January 9, 2015
While most of us were settling back into the office this week, Teresa Giudice from the infamous reality TV show “The Real Housewives of New Jersey” was settling in to her new home at the Federal Correctional Institution in Danbury. She’ll be trading the opulent, Italian-style divans inside her NJ mansion for a shabby, not-so-chic cot in a jail cell for the next 15 months (if she actually serves her full sentence).
According to the New York Daily News, Teresa and husband Joe were convicted of mail, wire and bankruptcy fraud. They took out millions in falsified mortgage and construction loans to support their lavish lifestyle. Joe was also convicted of tax fraud, since he failed to file a return in 2004 and admitted he didn’t pay taxes on some $1 million in income between 2004 and 2008.
At sentencing, Judge Esther Salas was infuriated by the Giudice’s lack of transparency in their pre-sentencing disclosure documents. Among the omissions the judge seemed to think had dubious justifications were the estimates of the family’s furnishings and jewelry. The courts and the IRS have increasingly sophisticated tools for identifying discrepancies in stated earnings and assets, but in this case a simple paperwork trail proved enough.
That’s because when declaring bankruptcy in 2009, the Giudices listed $60,000 in furnishings, but only $25,000 on sentencing day. Other recreational vehicles, cars and construction equipment seemed also to be missing from the probation office report that managed to make it to the Feds. When asked why no jewelry assets were reported, the Giudice’s lawyer said Teresa wore only the costume type.
Judge Esther Salas gave Teresa 15 of the maximum 27 months but allowed her to spend the holidays with family. The judge also allowed Teresa’s husband to begin his sentence after hers expressly to maintain a parent in the household for their four children.
For Joe the sentence is 41 months, but even then he may not be altogether free. Although he has lived in New Jersey for most of his life, he never became a U.S. citizen and will likely face deportation.
Albeit this couple offers an egregious example of misconduct, it goes to show the seriousness with which the courts take tax and bankruptcy fraud. Particularly if, as some believe, the judge in this instance was being lenient, whether owing to the couple’s fame or other reasoning.
Should Teresa miss the spotlight facilitated by Bravo, she can take heart knowing she’s staying at the prison made famous by the Netflix original series “Orange is the New Black.” The reality of it all is that she’s likely to be back in the limelight fast, though maybe not at her NJ home since it was put up for sale. Once she’s free to go, she may very well pick up her hair extensions on the way out and get back to the celebrity life.
December 19, 2014
In a heated bidding war that ended last week, the Chicago Cubs scored big by signing left-handed pitcher Jon Lester with a $155 million deal for six years and a vesting option for a seventh. Lester’s annual $25.8 million earnings will put him in second place for the highest annual salary paid to a pitcher, behind only Clayton Kershaw with $30.7 million. To draw Lester to Wrigley Field, the Cubs raised their bid from $135 to $155 million in the final inning, and yet this wasn’t the highest offer Lester received.
The San Francisco Giants’ last bid gave him the largest potential contract: A seven-year deal for around $168 million. Lester’s pros and cons list with each team was sure to be a long one. On the money side, while the Giants offered the highest figure, California taxes would have put Lester in the 12.3 percent tax bracket and since his income is over the $1 million threshold, subject to an additional 1% tax due to the Mental Health Services Tax. With the Cubs, Lester will instead enjoy a rate less than half that, thanks to Illinois’ 5 percent flat state income tax.
So even with the $13 million premium the Giants were willing to pay, Lester’s take-home salary in Chicago will be at least $1 million more when factoring in state taxes. That’s more money he could give to his favorite charities. (Since Lester’s battle with lymphoma at 22, he has actively advocated for the pediatric cancer community.) As a free agent, Lester has been quoted saying, “I want to go to a place that appreciates what I do on the field and off the field, as far as with our charitable work, how we represent the team in the community.”
Lester may also have chosen the Cubs for the chance to reunite with two executives who drafted him back in the day for the Red Sox: now-Chicago president Theo Epstein and general manager Jed Hoyer.
The Boston Red Sox made a lower final offer of six years for $135 million after starting with a low-ball $70 million contract that led to his trade to Oakland this past summer. Still, the star pitcher might have had sentimental reasons to head back, since it was with the Red Sox that he took two World Series Championships. But even the Giants’ prestige of having won the World Series three times in the last five seasons wasn’t enough. Lester still chose the Cubs, who in striking contrast haven’t won a World Series in over 100 years.
It’s not likely Lester’s decision hinged entirely on taxes, nor should any major life decision we make. But that doesn’t mean Lester or any of us can afford NOT to know what the tax impact of a particular choice holds. Having this knowledge in hand, regardless of which way we choose to go with a major decision, can help us find other ways to mitigate tax liabilities and preserve income.
In the event of any upcoming life or business change, whether planned or unexpected, consult with an advisor from the Talley & Company team to understand how your tax profile might be affected.    

