Tag Archives: Income Taxes

Treasury Deals Final Blow To States’ SALT Deduction Workarounds

The Treasury Department dealt the final blow to programs in states like New York and New Jersey designed to help residents circumvent the $10,000 limit on deductions for state and local taxes.

The federal regulations, issued Tuesday, prohibit workarounds that would allow residents to create charitable funds for a variety of programs where donors can get a state tax credit in exchange, effectively removing the state and local tax, or SALT, limitation.

The rules could also curb donations to some similarly structured charitable funds for private school tuition vouchers in Republican-led states such as Alabama and Georgia. Treasury said such programs allowed taxpayers to claim too many tax breaks in exchange for the donations.

The 2017 Republican tax law capped at $10,000 the amount of state and local tax payments that filers could deduct from their federal returns. That change spurred states like New York, New Jersey and Connecticut to find a way to remove the economic pain of the cap, but Treasury said that most plans gave people too many tax breaks.

Here’s how it worked: A state resident could, instead of paying state property taxes, choose to donate to a state-created charitable fund, for example, $30,000. That person would then get to write off the $30,000 as a charitable donation on his or her federal taxes and get a state tax credit for some of that, easing the sting of the lower write-off for their SALT levy.

The new federal regulations say taxpayers can receive a write-off equal to the difference between the state tax credits they get and their charitable donations. That means the taxpayer who makes a $30,000 charitable donation to pay property taxes and receives a $25,000 state credit would only be able to write off $5,000 on his or her federal bill.

“The regulation is a based on a longstanding principle of tax law: When a taxpayer receives a valuable benefit in return for a donation to charity, the taxpayer can deduct only the net value of the donation as a charitable contribution,” the Treasury Department said in a statement.

The regulations formalize a proposal first floated last August to end the workarounds.

A senior Treasury official said Tuesday that the rules include a provision that give taxpayers the ability to elect to have some charitable contributions to state funds treated as state and local taxes. That would allow taxpayers to claim as much of the $10,000 cap as possible. That change helps equalize the tax treatment for some taxpayers who were disadvantaged in the initial version of these regulations, the official said.

Treasury gave taxpayers some leeway if the state tax credit they received was for 15% or less of their donation. In those cases, taxpayers don’t have to subtract the amount of the tax credit from the charitable donations.

The SALT change was felt most acutely by taxpayers in states where incomes and housing prices are high, places that tend to vote for Democrats. Representatives from those states say Republicans targeted their voters to pay for the tax cut law. House Democrats are working on a plan to increase the deduction limit or repeal it entirely, though any legislative action would likely stall in the Senate.

An IRS official said in March that the agency is also looking at prohibiting other workarounds passed in New York and Connecticut state legislatures that circumvent the SALT cap. The regulations issued Tuesday don’t address other ways to avert the deduction limit.

Connecticut allows owners of so-called pass-through businesses — such as partnerships, limited liability companies and S corporations — to take bigger federal deductions to absorb some of the hit from the SALT deduction limit. New York created a way for employers to shield their employees from the cap.

Source: by Laura Davison | Bloomberg

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Netflix Paid NOTHING In Federal and State Taxes In 2018 Despite Record Profits of $845MM – And A $22MM Rebate

  • The Institute on Taxation and Economic Policy said corporations like Netflix are still ‘exploiting loopholes’ under the Tax Cuts and Jobs Act
  • Senior fellow Matthew Gardner said ‘Netflix is precisely the sort of company that should be paying its fair share of income taxes’ and called the figures ‘troubling’
  • Donald Trump promised ‘the biggest tax cut, the biggest reform of all time’
  • Netflix, which has just announced a price hike, now has 139 million subscribers
  • The streaming site says despite report they paid $131 million in taxes in 2018

(DailyMail) Netflix didn’t pay a cent in state or federal income taxes last year, despite posting its largest-ever U.S. profit in 2018 of $845million, according to a new report.

