Tax Day How to Pay No Taxes: 10 Strategies Used by the Rich
By Jesse Drucker on April 17, 2012
If you have lots of money, Tuesday, April 17, was one of the best tax days since the early 1930s: Top tax rates on ordinary income, dividends, estates, and gifts remain at or near historically low levels. That’s thanks, in part, to legislation passed in December 2010 by the 111th Congress and signed by President Barack Obama. Starting next January, rates may be headed higher.
For the 400 U.S. taxpayers with the highest adjusted gross income, the effective federal income tax rate—what they actually pay—fell from almost 30 percent in 1995 to just over 18 percent in 2008, according to the Internal Revenue Service. And for the approximately 1.4 million people who make up the top 1 percent of taxpayers, the effective federal income tax rate dropped from 29 percent to 23 percent in 2008. It may seem too fantastic to be true, but the top 400 end up paying a lower rate than the next 1,399,600 or so.
That’s not just good luck. It’s often the result of hard work, as suggested by some of the strategies below. Much of the income among the top 400 derives from dividends and capital gains, generated by everything from appreciated real estate—yes, there is some left—to stocks and the sale of family businesses. As Warren Buffett likes to point out, since most of his income is from dividends, his tax rate is less than that of the people who clean his office.
The true effective rate for multimillionaires is actually far lower than that indicated by official government statistics. That’s because those figures fail to include the additional income that’s generated by many sophisticated tax-avoidance strategies. Several of those techniques involve some variation of complicated borrowings that never get repaid, netting the beneficiaries hundreds of millions in tax-free cash. From 2003 to 2008, for example, Los Angeles Dodgers owner and real estate developer Frank H. McCourt Jr. paid no federal or state regular income taxes, as stated in court records dug up by the Los Angeles Times. Developers such as McCourt, according to a declaration in his divorce proceeding, “typically fund their lifestyle through lines of credit and loan proceeds secured by their assets while paying little or no personal income taxes.” A spokesman for McCourt said he availed himself of a tax code provision at the time that permitted purchasers of sports franchises to defer income taxes.
For those who can afford a shrewd accountant or attorney, our era is rife with opportunities to avoid—or at least defer—tax bills, according to tax specialists and public records. It’s limited only by the boundaries of taste, creativity, and the ability to understand some very complex shelters. Here’s a look at some of them:
The ‘No Sale’ Sale Cashing in on stocks without triggering capital-gains taxes
An executive has $200 million of company shares. He wants cash but doesn’t want to trigger $30 million or so in capital-gains taxes.
1. The executive borrows about $200 million from an investment bank, with the shares as collateral. Now he has cash.
2. To freeze the value of the collateral shares, he buys and sells “puts” and “calls.” These are options granting him the right to buy and sell them later at a fixed price, insuring against a crash.
3. He eventually can return the cash, or he can keep it. If he keeps it, he has to hand over the shares. The tax bill comes years after the initial borrowing. His money has been working for him all the while.
Seller beware: The IRS challenged versions of these deals used by billionaire Philip Anschutz and Clear Channel Communications (CCMO) co-founder Red McCombs. A U.S. Tax Court judge in 2010 ruled that Anschutz owed $94 million in taxes on transactions entered into in 2000 and 2001. He lost an appeal last December. McCombs settled his case in 2011. Despite the court cases, such strategies “are alive and well,” says Robert Willens, who runs an independent firm that advises investors on tax issues.
The Skyscraper Shuffle Partnerships that let property owners liquidate without liability
Two people are 50-50 owners, through a partnership, of an office tower worth $100 million. One of the owners—let’s call him McDuck—wants to cash out, which would mean a $50 million gain and $7.5 million in capital-gains taxes.
U.S. Senate Majority Leader Harry Reid (D-NV) (center) departs with an aide, after a senate vote in the early morning hours, from the U.S. Capitol in Washington January 1, 2013. REUTERS/Jonathan Ernst
By David Lawder and Richard Cowan
WASHINGTON (Reuters) - The Senate moved the U.S. economy back from the edge of a "fiscal cliff" on Tuesday, voting to avoid imminent tax hikes and spending cuts in a bipartisan deal that could still face stiff challenges in the House of Representatives.
In a rare New Year's session at around 2 a.m. EST (0700 GMT), senators voted 89-8 to raise some taxes on the wealthy while making permanent low tax rates on the middle class that have been in place for a decade.
But the measure did little to rein in huge annual budget deficits that have helped push the U.S. debt to $16.4 trillion.
The agreement came too late for Congress to meet its own deadline of New Year's Eve for passing laws to halt $600 billion in tax hikes and spending cuts which strictly speaking came into force on Tuesday.
But with the New Year's Day holiday, there was no real world impact and Congress still had time to draw up legislation, approve it and backdate it to avoid the harsh fiscal measures.
That will need the backing of the House where many of the Republicans who control the chamber complain that President Barack Obama has shown little interest in cutting government spending and is too concerned with raising taxes.
All eyes are now on the House which is to hold a session on Tuesday starting at noon (1700 GMT).
Obama called for the House to act quickly and follow the Senate's lead.
"While neither Democrats nor Republicans got everything they wanted, this agreement is the right thing to do for our country and the House should pass it without delay," he said in a statement.
"There's more work to do to reduce our deficits, and I'm willing to do it. But tonight's agreement ensures that, going forward, we will continue to reduce the deficit through a combination of new spending cuts and new revenues from the wealthiest Americans," Obama said.