November 7, 2014

Tax Breaks Could Cut Ballmer’s $2 Billion Payment for Clippers in Half

There’s been a lot of debate on both sides as to whether Steve Ballmer’s purchase price of $2 billion for the Los Angeles Clippers exceeded the team’s worth and revenue potential. On one hand, it’s hard to ignore the fact that no one has paid remotely as much to buy any one of the 30 NBA teams in the franchise’s entire history. Then again, the NBA just inked a deal with ABC/ESPN and Turner for broadcast and Internet rights earning the franchise nearly $2.7 million each season between 2016-2017 and 2024-25. That’s almost three times what the NBA gets with its current contract.

Maybe Ballmer believed that with this new deal in the works, along with a turnaround of the team’s reported mismanagement under previous ownership, he would have a real shot at making money on his investment despite his sky-high purchase price. And, maybe he just wanted the shiny new toy badly enough to pay whatever price it took to ensure it was his.

Still, there might have been at least one other factor that impacted his decision. Because as it turns out, Ballmer could claim about half of his purchase price of $2 billion over the next 15 years against his taxable income in a niche section of the tax code applicable only to sports franchise owners. To take advantage of it, an accounting treatment using goodwill, which refers to the difference between the purchase price and the cash and fixed assets of the team, would be used to structure the deal.

The Financial Times has reported, “Using a conservative model that assumes Mr. Ballmer could account for $1.5 billion in goodwill and a re-investment rate of 7 percent, the potential tax credits equate to about $1 billion in current terms.”

In the words of Washington Wizards owner Ted Leonsis, “There’s never been a better time to be an owner of an NBA franchise or frankly any professional sports team.” And, well…it pays to have an astute group of professionals keep their eye on the ball no matter what move a billionaire makes.

But perhaps buying a sports franchise isn’t your game, and this small corner of the tax code doesn’t apply to you. That still leaves thousands pages of rules and opportunities that could. The tax code is full of small but powerful regulations that can easily escape taxpayer notice. Ballmer has a powerful tax advisory team mining it to better inform his decisions for work and play. You can, too.

October 3, 2014

Goodbye Gifts Wrap Up Jeter’s Career (and Tax Obligations) on a High Point

Jeter gave his final farewell on the field last Thursday to millions of cheering fans and admirers watching, wrapping up an illustrious 20-year career in baseball and his reign as the captain of the New York Yankees. His sportsmanship and performance record has earned him not only accolades from the entire league, but also some pretty eccentric gifts as a token of their appreciation and respect. So what did they give a man who made $12 million last season alone? Jeter has collected everything from wine to cuff links and a kayak from other teams since he announced his retirement in February.

From the Astros, he took home pinstriped cowboy boots. From the Angels came a custom-painted paddleboard and the Brewers a bronzed replica of his bat. Let’s not forget the pair of Stan Musial cuff links he received from the Cardinals and a Hublot watch from the Mariners. Then there are the seats he’ll be able to rest on comfortably in retirement, including a bench made of bats from the White Sox and a seat from the Kingdome from the Mariners. If you want to see these gifts in all their audacious glory for yourself, check out the slide show from the New York Daily News.

While they may have been bestowed with much esteem and personal appreciation, the IRS treats these items from the business context in which they’ve given. That means one of the jobs Jeter’s tax advisory team is probably working on now is accounting for the taxes the five-time World Series champion will need to pay on all these “gifts” he’s received.

With career earnings totaling over a quarter of a billion dollars, Jeter may not be too shocked by the bill. But since Bloomberg News approximated the check to the IRS at $16,000 based on the gifts’ estimated total value, we certainly hope he liked what he got. If not, he can take comfort in that at least one of his gifts won’t be taxed: the donations made by several teams to Jeter’s charity, the Turn 2 Foundation.

The IRS’ definitions apply to gifts whether your job is on the baseball field or in boardroom. For example, employers that reward top-performing employees with a gift, say season tickets, may need to withhold taxes from the recipient’s cash pay for the tickets’ value since they can be considered income. If the recipient isn’t on payroll, the company may need to report it on Form 1099 instead.

