Government also uses the tax code to sway some of our smaller decisions, too. This is especially true with so-called “sin taxes” — essentially, fees we pay to consume unhealthy products or engage in unhealthy behaviors. As Adam Smith wrote in The Wealth of Nations, “sugar, rum and tobacco are commodities which are nowhere necessaries of life, which are become objects of universal consumption, and which are therefore extremely proper subjects of taxation.”

230 years later, sugar, rum, and tobacco are still taxed. (In New York City, a pack of smokes comes with a hefty $6.86 in federal, state, and local taxes — the tobacco is extra!) The 2010 health care reform slapped a 10% tax on tanning beds. Public health advocates have proposed taxes on fatty foods and sugary sodas to fight obesity. And many Americans, discouraged by what they see as a decades-long failure in the War on Drugs, call for legalizing drugs, taxing them to shift profits from private cartels, and using the revenue to fund anti-addiction efforts.

So, how effective are sin taxes at balancing their dual goals of raising revenue and discouraging unhealthy behavior? Well, federal and state tobacco taxes alone raise nearly $30 billion per year. They seem to do that job just fine. But some economists find that sin taxes send the wrong message by legitimizing the behavior they try to discourage. Here’s what Harvard Professor Michael J. Sandel says in his new book, What Money Can’t Buy: The Moral Limits of Markets:

“A study of some child-care centers in Israel shows how this can happen. The centers faced a familiar problem: parents came late to pick up their children. A teacher had to stay with the children until the tardy parents arrived. To solve this problem, the centers imposed a fine for late pickups. What do you suppose happened? Late pickups actually increased.”

Clearly, telling parents “don’t be late or we’ll fine you” sends a very different message than telling them simply “don’t be late.” And so it goes with sin taxes, too. Telling smokers and drinkers “don’t indulge or we’ll tax you” offers them implicit forgiveness — that it’s actually OK to light up and enjoy two-for-one Happy Hour so long as they pay the fee. (If you’re reading these words with a cigarette in one hand and a Red Bull in the other, you can breathe a sigh of relief!) It may sound hypocritical for Uncle Sam to wag his finger at you with one hand while he reaches into your pocket with the other. But sin taxes have been around a lot longer than income taxes, and they aren’t going away.

There’s really no “planning” we can help you do to avoid sin taxes. (We would just give you the same advice as your mother.) But it may be worth it, next time you pay any tax, to ask yourself “what’s the government trying to accomplish with this tax? What’s the government trying to get me to do?” Understanding why you pay a tax can make you a better-informed consumer. And that, in turn, helps all your dollars go farther.

Apple may be the most successful company on earth. At one point last year, they had more cash on hand ($76.2 billion) than the United States government ($73.8 billion). And Apple is currently the most valuable company on the planet, with a “market cap” (total value of tradeable shares) that topped $590 billion dollars on April 10. (That’s right . . . those iTunes you casually download for a buck each have created a company worth over half a trillion dollars.) In fact, Apple’s current market cap is more than the gross domestic products of Iraq, North Korea, Vietnam, Puerto Rico, and New Zealand — combined.

But Apple’s most recent annual report reveals the company’s genius for creating successful marketing strategies also extends to successful tax strategies. How else would you describe a strategy that lets Apple earn billions and pays less than 10% of their taxable income in tax?

How do they do it? Largely by keeping the money they earn outside the United States, outside the United States. Apple owns subsidiaries in tax havens like Ireland, the Netherlands, Luxembourg, and the British Virgin islands. They helped pioneer the “Double Irish with a Dutch Sandwich” strategy that hundreds of other multinational companies have imitated. Apple even maintains a subsidiary in tax-free Nevada — the blandly-named “Braeburn Capital” — to manage that enormous cash haul without paying tax in its home state of California. For 2011, the company paid a worldwide tax of $3.3 billion on $34.2 billion of profit. But one study concludes that Apple would have paid $2.4 billion more without these rules.

Now Apple has become part of the political debate. At the risk of grossly oversimplifying a pretty complicated discussion, Democrats in Washington scoff that taking an extra $2.4 billion in tax last year would have squelched Apple’s creativity. Republicans reply that using the cash to grow the business or distribute more dividends to shareholders will grow the economy faster than if it goes to the IRS. Both President Obama and presumed Republican nominee Mitt Romney have called for eliminating corporate tax loopholes in order to pay for lower rates (28% in President Obama’s plan, 25% in Governor Romney’s). Either way, Apple is likely to become one of the stories — like Warren Buffett paying a higher tax rate than his secretary — that come to define this year’s campaign.

