Alternative Minimum Tax Explained
May 18, 2012 4:59 pmBy Matthew Campione, Principal of SmolenPlevy and Contributing Writer for Forbes.com
Article originally published on Forbes.com.
About this time next year, many taxpayers will be just getting over the shock of paying perhaps thousands of dollars and more in 2012 income taxes because of the Alternative Minimum Tax (AMT). The amount of additional tax and number of taxpayers affected, will substantially increase if Congress does not increase the 2012 AMT exemptions as it has done for prior years. I know eyes glaze over when people hear AMT, but it is fairly simple to explain.
Picture the USA and a parallel universe: AMTUSA. Actually, I will make it simpler than this. Federal income tax law requires taxpayers to calculate income tax liability under one set of rules and then calculate income tax liability under another set of rules, AMT. The taxpayer is then required to pay the higher of the two results. So really it is parallel rules in the same universe.
The expressed purpose of AMT is to limit taxpayers from reaping too much benefit under the regular income tax law. For purposes of AMT various deductions, exemption, income exclusions and credits for regular income tax purposes are eliminated or reduced in calculating tax under AMT. AMT also has its own tax brackets; for individuals, AMT taxable income up to $175,000 is taxed at a 26% rate and AMT taxable income in excess of $175,000 is taxed at a 28% rate. However, many feel AMT as currently configured does not fulfill its expressed purpose because it usually affects mostly middle and upper middle income taxpayers. In short, the explanation for AMT has nothing to do with how it actually works. So, again, AMT is simply a parallel set of rules (in the same universe) that usually affects middle and upper middle income taxpayers. Are you with me so far?
Many individual taxpayers have higher income tax liability under AMT because state income taxes and property taxes are not allowed as deductions for AMT. Some legislators have suggested the elimination of state income tax and property tax deductions for regular tax purposes. This would make the regular tax more like AMT. This could lead to one set of income tax rules with regular tax liability more like the tax liability under AMT. So we could end up with only one set of income tax rules in the same universe.
Admittedly, the above explanation is an oversimplification of AMT. Taxpayers should know their specific tax footprint and be aware of the AMT adjustments that are applicable to their situation. If there is potential for significant AMT tax liability you should (have your accountant, or tax attorney) run projections of AMT and regular tax liability. Through tax planning items of income and deduction can be eliminated or reduced, or accelerated or deferred between tax years to reduce overall tax liability.
So why do taxpayers like Warren Buffett and Mitt Romney not pay additional tax under AMT? This is because preferential income like qualified dividends and capital gain are subject to the same preferential rate of 15% for AMT as well as for regular tax. This seems to be inconsistent with the expressed purpose of AMT. The Buffet Tax, witch did not make its way out of the Senate, would have required wealthy taxpayers with substantial preferential income to pay more tax. Does this mean the rich are in a different world for tax purposes as compared to the rest of the population?
Jason Smolen Spotlighted in Yahoo! Finance Article
May 17, 2012 9:43 pmHalf of Americans With Kids Set to Die Without a Will
By Lisa Scherzer | The Exchange – Sun, May 6, 2012 3:31 PM EDT
If you died tomorrow, who would inherit your assets? Your house? Your Snapfish albums?
If you’re like half of American adults with children, you haven’t made a will and therefore — legally speaking — haven’t answered these questions.
A survey from RocketLawyer.com, a legal services web site, last month found that 50% of Americans with children do not have a will. Even more alarming, 41% of baby boomers (age 55-64) don’t have one. The top three reasons cited by survey respondents for not having a will: procrastination, a belief that they don’t need one and cost.
[Related: How Long Will You Live, Exactly? Ask the Calculator.]
So what happens if you die without a will (known as dying “intestate”)? The state will decide how your property is distributed. “You don’t want the default to be what the state law is — sometimes it could work out in your favor, but sometimes it can’t,” says Jason Smolen, an estate planning lawyer and founding principal of SmolenPlevy.
Shifts in demographic patterns are making estate plans even more critical. As the survey notes, in the past five years the number of unmarried couples has jumped, according to the National Marriage Project. Throw a child into the mix and the surviving partner doesn’t get the same protections that are default under law for a married couple.
Don’t forget your ‘digital estate’
And no doubt you’ve heard about the digital afterlife. According to the RocketLawyer survey, 63% of respondents don’t know what happens to their digital assets when they die. Traditional estate planning doesn’t take into account this emerging class of assets — and it’s not just thinking about what you want to happen to your Facebook page or Match.com profile.
Your survivors may not even be aware of the extent of your online presence. Consider your online bank accounts, email accounts, iPod and all its music, blogs, photo albums, YouTube account, eBay account, PayPal account, e-book collection, Gilt Group subscription…you get the picture. Even your U.S. savings bonds are online.