With the holidays coming up fast, you may have questions about what constitutes a gift in the IRS’ eyes and how to properly report it, whether you’re on the giving or receiving end. Get the clarification you need by consulting with a Talley & Company advisor for whatever scenario that comes up.

 

 

September 26, 2014

Deciding Whether to Leave a Roth IRA to Heirs

Leaving a Roth IRA to children can be a great way to pass on money that’s allowed to grow tax-free over your lifetime and for some of theirs. To determine whether a conversion from a traditional IRA is an effective vehicle for moving money into the hands of your heirs, here are a few points to consider.

Your Tax Rates Compared to Theirs

If your tax rate is expected to be the same as that of your heirs’ when they take distributions, the Roth IRA does offer a small advantage. In this scenario, you’d be paying taxes on the conversion with your current tax rate and letting future growth compound over time in a more tax-efficient account.

On the other hand, if a beneficiary is going to have a much lower tax rate than yourself, either as a result of living in a lower-tax state or pulling in a lower net income, converting to a Roth would cut into their potential inheritance. Essentially, you’d be paying a larger tax bill up front than might have been paid later by your heirs. It also matters how much you convert and how fast, since converting the whole of an account at once could subject you to a higher tax load than doing so in increments over time.

Not everyone will have a clear picture of their heirs’ tax rates long after they’re gone. Still, you might have a good idea based on some career choices. For example, if your daughter is completing med school, chances are she’ll be subject to a higher tax rate than most. If your son is a K-12 teacher, he may not.

Potential Changes to Roth IRA Rules

Of course, all this may be null and void if proposed legislation goes through. If approved, President Obama’s 2015 budget would require Roth owners to take distributions starting at the age of 70.5 (whereas none are required right now), possibly eliminating the asset entirely before it’s inherited. A second change would require heirs to withdraw the entire sum of money from the Roth within five years of the account owner’s death. (Right now while distributions by heirs are required, they can be made over a lifetime, allowing the assets to compound in growth.) These revisions could diminish much of the benefit to using a Roth as an inheritance vehicle.

Whether or not these laws are approved, it’s a good idea to know where you stand now so that you can plan accordingly. If you’d like a closer analysis of whether converting part of your retirement savings into a Roth IRA would benefit your heirs, set aside time to discuss the idea with the Talley & Company tax advisory team.  

September 19,2014

The Three Stages of a Financial Windfall

Imagine having the winning ticket to a $640M Powerball lottery. Not a chance in this world–but $640 million???? It’s nice to daydream about! You’ve won the lottery and are retreating into a corner to keep your own council for a while. So what happens now?

First, that numb feeling is your brain in shock.  You’re not alone. With a windfall like this coming at them, many people also feel like their life is no longer under their control. Some experts say that the greatest predictor for success in handling a financial windfall is how well we can deal with the intense emotions—the “wind” part resembling a hurricane. Second, delight shows up at last when you realize for the first time in your life, your finances have never looked better.  Then the roller coaster hits a trough when you realize the tax man will demand their fair share. The third and final stage: the shock is back, followed by frustration and anger.

So what do a surprising number of lucky winners do after this emotional rollercoaster? Jump on the computer. A simple Google search and—Bingo! There are many sites promoting brokers who will buy winning lottery tickets at a discount and “take care” of the taxes so that winners keep more of the original amount.  They’re called “Ten Percenters” and seem to be thriving, customer-wise.  Other sites sell losing tickets at a discounted rate to offset taxes from winning tickets.  We won’t be diving into the legal issues ofthese unscrupulous practices, but we’ll leave it at they are questionable at best and dealing with Ten Percenters is most likely not in your best interest.

 

Talley & Company has been serving a loyal tax clientele for over 25 years and has a wealth of experience helping our clients mitigate their tax burden when experiencing a financial windfall event.  Whether your windfall is from a tax return, an inheritance, a bonus, a sale of a home, or a prize, Talley & Company is here to help.

 

Sources: http://www.smartaboutmoney.org/Portals/0/ResourceCenter/FinancialWindfall.pdf

http://www.forbes.com/sites/robertwood/2014/08/08/money-for-losing-lottery-tickets-how-winners-losers-underground-brokers-beat-taxes/

 

September 12, 2014

Pacquiao Scores Tax Knock-Out in First Round Vs. Philippines

World-champion boxer Manny Pacquiao is definitely no stranger to pummeling opponents in the ring, but the famous boxer is going for the knockout in a long-running tax dispute with the Philippine government. The fighter is in a battle with the Philippine tax authorities over 2.2 billion pesos ($50.3 million) they claim the national icon owes for his 2008 and 2009 earnings from bouts held in the U.S.