Taxes always play a part in Presidential races. But this time, with the economy still struggling and the Bush tax cuts scheduled to expire in a few short months, taxes will be even more important than usual. Our job, as November approaches, includes helping you understand just what the candidates’ proposals mean for your bottom line. So keep up with this blog — and if you’re curious how any of the proposals you hear about would affect your plan, call us!

Filmmakers spent four years “embedded” in the lush rainforest of Ivory Coast’s Tai National Park to make the movie, which follows the life of “Oscar,” a predictably adorable young chimp. Oscar learns how to use rocks to open nuts (apparently harder than it looks) and use sticks to go “fishing” for army ants (apparently a real delicacy to chimpanzee foodies). There’s a turf war with a rival community for control over a valuable nut grove. And, this being a Disney movie, Oscar loses his mother to a leopard around the beginning of the third reel. (It’s handled sensitively — there’s nothing to terrify children or grandchildren in the audience.) Losing his mother poses a real threat to Oscar’s life, until, remarkably, he’s “adopted” by Freddy, the community’s alpha male. The film is narrated by Tim Allen, whom even the youngest viewers will recognize as the voice of “Buzz Lightyear” from Disney/Pixar’s mega-successful Toy Story series.

Primatologists have suspected that chimpanzees like Freddy might altruistically adopt orphaned young in their group. But this is the first example of such behavior actually caught on film. (There’s no word on whether Freddy “taxed” the rest of the community for the expenses of caring for Oscar, or whether “tax avoidance” is part of their natural behavior!)

Disney has announced that they are donating a portion of Chimpanzee’s opening-weekend ticket sales to the Jane Goodall Institute for the “See Chimpanzee, Save Chimpanzee” program to protect habitats. Disney will donate 20 cents for every ticket sold, with a minimum donation of $100,000. (The movie grossed $10.2 million over its opening weekend, the highest opening gross in history for any nature documentary.) So — and here at last we come to the tax question of the day — does that mean that if you were one of the first to see it, you can deduct part of your ticket?

Unfortunately, no, that’s not how it works. You got your “money’s worth” from the movie itself, although Disneynature can certainly deduct the contribution on its return. It’s like buying a ticket to a college football game. The college itself may be a not-for-profit organization — but buying a ticket isn’t a “donation” because you get something of value in exchange. (Some colleges let you make donations in exchange for the right to buy season tickets — in those cases, the IRS treats that “right” as being worth 20% of the donation amount and lets you deduct the remaining 80%.)

Deductions for charitable contributions are a mainstay of the tax code. Charitable contributions let you do well for society while you do well for yourself — which of course is something we want to help with, too! We can help you maximize deductions for gifts of used clothing and household accessories. We can help you plan for bigger gifts of cash, cars or boats, art or antiques, appreciated securities, real estate, and even life insurance. And don’t forget, we’re here for the rest of your “community,” too!

Unexpected Result for Charity Volunteering – If an employer fails to pay over its payroll taxes, the IRS can seek to collect a trust fund recovery penalty equal to 100% of the unpaid taxes from a “responsible person.” A responsible person is a person who is responsible for collecting, accounting for, and paying over payroll taxes and willfully fails to perform this responsibility.

Payroll taxes withheld from an employee’s salary are monies the employee paid toward his or her tax liability and are not funds that belong to the employer. An employer that uses those funds to pay other expenses is using someone else’s money, and the IRS takes a very dim view of that act, since the government’s only recourse is with the employer and has to credit the employee with the withholding.

Case in point: an individual volunteered (unpaid position) to aid a financially struggling non-profit organization and became actively involved in the financial affairs of the non-profit, including writing the checks for the organization. The organization was behind on its trust fund payments, and the volunteer paid other liabilities ahead of the trust fund deficiency. As a result, the IRS assessed him the penalty of almost $200,000, which he paid and then went to tax court to get back. The tax court ruled in the IRS’ favor.

The case once again demonstrates the perils faced by a taxpayer who becomes involved in running a financially distressed company (for profit or non-profit) and chooses to pay other liabilities ahead of trust fund payments.

