It’s 2016: What to Do Now About Higher Income Taxes

Higher income, capital gains and estate taxes are now a fact.  The following tax changes were all implemented over the past few years:

  1. Expiration of top 35% income tax rate and reset to 39.6%;
  2. Increase in long-term capital gains rate from 15% to 20%, plus the 3.8% investment tax under the Affordable Care Act (“Obamacare”), for a top long-term capital gains tax rate of 23.8%.  (In many cases an additional 0.9% surtax also applies, making the total capital gains tax 24.7%);
  3. Short-term capital gains are now taxed at 39.6%, plus the Obamacare additional tax of 3.8%, for an effective short-term capital gains rate of 43.4% (again, often, plus 0.9% making the total 44.3%);
  4. Expiration of top 15% rate on qualified dividends and jump to 20%, plus the 3.8% investment tax under the Affordable Care Act, for a top dividend tax rate of 23.8%; ordinary dividends are now taxed at 39.6%;
  5. The gift and estate tax rate increased to 40%.

The 3.8% tax on net investment income is now imposed on joint filers with an AGI greater than $250,000 ($200,000 for single filers) pursuant to the Affordable Care Act.   This additional 3.8% tax is in addition to the already heightened rate that will apply and will be assessed on taxable interest, dividends, rents, some annuities and capital gains including on the sale of real estate.

Congress may also amend other tax laws to eliminate some favorable tax planning strategies.  Clients are therefore advised to engage in tax planning now, in order to have the benefit of “grandfathering” current beneficial tax strategies before additional changes to the tax law.  We can help explain tax changes, how they may effect your specific situation, and how to legally minimize your taxes.

There are various steps that taxpayers should consider now for effective tax minimization:

1.  Avoid capital gains tax via a Charitable Remainder Trust or via international tax planning strategies (e.g., tax advantaged foreign annuities and foreign private placement life insurance).

2.  Convert IRAs, 401(k)s and other retirement plans to Charitable Remainder Unitrust IRAs before the government taxes them.

3.  Engage in income tax planning via tax-compliant strategies that take advantage of favorable reciprocal tax treaties.

4.  Consider a Dynasty Trust.  Such a trust allows the preservation of assets for one’s immediate and remote descendants, along with offering asset protection from creditors, as well as delay of the estate tax bite for many generations.  The trust can distribute income to beneficiaries (who will pay income tax on these distributions of income), but principal is preserved, asset-protected and grows tax-free.

5.  Consider a Charitable Remainder Trust.  Contributing appreciated assets, such as stock, family businesses and real estate to a Charitable Remainder Trust is a good way to avoid the increased capital gains tax.  You and your beneficiaries can enjoy distributions from the trust at very low tax-favored rates, and at the end of the trust term, a remainder equal to ten percent of the original contribution to the trust will go to a qualified charity.  You will receive an additional tax benefit: a deduction equal to the present value of the remainder that will be left to charity.  The benefits: a low-tax income stream for you and your beneficiaries, philanthropy of your choice, a charitable deduction and significant capital gains tax minimization.

6.  It is also possible to minimize the tax on appreciated assets by exchanging such assets  in return for a foreign annuity policy.  Capital gains within the annuity policy would not be taxable.  Annuity payments can be deferred until retirement or advanced age, at which point tax would be due on the income component of the annuity payments.  Moreover, the annuity policy and the assets within the policy would be completely asset-protected from future creditors.  For complete tax elimination, a foreign life insurance policy can be incorporated, which would allow one to borrow against the cash value of the policy, completely free of taxation (the amounts borrowed, rather than having to be repaid, would be deducted from the ultimate death benefit).  Such tax strategies involving foreign annuities and foreign life insurance offer the most advanced asset protection from civil creditors, as well as significant tax minimization or even tax elimination.

7.  With respect to the self-employment tax (the equivalent of social security tax for taxpayers who receive income from self-employment or investments instead of wages) which increased from 4.2% to 6.2%, and the 3.8% surtax imposed on investment income (dividends, capital gains and passive rental income), tax compliant strategies exist which enable taxpayers to actively avoid both the self-employment tax and the investment income surtax.  Section 1402 of the Internal Revenue Code and the regulations provide an exemption for distributions of partnership income to limited partners, provided such distributions are not guaranteed payments and provided the limited partners meet certain conditions.  Through the use of multiple layers of limited partnerships, taxpayers may achieve complete exemption from the self-employment tax and the investment income surtax, thereby increasing their net income by as much as ten percent.  In many cases, clients may achieve tax exempt status by simply restructuring their existing family limited partnerships.