Most popular online account services like Facebook, Gmail, LinkedIn and Twitter have developed deceased-user policies, which provide the family or executor of the deceased user with information about what’s required to access the account.
“This is a problem most people don’t know they have,” says Smolen. His advice? Make a list of your accounts and passwords and print it out. His firm is in the process of setting up an online service for their clients to catalog their digital assets, as are others. Both RocketLawyer and LegalZoom have introduced services to address this rising need, allowing consumers to create a trust to manage their digital assets.
How to create a will: a primer
– List your significant assets, financial advisors, retirement plans, divorce papers, premarital agreements, and any other such documents.
– Gather employment benefits statements, life insurance policies, deeds to real property, partnership and business agreements and the last two years of income tax returns.
– If you’re married, each spouse makes a separate will.
– Decide who will inherit your property. After you make your first choices, choose alternate beneficiaries, too, in case your first choices don’t survive you.
– Choose an executor to handle your estate. Every will must name someone to serve as executor, to carry out the terms of the will. Be sure to let that person know you want them to serve as the executor so it’s not a surprise.
– Identify a guardian for your children. If your children are under 18, decide who you want to raise them in the event that you and their other parent can’t. You should also pick someone who can manage your children’s property.
– Identify other decision makers to carry out your health & money choices for you if you’re incapacitated.
– With that information, you can create a will online (there are plenty of online options and tips), or hire an estate planning attorney to help you (they can charge hourly rates of $100 to $500 or more).
Source: National Association of Estate Planners and Councils
Quantitative Easing, Only In America
May 8, 2012 3:06 pmBy Matthew Campione, Principal of SmolenPlevy and Contributing Writer for Forbes.com
Article originally published on Forbes.com.
Suppose the United States started printing money to cover costs instead of borrowing. This would be a way to alleviate deficit and debt ceiling problems. Better yet, taxes would not have to be raised and budgets would not need to be cut. In theory, the problem would be that the value of our currency would go down. It would take more money to buy things and the value of US treasuries would go down because debt obligations can be paid off with cheaper dollars. Clearly, we would view other nations negatively if they tried to do this. But for the United States, it may be a question of degree and how it is presented. Enter Quantitative Easing.
From December 2008 to the end of last year, total US debt increased from $10.7 trillion to $15.2 trillion, an increase of $4.5 trillion. However, only $2.9 trillion of this amount was borrowed from investors; the $2.9 trillion came from US investors, insurance companies and more than half from foreign countries and international investors. The remaining $1.6 trillion came mostly from the Federal Reserve.
The Federal Reserve acquired most of this US debt by simply creating dollars. This infusion of cash is suppose to be temporary because the Federal Reserve expects to be paid back from US revenue (not very likely), or a sale/ refinance of such US obligations to investors (relatively more likely). Absent substantial growth in our economy it is likely the Federal Reserve will hold this debt (and perhaps additional debt from another infusion through Quantitative Easing) for an indefinite period of time.
When it comes to debt the US owes to itself (over $6.4 trillion), it can avoid default by extending such debt in a variety of ways. So investors really have to worry about the United States meeting its obligations on closer to $9.5 trillion. We are still by far the largest economy in the world and this amount is less than 65% of our gross domestic product (GDP). Worldwide investor demand for US obligations is still enormous because of perceived minimal risk relative to other currencies/economies, and interest on such obligations is at historic lows despite the investment rating of Treasury obligations being downgraded last summer.
So far (manufacturing currency through) Quantitative Easing by the United States has been accepted by investors and other countries, and perhaps another round of Quantitative Easing would be acceptable as well. I must caution other countries that Quantitative Easing is risky and they should not try this at home. (The European Union should not do this because of issues related to multiple sovereignties.) However, there will be a limit on how much Quantitative Easing will be tolerated if the federal government continues to have large annual deficits and US debt held by investors approaches and exceeds GDP.
2012 Tax Legislation: Obama likely to Cut Taxes … For the Rich
May 8, 2012 2:55 pmBy Matthew Campione, Principal of SmolenPlevy and Contributing Writer for Forbes.com
Article originally published on Forbes.com
If agreement is reached this session of Congress, it is likely tax legislation will result in substantial tax cuts for the rich. Depending on the mix of a rich taxpayer’s income, this may be so even if the “Buffett Tax” was enacted as part of the new law.
How can this be when the Democrats control the Senate and Obama is president?
The answer is really simple. If Congress reaches agreement, it is likely the new tax law will not be as severe on the rich as the expiration of the Bush tax cuts in 2013. If the Bush tax cuts are allowed to expire the highest marginal income tax rate will go up from 35% to 39.6%, and the capital gains rate will generally go up from 15% to 20%. Very significant, qualified dividends will no longer be taxed at capital gain rates. Instead, dividends will be taxed at the recipient’s marginal rate up to 39.6%.