Tax Fraud on the Upswing – When a tax return is e-filed, the IRS’s computer will verify that the Social Security number(s) (SSN) on the return have not been previously used on another return for the same year, and will reject the e-file if it has. This most commonly occurs when both of the divorced or separated parents claim their child or children as dependents.

However, recently tax preparers are seeing more and more clients’ returns rejected because the taxpayer or spouse’s SSN has already been used. What is happening is thieves are stealing the taxpayer’s identity and filing phony returns to claim fraudulent refunds, leaving the taxpayer with the task of explaining to the IRS and all the other problems associated with identity theft.

If you believe you have been a victim of identity theft, you should immediately review the guidance provided by the IRS and follow the recommended procedures. If you need assistance, please give this office a call.

Now, The Atlantic magazine reports that landowners on the other side of the country are saving millions in tax by taking advantage of “America’s Dumbest Tax Loophole: The Florida Rent-a-Cow Scam.” But are those Florida cows as happy as their cousins in California?

Here’s how it works. Florida’s “greenbelt law” aims to help preserve farmland by taxing it according to its agricultural-use value, rather than its (higher) potential development value. To qualify, you just have to file a four-page application and convince your county tax appraiser that you’re using the land for “bona fide” agricultural purposes. You don’t even have to make an actual income from your “farming” in order to lower the valuation on your property. Pretty sweet so far, right?

But what if you’re not even really a farmer? What if you’re a rich developer, with land just sitting idle that you’re getting ready to build on, and you want to get in on the party? No problem! Lease your land to a nearby cattle rancher, plop a few cows in what’s left of the grass, and start saving big! Some landowners let ranchers graze their cattle for free. But the tax breaks are so rich and creamy that some landowners actually pay the ranchers to graze their cows, justifying the “rent-a-cow” nickname.

At this point, you’re probably scoffing this is . . . well, udderly ridiculous. Au contraire, my naive friend, au contraire!

The Miami Herald reported back in 2005 that over two-thirds of the greenbelt law’s biggest beneficiaries aren’t true farmers. Developer Armando Codina saved $250,273 in 2004 by grazing cattle on land he owned in northwest Miami-Dade County while he built industrial warehouses on it. Then he asked the county to declare his “ranch” to be an environmentally contaminated “brownfield,” while he still had cows on the land! (That had to make the cows happy.) Developer Richard Bell saved $140,168 that same year by grazing 16 cows on a 49-acre tract where he planned to build million-dollar McMansions. Even U.S. Senator Bill Nelson got in on the act — he keeps “about six cows” on 55 acres of property near the Indian River and saves $43,000 per year. The Herald found “skinny” and “underfed” cows eating garbage and grazing on bare, r ocky land throughout the state.

Developers confess that this may not have been exactly what the Florida Legislature intended when they passed the greenbelt law back in 1959. But they argue that vacant land shouldn’t be taxed at full value if it’s just aging till ripeness. And they point out that once the land is developed, new homes and offices generate plenty of tax revenue.

We have no clue if the Florida cows are as happy as the California cows. Nor can we tell you if their cheese is any good. But we can tell you that you don’t have to go to such ridiculous lengths to save big on your income taxes. The tax code is full of legitimate deductions, credits, and opportunities that serve legitimate public goals. And it’s our job to help put all those opportunities to work for you.

When you are an employee, the employer pays you a net amount after making all the required tax withholdings and provides you with a W-2 for tax reporting that shows your taxable wages and details all of the withholding amounts. If you are an independent contractor, the employer will pay you a gross amount without any withholding and will issue you a 1099-MISC.

Independent contractors must pay self-employment (SE) tax instead of having FICA (Social Security and Medicare program contributions) deducted from their wages. The SE tax rate is generally twice the amount of the FICA rate. Independent contractors are generally treated the same as self-employed individuals, so the SE tax and income tax are based on their net earnings after deducting any allowable expenses incurred to earn the income.

The problem here is that employees generally do not have tax-deductible expenses related to their jobs, so employees who are incorrectly classified as independent contractors find themselves essentially paying both the employer’s and their own share of the Social Security and Medicare taxes. To make matters worse, as an independent contractor, no federal or state income tax was withheld, leaving the independent contractor with a sometimes unexpected tax liability.

