US expats urge government to move to residence-based taxation. Link at: http://www.aca.ch/residencetaxproposalapril2012.pdf
Expats Urge Tax Reform
May 3rd, 2012Tax Relief Act of 2010: Benefits for Individuals
February 2nd, 2011By Daniel D. Kopman
Kopman Law Advisors | (949) 209-8936
1278 Glenneyre #402
Laguna Beach, CA 92651
www.kopmanlaw.com
Many individuals entered 2010 uncertain over the fate of federal tax incentives scheduled to expire at year-end. On December 17, President Obama signed the Tax Relief, Unemployment insurance Reauthorization and Job Creation Act of 2010 (H.R. 4853) after passage by the Senate on December 15 and the House on December 16. The new law extends, renews or enhances a large number of individual tax incentives, among the most far reaching being reduced individual income tax rates and an across-the board payroll tax cut for 2011. This letter highlights the key individual tax incentives in the new law. As always, please contact our office for more details.
Individual tax rates. Reduced individual tax rates put in place in 2001 were scheduled to expire after 2010. The new law extends the reduced rates for two years. The current rate brackets (10, 15, 25, 28, 33 and 35 percent) remain unchanged for 2011 and 2012. The new law also extends full repeal of the itemized deduction limitation and full repeal of the personal exemption phase-out, both scheduled to expire after 2010, for two years.
The extension of the reduced individual tax rates is significant. If the old rates had returned, the top two rates would have jumped from 33 and 35 percent to 36 and 39.6 percent, respectively. The current 10 percent rate would have disappeared. Additionally, marriage penalty relief in the form of an expanded 15 percent rate bracket would also have expired.
AMT relief. Along with extending these rate cuts, the new law targets relief to taxpayers facing the alternative minimum tax (AMT). Because the AMT is not indexed for inflation, and for other reasons, the tax steadily encroaches on middle income taxpayers. The new law stops this encroachment by giving individuals higher exemption amounts and providing other targeted relief. The reach of the AMT often surprises individuals. While the provisions in the new law are helpful, it is also important to plan strategically for the AMT. Unlike the income tax rates, the higher AMT exemption had already expired at the end of 2009 before the new law stepped in to save it. Its two-year extension, therefore, expires earlier, at the end of 2011.
Payroll tax cut. Social Security is financed through a dedicated payroll tax. Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $106,800 (in 2010 and 2011), while self-employed individuals pay 12.4 percent. Effective for calendar year 2010, the new law reduces the employee-share from 6.2 percent to 4.2 percent up to the taxable maximum. The employer-share remains unchanged. Self-employed individuals will pay 10.4 percent on self-employment income up to the taxable maximum. The reduction has no effect on an individual’s future Social Security benefits.
Let’s look at an example.
Tyler, who is single, earns $106,800 (the maximum taxable wage). For 2011, the new law reduces Tyler’s share of Social Security taxes on his earnings to 4.2 percent. Tyler will see $2,136 in savings for 2011.
The payroll tax cut replaces the Making Work Pay credit, which temporarily reduced income tax withholding in 2009 and 2010. The Making Work Pay credit phased-out for higher-income individuals. The payroll tax cut is across-the-board (up to the taxable maximum of $106,800).
Shortly after the new law was passed, the IRS instructed employers to start reducing the amount of Social Security tax withheld as soon as possible in 2011 but no later than January 31, 2011. For any Social Security tax over-withheld in January, employers should make an offsetting adjustment in an individual’s pay no later than March 31, 2011.
The payroll tax cut opens up some tax planning opportunities for individuals. The savings could be contributed to an IRA or another retirement savings vehicle, thereby compounding available tax benefits. The savings also could be used to help fund a Coverdell education savings account. Please contact our office for details.
Capital gains/dividends. In 2003, Congress set new maximum tax rates for qualified capital gains and dividends but, like the individual rate cuts, these taxpayer-friendly rates were temporary. For 2010, the maximum tax rate is 15 percent (zero percent for individuals in the 10 and 15 percent tax brackets). The new law extends these rates for two years, through December 31, 2012. In a related development, the new law extends the temporary 100 percent exclusion of gain on certain small business stock.
