office. “I don’t expect another bill that will add to it. It’s a package of over 100 pages. It’s going into markup tomorrow. There will be plenty of comments, and we do expect some changes, but we don’t know whether they will be major or minor changes.”

 

“It does not repeal the ACA entirely,” said Martin. “It repeals some of the taxes that are in it. It effectively repeals the individual mandate and the employer mandate, by reducing the penalties down to zero. It also repeals many other things.”


Prospects of success

Despite the Republican majority in the House, the success of the bill is not assured since there are a number of Republican lawmakers who have vowed to vote against anything short of a full repeal of the ACA.

 

Medicaid administered by the states will no longer be open-ended based on the number of individuals covered, Martin indicated. “Under the proposal, they will now give states a fixed-dollar amount. The whole idea is that it will help curtail Medicaid spending.”

 

The new proposal does not place a cap on the exemption for employer-sponsored health care plans. “That was a way they were going to raise revenue,” Martin said. “Back when the ACA was negotiated, it was originally going to cap what an individual could exclude from income from health coverage, so any amount offered by an employer to an employee in excess of that amount would be income. They took that out of the ACA and replaced it with the Cadillac tax, an excise tax on high-cost plans. The Republican proposal put that [the cap on employer-sponsored health car plans] back in the discussion draft that was leaked 10 days ago. It created a lot of push-back, so they took it out and put the Cadillac tax back in, but with a delayed effective date.”

 

The premium tax credit will be around until 2019 and then replaced with a new credit.

 

“The amount of the new credit is based on the age of the individual, so the older you get, the larger the credit you can receive,” Martin said. “If you make up to $75,000, you get the full credit, but once you go over $75,000 it phases out. And you’re not eligible for the credit if you are eligible for employer coverage.”

 

“We’re still early in the process,” Martin cautioned. “There could be significant, or very minor changes, it will be interesting to see how it all works out.”

 

 

 

 

 

 

Caterpillar lands in government's crosshairs

By Bloomberg News

(Bloomberg) Caterpillar Inc., the bellwether U.S. equipment maker praised just last week by President Donald Trump, now finds itself a government target as federal tax and banking authorities raided its Illinois offices.

 

The investigation comes as new chief executive officer Jim Umpleby shifts its global headquarters to Chicago to bolster the machinery maker’s push into foreign markets. Last week, Doug Oberhelman, the company’s chairman, participated in discussions at the White House, where President Donald Trump said “I love Caterpillar.”

 

The Internal Revenue Service, the Federal Deposit Insurance Corp. and the Commerce Department on Thursday searched Caterpillar locations in Peoria, East Peoria and Morton, according to Sharon Paul, a spokeswoman for the U.S. attorney’s office for the Central District of Illinois, said by telephone.

 

Declining to comment on the nature of the raid, she said that in other cases the U.S. attorney’s office has dealt with the IRS’s Criminal Investigations unit and Commerce’s Office of Export Enforcement.

 

The stock fell 4.8 percent to $93.77 at 2:15 p.m. in New York, heading for the biggest decline since June.

 

Earlier Probe

Although the focus of the raids wasn’t clear, the company said in an annual filing last month that it received a grand jury subpoena from the U.S. District Court for the Central District of Illinois in January 2015.

 

The subpoena requested documents relating to, among other things, financial information on U.S. and non-U.S. Caterpillar subsidiaries. That included undistributed profits of non-U.S. subsidiaries and the movement of cash among U.S. and non-U.S. subsidiaries, the company said. The Morton facility receives and ships replacement parts to dealers globally.

 

The manufacturer said it got additional subpoenas relating to this investigation requesting more information on the purchase and resale of replacement parts by Caterpillar and non-U.S. Caterpillar subsidiaries, as well as dividend distributions of certain non-U.S. Caterpillar subsidiaries. The company said in the filing that it believes this matter “will not have a material adverse effect on the company’s consolidated results of operations, financial position or liquidity.”

 

Caterpillar, which has a financial unit that lends to customers, confirmed Thursday’s searches and said it was cooperating.

 

“The timing is surprising, but there have been publicly stated concerns in the past, and it could be potentially related to that,” said Macquarie analyst Sameer Rathod. Caterpillar’s “transfer pricing accounting was under a microscope and we haven’t really heard anything on these for a long time.”

 

Swiss Case

In a 2009 whistle-blower lawsuit, a former Caterpillar executive accused the company of using offshore subsidiaries in Switzerland and Bermuda to avoid about $2 billion in U.S. taxes from 2000 to 2009. The company sold and shipped spare parts globally from Illinois while improperly attributing at least $5.6 billion of profit from those sales to a unit in Geneva, according to claims made in that lawsuit, which was settled in 2012.

 

In 2014, the U.S. Senate’s Permanent Subcommittee on Investigations followed up on the executive’s claims and found that Caterpillar had “shifted billions of dollars in profits away from the United States and into Switzerland.” In Switzerland, Caterpillar had an effective corporate tax rate of 4 percent to 6 percent, the panel found—far less than the 35 percent U.S. corporate income tax rate. Caterpillar told the Senate panel that it had fully complied with U.S. tax law.

