Tax Policy

“Unified Framework for Fixing Our Broken Tax Code” – A Magical Mystery Tour

Last week the Trump administration and Republican Congressional leaders released the aforementioned “Unified Framework.”  After taking a tour through the magical, “giant, beautiful, massive” (according to the Exaggerator-in-Chief) tax-cutting Framework, I find that what is unified is a mystery.  (Sorry, Mr. McCartney and the late Mr. Lennon.)

The Framework outlines, without reference to many numbers and with precious few specifics, over twenty disparate changes in the tax code.  The Framework suggests that the tax-writing committees of Congress will come up with the specifics and some additional ideas.  The Framework does not explain how the Federal government’s bills will be paid with less money coming in; there are only a few significant revenue generators proposed.  There are optimistic general aspirations that corporations will bring operations, money and employees back to the good old U.S.A., answering the siren call of lower tax rates and some vaguely-defined incentives for repatriation of funds.

One of the implied proposals is the elimination of the individual itemized deduction for state and local taxes.  Within moments after the release of the Framework, the Republican Unifiers got pushback from some of the biggest states that happen to have high state income tax rates.  Leading the protests were Republican members of Congress of those states and the precious few Republican government executives of those states.

A lot of oxen are being gored.  Many of those bovines have powerful and plentiful lobbyists in Washington.  There will be battles on many fronts.

So, what kind of tax planning do I think my clients should currently undertake?  Well, that’s not a fair question.  It is bit like asking a sports reporter to turn in his coverage of a football game before the contest even starts.  I may have some opinions, but they don’t mean much in light of the future brawls in the halls of Congress.  When the winners begin to emerge, I’ll start tax planning.

VKM

Click here to read this blog and others on our website at www.hmpc.com

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Tax Policy

Trump’s Tax Plan – Kind of Like a Butt Sketch

First, let me acknowledge that Butt Sketch is trademarked by Krandel Lee Newton.  I give him all the well-deserved credit for the term and the concept.  Mr. Newton and his crew of associate Butt Sketchers are famous across the nation now.  About 25 years ago, the Cedar Hill, Texas resident was a bit less well-known when he sketched the lovely Beth McAllister, four friends (whom we saw last weekend), and me.  Beth had agreed that night to be my bride.  We have another of his sketches of the two of us dating some 20 years later and executed at a little party we hosted.   Including our two portraits, Mr. Newton says that he has memorialized over 600,000 backsides.

The Butt Sketch is a charcoal caricature (usually full length) from behind the fully-clothed subjects. The result is a sketch, not a full-blown portrait. It has just enough detail to make the subjects recognizable, if you know them pretty well.

President Trump released a one-page outline of his tax plan on April 26, 2017.  It has just enough detail to recognize it as a tax proposal.  Particulars are meager.

I’ll give President Trump his due.  He fancies himself as a negotiator without peer.  I will not argue that he is a pretty good, if sometimes ruthless, bargainer.  Look at this vague plan as his opening bid.  While the outline hints at some interesting and welcome reforms, the framework he proposes faces opposition from 360 degrees.  It has technical and practical shortfalls, one of the biggest being the apparent ballooning of the national debt: Everybody gets a tax cut, according to the plan.  There are no revenue offsets even hinted.

So, an army of people will be trying to influence, change and add detail to President Trump’s Butt Sketch of a tax plan.  It will be interesting.

VKM

Click here to read this blog and others on our website at www.hmpc.com

Tax Policy

Where Does All the Money Go?

If you are like me, you know pretty much where your income comes from.  Where does it go?  That sometimes can be a little less transparent.

As I straightened up my office last night at the end of the tax busy season, I ran across a recent study published annually by The Committee for a Responsible Federal Budget that explores government spending.  It addresses the following question:  In 2016, how was $100 of taxes collected spent?

The answer:

Health – including Medicare, Medicaid and other health programs – $26.26
Social Security – $23.61
Defense and Military Benefits – $19.82
Interest – $6.25
13 other categories – $24.06

Where does the money come from?  The most recent year for which I could readily locate sources was the Federal fiscal year 2015.   A study by the Center on Budget and Policy Priorities said of taxes:

47% comes from individual income taxes
33% comes from payroll taxes
11% comes from corporate taxes
9% comes from all other taxes

The estate tax is part of “all other.”  In 2015, fewer than two of every 1,000 estates owed any estate tax.  The estate tax made up 0.6 percent of total federal receipts in 2015.

While not “revenue,” borrowings financed $438 billion of the $3.7 trillion Federal budget.

So, that’s where taxes go and that’s where taxes come from.

Happy April 18!

VKM

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Tax Policy

FEARLESS FORECASTS

Warning:  Take anything that I forecast with a grain of salt.  Along with most of the civilized world, I predicted wrongly the outcome of the 2016 presidential election.