Child tax credit. Many individuals enjoy the benefit of the $1,000 per child tax credit. Without the new law, the child tax credit would have dropped to $500 for 2011. The new law extends the $1,000 credit and keeps the refundability threshold at $3,000 for 2011 and 2012. In related developments, the new law also extends some enhancements to the earned income tax credit and the adoption credit for two years.
Estate tax. Under the new law, the federal estate tax will again apply to the estates of decedents dying after December 31, 2009 and before January 1, 2013. The new law sets a maximum estate tax rate of 35 percent with a $5 million exclusion ($10 million for married couples). Additionally, executors of estates of individuals who died in 2010 can elect out of the estate tax (and apply modified carryover basis rules) or can elect to have the estate tax apply. This election, and many of the other estate tax provisions in the new law, is very technical. Besides the estate tax, there are provisions in the new law extending and modifying the federal gift tax and the federal generation skipping transfer (GST) tax. Please contact our office so we can discuss how these changes will affect your estate planning.
Education. A variety of tax incentives are available to help save for and finance education costs. Like so many incentives~ they are temporary. The new law extends some of the most popular education tax incentives. They include:
• American Opportunity Tax Credit
• Higher education tuition deduction
• Student loan interest deduction
• Exclusion for employer-provided educational assistance
• Enhancements to Coverdell education savings accounts
• Special rules for certain scholarships
The education incentives in the Tax Code are among the most complex. Often, taxpayers will mistakenly believe they cannot claim more than one or they may inadvertently claim ones they should not. Our office can help you sort through the complexity of the federal education tax incentives.
Energy. Individuals who made some energy-efficient improvements in 2009 or 2010 may have benefitted from a special tax break. This tax incentive rewarded individuals who installed energy-efficient windows, doors, furnaces, and other items in their homes. The credit, while very valuable, was also very complex. The new law extends the credit but also adds to the complexity by reinstating rules for the credit in place before 2009. The complexity is certain to confuse taxpayers. Please contact our office if you are planning to install new windows, doors, heating or cooling systems or other energy-efficient items so you do not miss out on this tax break.
More incentives. The new law extends many valuable but temporary tax incentives for individuals. They include the state and local sales tax deduction, the teacher’s classroom expense deduction, and special rules for individuals who contribute IRA proceeds to charity. Keep in mind that not all of the expired temporary individual tax incentives were extended. Among the incentives not extended are the additional standard deduction for real property taxes, the $2,400 exclusion for unemployment benefits, the first-time homebuyer tax credit, COBRA premium assistance, and some others. If you have any questions about which incentives were extended, please contact our office.
The new law provides many options for tax planning for 2011, 2012 and beyond. Please contact our office and we can discuss how you can maximize your tax savings.
By Daniel D. Kopman
Kopman Law Advisors | (949) 209-8936
1278 Glenneyre, Suite 402
Laguna Beach, CA 92651
www.kopmanlaw.com
2010 Estate Tax Retroactivity Still in Question
October 27th, 2010By Daniel D. Kopman, Esq. CPA
There is bantering in parlors everywhere about whether Congress can and will impose the federal estate tax retroactively for 2010, thus taxing many estates such as the behemoth Steinbrenner estate in connection with decedents dying in 2010. The temptation to recover otherwise lost tax revenue is great.
The issue arises out of what many view as a lack of foresight and cogent consideration by Congress at the time EGTTRA was passed early in the prior decade. A number of estate fiduciaries now are on tenterhooks awaiting guidance. Similarly, the uncertainty which persists places estate tax advisors in the unenviable position of shoulder shrugging when clients broach the issue. While many would consider retroactivity unfair and others would see it as downright un-American, precedent from our third branch of federal government portends a contrary view.
In United States v. Carlton 512 U.S. 26 (1994), a decision free of dissent, held that a law restricting a statutory estate tax deduction for sales or stock to a company Employee Stock Ownership Plan (ESOP) was indeed constitutional even through it applied to decedents dying before the law’s enactment. As adopted in 1986, 26 U.S.C. 2057 authorized an estate tax deduction for half of the proceeds of the sale of certain securities by an estate executor to an ESOP.