 

Last month, the company said in an annual filing that it is “vigorously contesting” about $2 billion in additional tax and penalties that it says the IRS is proposing to collect on “profits earned from certain parts transactions” by a subsidiary in Switzerland known as Caterpillar SARL.

 

 “We believe the relevant transactions complied with applicable tax laws and did not violate judicial doctrines,” Caterpillar said in the disclosure.

 

A spokesman for the FDIC declined to comment on Thursday’s raids. Justin Cole, a spokesman for the IRS Criminal Investigation division, confirmed that its agents were on-site, without elaborating.

 

—Joe Deaux and Joe Richter, with assistance from Jesse Westbrook, David Voreacos, Sara Forden, John Voskuhl and Esha Dey

 

 

 

Seven things you may not know about IRAs

Make sure you aren’t overlooking some IRA strategies and potential tax and savings benefits.

Did you know that IRAs...

✔  Can be established on behalf of minors who earn money from odd jobs?

✔  Can be opened as a non-deductible traditional IRA and converted to a Roth IRA?

✔  Are available to non-working spouses, as well as taxpayers who receive alimony?

✔  Allow a “catch up” contribution of $1,000 for those 50 and up.

 

It’s the time of year when IRA contributions are on many people’s minds—especially those doing their tax returns and looking for a deduction. The deadline for making IRA contributions for the 2016 tax year is April 18, 2017.

 

Chances are, there may be a few things you don’t know about IRAs. Here are seven commonly overlooked things about IRAs.

 

1.

Even if you don’t qualify for tax-deductible contributions, you can still have an IRA.

If you’re covered by a retirement savings plan at work—like a 401(k) or 403(b)—and your 2016 modified adjusted gross income (MAGI) exceeds certain income limits, your contribution might not be tax deductible.1 But getting a current-year tax deduction isn’t the only benefit of having an IRA. Nondeductible IRA contributions still offer the potential for your money and earnings to grow tax free until the time of withdrawal. You also have the option of converting to a Roth IRA (see No. 7, below).

   

2.

A nonworking spouse can open and contribute to an IRA.

A non-wage-earning spouse can save for retirement too. Provided the other spouse is working and the couple files a joint federal income tax return, the nonworking spouse can open and contribute to their own traditional or Roth IRA. A nonworking spouse can contribute as much to a spousal IRA as the wage earner in the family. For 2016 and 2017, the IRA contribution limits are $5,500, or $6,500 for those over age 50.

 

3.

Alimony counts as earned income.

Although former spouses receiving alimony might not like having to pay tax on these payments, the fact that alimony counts as earned income may qualify them to contribute to an IRA. Keep in mind, however, that tax-deductible contributions to an IRA can’t exceed total taxable earned income. So if the total of your alimony payments and other taxable earned income is less than $5,500 ($6,500 if you’re 50 or older), your deductible IRA contribution will be limited to the lower amount.

 

4.

Self-employed, freelancer, side gigger? Save even more with a SEP IRA.

If you are self-employed or have income from freelancing, you can open a Simplified Employee Pension plan—more commonly known as a SEP IRA. Even if you have a full-time job as an employee, if you earn money freelancing or running a small business on the side, you could take advantage of the potential tax benefits of a SEP IRA. The SEP IRA is similar to a traditional IRA where contributions may be tax deductible—but the SEP IRA has a much higher contribution limit. The amount you can put in varies based on your earned income. For SEP IRAs, you can save 25% of pretax income up to a $53,000 limit for 2016 and a $54,000 limit for 2017 contributions. The deadline to set up the account is the tax deadline—so for 2016 it will be April 18, 2017 (for a calendar-year filer). But, if you get an extension for filing your tax return, you have until the end of the extension period to set up the account or deposit contributions.

 

5.

"Catch-up" contributions can help those age 50 or older save more.

If you’re age 50 or older, you can save an additional $1,000 in a traditional or Roth IRA each year. This is a great way to make up for any lost savings periods and make sure that you are saving the maximum amount allowable for retirement. For example, if you turn 50 this year and put an extra $1,000 into your IRA for the next 20 years, and it earns an average return of 7% a year, you could have almost $44,000 more in your account than someone who didn’t take advantage of the catch-up contribution.2

 

6.

You can open a Roth IRA for a child who has taxable earned income.3

Helping a young person fund an IRA—especially a Roth IRA—can be a great way to give him or her a head start on saving for retirement. That’s because the longer the timeline, the greater the benefit of tax-free earnings. Although it might be nearly impossible to persuade a teenager with income from mowing lawns or babysitting put part of it in a retirement account, gifting the contribution to an IRA on behalf of a child or grandchild can be the answer. The contribution can’t exceed the amount the child actually earns, and even if you hit the maximum annual contribution amount of $5,500, that’s still well below the annual gift tax exemption ($14,000 per person in 2016 and 2017).