Members were thankful that financial markets were closed, giving them a second chance to return to try to head off the fiscal cliff.
But if lawmakers cannot pass legislation in the coming days, markets are likely to turn sour. The U.S. economy, still recovering from the 2008/2009 downturn, could stall again if Congress fails to fix the budget mess.
"If we do nothing, the threat of a recession is very real. Passing this agreement does not mean negotiations halt, far from it. We can all agree there is more work to be done," Majority Leader Harry Reid, a Democrat, told the Senate floor.
A new, informal deadline for Congress to legislate is now Wednesday when the current body expires and it is replaced by a new Congress chosen at last November's election.
The Senate bill, worked out after long negotiations on New Year's Eve between Vice President Joe Biden and Senate Republican Minority Leader Mitch McConnell, also postpones for two months a $109 billion "sequester" of sweeping spending cuts on military and domestic programs.
It extends unemployment insurance to 2 million people for a year and makes permanent the alternative minimum tax "patch" that was set to expire, protecting middle-income Americans from being taxed as if they were rich.
'IMPERFECT SOLUTION'
The tax hikes do not sit easy with Republicans but conservative senators held their noses and voted to raise rates for the rich because not to do so would have meant increases for almost all working Americans.
"It took an imperfect solution to prevent our constituents from a very real financial pain, but in my view, it was worth the effort," McConnell said.
House Speaker John Boehner - the top Republican in Congress - said the House would consider the Senate deal. But he left open the possibility of the House amending the Senate bill, which would spark another round of legislating.
"The House will honor its commitment to consider the Senate agreement if it is passed. Decisions about whether the House will seek to accept or promptly amend the measure will not be made until House members ... have been able to review the legislation," Boehner and other House Republican leaders said in a statement.
Boehner has struggled for two years to get control over a group of several dozen Tea Party fiscal conservatives in his caucus who strongly oppose tax increases and demand that he force Obama to make savings in the Medicare and Social Security healthcare and retirement programs.
A campaign-style event held by Obama in the White House as negotiations with Senate leaders were taking place on Monday may have made it more difficult for Republicans to back the deal. In remarks to a group of supporters that resembled a victory lap, the president noted that his rivals were coming around to his way of seeing things.
"Keep in mind that just last month Republicans in Congress said they would never agree to raise tax rates on the wealthiest Americans. Obviously, the agreement that's currently being discussed would raise those rates and raise them permanently," he said to applause before the Senate deal was sealed.
Obama's words and tone annoyed Republican lawmakers who seemed to feel that the Democrat was gloating.
"That's not the way presidents should lead," said Republican Senator John McCain, Obama's rival in the 2008 election.
A deal with the House on Tuesday, while uncertain, would not mark the end of congressional budget fights. The "sequester" spending cuts will come up again in February as will the contentious "debt ceiling," which caps how much debt the federal government can hold.
Republicans may see those two issues as their best chance to try to rein in government spending and clip Obama's wings at the start of his second term.
(Additional reporting by Richard Cowan, Mark Felsenthal, Rachelle Younglai, Kim Dixon and Jeff Mason; Writing by Alistair Bell; Editing by Eric Walsh)
Will Rich People Desert the U.S. If Their Taxes Are Raised?
By BRUCE BARTLETT | New York Times – 1 hour 25 minutes ago
Bruce Bartlett held senior policy roles in the Reagan and George H.W. Bush administrations and served on the staffs of Representatives Jack Kemp and Ron Paul. He is the author of "The Benefit and the Burden: Tax Reform - Why We Need It and What It Will Take."
On April 30, the Treasury Department announced that 461 Americans had renounced their citizenship in the first quarter of 2012. A 1996 law requires that every person doing so be named, with their names published in the Federal Register. The idea is to shame those who may be renouncing their citizenship solely to escape taxation.
The extreme step of renouncing one's citizenship is necessary to escape taxation by the United States, because the United States, alone among the major nations of the world, taxes its citizens wherever on earth they live.
Other countries tax only those who live and work within their borders; if their citizens live and work in another country, they are liable only for taxes incurred in that country.
Americans living abroad, however, must not only pay taxes in the country in which they are living, but United States taxes as well, although there is an exemption of $93,000 that is adjusted for inflation annually. The only legal way for American citizens to avoid American taxes is to renounce their citizenship and live their lives permanently in another country.
In recent years, the number of Americans renouncing their citizenship has increased. According to the international tax lawyer, Andrew Mitchel, the number of Americans renouncing their citizenship rose to 1,781 in 2011 from 231 in 2008.
This led William McGurn of The Wall Street Journal to warn that the tax code is turning American citizens living abroad into "economic lepers." The sharply rising numbers of Americans renouncing their citizenship "are canaries in the coal mine," he wrote.
The economist Dan Mitchell of the libertarian Cato Institute was more explicit in a 2010 column in Forbes, "Rich Americans Voting With Their Feet to Escape Obama Tax Oppression."
According to Andrew Mitchel's research, the sharp rise in Americans renouncing their citizenship since 2008 is less pronounced than it appears if one looks at the full range of data available since 1997, when it first was collected. As one can see in the chart, the highest number of Americans renouncing their citizenship came in 1997.
Mr. Mitchel hypothesizes that the reversion of Hong Kong to Chinese control may have forced many residents of that former colony with dual citizenship to renounce their American citizenship, because China does not recognize dual citizenship.