Late in 1986, Carlton acting as an estate executor purchased shares in a corporation and then sold them to a company’s ESOP at a loss, thereby claiming a large Section 2057 deduction on his estate tax return. Subsequently, in December 1987, Section 2057 was amended to provide that eligibility for the deduction required that securities sold to the ESOP, of necessity, must have been owned by the decedent immediately before death. The Internal Revenue Service (IRS) denied Carlton’s Section 2057 deduction.
In a judicial challenge, the District Court sided with the IRS, maintaining that retroactive application of the law to Carlton’s decedent passed constitutional muster as it did not violate due process under the Fifth Amendment to the Constitution. The Court of Appeals reversed the decision of the District Court, holding, inter alia, that Carlton had reasonably relied to his detriment on pre-amendment law and, thus, disallowing his deduction based upon a subsequently enacted law failed to comport with due process and traditional notions of fair play.
Reversing the decision of the Court of Appeals, the Supreme Court found that retroactive application of the estate tax deduction required merely a showing that the need for the enactment was supported by legitimate legislative purpose furthered by rational means. As a first year Con-law student knows, these words mean liberality and deference to the legislative branch and, accordingly, when uttered by the Supreme Court, they are the death knell to any constitutional challenge.
An argument against retroactivity which depends for its reasoning upon distinguishing Carlton’s retroactive disallowance of an estate tax deduction, on the one hand, and retroactive application of the entire federal estate tax system in 2010, on the other, would likely fall on deaf judicial ears. Moreover, the precedential value of a pre-depression era 1928 Supreme Court case, Untermeyer v. Anderson, 276 U.S. 440 (1928) – in which the Court’s ruling effectively set aside a retroactive gift tax- may be viewed as a bit of an anachronism now when, politics aside, our central government and the states alike, appear hell bent on grabbing for dollars to cover the gargantuan and logarithmically expanding deficits.
Daniel D. Kopman is a real estate, tax, business and inheritance law attorney with offices located at 1278 Glenneyre Suite 402 Laguna beach, CA 92651. Tel: (949) 209-8936 Email: dkopman@kopmanlaw.com. Web address: www.kopmanlaw.com. Mr. Kopman formerly practiced in the middle 1980’s as a certified public accountant with two international big eight accounting firms. Important: See Disclaimer below.
The information provided herein is not intended to create any attorney client relationship with the recipient. The reader should not consider or rely upon the information contained in this newsletter as advisory in connection with any transaction or matter. As legal matters are factually specific, one should always consult with their legal counsel in their state or territory before pursuing any particular legal course of action.
By Daniel D. Kopman
Kopman Law Advisors | (949) 209-8936
1278 Glenneyre, Suite 402
Laguna Beach, CA 92651
www.kopmanlaw.com
Billionaires at Odds Over Tax Increases | Strange Days Indeed
October 13th, 2010Billionaires at Odds Over Tax Increases | Strange Days Indeed
By Daniel D. Kopman, Esq. CPA
In a Kafkaesque moment in history, Billionaires, including those in the Forbes 400, are strongly at loggerheads over proposed tax increases. Evidence of this phenomenon is seen in a triad of tax issues; the continuance of estate taxes, income tax rates for the wealthy, and whether hedge fund managers’ income should be taxed at 15% or 35% for federal income tax purposes.
Let’s focus on the first two issues. Illustrative of this phenomenon are competing $100,000 gifts made by each of by Microsoft CEO, Steve Balmer and Amazon creator, Jeff Bezos, on the one hand, and Bill Gates Senior, on the other. Gates Sr., an prominent attorney in his own right, and father of Microsoft Founder, Bill Gates, contributed one half million dollars to support ballot initiative 1098, which imposes a tax equivalent to 5% on couples with incomes over $400,000 as well as a millionaire’s tax in the form of a 9% levy on income in excess of one million dollars. With their gifts, Balmer and Bezos vow to oppose measure 1098.
Stalwarts, including David Koch and the Mars family, have for some time lent their financial support and imprimatur to lobbyists and activists seeking to put an end to the estate tax once and for all which, given their wealth and number of progeny, is not a bit shocking. But consider the fact that by contrast, many more from the ranks of the wealthy continue to support current estate tax proposals or even more aggressive ones. The list of tax hawk proponents includes the likes of Oracle of Omaha, Warren Buffet. Forbes recently reported that hedge fund billionaire Julian Robertson recently stated that the fairest way to get more tax revenue to close the deficit is “to tax the least deserving recipients of wealth, which are the inheritors.”