 

The Fidelity Roth IRA for Kids, specifically for minors, is managed by an adult until the child reaches the appropriate age for the account to be transferred into a regular Roth IRA in his or her name. This age varies by state. Bear in mind that once the account has been transferred, the account’s new owner would be able to withdraw assets from it whenever he or she wished, so be sure to educate your child about the benefits of allowing it to grow over time and about the rules that govern Roth IRAs.

 

7.

Even if you exceed the income threshold, you might still be able to have a Roth IRA.

Roth IRAs can be a great way to achieve tax diversification in retirement. Distributions of contributions are available any time without tax or penalty, all qualified withdrawals are tax free, and you don’t have to start taking minimum required distributions at age 70½.4But some taxpayers make the mistake of thinking that a Roth IRA isn’t available to them if they exceed the income thresholds.5 In reality, you can still establish a Roth IRA by converting a traditional IRA, regardless of your income level.

 

If you don’t have a traditional IRA you’re still not out of luck. You could open a traditional IRA and make nondeductible contributions, which aren’t restricted by income, then convert those assets to a Roth IRA. If you have no other traditional IRA assets, the only tax you’ll owe is on the account earnings between the time of the contribution and the conversion. However, if you do have deductible contributions in another IRA, you’ll need to pay close attention to the tax consequences. That’s because of an IRS rule that calculates your tax liability based on all your traditional IRA assets, not just the after-tax contributions in a nondeductible IRA that you set up specifically to convert to a Roth. For simplicity, just think of all IRAs in your name (other than inherited IRAs) as being a single account. For more information, read Viewpoints: “Answers to common Roth conversion questions.”

 

Got Nexus? Find Out Before Operating In Multiple States

For many years, business owners had to ask themselves one question when it came to facing taxation in another state: Do we have “nexus”? This term indicates a business presence in a given state that’s substantial enough to trigger the state’s tax rules and obligations.

 

Well, the question still stands. And if you’re considering operating your business in multiple states, or are already doing so, it’s worth reviewing the concept of nexus and its tax impact on your company.

 

Common criteria

Precisely what activates nexus in a given state depends on that state’s chosen criteria. Triggers can vary but common criteria include:

  • Employing workers in the state,
  • Owning (or, in some cases, even leasing) property there,
  • Marketing your products or services in the state,
  • Maintaining a substantial amount of inventory there, and
  • Using a local telephone number.

 

Then again, one generally can’t say that nexus has a “hair trigger”. A minimal amount of business activity in a given state probably won’t create tax liability there.

 

For example, an HVAC company that makes a few tech calls a year across state lines probably wouldn’t be taxed in that state. Or let’s say you ask a salesperson to travel to another state to establish relationships or gauge interest. As long as he or she doesn’t close any sales, and you have no other activity in the state, you likely won’t have nexus.

 

Strategic moves

As with many tax issues, the totality of facts and circumstances will determine whether you have nexus in a state. So it’s important to make assumptions either way. The tax impact could be significant, and its specifics will vary widely depending on just how the state in question approaches taxation.

 

For starters, strongly consider conducting a nexus study. This is a systematic approach to identifying the out-of-state taxes to which your business activities may expose you. The results of a nexus study may not necessarily be negative. You may find that your company’s overall tax liability is lower in a neighboring state. In such cases, it may be advantageous to create nexus in that state by, say, setting up a small office there. If all goes well, you may be able to allocate some income to that state and lower your tax bill.

 

Taxation and profitability

“The grass is always greener on the other side of the fence”, so the saying goes. If profitability beckons in another state, please contact our firm for help projecting how setting up shop there might affect your tax liability.

 

Nexus has been and remains the primary focus of companies considering whether and how they’d be taxed across state lines. (See main article.) But, recently, many states have established “market-based sourcing” for determining the tax liability of service companies that operate within their borders.

 

Under this approach, if the benefits of a service occur and will be used in another state, that state will tax the revenue gained from said service. “Service revenue” generally is defined as revenue from intangible assets — not the sales of tangible personal property.

 

Thus, in market-based sourcing states, the destination state of a service is the relevant taxation factor rather than the state in which the income-producing activity is performed (also known as the “cost of performance” method).

 

 

Can taxpayers avoid Obamacare penalties under Trump?

By Ben Steverman

 (Bloomberg) This tax season, millions of Americans are supposed to pay a penalty if they don’t have health insurance. At least, that’s what the Affordable Care Act requires. As the April filing deadline approaches, however, Americans have reasons to think they might get away with not paying what they owe.

 

After President Donald Trump took office, the Internal Revenue Service changed the way it handled the health coverage question on tax returns. Initially this tax season, the agency was automatically rejecting "silent" tax returns—those that didn't indicate whether the taxpayer had insurance coverage. The IRS reversed course a few weeks after Trump, on his first day in office, ordered agencies to ease the burdens of complying with the ACA. The unsuccessful Congressional effort to repeal and replace the ACA only added to the confusion.