It is undoubtedly the case that the vast bulk of those renouncing American citizenship do so for reasons unrelated to taxation. Americans who marry foreign nationals, for example, often adopt the citizenship of their spouse's nation. Also, many of those on the Treasury list are not actually American citizens, but foreigners who had permanent residence status in the United States. Those born with dual citizenship sometimes prefer to have only one to simplify their lives.
However, reports by Bloomberg News and the Zurich newspaper Tages-Anzeiger suggest that increased scrutiny by the Internal Revenue Service of Americans living in Switzerland, where a number of banks are suspected of aiding tax evasion, may have led some American expatriates living in that country to renounce their citizenship.
The mobility of individuals with a large net worth - who generally have no difficulty finding a nation to welcome them and their capital - has unquestionably increased in the last several years, especially within the European Union, where barriers against the movement of people have fallen sharply. This has reduced the ability of all governments everywhere from engaging in soak-the-rich policies.
As I noted in a recent post, Britain recently reduced its top income tax rate in part because of a belief that it would reduce the number of Britons living abroad. And the victory of the Socialist François Hollande in France's presidential election on Sunday, on a platform of raising the top tax rate to 75 percent, may lead to some relocation from there, according to an article in The Financial Times.
However, while there is no doubt that some people do migrate solely because of taxes, the number is small even when it doesn't involve a loss of citizenship. Source
Several important tax changes took effect in 2011 that will impact federal income tax returns filed this April. While some of the changes are straightforward, such as the standard mileage rates, others, including the tax handling of foreign financial assets, may be more complicated. Following is a list of the tax law changes for 2011 Federal tax returns.
Alternative Minimum Tax The alternative minimum tax (AMT) exemption amount increases for tax year 2011 to the following levels:
$48,450 for singles and heads of household (up from $47,450 in 2010)
$37,225 for married filing separately (up from $36,225)
$74,450 for married filing jointly, and qualifying widows or widowers (up from $72,450)
Alternative Motor Vehicle Credit The alternative motor vehicle credit cannot be claimed for a vehicle bought after 2010, unless it is a new fuel cell motor vehicle.
Capital Gains and Dividends Lower rates for long-term capital gains and dividends remain in effect for 2011 and 2012. The rate on long-term capital gains and dividends remains at zero for those taxpayers in the 15% income tax bracket and below; the rate is 15% for taxpayers in the 25% bracket and above. Most taxpayers will use new Form 8949 to report capital gain and loss transactions. Schedule D, the form that has been traditionally filed to show these transactions, is now used as a summary sheet.
Child Tax Credit The 2010 Tax Relief Act extended the credit of $1,000 per eligible child through 2012.
Designated Roth Accounts Taxpayers who rolled over an amount from a 401(k) or 403(b) plan to a designated Roth account during 2010 and did not elect to report the taxable amount on a 2010 return must report half on the 2011 return and the rest on the 2012 return.
Due Date of Tax Return Because April 15 is a Sunday and April 16 is the Emancipation Day holiday in the District of Columbia, tax returns are due on Apr. 17, 2012.
Estate Tax For individuals who died after 2010, the federal estate tax provides a $5 million exemption and a maximum 35% rate. These estate tax rules are scheduled to end following 2012.
First-Time Homebuyer Credit In order to claim the first-time homebuyer credit for 2011, a taxpayer (or their spouse, if married) must have been "a member of the uniformed services or Foreign Service, or an employee of the intelligence community on qualified official extended duty outside the United States for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010." For more, check out Top Tips For First-Time Home Buyers.
Foreign Financial Assets For tax years beginning after Mar. 18, 2010, certain taxpayers may have to file the new Form 8938 with their returns. Form 8938 is used to report the ownership of specified foreign financial assets (including any financial account maintained by a foreign financial institution) if the total value exceeds a specified threshold. The threshold amount varies depending on if the individual resides in the U.S. and if the tax return is filed jointly with a spouse. It is a separate form and does not replace existing requirements for reporting foreign assets to the Treasury Department using Form TD F 90-22.1.
Health Savings Accounts and Archer MSAs Beginning in 2011, the additional tax on health-savings account and Archer medical savings account distributions not used for qualified medical expenses has increased to 20% (up from 10% for HSAs and 15% for Archer MSAs). Also, starting in 2011, only prescribed drugs and insulin are considered qualified medical expenses.
Income Tax Rates The 2011 rates carry over from 2010, but the income brackets are higher to account for inflation. The 2011 tax rate schedule can be found on page 273 of IRS Publication 17 "Your Federal Income Tax: Tax Guide 2011 For Individuals."
Mailing Your Return The mailing address for paper returns may have changed because the IRS has changed the filing location for several regions. Taxpayers are advised by the IRS to read the "Where Do You File?" page at the end of the 1040 instruction booklet.
Making Work Pay Tax Credit The making work pay tax credit has expired and cannot be claimed on the 2011 return.
Energy Tax Credits for Homeowners The "25(C)" credit for energy-efficient improvements has been extended, but the amount of the credit has been reduced to a maximum of $500 per taxpayer per lifetime. Taxpayers who took the maximum $1,500 credit in 2010 are not eligible.
Personal Exemptions The amount one can deduct for each exemption has increased to $3,700 (up from $3,650 in 2010).
Repayment of First-Time Homebuyer Credit Taxpayers who must repay the credit may be able to do so without using Form 5405.