Among those who have signed a Responsible Wealth project statement pleading for the estate tax to be preserved are names that might surprise one, including George Soros, Ted Turner and the several issue of David Rockefeller. Indeed, for whatever reason, the number on the list of “redsitributionists” seems to be on the uptick.
Indeed, vigilant tax avoidance billionaire-advocates like Tom Golisano, of Paychex fame, persist. After three failed attempts at a run for Governor of New York and, following subsequent increases in the top tier New York income tax rate, Golisano finally pulled up stakes, moving his residence to the tax-free State of Florida.
Interesting stuff, but why the persistent rift in views over taxation? It could be proof that the wealthy are not really members of the good ol’ boys club espousing the evils of taxation as a mantra, as thought by many. Perhaps it is that at such perilous time in the history of America, with deficits and unemployment rates soaring, personal philosophy, patriotism and moral imperatives are taking precedence, at least for some billionaires, over greed and avarice? Who can tell?
By Daniel D. Kopman
Kopman Law Advisors
1278 Glenneyre, Suite 402
Laguna Beach, CA 92651
www.kopmanlaw.com
Small Business Jobs Act Is Now Law With President’s Signature
September 30th, 2010The Small Business Jobs Act became controlling law on September 27, 2010, upon receiving Presidential imprimatur. Formally known as the Small Business Jobs Act of 2010 (H.R. 5297), the Bill was approved and sent to the President for signature on September 23, 2010. The House approval stats. – 237 to 187. By way of background, the Bill previously cleared the Senate by a 61 to 38 margin on September 16, 2010, and this Act resulted from months of congressional negotiation and sometimes hot debate.
In titular terms, the moniker “Small Business” is somewhat of a misnomer. As widely expected, the Bill is chock-a-block full of provisions benefitting the largest of public and privately held corporations alike. As implied by its name, the centerpiece provisions of the Bill are general business incentives which include, without limitation, the following:
• 100% gain exclusion for qualified small business stock;
• Shortening of the holding period requirements subjecting Sub-S corporations and their shareholders to the existing Built In Gains (BIG) tax to 5 years;
• The carryback period for eligible small business credits is pushed out to five years;
• Code Section 179 expensing election limits are doubled;
• Extension of 50% bonus depreciation. Under prior legislation, Congress permitted businesses to deduct a portion of their capital acquisition expenditures for most new tangible personal property, and certain other new property, which it placed in service in 2008 or 2009 (or 2010 for certain property), by facilitating a first-year write-off of one half of the cost. The Act extends this first-year 50% write-off for qualifying property placed in service in 2010 (2011 for certain property). The Act also increases the expensing limits in 2010 and 2011, and allows expensing of a portion of the costs for certain real property (i.e., qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property);
• Cell phones will no longer be considered Listed Property for cost recovery purposes;
• Deductions for start-up businesses are enhanced;
• A self-employment tax deduction is available for 2010 health insurance costs;
• The penalty rules under Section 6707A for failure to disclose participation in certain tax shelters have been clarified and rendered more readily calculable which may result in considerably lower penalties for some taxpayers. The new law applies to 6707A penalties assessed after December 31, 2006.
Retirement – Tax Deferral Related Provisions
The Act provides a considerable level of new flexibility to participants in dealing with retirement plans. Certain participants’ balances in 401(k), 403(b) and 457(b) plans will be eligible for rollover into a designated Roth account within their plans. Moreover, certain participants in 457(b) state and local government plans (excluding non-profit entity plans) will be eligible for deferrals into Roth accounts similarly as participants in 401(k) and 403(k) plans are eligible under pre-existing law. New annuity provisions permit certain owners of non-qualified annuities (meaning owners of contracts are owned outside of an IRA or qualified plan) to enjoy an option to fractionalize their annuity contract in a manner so as to disaggregate the annuity payment stream from the contract balance, which provides for some interesting tax planning opportunities. This change applies to annuity payments received in tax years commencing on or after January 1, 2011.