Classifying a worker as an employee or independent contractor is not discretionary for the employer. The employer must follow federal guidelines when making the determination. Basically, it boils down to whether the employer has direction and control over the individual, which includes, among other guidelines, specifying working hours, how to perform the work tasks, the right to fire, etc. If the employer does have direction and control, the individual is probably an employee. (For more details on the guidelines, visit our prior post “Independent Contractors – how to classify workers.”)

If you have been treated as an independent contractor and think that you are really an employee, you do have recourse. You can file Form 8919. If the IRS agrees with you, you only have to pay the employee share of FICA/Medicare not the self-employment tax. You still have to pay the income tax. The filing will make life miserable for your presumably former “employer,” so it might turn into a bridge-burning exercise.
If you have questions, wish to explore alternatives, or need assistance filing Form 8919, please give this office a call.

To assist those most in need, a six-month grace period on failure-to-pay penalties will be made available to certain wage earners and self-employed individuals. The request for an extension of time to pay will result in relief from the failure to pay penalty for tax year 2011 only if the tax, interest, and any other penalties are fully paid by October 15, 2012.

The penalty relief will be available to two categories of taxpayers:

• Wage earners who have been unemployed at least 30 consecutive days during 2011 or in 2012 up to the April 17 deadline for filing a federal tax return this year.

• Self-employed individuals who experienced a 25 percent or greater reduction in business income in 2011 due to the economy.

This penalty relief is subject to income limits. A taxpayer’s income must not exceed $200,000 if he or she files as married filing jointly or must not exceed $100,000 if he or she files as single or head of household. This penalty relief is also restricted to taxpayers whose calendar year 2011 balance due does not exceed $50,000.

Taxpayers meeting the eligibility criteria will need to request the penalty relief by filing the new Form 1127A on or before the April 17th deadline. Form 1127A is not to be attached to the income tax return, but is filed separately. CAUTION: Form 1127-A does not extend the time to file your 2011 income tax return. To get an extension of time to file, you must file Form 4868, Application for Automatic Extension of Time to File U.S. Individual Income Tax Return.

The failure-to-pay penalty is generally half of 1 percent per month with an upper limit of 25 percent. Under this new relief, taxpayers can avoid that penalty until October 15, 2012, which is six months beyond this year’s filing deadline. However, the IRS is still legally required to charge interest on unpaid back taxes and does not have the authority to waive this charge, which is currently 3 percent on an annual basis.

If you have questions related to deferring your tax payment until October and the financial implications of doing so, please give this office a call.

The IRS is struggling just like the rest of us to carry out its mission with limited resources. Back in 2003, they audited just one out of every 203 returns. By 2010, that number was up to one out of 90. To stretch that audit budget even further, they’re auditing more and more taxpayers by mail. But one study shows that 10% of IRS mail never gets where it’s supposed to go, and 27% of those who do get their mail don’t even realize they’re actually being audited! Naturally, that leads to more and more of the paperwork screwups that every taxpayer fears.

Enter Nina Olson. She’s the IRS’s first and only Taxpayer Advocate, a position created by the 1998 “Taxpayer Bill of Rights” act. She supervises the Taxpayer Advocate Service, a nationwide group of 2,000 caseworkers who specialize in cutting through red tape and greasing the wheels of the great gummy IRS machine. If the IRS sends your mail to the wrong address, slaps you with a lien after you’ve already paid your bill, or just makes a mistake they can’t seem to fix, Olson’s office is the one we’ll call.

Last month, Olson delivered a presentation to the Federal Bar Association on how “the 99%” experience the tax system. And the picture she painted makes a tent in lower Manhattan Park look like a room at the Ritz. One in three taxpayers who call the Service don’t get an answer. Only half of those who write hear back within six weeks. The IRS is relying on computers instead of people to audit all but the highest-income taxpayers. And perhaps most curious of all, she says, “we’re getting to a situation where the only people who get face-to-face audits are the 1%”!

Now, correct us if we’re wrong, but do you really consider face time with an IRS auditor a “privilege”? We all know that at least some level of government is necessary. But there are just some parts you don’t want to see up close and in person. Like the “Level 4″ Biolab at the Atlanta Centers for Disease Control, for example, where we store the Ebola virus, Crimean-Congo hemorrhagic fever, and other superbugs we can’t risk having out on the loose. Or the “Supermax” penitentiary in Florence, Colorado, where we “store” the most dangerous felons we can’t risk having out on the loose. Or the inside of any IRS Service Center!