 

The reversal has prompted a debate among accountants and other tax preparers on what to tell clients to do about their Obamacare penalties, also known as "shared responsibility payments." The penalty starts at $695 per adult without coverage.

 

Obamacare penalties

Emily Wallace, 55, wasn't sure how to handle the $962 she owed for not having insurance. "I'm one of those fiftysomethings that the ACA really hurt financially," she said. The resident of Greenwood, S.C., goes without insurance because it would cost more than $7,000 a year to sign up for her husband's workplace policy and about $9,600 to buy a policy on the Obamacare exchange. She doesn't qualify for subsidies because of her husband's income, which also boosts the penalty she owes for not having insurance.

 

"It seems to me more wise to pay the penalty and save as much as we can for routine doctor visits," she said.

 

There are risks to filing a so-called "silent return" and skipping the penalty. "Legislative provisions of the ACA law are still in force until changed by the Congress, and taxpayers remain required to follow the law and pay what they may owe," the IRS said in a statement. The agency added that "taxpayers may receive follow-up questions and correspondence at a future date."

 

Some tax preparers will refuse to help clients file silent returns. Enrolled agents—accountants, lawyers, and other tax experts who are certified by the IRS and required to meet certain ethical and legal responsibilities—are the most likely to balk. The National Association of Enrolled Agents told its members that they "should continue to help taxpayers comply to the full extent of the law."

 

Not all tax preparers agree. Nina Tross, an enrolled agent who is also executive director of the National Society of Tax Professionals, said she warns her clients about the possible consequences of disobeying the ACA. But she lets them file a silent return if they want.

 

"They can make the choice," Tross said. And many are choosing to try to avoid their Obamacare penalty, she said. "They're rolling the dice on this, and the IRS is letting them."

 

The largest U.S. tax preparation companies, TurboTax, owned by Intuit Inc., and H&R Block Inc., are both letting customers file silent returns—while warning them of the possible consequences. A silent return may "increase the risk of an IRS notice or audit," H&R Block spokesman Gene King said. Tax preparers also point out there are other, legal ways to avoid the penalty, through multiple exemptions based on financial hardship and other criteria.

 

It's impossible to tell if the IRS will aggressively track down those missing payments. The agency could inundate silent filers with thousands of follow-up notices, requesting more information on their health insurance status. The IRS can easily check the veracity of the responses: By later this year, the agency will have collected and processed millions of health coverage records , giving it a good idea as to whether you owe a penalty or not.

 

Taxpayers can always refuse to pay Obamacare penalties. The IRS isn't allowed to collect on the health coverage penalty the same way it collects other tax debts. That means the agency can't garnish your wages if you fail to pay the penalty. The agency can, however, deduct the penalties you owe from future tax refunds.

 

Politics could be a key factor in how the IRS enforces the individual mandate this year.

 

On Friday, Trump said his predecessor’s health law was "imploding and soon will explode and it's not going to be pretty." If the Trump administration wants to further undermine Obamacare and its insurance markets, loosening enforcement of ACA penalties is one of several options.

 

On the other hand, Republican efforts to re-write the ACA seem to have failed for now. The GOP overhaul of Obamacare would have eliminated the individual mandate entirely, erasing the obligation to pay penalties retroactively to the beginning of the 2016 tax year. After canceling a vote on the bill on Friday, however, House Speaker Paul Ryan said, “we’re going to be living with Obamacare for the foreseeable future.”   

 

Before paying her penalty, Wallace wanted to wait and see what Congress would do. Then, earlier this month, she and her husband got word that someone else had filed a fraudulent return on their behalf. That forced them to file their taxes and pay the penalty. If Congress ends up eliminating the penalty, they figured, they could file an amended return and get the money back.

 

That's looking unlikely now, to Wallace's disgust and disappointment. "I'm more concerned about Washington's inability to solve the problem than I am about the $962 I have to pay for the penalty," she said.

 

Bloomberg News

 

 

 

People trust accountants more than politicians when it comes to taxes

ByMichael Cohn

Approximately two-thirds of residents of Group of 20 countries distrust politicians about the tax system, according to a new survey by a trio of accounting organizations.

 

The survey, by the Association of Chartered Certified Accountants, the International Federation of Accountants, and Chartered Accountants Australia and New Zealand, polled more than 7,600 people across G20 countries, which account for two-thirds of the world’s population. The survey found that 67 percent of the respondents said they either distrust or highly distrust politicians about the tax system.

 

In contrast, the poll respondents were more trusting of accountants. The survey found 57 percent of people in G20 countries trust or highly trust professional accountants when it comes to the tax system, compared to 49 percent who trust tax attorneys, and 35 percent who trust non-governmental organizations.

Survey from ACCA, IFAC and CA ANZ of G20 residents about tax opinions

In addition, 58 percent of the people polled in G20 countries said they believe the work of professional accountants is contributing to more efficient tax systems, while 56 percent said the work of accountants is contributing to more effective tax systems, and 49 percent who indicated it’s contributing to fairer tax systems.