Self-Employed Health Insurance Deduction For 2011, qualified self-employed taxpayers and S corporation shareholders can use the self-employed health insurance deduction to reduce income tax liability. The taxpayer must not be eligible to participate in an employer-sponsored health plan, and the insurance plan must be set up under the taxpayer's business. Premiums paid for health insurance for the taxpayer, spouse and dependents typically qualify for the deduction. The deduction is taken on Form 1040 Line 29. The deduction from self-employment income for determining self-employment tax, available for tax year 2010, no longer applies.
Standard Deduction Increased The standard deduction for certain taxpayers who do not itemize their deductions on Schedule A of Form 1040 has been increased. The amount of the deduction depends on the taxpayer's filing status. The standard deduction for most people is $5,800 for single or married filing separately, $11,600 for married filing jointly or for qualifying widow or widower with a dependent child and $8,500 for heads of household.
Standard Mileage Rates The standard mileage rate for the business use of a car, van, pick-up or panel truck has increased to 51 cents a mile for the first half of 2011, and 55.5 cents per mile for the second half.
Please note: While every attempt has been made to provide timely and accurate information, this article should not be considered a definitive tax guide, nor should it replace the advice of a qualified tax professional.
Posted on our Blog 11-8 Time to bring it out again with all of the questions being asked via email and on the call
Ten Things to Know About Capital Gains and Losses
IRS Tax Tip 2012-35, February 22, 2012
Did you know that almost everything you own and use for personal or investment purposes is a capital asset? Capital assets include a home, household furnishings and stocks and bonds held in a personal account. When you sell a capital asset, the difference between the amount you paid for the asset and its sales price is a capital gain or capital loss.
Here are 10 facts from the IRS about how gains and losses can affect your federal income tax return.
1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset.
2. When you sell a capital asset, the difference between the amount you sell it for and your basis – which is usually what you paid for it – is a capital gain or a capital loss.
3. You must report all capital gains.
4. You may only deduct capital losses on investment property, not on personal-use property.
5. Capital gains and losses are classified as long-term or short-term. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.
6. If you have long-term gains in excess of your long-term losses, the difference is normally a net capital gain. Subtract any short-term losses from the net capital gain to calculate the net capital gain you must report.
7. The tax rates that apply to net capital gain are generally lower than the tax rates that apply to other income. For 2011, the maximum capital gains rate for most people is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of the net capital gain. Rates of 25 or 28 percent may apply to special types of net capital gain.
8. If your capital losses exceed your capital gains, you can deduct the excess on your tax return to reduce other income, such as wages, up to an annual limit of $3,000, or $1,500 if you are married filing separately.
9. If your total net capital loss is more than the yearly limit on capital loss deductions, you can carry over the unused part to the next year and treat it as if you incurred it in that next year.
10. This year, a new form, Form 8949, Sales and Other Dispositions of Capital Assets, will be used to calculate capital gains and losses. Use Form 8949 to list all capital gain and loss transactions. The subtotals from this form will then be carried over to Schedule D (Form 1040), where gain or loss will be calculated.
For more information about reporting capital gains and losses, see the Schedule D instructions, Publication 550, Investment Income and Expenses or Publication 17, Your Federal Income Tax. All forms and publications are available at www.irs.gov or by calling 800-TAX-FORM (800-829-3676).
Links:
Publication 17, Your Federal Income Tax (PDF 2015.9K) Publication 550, Investment Income and Expenses (PDF 516K)
Until recently, the quiet Swiss town of St. Gallen was best known for the medieval manuscripts housed in its abbey library.
But lately the city has had to grapple with a less pious claim to fame: St. Gallen is home to Wegelin, a private bank indicted by U.S. authorities this month for allegedly helping rich Americans evade taxes.
February 15, 2012 [From: Sovereign Man Newsletter]
The Foreign Account Tax Compliance act, or FATCA, is one of the most arrogant pieces of legislation ever conceived. President Obama signed the Act into law in 2010, and there are a some key provisions that are important to understand.
Reporting Requirements of US Tax Serfs holding Foreign Financial Assets
According to the IRS, "FATCA requires certain U.S. taxpayers holding foreign financial assets with an aggregate value exceeding $50,000 to report certain information about those assets on a new form (Form 8938) that must be attached to the taxpayer'Äôs annual tax return."
In other words, the law extends the existing reporting and disclosure requirements for US citizens and residents holding certain assets abroad.
Reporting Requirements of Foreign Financial Institutions
This is the part that's really arrogant. The US government is requiring any foreign organization it deems to be a financial institution to enter into an information-sharing agreement with the IRS. They're effectively trying to regulate what foreign companies do on foreign soil. Seriously arrogant.
The analogy I always use is that it's like the government of Saudi Arabia forbidding US grocery store chains from selling pork to Saudi citizens who happen to be on US soil.
Here's the kicker. Foreign banks who thumb their nose at the US government and do not enter into the information sharing agreement face a steep penalty: a 30% tax will be withheld on US-source income that goes to, or through, their bank.
So let's say XYZ Bank in some offshore jurisdiction doesn't enter into the agreement. The next time a payment goes from JP Morgan to any account holder at XYZ Bank, JP Morgan will withhold 30% of it.
The implications of this legislation are extraordinary. The old saying, "That which is about to fall... deserves to be pushed," comes to mind. The global banking system is already so broken and wounded. FATCA is going to finish it off.