In addition, the streaming giant reported a $22 million federal tax rebate, according to the Institute on Taxation and Economic Policy (ITEP). 

Senior fellow at ITEP Matthew Gardner said corporations like Netflix, which has its headquarters in Los Gatos, California, are still ‘exploiting loopholes’ and called the figures ‘troubling’.

Netflix says they paid $131 million in taxes in 2018 and this is declared in financial documents. But Gardner says this figure relates to taxes paid abroad, according to a separate part of their statements.   

He told DailyMail.com: ‘It is pretty clearly true that Netflix’s cash payment of worldwide income taxes in 2018 was $131 million. But that is a worldwide number—the amount Netflix actually paid to national, state and local governments worldwide in 2018. This tells us precisely nothing about the amount Netflix paid to any specific government, including the U.S.’ 

Gardner added: ‘Fortunately, however, there is another, more complete geographic disclosure of income tax payments. 

‘The notes to the financial statements have a detailed section on income taxes. And what this tells us is that all of the income taxes Netflix paid in 2018 were foreign taxes. Zero federal income taxes, zero state income taxes in the US.’ 

Gardner said the public is now ‘getting its first hard look at how corporate tax law changes under the Tax Cuts and Jobs Act affected the tax-paying habits of corporations’.

He said: ‘With a record number of subscribers, the company’s profit last year equaled its haul in the previous four years put together. When hugely profitable corporations avoid tax, that means smaller businesses and working families must make up the difference.

Netflix CEO Reed Hastings. The company didn’t pay a dime in state or federal income taxes last year despite posting its largest-ever U.S. profit in 2018 of $845 million, a new report says.

Netflix, which has just announced a price hike, now has 139 million subscribers.

President Donald Trump promised ‘the biggest tax cut, the biggest reform of all time’ and said ‘the numbers will speak’ for themselves when he signed the bill in December 2017.

The GOP argued their tax overhaul plan would mean middle class Americans will get a big tax cut and see their wages go up because of a slash on the rate paid by corporations.

But Gardner argued ‘many corporations are still able to exploit loopholes and avoid paying the statutory tax rate—only now, that rate is substantially lower’.

He added: ‘Netflix appears to be every bit as unaffected by corporate tax laws now as it was before President Trump’s ‘reform’. 

‘This is especially troubling because Netflix is precisely the sort of company that should be paying its fair share of income taxes.’

Hit movies like Bird Box saw the company reach 139 million subscribers worldwide.

Users can pay up to $15.99 for Netflix’s premium package to access their hit shows, movies and documentaries. There are now 139 million subscribers worldwide to the service which announced a price hike earlier this month.

The online streaming service announced it would bump costs by 13 to 18 percent depending on the plan. The website’s most standard and most popular package will cost $12.99 moving forward, compared to today’s price of $10.99.

Customers who typically pay $7.99 with the basic plan will have to pay $8.99 with the new pricing. And those with the premium plan at $13.99 will now pay $15.99 each month for the service.

Netflix says they paid $131 million in taxes in 2018. Gardner says this figure relates to taxes paid outside the US. 

Source: By Lauren Fruen For Dailymail.com

 


Wealthy Blue-Staters Are Using Shady Alaskan Trusts To Dodge SALT-Deduction Caps

Wealthy Americans living in blue states are scrambling to find tax loopholes that will help them get around one of the most controversial (and for some, infuriating) provisions in President Trump’s tax plan: The capping of the so-called SALT deduction. Enter real-estate planner Jonathan Blattmachr, who this week made the mistake of explaining to a Bloomberg reporter about a plan he’s devised for his clients who are trying to get out of paying the additional taxes on their summer homes in the Hamptons or Cape Cod. According to the Bloomberg story, Blattmachr is planning on transferring the interest in his two New York residences – one in Garden City and one in Southampton – into LLCs, which he will then divide up into five separate trusts that will be based in Alaska. He can then use the trusts to take the maximum $10,000 deduction five separate times. In this way, he can deduct $50,000 in mortgage taxes from his federal tax bill instead of $10,000.