Tax Revenue Impact
The Revenue impact of many provisions of the Act means foregone dollars in the public fisk, projected to range in the tens of billions of dollars in the near term. While, in this writer’s opinion, such amounts are inestimable within any degree of precision, an equal opaqueness surrounds whether the objective of economic stimulus which inspired the Act will be achieved. Enthusiasts of economic recovery are depending upon it. Bear in mind that at least some of the new provisions are projected by the Joint Committee of Taxation to provide increased tax revenues such as the retirement savings provisions and limitations on eligibility for cellulosic biofuel producer credit.
In summary, the foregoing provisions of the new Act and many not referenced in this blog will provide tax planning opportunities for small and large businesses alike, at a time when they may be more necessary than merely welcome. Readers are encouraged to consult with their tax advisors for more details.
Daniel D. Kopman is a real estate, tax law, business law and inheritance attorney at 1728 Glenneyre, Suite 402, Laguna Beach, CA 92651. Tel: (949) 209-8936 Email: dkopman@kopmanlaw.com. Web Address: www.kopmanlaw.com. In the mid 1980’s, Mr. Kopman formerly practiced as a certified public accountant with two international big eight accounting firms. Important: See Disclaimer below.
Disclaimer
The information provided herein is not intended to create any attorney client relationship with the recipient. The reader should not consider or rely upon the information contained in this newsletter as advisory in connection with any transaction or matter. As legal matters are factually specific, one should always consult with their legal counsel in their state or territory before pursuing any particular legal course of action.
The Low Down on Short Sales You Know the Good: What About the Bad and Ugly?
September 14th, 2010By Daniel D. Kopman Esq. CPA
We all know that most short sales of real estate in Southern California fail to come to fruition.
Most often, the failed transactions lead to frustrated buyers ultimately deciding to move on to the next deal, real estate agents wasting inordinate amounts of time without recompense, and sellers who cannot avoid foreclosure proceedings, bankruptcy and eviction. The property which is at issue then subsequently surfaces as a REO listing.
There are a number of factors which conspire to bring about this result. These factors, while not an exhaustive list, include financial institutions with mitigation departments which are poorly staffed, typified by high turnover and bureaucracy to the point of decision paralysis. Under-water unmotivated holders of second, third and even fourth deeds of trust are in the picture. They risk having their interest partially or totally wiped out. Indeed, they may believe they have little reason to cooperate. Short sale target properties, by reason of what brought them to such a state in the first place, are also often plagued with income tax liens and property tax arrearages,
all of which must be paid off by someone or, alternatively, discharged before escrow can be closed. Such encumbrances are often deal killers but, as discussed below, they needn’t be.
Other problems include an expanding cast of characters, including folks calling themselves “short sale” specialists, who purport to work with sellers’ agents in exchange for a portion of the listing agent’s commission. Agents faced with the prospect of sharing commissions which are often already lower than commissions than they would receive in arms- length transactions, maybe less motivated to invest the time and energy needed to get the project completed. This is classic human behavior. If good at their job, short sale specialists are sherpas – key players in making the sale happen. The “specialist” title here is self-anointed, lacking in formal licensing or credentialing separate and apart from a general real estate agent’s license. For every skilled specialist, there are probably four or five others who are largely clueless about the whole process or are simply ill equipped to be helpful for a variety of reasons. For many specialists who purport to know what they are doing, they are poorly equipped and understaffed to handle the volume of cases they undertake. This is because the short sale specialists’ game is decidedly low-margin and high-turnover.
Other problems include sellers with their own agenda who unethically utilize the process to drag out their free living arrangements and who may otherwise be lacking in full commitment to the task of completing the sale. Others hope to hold out for side deals with one eye continuously looking to the door for another buyer to walk in and who may be willing to sweeten the deal by paying the seller a tidily greater sum of cash simply as impetus to complete the transaction and vacate the property. Once in contract some sellers feign false reasons to cancel escrows thusly torpedoing deals at their fiat should another buyer come along who is ready and willing to pay a larger bounty.