I'm starting to believe that it was designed to be this way. Even the most casual read of the legislation leads one to conclude that it was intentionally written to be ambiguous and unenforceable.
For example, the law requires that US tax serfs must report foreign financial accounts held at foreign financial institutions (FFI). What is an FFI? A bank? Brokerage? Gold dealer? Trust company? It's not clear.
The law defines 'foreign financial institution' using the term 'foreign financial account,' and vice versa. It's like someone who has no concept of baseball asking, "What is a first baseman?" And responding, "The guy next to the second baseman..."
"OK, so what is a second baseman...?"
"The guy next to the first baseman."
Such ambiguities are so obvious that there are only two possibilities. Either the people drafting the legislation are complete idiots, or the ambiguities are intentional for the sake of giving executive agencies wide latitude.
I believe it is the latter... which makes FATCA even more insidious. Ambiguity in legislative language means that the enforcement agencies charged with executing the laws have a lot of leeway in how they interpret the rules and formulate their own policies.
If the law doesn't specifically state what a foreign financial institution is, then the IRS gets to come up with that definition (and penalties for noncompliance) on its own.
It's also clear at this point that FATCA was intentionally designed to be unenforceable. Think about it-- every single 'foreign financial institution' (whatever that is...) on the planet has to enter into an information-sharing agreement with the IRS? How is that REMOTELY realistic? It's not.
What's more, every foreign financial institution that DOES enter into an agreement has to further agree to withhold a 30% tax on payments to other foreign financial institutions that do NOT enter into the agreement.
Again, not even remotely possible. There are millions of foreign wire payments made every single day. Banks are supposed to be able to know which of the beneficiary banks entered into an agreement and which didn't... and the US government is going to supervise the whole thing?
Fat chance. This, brought to you by the folks who couldn't get bottled water to New Orleans during the Hurricane Katrina fiasco, and the banks who were robosigning hundreds of thousands of contracts without any oversight.
So why would they pass a law that has no real hope of being appropriately implemented? Two reasons.
The first is fear. Fear is a powerful weapon, and if the US scares the crap out of foreign banks, most banks will simply close their doors to US tax serfs... thus limiting the offshore options. This has already happened, Switzerland is a notable example.
The second is to expand the scope of Big Brother. A few days ago, the Treasury Department issued a joint statement with the governments of the UK, France, Germany, Italy, and Spain on government information sharing agreements, which would preclude banks from having to sign up individually with the IRS. Other countries are expected to join the pact. [see below]
In other words, Congress passes a law that's impossible to implement. Foreign banks get really nervous and petition their governments for a solution. Governments agree and enter into a mass government-to-government agreement by which ALL information is shared with everyone.
Banks are off the hook. Governments get all the information they want. And it's becoming obvious that this was the intention all along. Ah, so.
Financial privacy, meet speeding bullet.
Until tomorrow,
Simon Black Senior Editor, SovereignMan.com =======================================================
US Enlists 5 EU Nations In Offshore Tax Crackdown
By Lynnley Browning
Wed Feb 8, 2012
* UK, France, Germany, Italy, Spain part of new framework
* Treasury says governments would collect info from banks
* Eases burden on banks, puts pressure on EU governments
* Most FATCA rules expected to take effect in 2013
Feb 8 (Reuters) - The U.S. Treasury Department on Wednesday enlisted five EU nations to help crack down on offshore tax evasion by Americans and ease the burdens the effort has imposed on many banks and financial institutions.
After complaints from the global financial industry about costs and legal issues, Treasury announced a new multilateral approach to implementing the Foreign Account Tax Compliance Act, or FATCA.
Enacted by the U.S. Congress in 2010, FATCA is intended to help the U.S. Internal Revenue Service gather information about Americans' accounts with more than $50,000 in assets in foreign banks and other institutions.
Scheduled to take effect in 2013, the new law as drafted calls for banks and financial institutions worldwide to gather the information and directly disclose it to the United States' Internal Revenue Service (IRS) tax collection agency.
Under Treasury's proposed "new government-to-government framework for implementing FATCA," the governments of France, Germany, Italy, Spain and the United Kingdom will work together to create a means to collect the information from their banks and send it to the United States.
Treasury said that once these five "FATCA partner" countries finalized the framework, banks in those countries would not have to enter into separate data disclosure agreements with the IRS.
In addition, in a reciprocating agreement, Treasury said the United States would collect and share information with the five participating EU countries about accounts held by their citizens in U.S. financial institutions.
For nations not invited to become "FATCA partners" with the United States, banks and financial institutions in those countries must still cooperate on their own with the IRS.
Noticeably absent from the new framework were major international banking nations such as Canada, Switzerland and the Netherlands, not to mention tax haven jurisdictions such as Ireland, the Cayman Islands and Bermuda.
LIST OF 'FATCA PARTNERS' MAY GROW
A Treasury official said in a conference call with reporters that more countries may join the "FATCA partners" list.
"We've had numerous conversations with other governments beyond the five that are cited," the official said.
Asked about Canada's exclusion from the list of five countries, a senior government official with knowledge of the matter told Reuters that the United States "was open to exploring a similar arrangement with Canada."
Canadian Finance Minister Jim Flaherty said the ministry had raised "serious concerns" about FATCA with the United States.
"Today's announcement appears to demonstrate an interest in greater joint government collaboration to address such concerns. We will continue to work with our American counterparts towards an approach acceptable to both our countries," he said.