If the federal estate tax is not repealed, 2012 changes would likely include a reduction of the maximum estate tax rate from 55% to 45% or perhaps 35%. This would allow the wealthiest of families to each save millions, tens of millions or even hundreds of millions in estate tax liability. The lifetime estate and gift tax exemption for 2013 is likely to be reduced from its current unprecedented high of $5.12 million per spouse which Obama agreed to in December 2010. In fact the exemption may not be much more than the $1 million per spouse exemption if the Bush tax cuts are allowed to expire. But the wealthiest Americans will have had the benefit of using the higher exemption amounts through gift and generation skipping tax planning for 2011 and 2012. Estates with not much more than a million dollars could be subject to estate tax liability after 2012. People at this level of wealth are less likely to use or afford tax planning more commonly used by wealthier ($10 million and up) families. While for most people a million dollars is a fortune, for the truly rich, this is not wealthy. Such a low exemption amount will make it more difficult for families to accumulate wealth and retain assets for the benefit of their children and descendents.
Unrelated to the above, Congress should immediately address the alternative minimum tax (AMT) exemption, commonly referred as the “patch”. Without the patch middle and upper middle income families will pay as much as $100 billion more in income taxes for 2012. If Congress is going to address tax legislation it should address more imminent tax issues.
Stay at Home Moms Circa 2012
April 30, 2012 3:28 pmBy Matthew Campione, Principal of SmolenPlevy and Contributing Writer for Forbes.com
Article originally published on Forbes.com
Not only do we have to deal with issues related to taxes, the economy and federal debt, the perceived criticism of Ann Romney as a stay at home mom has made its way into the political discussion. Of course the criticism is wrong if the message was that stay at home moms do not work. From a child’s perspective I took for granted what my stay at home mom did for me and my siblings. From the perspective of a husband and father, I came to appreciate all the things my mom did for me and I respect all the hard work and responsibilities my wife took on as a stay at home mom for our children. So I respect the decision of a mother (or father) to be a stay at home parent. I hope it works out well for you and your family.
If the comment was intended to point out that many moms do not have an economic choice to stay at home, I believe there would be substantial agreement. In case someone draws an unintended inference from what I just said, it is also okay for a mother who can afford to stay home to decide to work outside the house and pursue a career. So isn’t the issue whether a person has a choice?
From a philosophical perspective the verdict is still out on whether we really have choices or a confluence of factors is determining every outcome. From a practical perspective we should act as if we have choices. However, choice may simply be a state of mind; when you feel you have alternatives you have a choice, but when you feel inhibited your decisions are limited.
This is where the economics of today’s household comes in. It seems that we have been running very hard to keep up with our standard of living. What used to be affordable in the 1960s and 70s with one person earning an income, by the mid 1990s required many families to have two income earners. Over the past several years not only did many households require two earners, easy credit and borrowing became an important part of keeping up. Many families are now saddled with large mortgages, student loans and credit card debt. Where does the progression go from here?
Under these circumstances I suspect many parents feel they both must work to provide for their family’s present and future needs. It is in this context a mother who does not need to work may not fully appreciate the difficulties many working moms go through. However, I do suspect that a stay at home mom like Ann Romney does understand how a mother who wants to stay home but cannot, must feel.
How We Continue to Pay for Mortgages on “Underwater Homes”
April 30, 2012 3:24 pmBy Matthew Campione, Principal of SmolenPlevy and Contributing Writer for Forbes.com
Article originally published on Forbes.com
By now, I am sure most of you know what underwater home means. For the few who are still not familiar with the term, it is where a mortgage secured by a home exceeds the fair market value of the home. As a result of the residential real estate/home mortgage crisis over the past several years, there are more than 11 million homes, over 22% of all residential properties, with mortgages in excess of value. Another 2.5 million homes have only nominal value above the mortgage amount. Most of the owners of these properties are not eligible or capable of paying down the existing mortgage (so the remaining debt is more than nominally below the value of the home) and refinancing the balance with a mortgage at much lower current interest rates. As I mentioned in a previous article (HARP Strikes a Sour Cord), rather than default most of these homeowners continue to live up to their obligations and quietly suffer through making high monthly payments on these loans. As a result each owner is paying hundreds of dollars and in some instances thousands of dollars each month of additional interest.
I suspect many of you already know where I am going with this. Just like other homeowners, owners of underwater homes claim mortgage interest deductions on their tax returns. Under current tax law (and tax law that is suppose to take affect next year) the aggregate federal tax savings for all homeowners claiming this deduction is likely to exceed $90 billion dollars each year. This means the federal government is forgoing perhaps $10s of billions of revenue each year related to high interest mortgages on underwater homes. So indirectly we are all paying for underwater mortgages, and we will continue to do so until underwater mortgages have substantially dissipated.