Does Olson’s “1%” comment conjure up images of plush IRS offices, with thick oriental carpets and rich leather upholstery, staffed by discreet, white-gloved concierges sitting at granite-topped desks? We can assure you that when it comes to getting audited, even the 1% have to settle for the same government-issue linoleum floors, metal chairs, and battleship gray desks as everyone else. (And really, in the unlikely event you are audited, we probably won’t let you go with us anyway! Trust us — it’s for your own protection.)

We talk about how proactive planning cuts your tax bill, but paying less tax isn’t the only perk of a good tax plan. Did you know that smart tax planning can also cut your audit risk? In fact, some strategies — like choosing certain business entities — can cut that risk by as much as 90%. So call us if you think face time with an auditor is a “privilege” you can do without!

In addition, the April 17, 2012 deadline also applies to the following:

• Tax year 2011 balance-due payments – Taxpayers that are filing extensions are cautioned that the filing extension is an extension to file, NOT an extension to pay a balance due. Late payment penalties and interest will be assessed on any balance due, even for returns on extension. Taxpayers anticipating a balance due will need to estimate this amount and include their payment with the extension request.

• Tax year 2011 contributions to a Roth or traditional IRA – April 17 is the last day contributions for 2011 can be made to either a Roth or traditional IRA, even if an extension is filed.

• Individual estimated tax payments for the first quarter of 2012 – Taxpayers, especially those who have filed for an extension, are cautioned that the first installment of the 2012 estimated taxes are due on April 17. If you are on extension and anticipate a refund, all or a portion of the refund can be allocated to this quarter’s payment on the final return when it is filed at a later date. Please call this office for any questions.

• Individual refund claims for tax year 2008 – The regular three-year statute of limitations expires on April 17 for the 2008 tax return. Thus, no refund will be granted for a 2008 original or amended return that is filed after April 17. Caution: The statute does not apply to balances due for unfiled 2008 returns.

If this office is holding up the completion of your returns because of missing information, please forward that information as quickly as possible in order to meet the April 17 deadline. Keep in mind that the last week of tax season is very hectic, and your returns may not be completed if you wait until the last minute. If it is apparent that the information will not be available in time for the April 17 deadline, then let the office know right away so that an extension request, and estimate tax vouchers if needed, may be prepared.

If your returns have not yet been filed, please call right away so that we can schedule an appointment and/or file an extension if necessary.

Quid pro quo contributions typically include the purchase of tickets for sightseeing tours, all-expense-paid trips, theatrical or concert performances, books or subscriptions to magazines, stationery, candy, etc., and are sold with a generous mark-up that is designed to help the charity in performing its functions. In these cases, the charitable deduction is the excess of the payment over the value received by the purchaser-contributor. For instance, when tickets to a show are purchased from a charity at a price in excess of the normal admission charge, the excess over the latter (plus tax) is a charitable contribution.

Determining and documenting the amount of the purchase that represents the charitable portion is the key to being able to take a charitable tax deduction for quid pro quo purchases. Tax law requires charitable organizations that receive a quid pro quo contribution in excess of $75 to provide a written statement, in connection with soliciting or receiving the contribution, that informs the donor that the amount of the contribution that is deductible for federal income tax purposes is limited to the amount of the purchase that is in excess of the value of the property or service purchased and a good-faith estimate of the value of the good or services purchased.

Example #1—A taxpayer purchases a cookbook from a charity for $100. The charity provides the taxpayer with a good faith estimate of $20 for the value of the book in a written disclosure statement. Thus, the taxpayer’s charitable deduction is $80 ($100 minus the $20 value of the book).

Example #2—A taxpayer attends a charity auction. The charity provides a catalog of the items for auction and a good-faith estimate of the value of each item. The taxpayer is the successful bidder for a vase valued at $100 in the catalog, for which the taxpayer bid and paid $500. The taxpayer’s charitable deduction is $400 ($500 minus the good-faith valuation of $100).

Example #3—A taxpayer pays $40 to see a special showing of a movie for the benefit of a qualified charity. The ticket read “Contribution $40”. If the regular price for the movie is $10, the contribution would be $30 ($40 minus the regular $10 ticket price).

If you made or are considering making a quid pro quo purchase from a charitable organization and have questions relating to the amount that will represent a charitable contribution, please give this office a call.