 

“Two-thirds of respondents distrust or highly distrust politicians on the topic of tax,” said IFAC executive director of external affairs Russell Guthrie in a statement. “They are cutting through the political rhetoric, and instead place their trust with the experts. Governments have work to do to rebuild public trust in tax systems. The accounting profession has always advocated for a ‘big picture’ approach to tax policymaking in the global economy—the complexity that exists now is counterproductive to the public interest.”

 

Asked about cooperation versus competition in the tax arena, nearly three-quarters of the survey respondents indicated they are more concerned that their government cooperates with other countries for a more coherent international tax system, than competes for national interests such as increasing tax revenue or attracting multinational business. The poll found 73 percent of the respondents believe it is important or very important for governments to cooperate with each other on tax policy to create a more coherent international tax system. They were more than 3.5 times more likely to favor cooperation over competition.

 

The survey respondents were generally more supportive of tax incentives for a variety of social and economic goals, with 76 percent of the respondents indicating they support government tax incentives for green energy projects, 74 percent supporting tax incentives for retirement planning, and 68 percent for infrastructure projects.

 

 “While I wouldn’t support constant tinkering with the tax system by governments of G20 countries—as tax regimes need to be long-term and properly bedded down—it is interesting that people highly favor utilizing tax systems to achieve broad social and economic objectives,” said ACCA head of tax Chas Roy-Chowdhury in a statement.

 

The survey results differed across countries when respondents were asked about tax minimization strategies. Residents of English-speaking countries of the G20 generally expressed more skepticism about tax minimization. Poll respondents in Australia, Canada, the U.S. and the U.K. tended to indicate they believe high-income earners and multinational companies are not paying enough taxes.

 

Besides those countries, the survey also polled respondents in Argentina, Brazil, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea and Turkey.

 

 

 

Amazon prevails in high-stakes tax case with IRS

By Michael Cohn

The Tax Court decided in favor of Amazon.com in an expensive transfer pricing dispute with the Internal Revenue Service involving intellectual property that the e-commerce giant assigned to a European subsidiary in Luxembourg.

 

The IRS had charged Amazon with a deficiency in its federal income taxes of nearly $8.4 million for 2005 and over $225.6 million for 2006, disagreeing with how Amazon had accounted for the intangible assets required to run its European website business. The IRS made substantial transfer pricing adjustments reallocating income to Amazon’s U.S. business from the subsidiary in low-tax Luxembourg.

 

A sign at an Amazon.com fulfillment center in Hemel Hempstead, U.K.Chris Ratcliffe/Bloomberg

 

In a series of transactions in 2005 and 2006, Amazon had transferred three groups of intangible assets to the Luxembourg subsidiary, including the software and technology used to run its European websites, fulfillment centers and related businesses; marketing intangibles such as trademarks and domain names for the European business; and customer lists and other information relating to Amazon’s European customers.

 

The court had to decide on the proper amounts of Amazon’s “buy-in obligation” for the assets it had transferred, along with the proper amount of intangible development costs.

 

Amazon had originally reported a buy-in payment from the European subsidiary of $254.5 million, to be paid over seven years. However, in its examination of Amazon’s returns, the IRS concluded the buy-in payment had not been determined at arm’s length. The IRS contended that the transferred property had an indeterminate useful life and had to be valued not as three separate groups of assets, but as integrated components of the same operating business. In applying a discounted cash flow methodology to the cash flows anticipated from the European business, the IRS determined a buy-in payment of $3.6 billion, which was later reduced to $3.468 billion.

 

However, Amazon argued that the discounted cash flow methodology used by the IRS was substantially the same as one the Tax Court had rejected in a 2009 case involving Veritas Software. It disputed the conceptual soundness of the IRS’s methodology, contending that it treated short-lived intangibles as if they had perpetual useful lives. Amazon argued the IRS was inflating the buy-in payment by improperly including the value of subsequently developed intangible property in it.

The Tax Court sided with Amazon, concluding Thursday that the IRS’s valuation approach was “arbitrary and capricious.”

 

 

 

Tax overhaul becomes GOP's priority as health-care stalls

By Alexis Leondis

 (Bloomberg) President Donald Trump and House Speaker Paul Ryan say they’re ready to put a tax overhaul at the top of their agendas.

 

After the lack of sufficient support among House Republicans forced them to cancel a scheduled vote on a bill to repeal and replace Obamacare, both men highlighted the need to focus now on rewriting the U.S. tax code.

 

“So now we’re going to go for tax reform, which I’ve always liked,” Trump said Friday following the decision to cancel the vote. Health care represented the first big test of Trump’s ability to steer ambitious proposals through Congress—yet some experts say he’s seemed more interested in tax issues throughout his comparatively brief political career.

 

House Ways & Means Committee Chair Rep. Kevin Brady, R-Texas (right) and Speaker of the House Paul Ryan, R-Wis., at a hearing.Bloomberg News

 

“Tax reform has always been a bigger priority for the administration than health-care reform—when they were in campaign mode, tax reform was their big thing,” said economist Kyle Pomerleau, the director of federal tax projects at the conservative Tax Foundation.