Michael Mundaca, a co-director at Big Four accounting firm Ernst & Young and formerly the U.S. assistant secretary for tax policy, said: "It will be interesting to see how other countries and especially other financial centers react."
Becoming a "FATCA partner" means being able to ensure adoption of suitable disclosure laws, no easy task in countries with bank secrecy and client confidentiality laws; getting banks to collect and disclose data to their own national authorities; and then transmitting that data to the United States.
The new multilateral framework addresses secrecy issues in some countries that prevent banks from directly disclosing client data to the United States, Treasury said.
TEMPLATE FOR OTHER DEALS
Opting for a multilateral approach "acknowledges the detrimental impact to the United States of the 'go it alone' mechanism that was ... inherent in the FATCA regime," said Scott Michel, a tax lawyer at the firm of Caplin & Drysdale.
"This agreement ... will obviously provide a template for other agreements," he said, adding that countries declining to strike similar deals may find their own financial institutions will face overly burdensome compliance and reporting costs.
As originally drafted, FATCA will require that foreign financial institutions either collect and turn over data on U.S. clients with accounts of at least $50,000, or withhold 30 percent of the interest, dividend and investment payments due those clients and send the money to the IRS.
Foreign institutions and entities that refuse or fail to comply would face bills for taxes due, a penalty of 40 percent of the amount in question and heightened scrutiny by the IRS.
Financial institutions and intermediaries had objected that forcing banks to track pass-through payments on syndicated loans, swaps, foreign currency trades and routine money transfers was unduly burdensome.
Pass-through payments are payments that flow through separate legal entities on their way to the recipient.
Those affected by FATCA include commercial, private and investment banks and shells and trusts; broker-dealers; insurers; mutual, hedge and private-equity funds; domiciliary companies; limited liability companies, partnerships; and other intermediaries and withholding agents.
Treasury said it would allow foreign financial institutions to rely on information they have already collected under anti-money laundering and "know your customer" rules to determine whether they have U.S. taxpayers as clients and thus must collect and disclose information about them under FATCA.
_Why Are Billionaires Paying the Least in Taxes? Posted on December 9, 2011 by Libby Kane
No one likes taxes.
And no one likes the idea that they’re paying more taxes than anyone else, no matter what their income.
That’s why President Obama’s claim Tuesday night that “some billionaires have a tax rate as low as 1%” is making waves. The idea that the people who have the most are handing over the least to the government is unappealing, but, in some cases, true.
Warren Buffett, the philanthropic billionaire and chairman and C.E.O. of Berkshire Hathaway, published an August opinion piece in the New York Times titled “Stop Coddling the Super-Rich,” where he revealed that he paid 17.4% in federal income taxes in 2010, while the rest of his office averaged a tax rate of 36%.
His essay was so widely discussed that when President Obama proposed that people earning more than $1 million per year should pay at least the same income tax rate as middle-class Americans, it was dubbed “The Buffett Rule.”
All of this is well and good, but let’s back up for a second: How is it possible that the taxes of the 1% are only 1%? Is the 1% Really Only Paying 1%?
It’s a fact that those in the highest income brackets often pay the least in taxes. The actual rate, whether 1% or more, is not likely to ever be confirmed due to the relatively low number of billionaires and the privacy restrictions of such an investigation. But, we do know, courtesy of the Tax Policy Center, that more than 4,000 households earning over $1 million owed no federal income tax whatsoever last year.
It’s not that the rich are operating outside of the law: Perfectly legal tax rules tax investments at a lower rate than regular income. And what’s something that many wealthy people have? Investments and other monetary vehicles with low tax rates. They also have the disposable income necessary to hire a money manager and to make charitable donations, both of which help them get even more tax breaks. Why Taxes Are a Political Sticking Point
So as the Occupy Wall Street protests pointed out, there really is a difference between the 1% and the 99%, at least when it comes to what they pay Uncle Sam.
But whether we should do anything about that difference has the government divided. Taxes were, in fact, one of the points of contention that led to the breakdown of the so-called Super Committee, which was charged with creating a feasible solution to reduce the country’s debt.
To funnel more money into the government, the Democratic party has proposed increasing taxes for those earning more than $1 million and simultaneously extending, for everyone else, the Bush-era tax cuts that are set to expire at the end of the year.
The Republicans, meanwhile, are in a tight spot politically. They oppose the Democrats’ plan to extend the Bush-era tax cuts for everyone but the rich, but can’t vote against the Democrats’ proposal without appearing that they only support tax breaks for the rich.
While it remains to be seen how Washington will rule on the matter, we can say this: “The rich” are taxed disproportionately less because they have the resources and the knowledge to legally work the system. Not everyone can have the resources, but know-how is something we can all work to acquire.
_Taxpayers with overseas accounts seethe at penalties
By Amy Feldman
NEW YORK | Thu Dec 8, 2011 3:10pm EST
(Reuters) - The Internal Revenue Service's crackdown on overseas tax cheats is having an unintended consequence on American expats. It's prompting many of them to pay penalties for failure to file paperwork that may be drastically out of proportion to the actual amount of taxes owed.
After Reuters ran an article on November 9 (link.reuters.com/cyw45s) about the latest developments in the IRS's search for unpaid taxes on foreign accounts, many American expats and dual citizens contacted us with tales of woe. In phone conversations and emails with more than a dozen people during the last three weeks, we heard stories of stress, fear and attempts to do the right thing before the latest voluntary disclosure window closed in September.