“This is an under-the-radar thing and it’s novel,” said Blattmachr. (Or at least it was under-the-radar until you went blabbing to the media). The trusts that Blattmachr and other savvy estate planners are using to take advantage of this loophole are called non-grantor trusts. While trusts are typically used by the wealthiest Americans to preserve their wealth as it’s handed down from generation to generation, the tax law is giving the merely wealthy an incentive to explore setting up these trusts to pay taxes at rates found in low-tax red states. The trusts can help property owners avoid paying an additional $100,000 in taxes across their properties.

However, the plan isn’t practical for everybody, and even those who can reap the benefits over the long term must take an up-front risk because they must pay the maintenance costs for the trusts – which can be as high as $20,000 – up front. If the IRS ever issues guidance invalidating the loophole, there’s no way to recover those costs.

Setting up dozens of non-grantor trusts for those with six-figure plus property taxes can be impractical and burdensome. Plus, those whose taxes are under six figures feel the new cap most acutely, according to Steffi Hafen, a tax and estate planning lawyer at Snell & Wilmer in Orange County, California. Those clients often have monthly mortgage payments that eat up a big chunk of their take-home pay, Hafen said.

More than 10 percent of taxpayers in New Jersey will see a tax hike under the new law – the highest percentage in the U.S. – followed by Maryland and the District of Columbia at 9.4 percent, 8.6 percent in California and 8.3 percent in New York, according to an analysis earlier this year by the Tax Policy Center. Those who’ll pay more are mostly being affected by the state and local tax deduction limit.

Mark Germain, founder of Beacon Wealth Management in Hackensack, New Jersey, said the strategy is “absolutely viable,” adding that he has about a dozen clients who want to create non-grantor trusts.

Building and administering the trusts could cost about $20,000, according to Brad Dillon, a senior wealth planner at Brown Brothers Harriman. But those expenses would be justified after a few years, said Scott Testa, a lawyer who leads the estates and trusts tax practice at Friedman LLP in East Hanover, New Jersey.

Already, it’s unclear just how much longer individuals will be able to take advantage of the loophole. As Bloomberg explains, an existing provision in the US tax code could easily be revived to prohibit Americans from using trusts to avoid paying SALT taxes. Though it would take effort on the IRS’s part.

Still, the Internal Revenue Service could issue guidance that would prevent taxpayers from using the trusts to get around the SALT cap. An existing provision says that multiple non-grantor trusts with identical beneficiaries and identical grantors – and whose primary purpose is to avoid taxes – can potentially be considered a single entity, with just one $10,000 SALT deduction. But the measure has never been bolstered by regulations, leaving it vague.

That IRS provision could potentially derail the whole strategy, Dillon said. But compared to the other workarounds that have been proposed by high-tax states, the non-grantor trust “is the only one that’s come out of the fray that seems like a viable structure,” Dillon said.

Furthermore, people with large mortgages might have difficulty convincing their lender to allow them to transfer ownership over to an LLC.

The strategy isn’t for everybody: People with large mortgages on their homes might not be able to win approval from the bank to transfer ownership to an LLC. Also taxpayers with a primary residence in Florida, which like Alaska doesn’t have an income tax, can’t take advantage of the scheme because of complex rules surrounding the state’s homestead exemption.

But for those who are curious, here’s an in-depth explanation of how the process works:

Here’s how it works: First, you set up an LLC in a no-tax state such as Alaska or Delaware. Then, you transfer fractions of that LLC into multiple non-grantor trusts, which are trusts that are treated as independent taxpayers (unlike grantor trusts, where the person who creates them are generally taxed on the trust income). Each trust can take a deduction up to $10,000 for state and local taxes.

If a spouse is designated as the beneficiary, another “adverse” party – meaning someone who may want the money also — has to approve any distributions.