8.  Of course, leveraged gifting is a very advantageous ways of lowering one’s tax base.  In addition, consider gifting appreciated investment assets to charity.  If you’ve owned the appreciated investment for longer than one year, you may be able to deduct the full market value and avoid tax on the appreciation.

It should be noted that tax strategies such as those above were utilized to save significant amounts of taxes in several recent highly publicized transactions, including the initial public offering (IPO) of Twitter, the IPO of Facebook, and the sale of Lucasfilm to Disney.  The strategies discussed herein are available to everyone with appreciated assets and estates of all values.  Contact us to discuss your facts and tax minimization techniques.

Proposed Tax Law Revisions Mandate Timely Tax Planning

We take this opportunity to share several important recent developments that may likely impact your assets and taxation as it pertains to tax planning.  We can assist you in preparing for the changes, including development and implementation of strategies and techniques to minimize tax liability and preserve assets within the family.

There have been many proposed changes to tax laws and regulations.  Planning ahead of these changes is crucial. President Obama’s proposed 2016 budget includes changes that would eliminate many strategies that could save significant taxes.  These changes include:

• elimination of favorable tax treatment for Grantor Retained Annuity Trusts (GRATs) which are used to transfer family assets with minimized tax consequences;

• limitation on annual gifts excluded from the gift tax;

• reverting to a prior smaller exemption from estate tax (specifically, to 2009 when the estate tax exemption was only $3.5 million per person and lifetime gift exemptions were $1 million per person) and a return to the top estate tax rate of 45%;

• increasing the top capital gains tax rate to 28.5% (+3.8% surtax on investment income and 0.9% excess investment income tax).

• eliminating the “step up” in basis for appreciated assets at death.

While certain of the above proposals are unlikely to be approved by Congress, note that Congress frequently changes the rules.  Recall, for example, the rush to estate planning at the end of 2012, when the exemption from estate tax was set to expire.  In addition, Congress in recent years approved increases in capital gains tax rates, dividend tax rates and also implemented the 3.8% investment tax.

There are strategies that can be implemented before these changes are promulgated by the government.  We can assist you in best anticipating the proposed changes and developing strategies to overcome the tax increases.  Contact us for a confidential discussion.

2013 Year End Notes, Part 2: Year End Tax Planning / Looking Ahead to 2014: What to Do Now About Higher Income Taxes

Higher income, capital gains and estate taxes are now a fact.  The following tax changes were all implemented in 2013, raising taxes considerably from 2012: Continue reading

Asher Rubinstein quoted by Reuters on Gingrich and Romney Tax Returns

Asher Rubinstein quoted by Reuters on Gingrich and Romney Tax Returns
(Reporting By Samuel P. Jacobs; Reporting by Kim Dixon; Editing by Eric Walsh and Philip Barbara)
For original article, please click here

Gingrich releases tax returns during debate

(Reuters) – Republican presidential hopeful Newt Gingrich released his tax returns on Thursday, revealing that he and his wife Callista paid $995,000 on an income of $3.1 million in 2010.

In a move designed to embarrass rival Mitt Romney, who has not made his tax forms public, Gingrich issued his returns during a presidential debate in South Carolina.

The bulk of Gingrich’s income appears to come from Gingrich Holdings, one of the companies run by Gingrich before he ran for president. Of his total income, $2.4 million, apparently largely related to Gingrich Holdings, was likely taxed at the “ordinary income” tax rate of 35 percent.

Gingrich’s return showed relatively small capital gains and dividends holdings, which would be taxed at the 15 percent rate – about what Romney estimated his effective tax rate would be earlier this week.

Altogether, Gingrich paid a tax rate of 31.5 percent in 2010. The campaign said Gingrich and his wife donated $81,000 to charities in 2010.

During Thursday’s debate, Gingrich called on Romney to release his tax returns now while the presidential race was still reasonably early.

“If there’s anything in there that is going to help us lose the election, we should know before the nomination. If there’s nothing in there, why not release it?” Gingrich said.

“I’ll release my returns in April, and probably for other years as well,” Romney, a multimillionaire, said.

The debate moderator asked Romney if he would follow the example of his father George, who released 12 years of tax returns when he campaigned for president in 1968.

“Maybe,” Romney said.

This week, Romney said that he pays a tax rate close to 15 percent, much lower than that of most working Americans, because much of his earnings come from investments.

“I’m not going to apologize for being successful,” Romney said.

Rick Santorum, a former U.S. senator from Pennsylvania who is battling with Gingrich to be the conservative alternative to Romney, said he would release his tax returns, but they were at home on his computer.

Speaking before Gingrich released his returns, New York high net worth attorney Asher Rubinstein said Romney’s 15 percent tax rate was legal and to be expected.