Pacquiao and his managers say he paid the taxes he owed to the U.S., and that because of a treaty agreement between the two countries, he isn’t subject to double taxation. The boxer is neither a U.S. resident or citizen, but the U.S. has special regulations requiring foreign athletes who work in the U.S. to file taxes. That U.S.-based work can entail anything from participating in a tournament to taking part in endorsement deals.

According to the Philippine tax office, Pacquiao has not provided them the official, certified paperwork it requires to demonstrate proof of his U.S. tax payments. Meanwhile, the fighter’s promoters, Las-Vegas-based Top Rank, say the documents have been requested but just haven’t come through yet.

Prior to the recent Supreme Court ruling, the Philippines Bureau of Internal Revenue issued a warrant to 36 banks to seize Pacquiao’s assets, some of which included his wife’s accounts. Based on the news report on the latest Supreme Court ruling, the Philippine government also threatened to take the money owed by selling off the assets it seized. Later the tax court agreed to lift the asset freeze on the condition Pacquiao posted the cash bond equivalent to their claim to back taxes and interest.

There’s still a long way to go before Pacquiao, who also happens to be a congressman representing the Sarangani province, takes home the championship belt on this one. But with the new Supreme Court ruling on his side, he said in a statement, “For now, I am just glad I will be able to concentrate on training for my upcoming bout.”

Pacquiao’s relief is expected. Having to resolve a tax dispute with the authorities, Philippine or U.S., can divert precious attention from athletes trying to stay on top of their game and business owners who have daily operations to manage. The paperwork and back-and-forth communications can take weeks, months or years to clear, all of which requires time, patience and specialized expertise even the most knowledgeable business leaders are unlikely to have. Having an experienced tax advisory team in the ring with you should you be subject to a tax inquiry can be a life saver to this otherwise brutal experience. Just don’t wait for a letter from the IRS before you put your team together.

September 4, 2014

Kids Cost More Than Ever to Raise—Here’s How Much

If you ever had the distinct impression that your kids were costing you a fortune, you can feel good knowing that you were right. According to the USDA’s annual Expenditures on Children by Families report, a child born in 2013 will cost the average middle-income, two-parent family more than $245,000 to raise until the age of 18, representing a 1.8 percent increase from 2012. Adjusted for projected inflation, that number is more like $304,000.

If you make more, you’re also probably spending more. The report estimates that high-income households, or those earning over $106,540 in before-tax income, spend about $408,000 per child. For a two-child household, that’s between $21,330 and $25,700 per kid every year, depending on the age of the child. (You may have already have guessed this, but annual expenditures generally increase as the age of the child does.)

The more kids a family has, the less they spend on each one. Families with three or more kids spend 22 percent less per child than those with two kids, and families with one child spend an average of 25 percent more on the only child than those with two kids.

Where does all that money go? The largest share of total child-rearing expenses across all income levels in the USDA’s calculations is housing. For high-income earners, housing represented 33 percent of total child-rearing expenses. Where you live matters, too, since housing costs vary across the U.S. Those in the urban Northeast spend the most to raise a child ($282,480), and those in the urban South the least ($230,610). The urban West, which includes California, runs somewhat down the middle ($261,330). The second-largest expense for high-income households was child care and education, coming in at 23 percent. Generally, the higher the income, the greater the expenditure was in this category.

The USDA’s report also accounts for food, healthcare and transportation, among other things. What it doesn’t include are expenses incurred during pregnancy or those incurred after the age of 18, such as college. Add those into the mix and sure enough, there’s plenty of proof that raising kids isn’t cheap.

Thankfully, the joys that accompany parenthood far exceed their costs in mere dollars and cents. These numbers simply remind us that the arrival of a new child or grandchild into our lives can mark a pivot point to how we manage our finances. From the moment they’re born, new considerations and opportunities arise that should involve your tax and legal advisory team. For example, you may decide to re-strategize your tax position, initiate or make changes to life insurance and estate plans, or open up a college savings plan.

To be certain you’re taking advantage of as many savings opportunities as possible, meet regularly with experienced tax and financial professionals as your children grow and your family’s needs do, too.