Keep in mind that you no longer control or can benefit from anything placed in the trust. And you have to put investment assets in the trust that will generate enough income to balance out the $10,000 deduction. One option would be a vacation home that generates rental income, according to Steve Akers, chair of the estate planning committee at Bessemer Trust. Marketable securities could also work.

Some caveats: If the home placed in the non-grantor trust is sold, the trust recognizes the gains on the sale and has to pay taxes on it – and it won’t be able to take advantage of a special home sale exclusion that’s available under a separate tax rule. For those with New York residences, putting the home in the LLC or the trust could potentially trigger the state’s 1 percent mansion tax, which is levied on sales of homes of at least $1 million.

As we pointed out earlier this year (citing research from BAML), the Northeast and West coast – traditionally liberal bastions and, according to some, explicitly targeted by the Trump administration – generally have higher average amounts and will feel most of the pain. The chart below shows a heat map for average amount claimed under SALT deductions, with redder states farther above $10k and greener states below.

https://www.zerohedge.com/sites/default/files/inline-images/2018.06.15salt.jpg?itok=I0kc76vc

For those who are still getting up to speed on the new tax law, Goldman offered this guide earlier in the year to the most important provisions. Of course, estate planners aren’t the only ones searching for loopholes. Several blue-state governors have threatened “economic civil war” on Washington by devising loopholes for their residents that will allow them to take advantage of a “charitable” fund being set up by certain states that will essentially allow them to convert some of their taxes into charitable contributions that can still be deducted from their federal tax bill. However, the IRS has already warned states not to try and circumvent the SALT deduction caps. The retaliation has sent state lawmakers scrambling for an alternate solution. As next year’s tax deadline draws closer, expect the conflict between blue states and the federal government to intensify.

Source: ZeroHedge

***

The Sources Of Tax Revenue For Every US State, In One Chart

In the aftermath of Trump’s tax reform, which many mostly coastal states complained would cripple state income tax receipts and hurt property prices, S&P offered some good news: in a May 30 report, the rating agency said that “[s]tate policymakers have a lot to cheer,” noting the current slowdown in Medicaid signups and dramatically higher revenue collections, to the tune of 9.4%, are significantly boosting state fiscal positions.

https://www.zerohedge.com/sites/default/files/inline-images/S%26P%20states.jpg?itok=b_rsP1fm

Still, the agency’s view is that current conditions are “most likely only a temporary respite” (very much the same as what is going on at the federal level) means that the agency is likely to focus on “a state’s financial management and budgetary performance during these ‘good’ times” to determine its “resilience to stress when the economy eventually softens” according to BofA.

To that end, S&P warns that:

“For those [states] that either stumble into political dysfunction or – out of expedience – assume recent trends will persist, this moment of fiscal quiescence could prove to be a mirage.”

For now, however, let the good times roll, and with real GDP growth tracking at 3.8% for 2Q18, state tax receipts should grow at a rate of over 10% based on historical correlation patterns, with the growth continuing at 9% and 8% in Q3 and Q4.

https://www.zerohedge.com/sites/default/files/inline-images/state%20taxes.jpg?itok=lpbVNyfL

This is good news for states that had expected a sharp decline in receipts, and is especially important for states heavily skewed to the personal income tax since revenue from that source should rise by over 14%, according to BofA calculations.

Finally, the BofA chart below is useful for two reasons, first, it shows the states most reliant on individual income taxes from the Census Bureau’s most recent annual survey of tax statistics. Oregon – at 69.4% of total tax collections – is most reliant on individual income taxes, followed by Virginia (57.7%), New York (57.2%), Massachusetts (52.9%) and California (52.0%). More notably, it shows the full relative breakdown of how states collect revenues, from the Individual income tax-free states such as Florida, Texas, Washington, Tennessee, and Nevada, to the sales tax-free Alaska, Vermont and Oregon, to the severance-tax heavy Wyoming, North Dakota and Alaska, and everyone in between: this is how America’s states fund themselves.

https://www.zerohedge.com/sites/default/files/inline-images/state%20revenue.jpg?itok=PBD-1Mn5
(click here for larger image)

Source: ZeroHedge

Trump Is About To Crush Home Prices In Counties That Voted For Hillary: Here’s Why


As discussed last Friday, several notable surprises in the proposed GOP tax bill involved real estate, and would have an explicit – and adverse – impact on not only proprietors’ tax bills, but also on future real estate values if the republican tax bill is passed. And, as the following analysis by Barclays suggests, they may have a secondary purpose: to slam real estate values in counties that by and large voted for Hillary Clinton.