“Newt Gingrich has stated that his tax rate was 31%, in contrast to Romney’s 15 percent. It seems … that Mr. Romney is not only a better investor, he also consulted better tax lawyers,” he said.

Lessons from the Mitt Romney and Newt Gingrich Tax Returns

Lessons from the Mitt Romney and Newt Gingrich Tax Returns
by Asher Rubinstein, Esq.

The tax returns of the Republican presidential candidates have been the subject of many news reports and discussion this week.  In these days of high unemployment and economic uncertainty, Mitt Romney has been demonized by his own party and by Democrats for being wealthy and for running a successful investment fund.  Now, he is being criticized over his taxes.

We wish to point out that our comments are in no way an endorsement of any candidate or any political party.  We strive to write about issues of taxation and law, and we do not take a political stance.  With this in mind, we would like to comment on some of the recent news reports.

1.  Romney “has been paying a far lower percentage in taxes than most Americans, around 15 percent of annual earnings”.

This is because most of his income is investment income, taxable at 15% capital gains rate (after they are first taxed on the corporate level), rather than 30+% income tax rate.  This preferential tax rate encourages investment in corporations, new technologies, real estate, etc. and stimulates the economy.  To increase the capital gains tax rate to income tax levels would discourage investment and cause people to park money in, e.g., bank accounts paying very low interest.

2.  “Bain Capital, the private equity partnership Romney once ran, has set up some 138 secretive offshore funds in the Caymans.”

Hedge funds and private equity funds are regularly established in foreign jurisdictions such as Cayman in order to attract investment from non-US persons (who may be reluctant to invest in the US for reasons including high tax rate, State and Federal regulation, etc.).

Cayman funds are not “secretive”.  They are publicly registered, annually reviewed and are subject to KYC, anti-money laundering regulations.  Moreover, Cayman and the US have signed a Tax Information Exchange (TIE) agreement and a Mutual Legal Assistance Treaty (MLAT).

There is no prohibition on a US person from investing in a Cayman fund.  It is not illegal.  So long as the investment is disclosed to the IRS (on the FBAR form) and foreign income reported and tax paid on that income, there is nothing wrong.

There is no tax advantage for a US person to invest in a Cayman fund.  The investment is reported to the IRS, and will be taxed at the same rate as if it had been a US investment.

Even if there was a tax reason to direct investment to Cayman, people and businesses very often chose their course of action, including major decisions, on the basis of tax minimization through geography.  Hedge funds legally move from New York City to Connecticut to save taxes.  Elderly people move to Florida for reasons other than weather.  Howard Metzenbaum, who spent decades of public service as a U.S. Senator, moved to Florida in his final years because there is no estate tax in Florida.

3.  “Unlike most Americans, Mr. Romney has between $20.7 million and $101.6 million in his IRA.”

Romney’s IRA was funded with shares (or partnership interests) of Bain many years ago, when the share prices (or partnership interests) had a much lower value.  Over time, those shares (interests) grew in value.  That is the purpose of an IRA – the tax-deferred accumulation of gains over time.

When Romney withdraws from the IRA, gains will be taxed at ordinary income tax rates (30+%), rather than capital gains rate (15%), even though the gains are technically capital gains rather than income.

Even if Romney does not withdraw from the IRA, when he is 70.5 years old, the IRS will still tax the funds not withdrawn, at income tax rates.

It seems to us that Mr. Romney availed himself of legal opportunities to pay less in taxes.  We are reminded that lowering one’s taxes is neither illegal nor immoral.  On a basic level, people take either the standard deduction or itemize deductions, depending on the more favorable outcome.  There is nothing sinister in this.

Judge Billings Learned Hand (1872-1961), one of the most important federal judges of the last century, wrote:

“Over and over again, courts have said that there is nothing sinister in arranging one’s affairs as to keep taxes as low as possible. Everybody does so, rich and poor; and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions.”  (Commissioner of Internal Revenue v. Newman, 159 F.2d 848 (2d Cir. 1947) (dissenting opinion)).

Moreover, Justice George Sutherland (1862-1942) of the United States Supreme Court wrote:

“[T]he legal right of a taxpayer to decrease the amount of… what otherwise would be his taxes, or altogether avoid them, by means which the law permits cannot be avoided.”  (Gregory v. Helvering, 293 U.S. 465 (1935)).

These words establish a clear principal: Tax minimization, through legal means, is not only allowable, it is wise and it is universal.

Newt Gingrich has stated that his tax rate was 31%, in contrast to Romney’s 15%.  It seems to us that Mr. Romney is not only a better investor, he also consulted better tax lawyers.

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