 

During a rally earlier this week, Trump repeated a theme from recent speeches, calling for “massive tax reform”—though details of the plan he’ll offer remain unclear.

 

‘Ambitious Plans’

During a press conference Friday, Ryan acknowledged that failing to repeal and replace Obamacare would make a tax overhaul more difficult, but not impossible, because his members have more consensus on taxes. He said he met with the president, as well as Treasury Secretary Steven Mnuchin, on Friday to discuss a tax overhaul.

 

“Now we’re going to move on with the rest of our agenda because we have big, ambitious plans to improve people’s lives in this country,” Ryan said.

 

Trump’s tax proposals changed throughout his presidential campaign—by Election Day, his plan had moved closer to the tax blueprint that Ryan and other House leaders prefer. Both plans would consolidate the number of individual income-tax rates to three from the existing seven; the top rate would drop to 33 percent from 39.6 percent currently.

 

On corporate taxes, Trump and Ryan have yet to forge an agreement—particularly on the controversial issue of “border adjustments.” Ryan favors replacing the existing 35 percent corporate income tax with a 20 percent tax rate on companies’ domestic sales and imports. Exports would be excluded.

 

Border Adjustment

That border-adjusted approach—which opponents say would increase consumer prices—has divided Trump’s White House advisers, and the president hasn’t yet announced a position on it. Supporters say higher prices on imported goods would be offset over time by a strengthening dollar.

 

“One of our concerns about it is that if the currency moves, then the Wal-Mart shopper shouldn’t be impacted," Mnuchin said during a Friday morning appearance at an event sponsored by the media company Axios. "But if the currency moves, that has an impact for our exporters. It’s a very complicated issue worth looking at carefully.”

 

Mnuchin said the White House is committed to a tax overhaul that includes corporate and individual tax cuts. He added that the administration had been working on a tax plan for the past two months and it’s something “we are designing from scratch and running through a lot of scenarios.”

 

Mnuchin has previously said tax legislation would be completed by Congress’s August recess. On Friday, he said he’s still optimistic about the August target but signaled a tax overhaul by the fall might be more likely.

White House Budget Director Mick Mulvaney also said Friday the White House will be taking the lead on pushing the tax overhaul—and that the president is working on that plan now.

 

“When you see tax reform the first time, it will be the president’s plan and we’ll drive the debate on that,” Mulvaney said during an interview on ABC’s “Good Morning America.”

 

Kevin Brady, chairman of the tax-writing House Ways and Means Committee, said he remains committed to getting a tax overhaul completed before Congress’s recess in August and that he still wants to use the House GOP plan to achieve a meaningful corporate rate reduction.

 

 “We’re going to head straight into the next game, which is the biggest tax reform in modern history,” Brady said.

 

—With assistance from Anna Edgerton, Lynnley Browning, Saleha Mohsin and Kevin Cirilli

Bloomberg News

 

 

 

Oil investor Zukerman gets almost six years for tax evasion

By Christian Berthelsen

 (Bloomberg) Oil industry investor Morris Zukerman was sentenced to 70 months in prison for evading $45 million in taxes, a scam that included a bogus $1 million charitable donation and fibs to his own accountants. He was also fined $10 million.

 

"I recognize and profoundly regret the criminal offenses I committed," Zukerman told U.S. District Judge Analisa Torres during the hearing in a Manhattan federal court room, reading from a prepared statement. "This is painful to acknowledge."

 

Zukerman’s schemes were even more robust than those uncovered by prosecutors. As his case moved toward sentencing, Zukerman, 72, filed amended tax returns showing that his undeclared income was more than $17 million higher than what the government alleged in its indictment, prompting prosecutors to argue that Zukerman doesn’t deserve leniency.

 

Morris Zukerman, chairman of ME Zukerman & Co., exits federal court in New York.Eric Thayer/Bloomberg

 

They sought a sentence of as long as 84 months.

 

"There are two words and two words alone that explain the conduct in this case: unmitigated greed," Special Assistant U.S. Attorney Stanley Okula said. "The defendant is in a financial position enjoyed by very few in this country. There was no economic need for him to do what he did."

 

Defense lawyers disagreed and said the revised tax returns demonstrated their client was being forthcoming. They sought a sentence with limited time, saying Zukerman’s advanced age raised health concerns and made recidivism unlikely.

 

‘Citizenship Award’

The judge appeared skeptical of defense arguments throughout the hearing, asking his defense lawyer at one point: "Do you think he should get a good citizenship award for paying his back taxes?" Though she declined to impose a prison term at the top of the guideline range, she raised Zuckerman’s fine far above the maximum guideline of $250,000.

 

Zukerman’s family members, who sat behind him during the hearing, wept as the sentence was imposed, and he hugged them afterward. He declined to comment as he left the courtroom.