The tax benefit of the home mortgage interest deduction is part of over a trillion dollars of tax savings the federal government doles out each year through various exemptions, special tax rates, deductions and credits. Depending on the state, there may also be substantial state and local income tax savings related to the home mortgage interest deduction. A more fundamental and broader question is why should the government subsidize housing for many who could afford it to begin with? However, homeowners, lenders, realtors, builders, and even local governments that collect tax related to the value of these properties have a substantial interest in maintaining the status quo. Other tax benefits have their advocates as well. This is why it is so difficult to enact a flat(er) tax.
March Madness: The $640+ Million Lottery
April 16, 2012 3:29 pmBy Matthew Campione, Principal of SmolenPlevy and Contributing Writer for Forbes.com
Article originally published on Forbes.com
This is an article that could have millions of viewers today. Tomorrow only one or a few may be interested. Even though the NCAA basket ball tournament is not over yet most of you already know that you did not do so well with your brackets. However, there are tens of millions of you who purchased lottery tickets and are waiting for the biggest lottery prize ever. You know the odds are small, one in over 170 million, and you are much more likely to be hit by lightening, but the idea of winning that much money is intoxicating. Hope springs eternal and you know your chances are better than being bitten by a shark – if you live in Wyoming. Would you know what to do if you won that much money?
This is a lottery that may even have people of substantial wealth purchasing tickets. Those of you who are as wealthy as Mitt Romney or have at least a high nine figure net worth probably should know what to do. But what are the rest of us suppose to do. Even a king size mattress is not big enough to stash this much winnings. Also, having a ten figure balance in a checking and savings account does not seem to be a good idea either.
First you should know that if you win you are not going to receive $640 million dollars. If you take the lump sum distribution you will receive close to $225 million after federal and state tax withholdings. If you accept the annuity you will receive close to $14 million a year, after tax withholdings, for 29 years based on current tax rates. You may be intimidated by the size of the lump sum distribution and consider taking the annuity, but the better financial advice would be to take the lump sum distribution. It should be noted that if a winning lottery ticket is shared by more than one person Form 5754 needs to be filled out to show how the winnings are divided.
Winning this much money will be a life changing experience, good and bad, and it will be important that you and your family adjust to and understand this level of wealth. There is no simple answer, but here is what I would do.
This is not an advertisement but I recommend you find a tax and estate planning attorney who ordinarily represents high net worth families. This person already has much of the knowledge and advice you will need to help you work through your new situation. $225 million is still too much to stuff in a king size mattress so I recommend you divide this money into several figurative buckets. Spread $1 to 5 million among several banks, certificates of deposit, savings accounts and your checking account. Invest $60 to 90 million in federal treasuries. Spread the balance among a few wealth/asset managers that are use to managing more than a few hundred million of assets on behalf of their clients. The mix of your investments should include publicly traded fixed income and equity assets such as investment grade bonds, preferred stock and common stock. The goal here should primarily be income production and asset preservation rather than growth because you are already rich. Avoid investments and ventures that promise high return because there usually is a greater likelihood you will lose your investment.
Prepare for the fact that your standard of living is going to change. For a variety of reasons it will be difficult to stay in the three bedroom rambler and neighborhood you loved before you achieved substantial wealth. Over time you will need to get use to spending perhaps as much as $6 to 11 million a year. Easier said than done, but be careful that you and your family consume this spending in a constructive and healthy way. Over time you also need to avoid spending significantly more than $11 million a year. Although $225 million might seem like an endless amount, you actually may not outlive your wealth if for example you are consuming more than $14 or 16 million a year.
Because of your substantial wealth you must now consider short and long term income, gift, estate and generation skipping tax planning. Most of this may be foreign to you but this is what wealthy people do. You will be advised about substantial charitable contributions you can deduct on your 2012 income tax return, and the most efficient ways to make such contributions. You will also be advised to transfer as much as $10.24 million to your children and descendents in 2012, usually in a trust, so you and your descendents can avoid gift, estate and generation skipping tax on this amount. This transfer planning probably will not be available after 2012. Based on your new mix of income and deductions other income and gifting strategies will be deployed in future years depending on the law at that time.
I wish you lots of luck tonight. However, losing may not be that bad for most of you if you develop a greater appreciation of what you already have.
No Etch a Sketch for Federal Tax Law
April 10, 2012 3:18 pmBy Matthew Campione, Principal of SmolenPlevy and Contributing Writer for Forbes.com
Article originally published on Forbes.com
I am old enough to remember when the Etch-A-Sketch was a very popular toy. I was very good at drawing vertical and horizontal lines but drawing shapes and even diagonal lines required some skill. I marveled at some of the detailed pictures people would create, but most of my efforts ended with me turning the Etch a Sketch over, shaking it, and starting all over again.