August 29, 2014

More People Than Ever May Relinquish Their U.S. Passports This Year

The Treasury Department just published its latest quarterly report revealing the names of people who have given up their U.S. citizenship or long-term residency. On the list were 577 individuals, bringing the 2014 total so far to 1,577. This mid-year total puts us on pace to exceed last year’s numbers, which hit a record-breaking 2,999 individuals, already a 221% jump from 2012.

Short of asking them outright, we can’t know why those on the list chose to leave, but we might infer that taxes could have been at least one of the factors calculated into their decision-making process. That’s because the U.S. requires citizens and green-card holders to file tax returns no matter where they live. So depending on where expats reside, they may be required to pay taxes in the country in which they live and work while also paying the U.S. government.

The Foreign Account Tax Compliance Act could also be influencing some taxpayers to leave their passports behind. The law took effect this year and requires foreign financial institutions to report account information to the U.S., both for U.S. citizens and green-card holders living in the U.S. and abroad.

In 2012, Facebook co-founder Edward Sevarin was one of the recognizable names who renounced his U.S. citizenship. He headed for Singapore before the Facebook IPO, a move that undoubtedly reduced his tax bill since Singapore doesn’t impose a capital gains tax and has a low 18% tax rate. In 2013, American music icon Tina Turner was also on the list, though she has already been living in Switzerland for the last two decades with her boyfriend and now-husband Erwin Bach, a German music producer.

Individuals aren’t the only ones looking to expatriate. Walgreens, the largest pharmacy retailer in the U.S., considered an inversion from U.S. to Swiss corporate citizenship to cut down on tax obligations. But in this month’s announcement of the company’s decision against it, Walgreens’ chief executive Gregory Wasson told analysts the change “included potentially putting the company in a significantly worse position than if we had not inverted at all, such as a protracted controversy with the IRS.” He also acknowledged the risk of “consumer backlash and political ramifications,” referring to boycotting threats by consumers and the potential loss of almost a quarter of the company’s sales derived from Medicare and Medicaid.

The decision to expatriate should never be taken lightly, and taxes should never be the sole factor in consideration. There are not only indirect costs to giving up residency in one of the world’s greatest nations but direct ones as well, including the exit tax. Fortunately, there are many, many strategies for reducing personal and corporate tax liabilities. By planning well ahead of tax day and working strategically with experienced professionals, we can all save money on our taxes without having to give up our citizenship or green cards. 

July 25, 2014
Crowdfunding is helping thousands of businesses acquire much-needed capital and build a core fan base. Businesses of all kinds and for many funding purposes are using crowdfunding platforms, from yoga studios looking to grow into larger spaces to tech innovators wanting to bring new gadgets to market.
If you’re considering a campaign to launch your business, expand a product line, or fund a special project, scheduling a few minutes with Talley and Company’s advisory team can ensure your campaign is set up properly from the start to avoid obstacles from a tax and legal perspective. (There’s nothing worse than obtaining hard-earned funding only to discover that federal and state tax obligations may keep you from fulfilling your vision.)
For businesses, there are two main avenues for crowdfunding, and depending on which you choose, the tax and legal implications will differ greatly. In the rewards-based approach, supporters are typically offered a chance to earn tiered rewards for different contribution levels. These can be anything from a branded T-shirt to pre-ordering a product still in development. Kickstarter and Indiegogo are two popular platforms.
With this option, the income you derive from your campaign will most likely fall under one or more of four categories: revenue, sales, investment or gift. In most cases, the money you earn from a campaign will have to be included as gross income for your business. If you’re offering a product or service in exchange for donations, you may also need to pay sales tax from customers in the state that you’re registered. The expenses you incur for fulfillment of rewards, products or services may be deductible against the income you earn. In some cases, funders will request nothing in return other than the joy of knowing they helped bring an ingenious idea to life. With meticulous records, these may be claimed as gifts. Just keep in mind that the IRS has stricter definitions for what falls under this category than you or I might.
In the equity-based approach, investors get a financial return or an ownership stake in the company for their support. Crowdfunder is one of the platforms in this newly developing category. If you’re using this option, the tax and legal obligations are a different animal entirely, since now we’re talking about investment money and not revenue. In fact, the laws in this area are still undergoing changes, so keeping in close contact with your legal team right from the beginning is essential.
No matter which option you choose, a successful campaign involves a lot of forethought, time and planning to reach funding goals and generate priceless media attention for your big idea. If you’d like to see the creative strategies and executions used by the most highly funded companies, check out the Top 100 Crowdfunded Companies

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