 

In his guilty plea last year, Zukerman admitted claiming millions of dollars in bogus deductions, providing false information and documents and failing to report profits, including $28 million from the sale of a company.

 

Prosecutors said he gave phony information to his accountants and lawyers who were representing him in an audit by the Internal Revenue Service. He also claimed to have donated $1 million to a conservation group to purchase land on Block Island in Rhode Island, when he actually bought the land outright himself.

 

In addition to pleading guilty, Zukerman agreed to pay $37 million to the IRS.

 

Lending Art

Zukerman launched his investment firm in the late 1980s after a 16-year run at Morgan Stanley, where he led the bank’s energy practice for a time. His major projects included partnerships with ConocoPhillips Co., Exxon Mobil Corp. and Kinder Morgan Inc. He was also active in philanthropy, funding a sociology professorship at his alma mater, Harvard University, and lending works from his art collection to the Metropolitan Museum of Art.

 

Authorities alleged that part of Zukerman’s tax evasion involved his art dealings, having $50 million worth of Old Masters paintings shipped to addresses in Delaware and New Jersey to avoid New York state sales tax. The paintings almost immediately ended up on the walls of his Park Avenue duplex. He also agreed to pay New York state $4.6 million.

 

In support of their sentencing position, prosecutors submitted emails between Zukerman and others coordinating the delivery of art to his New York apartment after it had been shipped to Delaware, and emails in which he openly discussed profits from a business deal that he didn’t declare to tax authorities.

 

In his defense, Zukerman submitted more than 100 letters from supporters vouching for his character, including one from Zbigniew Brzezinski, the U.S. national security adviser during the Carter administration, who presided over the marriage of Zukerman’s daughter and cited his "genuine patriotism." He also submitted a 2007 letter from the then-president of the Metropolitan Museum of Art, Emily Rafferty, thanking him for a $100,000 pledge.

 

The case is U.S. v. Zukerman, 16-cr-00194, U.S. District Court, Southern District of New York (Manhattan).

 

Bloomberg News

 

 

 

The ‘very strange’ item on Trump’s 1040: alternative minimum tax

By Lynnley Browning

 (Bloomberg) Leaked pages of President Donald Trump’s 2005 tax return offer no new details about his foreign income and business dealings but highlight a tax he’s vowed to abolish.

 

The alternative minimum tax, or AMT, was responsible for 80 percent of Trump’s 2005 federal income tax bill of $38.4 million, on income of $152.7 million. That’s a “startlingly” large proportion, said Alexander Popovich, a wealth adviser at JPMorgan Chase & Co.’s private bank. “It’s very strange—usually, the AMT is not going to cause anywhere near such a difference,” Popovich said.

 

Trump has contravened 40 years of tradition by declining to release his tax returns, so the two pages of his 2005 return, which veteran tax journalist David Cay Johnston presented on MSNBC’s “The Rachel Maddow Show” Tuesday, offer a rare—but limited—peek into the president’s finances. Among the items on view: Trump got hit with a tax that in recent years has affected increasing numbers of well-off, but not necessarily wealthy, Americans.


The AMT was introduced to taxpayers in 1970 as a way to prevent high-earning households from winnowing down or zeroing out their federal income-tax bills. The tax works by taking away personal and dependent exemptions, as well as various itemized deductions, including those for state and local taxes. Other deductions are capped. It’s triggered by almost two dozen factors, including losses, depreciation, stock options and exemptions for children.

 

State Taxes

As inflation boosted incomes, the AMT has captured a larger number of taxpayers—including roughly 30 percent of households with cash income between $200,000 and $500,000, according to the Urban-Brookings Tax Policy Center, a Washington-based policy group. Higher state and local taxes in states like California, New York, New Jersey and Massachusetts—which can’t be deducted under the AMT—have helped stir complaints about the tax.

 

Trump and House Republicans have both formally called for abolishing it as part of their planned tax overhaul. The tax will raise about $35 billion this year, about 2.2 percent of all individual income tax revenue, according to the Tax Policy Center.

 

“The AMT created this incredibly complicated formula to try to compensate for all of the deductions that are built in on the other side of the tax piece,” Senator James Lankford, an Oklahoma Republican, said Wednesday.

 

Democrats are wary of scrapping it. “I’m an advocate of the AMT,” New York Senator Chuck Schumer, the Democratic leader, said.

It’s unclear what caused Trump to have to pay the AMT. The large bill “raises more questions than it answers,” said Leonard Burman, co-founder of the Tax Policy Center. “For the vast majority of people, the AMT is only a portion of their tax liability—just a supplement to their regular taxes.”

 

Trump’s Documents

The leaked documents show that Trump and his wife, Melania, paid $5.3 million in federal income tax and more than $31 million in AMT. The combined $38.4 million tax bill gave the Trumps a federal tax rate of about 25 percent. It’s not clear that absent the AMT, they would have paid only a 3.5 percent rate, because of differences in the way deductions are treated by the AMT and regular income tax.