The Etch-a-Sketch made its way back into the news last week when Eric Fehrnstrom, a senior advisor to Mitt Romney, compared Romney’s general election campaign to an Etch-a-Sketch; “You kind of shake it up and we start all over again.” This of course led to immediate criticism mostly from Romney’s Republican opponents questioning his stripes as a true conservative. Gasp, a candidate doing what is expedient to win an election! This is Politics 101. The most immediate affect of this controversy was for the stock value of the toy company that makes the Etch a Sketch to almost double. I would say an app for the iPad cannot be far behind except there are at least three already?
Unfortunately, in most real world situations it is not so easy to start over. I will use the federal tax law as an example. There are a lot of vested interests in our current tax system that have become firmly entrenched over the past 40 years. Over a trillion dollars of tax benefits will be doled out this year based on these vested interests. Also, spending is well entrenched with most of the revenue spent on entitlement programs and defense. In fact, spending is so well entrenched federal debt has increased over a trillion dollars each of the past few years to cover the budget. Unlike an Etch-a-Sketch you cannot wipe the slate clean here. It has been attempted before (flat tax, fewer deductions, balanced budget, etc.) with no success.
So a politician can be a chameleon and change direction to garner enough votes to win an election. It is a different matter once he or she is in office. Unfortunately we may have to manage and moderate within the system we are in, unless the divergent forces can no longer function together. I suspect there are some who feel that day has already past.
Don’t Overpay Your 2012 Federal Taxes, You Might Find the Refund Delayed Next Year
April 3, 2012 1:59 pmBy Matthew Campione, Principal of SmolenPlevy and Contributing Writer for Forbes.com
Article originally published on Forbes.com
Around this time each year, those of you who are receiving significant tax refunds will hear that this is like giving the federal government an interest free loan. You should instead owe tax come April so long as what you still owe does not trigger underpayment penalties. This way, it is like you are getting an interest free loan from the government.
Depending on your situation, you can adjust your payroll withholdings and/or quarterly estimated payments so that you pay the minimum penalty free amount during the year. One caution, you must also be disciplined to save enough to pay the balance due by April 15 next year.
Generally, you are required to pay the lower of 90% of the current year’s tax liability or 100% of last year’s tax liability (110% of last year’s tax liability if last year’s gross income exceeded $150,000). If 2011 was a low tax liability year, as compared to what you expect to owe for 2012, you would pay 100% (110%) of last year’s tax liability even if you will owe substantially more than 10% of 2012 taxes in April 2013. Conversely, you would project tax liability for 2012 and pay 90% of that amount if tax liability for 2011 was significantly higher.
Ordinarily, the minimum amount must be paid ratably over the year. However, there are two major exceptions. First, amounts paid through withholdings are treated as being paid evenly over the year, so additional withholdings near the end of the year could make up for underpayments earlier in the year. The additional withholdings can be due to raises, a year end bonus, or the result of a further review of your income, deductions and credits for the year. Second, higher estimated payments later in the year can be justified based on a significant increase in income earned later in the year.
The above is good advice for any tax year. So why is 2012 any more significant? No, it dose not have to do with any predictions related to the Mayan Calendar. By the end of the year, or early next year the federal government will have reached its current federal debt ceiling of $16.3 trillion. Although I hope we do not have a replay of last summer, it is possible Congress will not immediately agree to an increase of the debt ceiling, and the government will begin to shut down. This could result in the IRS not processing returns and paying refunds until the shut down is over. You may feel this is remote, but don’t say you weren’t warned.
Will the Country Run on AMT This Year?
March 27, 2012 5:07 pmBy Matthew Campione, Principal of SmolenPlevy and Contributing Writer for Forbes.com
Article originally published on Forbes.com
It is already March and many people are still looking backwards focusing on their 2011 tax returns. A good number of you and “you know who you are”, will procrastinate until April to complete your returns. However, proactive taxpayers are already planning for 2012 and 2013.
If you are still looking in the rear view mirror you probably are not aware of a substantial increase in 2012 income tax that may affect you unless federal tax law is changed. This is because Congress and the President have not yet enacted legislation increasing the 2012 Alternative Minimum Tax (AMT) exemptions, as they have done so the past several years. Without the exemption increases, sometimes referred to as the AMT patch, mostly middle and upper middle income families will pay more than $100 billion additional income tax in 2012. So I guess you could say that the country will (at least in part) be running on AMT if the law is not changed. (I always try to bring closure to my puns.)