Once I overcame the shock of the presidential election results, I began to watch, listen, discuss and read about possible tax changes that could occur.  For the first time, I read seriously President-elect Trump’s tax plan.  I dusted off my copy of the tax proposals in “A Better Way – Our Vision for a Confident America,” published by House Republicans this summer.  Here are a few fearless forecasts and related observations about possible Federal tax law changes.

  1. Sometime during the next two years – 2017 and 2018, expect the most drastic tax changes since 1986. They may be even more drastic than the 1986 tax reforms.  Republicans (at least, in name) control the White House, the Senate and the House of Representatives and will do so at least until 2019.  While the Senate majority is not filibuster-proof, Senate Republicans can use the budget reconciliation process to pass tax changes with their 52-48 majority.
  1. Obamacare is toast. However, there will be some kind of government-sponsored, government-enabled, government-encouraged, and/or government-subsidized health insurance solutions for people that can’t access healthcare through employers or Medicare or Medicaid.  You can’t just get rid of entitlements; they are sticky like fly paper.
  1. Individual and corporate tax rates will be reduced. The tax base will be increased somewhat.
  1. Related in part to item 3 above, 2016 may be one of the most significant years to follow closely and meaningfully the old tax planning strategy of accelerating deductions (into years with higher rates, it appears) and deferring income (into years with lower tax rates, it appears).
  1. The alternative minimum tax will go away. Yippee!!
  1. The Federal estate tax will most likely be repealed. However, there may be some fiscal counter-measures.  There could be no step-up (or limited step-up) in basis of property at death.  There may be continued gift taxes.
  1. The specter of massive increases in the Federal budget deficit will temper some of the Trump and Congressional tax cutting proposals. Indeed, fiscally conservative Republicans and Democrats may forge an uncomfortable alliance to rein in the total amount of tax cuts without revenue increases or spending cuts from someplace.
  1. Both proposals provide for immediate expensing of capital expenditures. The details differ, but not enough to derail the idea.
  1. There are many other tax law changes in both proposals. Some align, others do no.  Many will be enacted.
  1. While generally pointed in the same direction, the Trump campaign proposals and the House Republican proposals are different in a number of ways. The Trump proposals are very light on details.  While “A Better Way” is more comprehensive and cohesive, the authors concede that it is a policy “blueprint.”  Many details still must be developed.

Again:  I’ve been dead wrong before – recently.

VKM

Tax Policy

That Makes Me Smart

Of course, I watched the presidential debate on Monday night.  It was great entertainment.  Captivating reality TV.  Better than “The Apprentice.”  Better than “Naked and Afraid.”

To me, the highlight of the show was Donald Trump’s blurting out a response to Hillary Clinton’s conjecture that he may not be releasing his returns because he may not be paying taxes:  “That makes me smart.”

I am sure that it is no surprise that the next day Mr. Trump denied making that statement. Even for The Donald, it’s hard to unring that bell when 84 million people saw him make the comment on television.

Politics aside, it does not surprise me at all that Mr. Trump pays little or no taxes on the over $500 million of income that he says he made in 2015.  The reason?  Mr. Trump’s primary business is real estate.

I have had quite a few clients over the years who were wealthy real estate professionals – in particular, owners of rental real estate.  With leverage – often funded by nonrecourse loans – and with the application of real estate cost segregation for tax purposes, a real estate investor can generate “HUGE” tax deductions with a relatively modest investment of cash.  Theoretically, the accelerated depreciation is a timing difference – pay Uncle Sam now or pay him later.  But, by using like-kind exchanges and more leverage to trade up to bigger deals, one can delay paying the piper for a long time.  Heck, if you can manage to die with the low adjusted tax basis assets – made low by tax depreciation, you can avoid the income tax recapture altogether, thanks to the date-of-death income tax basis step-up (or step down) rules!

Being a real estate investor alone could pretty much wipe out income taxes, if the strategy is pursued aggressively.  I’ll bet Mr. Trump deploys any number of other tax shelters.  Forbes reported this summer that Mr. Trump has given away over $60 million in tax-deductible conservation easements primarily related to his golf courses. It would make Mr. Trump smart to license his name through an offshore company based in a tax haven with little or no income tax.  It would make Mr. Trump smart to let his children and grandchildren invest in his deals, directly or through trusts, in order to lower his future estate taxes.  It might possibly make Mr. Trump smart to own his foreign assets, such as his golf course in Ireland, in offshore entities that don’t pay U.S. tax.  I know that it would make Mr. Trump smart to own his assets through entities not domiciled or having nexus in New York, which has very high income taxes.  It would make Mr. Trump really smart to not be domiciled in or a statutory resident of New York City, but to be domiciled in and a resident of Florida, where he has at least one home.