Aside from the ethical issues plaguing short sales, one of the largest problems in completing these transactions is the juggling of authorizations and clearances from lending institutions bearing different expiration dates and, of course, partially or completely non-responsive lenders. The transactions with the greatest probability of success are those in which the deal has been pre-negotiated with all mortgagees and lienors, including commissions and all transaction fees,
before the properly is listed on the multiple listing service and where the listing price properly reflects that value. OK, so most of us are aware of the foregoing factors. But how can one stack the odds in favor of completing a short sale. First, education of the buyer and seller on the process and counseling in patience and flexibility is important. Too many deals falter simply because the short term expectations of the bargaining parties are not satisfied. But also due to the overwhelming conflicts of interest which exist or can come into play during negotiations and escrow, one would be ill-advised to maintain dual agent representation. Each of buyer and seller are best independently represented.
Second, it is crucial to investigate the background of the short sale specialist with whom you plan to work. Query numerous agents in your market for referrals and, importantly, follow up assiduously with those referrals. While somewhat anomalous, if the listing agent is willing to invest significant ramp up time, it may be possible to complete the transaction without a specialist. I lean toward using one, however, with the important caveat that a qualified and experienced specialist is crucial to success. Proactivity by both agents is essential. The specialist should be authorized and instructed to be candid and open with both agents on procedural matters and not withhold important information and developments. Disclosure agreements with the parties may be useful or important to obtain. Agents themselves have to remain abreast of the status of the transactions at all times, right down to expunging the last encumbrance on the property. This can be time consuming, but the standard of care applying to real estate professionals and fiduciaries commands as much.
The buyer should consider offering the seller an incentive to vacate the property at the close of escrow. I am aware of short sales in which escrow closed with the seller still in possession. This is a huge mistake. The buyer effectively purchased a home and, along with it, an unlawful detainer lawsuit. Come to terms on a small financial carrot to entice seller to vacate. The dangling fruit is not paid until the buyer confirms with escrow that he or she is in possession of the property post-escrow closure. This amount should not be so large as to have the appearance of conspiring to pay seller money a la carte. Compromising banks will undoubtedly request a written confirmation to the contrary. The sale of personal property and an ancillary personal property sales contract, if reasonable in amount, would likely support a payment made in good faith, if above board. If possible, obtaining approval by seller’s secured lenders is advisable.
If seeking to buy property for sums which are under fair market value, impatient buyers with weak stomachs would best be served looking at REO properties instead of short sales. However, a well priced short sale may offer a far better opportunity to purchase property at deeper discounts to market value. If well orchestrated, a short sale can yield a nice bargain or even a windfall. If you are seeking out short sales for investment purposes, consider having more than one in the works simultaneously to improve the odds of completing at least one. A contingency clause must be carefully drafted to avoid exposure to a breach of contract lawsuit if joint, or even multiple deals come through contemporaneously.
Knowledge is referent power. Know what is happening with the bank by selecting a quality specialist and keep the client informed and counseled. Avoid double ending short sales. Listing agents should inform clients who may be inclined to shop for buyers who will pay them more cash on the side, of the legal and ethical problems of doing so once in contract. Buyers should be on alert for sellers who may be predisposed to back out with little to no warning when another good thing comes along. Once in contract, a seller trying to back out under false pretenses would be advised to consider that they may be faced with a lawsuit and recordation of a notice of pendency of proceeding, or lis pendens, against the property which is likely a seller’s one-way ticket to foreclosure or bankruptcy.
Check title early and often. Negotiations should commence immediately on eliminating income tax liens. If the seller holds no equity in the property, the IRS and Franchise Tax Board may be inclined to release liens. However, this process takes time. Failure to commence the process early can cause the clock to run out on the letters of approval the banks provide, which nearly always have short expiration dates anyway and must be continually renegotiated.
Separate and apart from the implicit financial advantages of short sales and, while they are challenging, they can be an intrinsically rewarding experience.
Daniel D. Kopman is a real estate, business law and inheritance attorney at 1278 Glenneyre Suite 402, Laguna Beach, California 92660. Tel: (949) 209-8936 Email: dkopman@kopmanlaw.com. Web Address: www.kopmanlaw.com. In the mid 1980’s, Mr. Kopman formerly practiced as a certified public accountant with an international big five accounting firm.
The information provided herein is not intended to create any attorney client relationship with the recipient. The reader should not consider or rely upon the information contained in this newsletter as advisory in connection with any transaction or matter. As legal matters are factually specific, one should always consult with their legal counsel before pursuing any
particular legal course of action.