In November 2011 I highlighted the 2012 increases in AMT and the employee payroll tax unless the AMT patch and the employee payroll tax cut were extended to 2012. Last month legislation extended the employee payroll tax cut to all of 2012. Although the federal government is very much aware of the AMT patch issue, there is no imminent legislation extending the AMT patch to 2012. Without the AMT patch many middle and upper middle income families will pay more AMT then they saved from the employee payroll tax reduction.
When are Congress and the President going to address this issue? As more and more people become aware of the AMT problem and related additional tax liability doesn’t this diminish the economic stimulus benefits of the payroll tax cut? Without the AMT patch it seems that the government is giving with one hand while taking away with the other. As if the government has not done this before, will taxpayers be left to twist in the wind while the issue remains unresolved? The federal government should address the AMT patch (whether enacted or rejected) now.
Of course, everyone should understand that extending the AMT patch to 2012 probably will increase the 2012 deficit more than $100 billion. It is unlikely Congress will be able to agree on offsetting measures in an election year. Unless this issue is brought to the forefront, there is a chance this issue will remain unaddressed until perhaps as late as early next year. Come on everybody, let’s do the twist.
The Employee Social Security Payroll Tax Cut for 2012, the Political Path of Least Resistance
March 25, 2012 4:53 pmBy Matthew Campione, Principal of SmolenPlevy and Contributing Writer for Forbes.com
Article originally published on Forbes.com
Like many Americans I prefer to see members of Congress and the President working together to hammer out legislative solutions. Unlike the discord over the past two years regarding taxes and the federal debt ceiling, the passage of legislation this month, extending the payroll tax cut for employees to the end of the year, occurred with the substantial cooperation of both parties. Is this the beginning of more constructive behavior between the Democrats and the Republicans? I don’t think so.
Last November I predicted that extending the payroll tax by increasing the federal deficit would be the most likely outcome. In an election year it was the easy thing to do. Even though the federal government will go over $100 billion further in debt, the tax cut is better than a chicken in every pot (maybe today it is a full tank of gas) for every voter. I recognize the tax cut will be a short term economic stimulus because families will have more money to spend. But I believe each side is more interested in taking credit (or at least not giving up the high ground) for the tax cut, hoping to garner more votes this November so their candidates will be the next President and controlling members of Congress. Call me cynical, but I believe it was primarily political posturing that carried the day.
Kathryn Dickerson Discusses Prominent Celebrity Divorce
March 21, 2012 4:00 pmKyung (Kathryn) Dickerson, Principal with SmolenPlevy
It’s not just about practice anymore for former NBA star Allen Iverson. Iverson’s estranged wife, Tawanna Iverson, wants a list of every woman with whom he has had sex since they married in 2001. The former Philadelphia 76er’s alleged philandering could play a role in divorce hearings says Family Law attorney Kyung (Kathryn) Dickerson of SmolenPlevy on FOX5 news.
“Adultery does impact divorce proceedings,” says Dickerson. “She absolutely does have the right to ask for this list, and it makes sense. The fact that she’s asking for names and phone numbers is nothing compared to what she could be asking for and potentially should be asking for.”
Dickerson says if she were Iverson’s attorney, she would also ask for:
- 1. Address of women with whom he had sexual relations
- 2. Dates and locations of the interactions
- 3. Information on the actual act that was committed
- 4. Amount of money spent on the women
Dickerson adds if Iverson did not use protection and Tawanna contracted a disease, any future long term medical care that she might need would play a role in the spousal support that she may need and the other women who were involved are at risk and should be informed.
In a divorce, extra-marital affairs could alter outcomes:
- 1. Marital money was spent on affairs, the division of property and finance will be affected
- 2. Infidelity, especially if the parent is going to maintain a pattern of casual encounters and introduce the children to his or her multiple partners implicates the stability as a parent if child custody is an issue
“Many people don’t realize adultery is actually a crime, a misdemeanor in many states, including Virginia and Maryland,” Dickerson says. “Defense could argue Tawanna condoned or forgave her husband’s actions, and therefore the adultery should not impact the case, but the question is ‘Did she know about all of the mistresses? When did she learn of the adultery?’ Depending on the answers, condonation may not have occurred.”
For more on the Iverson divorce, watch Kathryn Dickerson on Fox5 News:
Northern Virginia Divorce Attorneys
A Day in the Life of a Probate Administration Attorney
March 15, 2012 3:41 pmGretchyn Gay Meinken, Associate with SmolenPlevy
I doubt my day is any different than most, but there are very few attorneys my age who share my practice area (if you’re wondering, I’m in my thirties). The reality is that I deal with death and the legal clean-up process that normally occurs afterwards. Most consider this undesirable — I understand why. Most people avoid the topic of death for a variety of reasons: it’s depressing, it reminds us of those we have lost, and it reminds of us of our own mortality, to name a few. I used to avoid the topic as well, until I started practicing in the area of probate administration. Now that doesn’t mean I understand death, or that I am completely comfortable with thinking about my own demise, but I can say that I am happy I can provide my clients with the comfort and guidance they need after losing a loved one.