These people included U.S. citizens married to foreigners who'd left this country decades ago, retirees whose lives spanned multiple countries, Vietnam War draft-dodgers who'd long since received amnesty and dual-taxpayers trying to do their U.S. taxes themselves from places where accountants versed in U.S. tax obligations were a rarity.
One woman called from Australia on a Sunday night and started crying on the phone; another said she'd gotten psoriasis from the stress. A few were considering expatriating as soon as they could get their taxes in order.
Marvin Van Horn, a 62-year-old U.S. citizen and permanent resident of New Zealand, is one of those caught by the IRS's effort. Van Horn, who is semi-retired, bought a home in New Zealand with his Australian wife more than a decade ago. He first heard about the foreign-income reporting requirements in 2009, while listening to National Public Radio during a trip to the U.S.
Van Horn scrambled to get his paperwork in for the first voluntary-disclosure period in 2009. After completing tax returns for a six-year period required by the voluntary disclosure program, Van Horn says, he realized he owed some tax, which he had no problem paying. However, he says, "the penalty was out of proportion to the tax failure. You look for reasoned justice, not mandatory sentencing."
As he went through the process, Van Horn tried to calculate his penalty for failing to file the foreign bank account reporting form, known as the FBAR."I figured, 'Oh my God, it's going to cost around $90,000,'" he says. "I am not rich, and that's not chicken feed anymore. That eats up retirement savings. It hurts."
Worse, when the IRS examiner reviewed his voluntary disclosure file, he says, she wanted to know if he'd ever rented out his house when he wasn't there. Because the answer was yes, she told him, his house would go into the penalty calculation. Van Horn was incredulous: "I said, 'You want to apply the penalty based on my house?' So then my penalty went from $90,000 to $172,000. I said, 'This is ridiculous. For a tax failure that's less than $20,000 over six years and a failure to file a form, you want to charge me a penalty of $172,000?' "
Van Horn contacted the IRS's Taxpayer Advocate Service, which agreed to work on his case. After a series of offers and counter-offers, he says, the result was a single "non-willful" FBAR penalty of $5,000 per year, or $25,000 total. While relieved with the outcome after 26 arduous months, Van Horn wonders: "Why the hell couldn't the IRS devise a method to separate the minnows from the whales at the beginning of the process?"
IN A BIG SEA
The IRS had no comment for this story, but said in past statements that 30,000 people have come forward during the tax amnesties so far, and that it collected a total of $2.2 billion from those who participated in the 2009 program, and an additional $500 million as of September 15 (a number that does not include penalties).
But this may just be the tip of the iceberg. There are between five and six million Americans living abroad, and another 39 million immigrants in the U.S. (who face similar issues with overseas disclosure if they have accounts back home). Yet, in 2009, there were just 534,043 FBARs filed, according to a report by the Treasury Inspector General for Tax Administration.
In a recent article in Tax Notes, Scott Michel, president of Caplin & Drysdale in Washington, D.C., and Mark Matthews, a tax partner at Morgan Lewis & Bockius in Washington, D.C. wrote that they saw few of the stereotypical offshore tax cheats in their practices. Instead, many had inherited foreign assets from foreign-born parents and other relatives (during the first program) or they had lived abroad for years (in the second).
"They built the program for criminals, and they just can't figure out how to deal with all these innocents who've been caught up in it," says Matthews, a former top IRS official. "A program that is a pretty good deal for a criminal is devastating for someone who didn't really do anything wrong."
Two voluntary disclosure programs offered amnesty from criminal prosecution, but the monetary penalties were steep. In the latest window, the penalty for failing to report foreign accounts was generally 25 percent of the highest aggregate balance between 2003 and 2010, plus an additional penalty of $10,000 for each FBAR not filed. The FBAR filing is required for any U.S. person with at least $10,000 in a foreign financial account.
Even the IRS may realize there's a problem. There is now a special 5 percent penalty for those who owed little or no tax, and an opt-out mechanism for those believe they might get a better deal outside the official voluntary-disclosure program.
THE CANADA PROBLEM
Canada has the largest population of dual citizens and other U.S. taxpayers, and has been the location of intense political maneuvering between the two countries.
Many Canadians, like Ruth (who spoke on condition that her last name not be used), a 53-year-old stay-at-home mom in Kingston, are struggling to cope with the rules, wondering whether they might receive some leniency. Ruth was born in the United States; her husband is Canadian. Once she discovered the rules on overseas disclosure, she felt she had little choice but to enter the voluntary-disclosure program. But she's so anxious and angry now that she's considering renouncing her U.S. citizenship.
"Nobody comes to Canada to get away from taxes," Ruth says. "Most of us in Canada don't owe any taxes to the United States because of the tax agreements in place. But you still owe the FBAR penalties of $10,000 per year, and if you have a checking account and a retirement account, it adds up pretty quickly."
In Canada, Ruth says, there's particular anger that the Canadian retirement accounts are included in the overseas asset penalty calculations. She also worries that money her Canadian mother-in-law gave to her Canadian son (who is not a dual citizen) to help pay medical bills could also be included in her penalty calculations. But she won't know what the actual penalty calculation will be for some time. "It's the middle-class and the retired who are really being hit," she says. "It's unconscionable that we are put in this position where we have to give up our citizenship or put our families under this stress and strain."
