All posts tagged: Tax

A Brief History of Tax (with apologies to Stephen Hawking)

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Every now and then, it’s good to take a break from the nuts and bolts of the law and take a look at the bigger picture. Take tax, for example.  Tax law is notoriously complex.  It affects probably every area of our lives (the joke being that tax lawyers are the last general practitioners).  It drives decisions in both corporate law and estate planning.  Which corporate form to use – an LLC taxed as a partnership or an S-Corp?  Provide for bypass trusts in my will, or give gifts outright to my beneficiaries?  Whatever the consideration, there’s probably a tax law for that. So, from time to time, why not look at how we got where we are and why? In The Atlantic today, Charlotte Crane of Northwestern University’s law school writes a concise, useful and readable piece outlining the history of the income tax in America, its constitutionality, and some of its very broad results in 20th Century American policy making. Professor Crane starts with the constitutional battle over the income tax and its …

What Do You Mean I Can’t Deduct My IRA Contribution?

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You might not be able to.  There are two factors that determine whether you can deduct your contribution to your IRA, and if so, how much. The first factor is whether you’re covered by a retirement plan at work.  If you aren’t, you get the most out of your deduction.  A single filer can take the full deduction up to the amount of his or her contribution limit – same for someone filing married filing jointly. Coverage by a retirement plan at work begins to chip away at that maximum deduction until there isn’t any left.  If you’re single, you can still deduct the entirety of your IRA contribution up to the contribution limit – but only if your modified adjusted gross income (AGI) is $58,000 or less.  From there, it’s a sliding scale up to $68,000, at which point no deduction is allowed.  The IRS giveth, and the IRS taketh. If you’re married, filing jointly, the full deduction is allowed with modified AGI up to $92,000.  Once you and your spouse hit $112,000, the …

Roth IRAs – Pay Now, Gain Later

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A little while back, we talked about IRAs.  But what about Roth IRAs? They differ from regular IRAs in several ways, notably at the contribution and distribution stages. Unlike IRA contributions which are tax deductible, Roth contributions are not tax deductible.  But a small hit on the front end is designed to yield significant dividends on the back end.  When you go to make a withdrawal from your Roth some years down the road, there is no tax.  More on that later. Annual contribution limits to a Roth are $5,500 (officially, they’re the lesser of $5,500 or your taxable compensation for the year, but as a practical matter for this purpose, that generally means a cap of $5,500).  If you’re 50 or older, that limit is bumped to $6,500.   Moreover, contributions can be made after one turns 70 ½  — the age at which contributions to regular IRAs must stop. Note: contributions to other, regular IRAs will count against your annual contribution limit to your Roths. There are a couple of other limits with Roths.  …

Foreign Tax Laws and American Business in the News

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Here are a couple of articles to shed some light on the news of late. Last week, PC giant Dell announced a stock buyback.  The assumption went that they were going private to strip down and retool.  Not so much, says Matthew Yglesias of Slate magazine online. According to Yglesias, Dell’s motivation s not necessarily simply related to revamping its business model or vision.  Rather, it’s a move to repatriate massive cash reserves that are stored offshore and mitigate the tax liability and increase liquidity available to it here. For the story, see Dell’s Gigantic Tax Dodge. The second tax story, from Jeff Gerth of ProPublica, also involves large entities, this time banks, taking advantage of foreign tax laws, but not faring as well as Dell. According to a ruling in the US Tax Court, “The STARS transaction was a complicated scheme centered around arbitraging domestic and foreign tax law inconsistencies.” The full story on that, with links to the tax court ruling, can be read here.

Marriage Penalty and Federal Income Tax

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This is my second post today stemming from conversations I had earlier this week, and the fact that this issue came up – like that of the margin tax – seems sufficient reason for a post about it. So, is there a marriage penalty?  Well, sort of.  There is not a conscious policy to use the tax code to discourage marriage; instead, the marriage penalty describes an incidental phenomenon that is the result of our progressive tax structure. Think back to high school physics and centrifugal force.  Centrifugal force doesn’t exist; centrifugal force is what you think you feel when there is actually centripetal force.  Similarly, the government is not penalizing you when you get married. It just feels like it. Briefly described, the marriage penalty occurs when two people get married and pay more in tax together, filing as married filing jointly, than they would if they had remained single.  What causes it?  The higher tax is a result of the progressive tax structure of income tax rates in the U.S.  While a complete …