So what exactly is probate administration? “Probate” is the process of proving the validity of a Last Will and Testament before a court. “Administration” is the process of marshaling and distributingthe assets of a deceased person. Probate administration is logically the combination of the two. What assets go through the probate process? All assets in the deceased person’s individual name are required to go through probate; however, assets with beneficiary designations (401(k), IRA, life insurance policies, etc.) are considered non-probate and do not fall under the court’s purview.
The process of probate administration itself can be a drawn out process, depending on the complexity of the assets and the responsiveness of all parties involved. The typical administration takes about a year and a half, but some last several years while others last less than a year. The process normally involves dealing with creditors, banks, brokerage houses, stock transfer agents, life insurance companies, preparing tax returns for the deceased person and his or her estate, and working with financial advisors, real estate agents, accountants, and appraisers of real property and tangible personal property.
When there is a surviving spouse, it is also necessary to consider the impact of the deceased spouse’s passing on the surviving spouse’s estate plan. For instance, if the deceased spouse left a substantial estate, it may be beneficial for estate tax purposes to have the surviving spouse disclaim assets he or she was to receive, thereby directing the assets to the deceased spouse’s irrevocable trust. It may also be necessary to review and/ or revise the estate documents of the surviving spouse to ensure they are appropriate given his or her financial circumstances.
There are always surprises along the way. For instance, there’s the notary that forgot to put his seal on the Last Will and Testament, resulting in time spent tracking down witnesses to sign an affidavit to prove the document’s validity. Or there is the estate that has been open for over twenty years with no reports or accountings filed, requiring the history of the estate to be pieced together in order to bring it to closure. There is the discovery of firearms in an estate necessitating finding and hiring a gun dealer to transport the guns to the proper beneficiaries (ultimately resulting in the destruction of my computer hard drive and the delivery of a brand new computer — it’s amazing how many viruses can be obtained by searching for gun values and dealers on the internet). My personal favorite, however, is the discovery by a surviving spouse that the assets of the estate were significantly greater than expected, ensuring that he or she will continue to be provided for during the remainder of his or her life.
I am often asked if I enjoy probate administration, and the answer is simple: yes. I enjoy probate administration because I know that I am helping my clients. My clients are dealing with the loss of a loved one, and my assistance provides them the ability to focus on the grieving process instead of the legal and tax ramifications of that loss. My clients’ circumstances vary -some are dealing with raising an minor child alone, others are facing the reality of life alone after losing their partner of forty years — but the constant is that the assistance I provide gives them the time to focus on what is most important to each of them — time to figure out life without a loved one’s presence. The fact that I am able to give them that time is, in itself, rewarding.
This article was originally published in Docket Call Vol. 28 No. 2 Winter 2012; Martha E. Hulley, Ed. The Newsletter of the Young Lawyers Conference of the Virginia State Bar.
Carried Interests: A Drop in the Ocean of Preferential Income
March 10, 2012 6:35 pmBy Matthew Campione, Principal of SmolenPlevy and Contributing Writer for Forbes.com
Article originally published on Forbes.com
Before recent attacks by the Obama administration, the taxation of “carried interests” has been somewhat settled for almost 20 years. Rules regarding partnership taxation have evolved consistent with this treatment. While the proper treatment of carried interests under current law is still open to debate, legislation proposed by the President recognizes that the current treatment of carried interests has effectively become the law. Why revisit this issue?
So that everyone is on the same page, a carried interest is a profits interest in a business or venture, usually held by a partnership or limited liability company, which becomes valuable after the partners who contributed capital recover their investment and perhaps a priority return on their investment. For example, the parties can agree that after the investor partners receive their investment and priority return, income and profits will be split 20/80 between the promoter partners (carried interests) and the investor partners. Although the value is created in part due to the promoters personal efforts, the carried interest is taxed like a partnership interest when income and gain is recognized.
Prior to the administration of the law becoming settled in 1993, there was substantial debate as to how these partnership interests should be taxed. Discussion centered around whether, when and how much the carried interest should be taxed as compensation (subject to ordinary income and self employment taxes) instead of a partnership interest with the potential for capital gain. It was recognized that if compensation was in whole or in part the answer, the rules would be difficult to draft and administer. There was also the question of how such taxpayers could be distinguished from other entrepreneurs who used debt instead of capital, or received an interest in a business and worked hard while the value of the business grew (still receiving the benefit of capital gain when the business/ownership interest was sold).