 

It’s unusual that the Trumps were caught by a tax that predominantly hits earners in the $400,000 to $1.2 million gross income range, said Popovich of JPMorgan Chase. Far wealthier taxpayers can typically avoid its effects because capital gains income—a mainstay for the top 0.1 percent—largely escapes the AMT.

 

Chuck Collins, a scholar at the left-leaning Institute for Policy Studies, said he assumed that a reported loss of $103 million on Trump’s 2005 return, combined with depreciation for real estate, “probably” triggered the alternative levy. “The AMT tends to catch people who have paper losses,” he said.

 

Depreciation Cited

In a statement released Tuesday night before the MSNBC broadcast, the White House cited a “large-scale depreciation for construction,” but didn’t elaborate.

 

Burman said the loss may have been carried over from 1995, when Trump reported a $916 million loss on his New York state tax return, according to documents that were leaked to the New York Times last October.

 

Taxpayers are allowed to “carry forward” losses that they can’t fully use in a given year because they don’t have enough taxable income. Bloomberg reported in October that the $916 million loss probably stemmed from Trump’s use of a now-banished tax provision that allowed investors to turn canceled debt into personal losses for the purposes of reducing their federal tax bills.

 

“Whoever leaked the two pages didn’t release the supporting schedules to the return, which would show how and why the AMT was triggered,” Burman said. “There could be things on the full tax return that might tell us something about the nature and structure of his businesses and income that triggered the tax.”

 

Prior Year

However, the two pages from 2005 may well provide a clue about something else: Trump’s federal tax bill for 2004. The document lists estimated tax payments of $13,291,993 that Trump made in 2005—and under federal rules in place at the time, those payments had to total 110 percent of his 2004 tax liability.

 

That means Trump probably had a federal tax liability of roughly $12.1 million in 2004, according to Matthew Morris, a tax attorney at law firm Bowditch & Dewey LLP, who reviewed the 2005 document and made the calculations. It’s also possible that the estimated tax payments were overpayments, but that seems unlikely, Morris said.

 

- With assistance from Sahil Kapur

Bloomberg News

 

 

 

The smoke slowly clears on marijuana regulations

By Amy Pitter

The voters clearly have spoken, and soon recreational marijuana will be widely sold here in Massachusetts, following a slow and ongoing rollout of medicinal dispensaries. As it has in other states, the budding new industry will come with many regulatory complexities, and along with them, the lingering issue of the federal government standing at odds with state law. CPAs potentially engaging clients in the marijuana industry have more assurances that they are legally safe but should be aware that the ground could suddenly shift.

 

Already the Massachusetts legislature has greeted the prospect of marijuana legalization with some caution, delaying the full implementation of the law while also considering amending the voter referendum in other ways, including increasing the marijuana excise tax. Thus the law itself remains a work in progress as a legislative committee convenes to propose amendments.

 

For providers of professional services considering working in the marijuana industry, in Massachusetts or any other state that permits it, caution also is a sensible approach, for the legal conflict still lingers: The Federal Drug Enforcement Administration has stood by its August decision that marijuana is still in the most restrictive category for U.S. law enforcement purposes. And the new administration taking shape in Washington very likely won’t relax the DEA’s stance. Incoming Attorney General Jeff Sessions has been a vocal critic of the legalization of marijuana, although at his confirmation hearing he did not draw a hard line on states’ rights to create and enforce their own marijuana laws. The good news for the legal marijuana industry is that Sessions seemed to acknowledge that resource constraints will require the federal government to look the other way as states continue to decide their own marijuana destinies.

 

More reassuring is the news that state governing bodies of professional services, including accounting, have moved to clarify that professionals won’t face repercussions for providing services to the marijuana industry. For instance, in Massachusetts, the Board of Public Accountancy in February issued a statement assuring accountants that it wouldn’t take action against individuals and firms that work on legal marijuana clients. It cautioned, however, that firms still risk being at odds with federal law, but the board made an important move by in effect helping to assuage the concerns of the Massachusetts accounting profession.

 

It’s not clear sailing, however. Many banks remain wary of taking on marijuana business. They have deferred to rules under the Cole Memo, which lays out nine criteria for state-chartered banks to follow that would allow them to accept deposits from marijuana businesses without fear of prosecution. However, with few exceptions, bankers in Massachusetts and elsewhere are awaiting further instructions from the Division of Banks.

 

All the same, the risk of federal intervention clearly is diminishing as the marijuana industry expands. Marijuana brought in an estimated $6.7 billion in sales last year and 29 states have legalized medical marijuana. Eight states allow recreational use. It would appear the horse is out of the proverbial barn, but with a new president in place eager to flex political muscle, a strong show of federal control on the issue is not beyond imagining.

 

As the marijuana industry launches in Massachusetts and elsewhere, there no doubt will be an intensive regulatory focus and ongoing hurdles, including hurdles legal and financial, to clear. And there’s no question that a complex industry facing a raft of regulation calls for the depth of experience and professionalism that CPAs bring.