Margin Tax, the Texan Tax

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Margin tax.  What is it?  A friend asked me about it earlier this week.  It’s not something I think about every day, but if you own a business in Texas, it’s something you need to consider. Texas is often cited by many for its business-friendly climate stemming from, among other things, its lack of a state income tax for individuals, as well as a light regulatory touch.  Those points aside, doing business in Texas is still not entirely free of levies. In 2006, Texas completely overhauled its scheme for taxing businesses.  It lowered the effective rate imposed on businesses, but also made more types of legal business structures eligible to be taxed.  The legislature called this new tax the margin tax. So if you own a business in Texas, how much is this going to cost? The amount of margin tax payable by a business is based on a business’s gross receipts after deductions for either of the following: 1) compensation, or 2) cost of goods sold, with apportionment.  Simple enough, right?  But what does …

IRAs, or Estate Planning Through Deductible Contributions

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As we’ve stated before, estate planning is more than just distributing property after we’ve gone.  The planning part of the equation often involves active engagement and…well, planning.  That’s where estate planning intersects with wealth management. The concept of “inside buildup” is central to wealth management and, by extension, to estate planning.  We first addressed this in our entry on 529 Plans a couple of months back.  Wealth begets wealth, and to the extent that someone with wealth or assets – even a modest sum – can avoid any loss of that wealth or defer the time when any bill on that wealth comes due (think time-value of money), he is preserving that wealth through inside buildup.  For our purposes here the most important bill to come due is taxes.  One of the best known ways to defer that tax bill is through an Individual Retirement Arrangement (IRA). IRAs.  It’s almost impossible to find someone who hasn’t heard of them.  They are so ubiquitous and the literature about them so voluminous that if you put all …

Fiscal Cliff Deal – What Does It Mean?

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We’re days – hours even – away from the deal that was struck to avert the fiscal cliff.  Income brackets, deductions, and exemptions have been targeted, and now that legislation has provided some certainty concerning the new rules, the question looms: what does that mean to taxpayers as a practical matter? We’re still working on that angle ourselves, but to give you some guidance in the meantime, here are two articles that address a couple of the changes.  One, from Ron Lieber of The New York Times explains how some exemptions and deductions will be cut and the shifting burden  on those who fall under the Alternative Minimum Tax (AMT) and may be found here – http://www.nytimes.com/2013/01/03/your-money/piecing-together-a-tax-plans-effects.html?hp. The other, by Cyrus Sanati, writing in Fortune magazine online, examines the broader policy implications, especially as they relate to increased tax rates on investment income, and may be found here: http://finance.fortune.cnn.com/2013/01/02/fiscal-cliff-investors/. We’ll keep you posted.  Happy New Year, everyone.

529 Plans

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Today’s post shifts focus some.  Estate planning seeks to pass on as large or robust an estate as possible.  Prudent estate planning also ensures that those charged with preserving and growing that estate are up to the task.  529 plans accomplish both.  They allow savings for a specific, educational purpose, and they minimize tax liability along the way. What’s a 529? 529 plans are named after Section 529 of the Internal Revenue Code, which was passed by an act of Congress in 1996.  There are two types of plans: prepaid and savings.  A prepaid plan lets a taxpayer pay for tuition at today’s rates, rather than paying tuition at the then prevailing rates years later when the taxpayer’s child actually attends college.  It’s a hedge against inflation generally and the ever increasing cost of college specifically. A savings plan is one in which the taxpayer makes contributions to a plan or a fund, with the expectation that the investment in the fund appreciates in value over time.  In some ways, it’s similar to several other savings …

What Can a Will Do?

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Earlier, we covered some of the unfortunate consequences of not leaving a will.  But, if there is a well-drafted will in place, what can it do? Generally speaking, a will states what a person intends to happen after his or her death.  This person is the testator.  Specifically, a will directs what the testator wants to happen to her property after her passing.  Additionally, because a will has no legal effect until the testator is actually deceased, the testator obviously will not be around to carry out his own wishes.  Therefore, a will can also appoint who will carry out the wishes of the deceased person.  At its most basic, a will appoints the executor of the will – the person who will carry out the testator’s wishes. When the testator includes more complex provisions, a will may also name trustees to preside over trusts that the will may create. A will can do the following: Appoint a guardian for a minor child or an incapacitated child; Give property and assets to a surviving spouse; …