If enacted, legislation proposed by the President regarding carried interests would force us to revisit difficult issues that were considered 20 years ago. Rules and regulations would need to be drafted (which would probably take several years) to delineate to what extent a partnership interest should be treated as a carried interest and when ordinary income is recognized. Such rules will also need to be integrated with recent legislation and regulations governing deferred compensation arrangements.
While tax practitioners make a living advising and planning with respect to complex tax legislation and regulations manufactured by the federal government, I prefer to forgo the opportunity in this instance. I believe the federal government came to the right conclusion in 1993 and the law should not be changed. Also the tax revenue generated each year from changes to the carried interest rules is expected to be less than $2 billion, about enough to run the federal government for a few hours. Why such complexity for so little? Other proposed changes affecting upper income taxpayers such as taxing qualified dividends as ordinary income and taxing capital gains at 20% would do more to raise revenue from those who can most afford it with much simpler legislation. Also, the so called “Buffett” tax (an effective tax rate of not less than 30% on taxable income over $1 million), if enacted, would do much to limit the benefits of preferential income including the gain from carried interests.
Progressive Income Tax Theory: How Much More Can The Rich Be Taxed?
March 8, 2012 7:52 pmBy Matthew Campione, Principal of SmolenPlevy and Contributing Writer for Forbes.com
Article originally published on Forbes.com
Whether our federal tax system is progressive enough has been a major focus of attention the past few years. Certainly, trillion plus dollar annual deficits, the extension of the Bush tax cuts through 2012, and public disclosure of personal tax information (highlighting low effective tax rates) by Warren Buffett last year and Mitt Romney this year has made public an issue usually limited to discussion among tax academics. So how progressive should our federal income tax system be?
A progressive income tax based purely on affordability and ability to pay would at some point approach a 100% marginal tax rate after a threshold of perhaps $15 or 20 million of taxable income. Certainly there would be a point were almost everyone’s appetite would be met with anything more surplus. A tax system this progressive ironically would put some people in the wealthiest 1% in the 99%, at least for tax bracket purposes. Obviously a system this progressive would curtail the formation and movement of capital by the wealthiest of Americans, as well as remove the incentive for entrepreneurs to make more than highest bracket amount. It would also raise serious questions about excessive government spending and wealth redistribution beyond reasonable programs for the benefit of the general public. I think most people would agree such an income tax system would be contrary to capitalism and un-American.
Any significant level of tax that would be incurred where a person has a choice will be an impediment to economic decisions. However, such impediment usually is based on the relative alternatives. So let’s say for hypothetical purposes the maximum rate for taxable income over $15 million was limited to 50%. Further, let’s assume the progressive rates for taxable income between $1million and $15 million ranges between 25% and 45%. This could be accomplished through a more robust Alternative Minimum Tax (AMT) with qualified dividends; capital gains and perhaps a charitable deduction add back above a certain amount taxed at more progressive AMT rates. For taxpayers with substantially less capital gains and qualified dividends (below the AMT thresholds) such income could continue to be taxed at lower preferential rates.
Under the above changes the increase in tax revenue from the wealthiest 1% would be huge. For example, based on federal income tax information disclosed by Mitt Romney his federal income tax for 2010 and 2011 would be over $6 million for each year instead of $3 million per year. He would still have over $9 to 10 million of after tax income for each year. Is $9 to 10 million still enough incentive despite the tax consequences?
There will be some people who feel there should be a limit to the dollar amount any one household should be expected to pay. After all, the taxes Romney paid in 2010 and 2011 exceed the net worth of most families in the wealthiest 1 percent. I agree in concept, but it is difficult to set a cap at this time because of the present revenue needs of the federal government.
If people who read my articles feel that I am pro more tax revenue I say they are not giving this and prior articles proper balance. I say for the situation we are in now we must attack federal debt and deficits with a combination of revenue increases (from upper-income households as well as the rich), spending cuts and curtailed spending increases. The long-term goal (5 to 7 years) is for the government to live within its means as a function of the size of our economy. I am not adverse to cutting taxes when annual budget deficits (except in emergencies) are below 3% of the gross domestic product (GDP) and federal debt (including non-publicly held debt) is below 75% of GDP. I am also on record as saying the federal government should be legally obligated (except in emergencies, with the approval of Congress) to live within these established parameters.
I understand that the magnitude of GDP and government spending are interrelated. Certainly, recent government spending (unfortunately funded in part with trillions of dollars of debt) has helped the economy maintain a foothold and start to grow. I believe many economists would agree that the Great Recession is an emergency that warranted this response. We should not, however, continue to incur trillion dollar deficits. It is unfortunate that politics has delayed a balanced approach to this and other problems. It is a question of degree; economic growth should come primarily from the private sector and secondarily from government spending funded mostly with revenue, not excessive debt.