So, why does Mr. Trump fear people knowing what his tax returns say?  I don’t think the discouraged and angry blue collar workers that comprise the core of his supporters will take kindly to a man who says he is worth $10 billion paying less tax than they do.

Do I find these types of tax reduction strategies offensive? Not at all.  Helping people pay only as much tax as they legally must pay is how I make my living.  I help make people smart.

VKM

Click here to read this blog post and others on our website www.hmpc.com

Tax Policy

Analysis of Trump Tax Plan versus Clinton Tax Plan – One Day Shelf Life

This quick analysis is subject to change and is possibly accurate as of August 15, 2016.  If there is anything wrong with it, there are a few possible reasons.  For example, the blog may have been misstated by the “disgusting and corrupt media.”  Alternatively, somebody – probably Russian operatives – may have hacked my email account and intentionally created errors in this posting.  In any case, it may not be accurate at the time you read this blog because one or both of the candidates may have changed his and/or her proposals sometime today or tomorrow or soon thereafter.

First, let’s start with Mrs. Clinton’s tax policy proposals.  They have been pretty consistent for the last several months.  In summary, they are, for the most part, warmed-over Obama proposals.  President Obama has proposed many of these tax changes for years.  A Republican Congress or a divided Congress has pretty much stymied his changes.  One major exception – ObamaCare.

Mr. Trump’s proposals are pretty radical.  After reviewing his tax plans as of 8:00 a.m. CDT today, I conclude that his policies will help the little guy some and rich guys like Donald Trump a lot.  If you want the details, I’ll be glad to chat over a cup of coffee.

On a macro level, what is the difference to the U.S. Treasury between the Clinton plan and the Trump plan?  Most analysts say that Clinton’s plan would raise taxes about $1 trillion over a 10-year period.  Independent experts calculated that Trump’s first tax proposal would cost the U.S. Treasury $10 trillion over 10 years.  His people say that his newest plan, a few days old, only cuts taxes $3 trillion over 10 years.  It looks like independent analysts have not had time yet to opine on that number.  As you might guess, there is some concern about how basic government functions would be funded under the Trump plan.

What are my thoughts? I don’t think that either plan will move forward intact or in a form significantly resembling either of these original proposals.  Reforms will be more incremental.  Too many oxen are being gored; too many lobbyists are employed in Washington.  I’ll double down on my bet, if the House of Representatives, the Senate and the Presidency are not controlled by the same party.

VKM

Click here to read this blog and others on our website at www.hmpc.com

IRS, Tax Policy

HAPPY NEW YEAR!

I apologize if on occasion I was a bit delayed in returning your calls in 2013. I resolve to do better in 2014. My excuse is a good one. It was a very busy year in the tax business in 2013.

The year started with the passage of the American Taxpayer Relief Act of 2012 (dated January 2, 2013). This law made permanent a number of “Bush tax cuts” (as amended, for many), made permanent and subject to inflation the perpetually temporarily increased alternative minimum tax exemption, permanently exempted many people from ever having to file estate tax returns and pay estate or gift taxes. It also extended for one or more years, the “extenders” – tax benefits that generally are extended for one year at a time.

The Supreme Court’s Windsor decision struck down a section of the Defense of Marriage Act that required same-sex spouses to be treated as unmarried for federal law purposes. The IRS has been hard at work trying to deal with innumerable complexities caused by the change. Many states are making similar changes.

Treasury published final (for the most part)”tangible property repair” regulations addressing the age-old problem of “capitalization versus repairs” classification. These regulations apply to any taxpayer or pass-through entity that has fixed assets; that pretty much means everybody directly or indirectly, except persons who are only wage-earners. These new regulations will narrow somewhat the arguments between the IRS and taxpayers, once everyone understands them.

Regulations and other guidance were issued that address the new taxes beginning in 2013 enacted by the Affordable Care Act (“Obamacare”), namely the 0.9% Medicare surtax on wages and self-employment income and the 3.8% surtax on net investment income.

Did I mention Obamacare? Healthcare.gov? Many businesses and individuals had to spend a lot of time in 2013 preparing for the mandatory health insurance provisions that begin to descend upon businesses and individuals in 2014.

Finally (not really, but I am tired of writing), almost all of the “extenders” expired on December 31, 2013. According to The Washington Post, the number was “about 55 different tax breaks.” (Actually, it is quite hard to get an exact count.) Many observers hope that Congress will extend these breaks for 2014 (and beyond). However, some expect little action on the subject until after the November elections. Also, there is a little problem of the $50 billion per year that these breaks cost, as estimated by the Center on Budget and Policy Priorities.

So, 2013 and the beginning of 2014 have been action-packed. I expect more of the same in 2014. On second thought, please just be a little patient when it takes me a bit of time to return calls.

-VKM