Perhaps even stranger is the story of L. (who spoke on condition that her name not be used). She's a 54-year-old Canadian, who was born in Canada and has only worked in Canada, but who recently discovered that she's a dual citizen for tax purposes because her mother, then a U.S. citizen, registered her with the embassy at birth. Before she could even file for voluntary disclosure, she had to cross the border from Vancouver to get a Social Security number. As the rules on citizenship were changed, L. says, "they failed to tell me about this change, and now they want to take a good chunk of my retirement savings."
She figures she may owe a little bit in back taxes, but if the full penalties are applied, they could total $75,000. As she says: "Every single bank account I have is an offshore account for tax purposes, because I am a Canadian."
What next? The IRS will need to process the paperwork filed by all those who filed for voluntary disclosure this year, a painstaking process that will determine a penalty calculation for each filer.
"There are all sorts of shades of culpability in a program that the IRS couldn't deal with when it had to move a lot of people through," says Jack Townsend, a Houston tax attorney who writes on these issues at his Federal Tax Crimes blog. "The people who made out well are the real crooks who have been doing this for years, while the people who don't have that culpability are getting hammered because of the one-size-fits-all rule."
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The author is a Reuters contributor. The opinions expressed are her own.
(Editing by Lauren Young and Beth Gladstone) SOURCE LINK
What is considered a gift? Any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money's worth) is not received in return.
What can be excluded from gifts? The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.
Gifts that are not more than the annual exclusion for the calendar year. Tuition or medical expenses you pay for someone (the educational and medical exclusions). Gifts to your spouse. Gifts to a political organization for its use. In addition to this, gifts to qualifying charities are deductible from the value of the gift(s) made.
May I deduct gifts on my income tax return? Making a gift or leaving your estate to your heirs does not ordinarily affect your federal income tax. You cannot deduct the value of gifts you make (other than gifts that are deductible charitable contributions). If you are not sure whether the gift tax or the estate tax applies to your situation, refer to Publication 950, Introduction to Estate and Gift Taxes.
How many annual exclusions are available? The annual exclusion applies to gifts to each donee. In other words, if you give each of your children $11,000 in 2002-2005, $12,000 in 2006-2008, and $13,000 on or after January 1, 2009, the annual exclusion applies to each gift.
What if my spouse and I want to give away property that we own together? You are each entitled to the annual exclusion amount on the gift. Together, you can give $22,000 to each donee (2002-2005) or $24,000 (2006-2008), $26,000 (effective on or after January 1, 2009).
What other information do I need to include with the return? Refer to Form 709 (PDF), 709 Instructions and Publication 950. Among other items listed:
Copies of appraisals. Copies of relevant documents regarding the transfer. Documentation of any unusual items shown on the return (partially-gifted assets, other items relevant to the transfer(s)).
What is "Fair Market Value?" Fair Market Value is defined as: "The fair market value is the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts. The fair market value of a particular item of property includible in the decedent's gross estate is not to be determined by a forced sale price. Nor is the fair market value of an item of property to be determined by the sale price of the item in a market other than that in which such item is most commonly sold to the public, taking into account the location of the item wherever appropriate." Regulation §20.2031-1.
Who should I hire to represent me and prepare and file the return? The Internal Revenue Service cannot make recommendations about specific individuals, but there are several factors to consider:
How complex is the transfer? How large is the transfer? Do I need an attorney, CPA, Enrolled Agent (EA) or other professional(s)? For most simple, small transfers (less than the annual exclusion amount) you may not need the services of a professional.
However, if the transfer is large or complicated or both, then these actions should be considered; It is a good idea to discuss the matter with several attorneys and CPAs or EAs. Ask about how much experience they have had and ask for referrals. This process should be similar to locating a good physician. Locate other individuals that have had similar experiences and ask for recommendations. Finally, after the individual(s) are employed and begin to work on transfer matters, make sure the lines of communication remain open so that there are no surprises.
Finally, people who make gifts as a part of their overall estate and financial plan often engage the services of both attorneys and CPAs, EAs and other professionals. The attorney usually handles wills, trusts and transfer documents that are involved and reviews the impact of documents on the gift tax return and overall plan. The CPA or EA often handles the actual return preparation and some representation of the donor in matters with the IRS. However, some attorneys handle all of the work. CPAs may also handle most of the work, but cannot take care of wills, trusts, deeds and other matters where a law license is required. In addition, other professionals (such as appraisers, surveyors, financial advisors and others) may need to be engaged during this time.
Do I have to talk to the IRS during an examination? You do not have to be present during an examination unless IRS representatives need to ask specific questions. Although you may represent yourself during an examination, most donors prefer that the professional(s) they have employed handle this phase of the examination. You may delegate authority for this by executing Form 2848 "Power of Attorney."
What if I disagree with the examination proposals? You have many rights and avenues of appeal if you disagree with any proposals made by the IRS. See Publications 1 and 5 (PDF) for an explanation of these options.
What if I sell property that has been given to me? The general rule is that your basis in the property is the same as the basis of the donor. For example, if you were given stock that the donor had purchased for $10 per share (and that was his/her basis), and you later sold it for $100 per share, you would pay income tax on a gain of $90 per share. (Note: The rules are different for property acquired from an estate). [ Link to Estate Tax Q&A ]
Most information for this page came from the Internal Revenue Code: Chapter 12--Gift Tax (generally Internal Revenue Code §2500 and following, related regulations and other sources)