Going back to Friday, the biggest surprise was that mortgage interest would only be deductible on mortgage balances up to $500K for new home purchases, down from the current $1mn threshold. Existing mortgages would be grandfathered, such that borrowers with existing loans would still be allowed to deduct interest on the first $1mn of their mortgage balances. In addition, only the first $10K of local and state property taxes would be allowed to be deducted from income. Finally, married couples seeking a tax exemption on the first $500K of capital gains upon a sale of their primary residence will need to have lived in their home for five of the past eight years, versus two out of the past five years under current rules. This capital gains tax exemption would also be gradually phased out for households that have more than $500K of income a year.

As might be expected, the above provisions caused an uproar in the realtor and home building industries, as Barclays Dennis Lee points out. The National Association of Realtors (NAR) released a statement commenting that “the bill represents a tax increase on middle-class homeowners”, with the NAR President stating that “[t]he nation’s 1.3 million Realtors cannot support a bill that takes home ownership off the table for millions of middle-class families”. Meanwhile, the chairman of the National Association of Home Builders (NAHB) stated that “[t]he House Republican tax reform plan abandons middle-class taxpayers in favor of high-income Americans and wealthy corporations”. Given the strong resistance from these two powerful housing groups, there may be changes made to these provisions in the final version of the bill.

What is more interesting, however, is a detailed analysis looking at who would be most affected by Trump’s real estate tax changes. Here, an interest pattern emerges, courtesy of Barclays.

According to CoreLogic, the median home price in the US is around $224K while the average property tax paid by homeowners in the country is around $3,300. This suggests that only a minority of homeowners are likely to be affected by the proposed mortgage interest and property tax deduction caps. Indeed, according to preliminary analysis by the NAHB, only about 7mn homes will be affected by the $500K mortgage interest deduction, and since these homeowners will receive the grandfathering benefit, they will not experience any immediate increase in taxes as a result of the mortgage interest deduction cap.

Meanwhile, approximately 3.7mn homeowners pay more than $10K in property taxes according to the NAHB. These homeowners will experience an immediate increase in taxes from the property tax deduction cap; however, to put this number in perspective, the US Census estimates that there are approximately 76mn owner-occupied homes in the country, indicating that fewer than 5% of households may experience a rise in taxes as a result of the property tax cap.

Who Is Most Impacted?

As expected, the homeowners who will be most negatively affected by the proposed caps primarily reside along the coasts, particularly in California. Using estimated median home prices provided by the NAR, Barclays found that of the 20 counties in the country with the highest median home prices, eight were located in California (Figure 3). Perhaps not surprisingly, a majority of voters in all 20 counties voted for Clinton in last year’s presidential election. In fact, Clinton won the vote in the top 45 counties in the country with the highest median home prices. Suddenly the method behind Trump’s madness becomes readily apparent…

https://i2.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/10/21/barc%20real%20estate%201.jpg

And while we now know who will be largely impacted, there is a broader implication: not only will these pro-Clinton counties pay more in taxes, it is there that real estate values will tumbles the most. Hers’ Barclays:

We can also use the above median home prices to estimate the potential increase in taxes from the deduction caps in the first 12 months for would-be homeowners looking to purchase a home in these counties. Using the simplifying assumption that all borrowers purchase their homes at the median home price in each county and take out an 80% LTV, 30y mortgage at a 4% rate, we can come up with estimates for the monthly P&I payment for each of these areas (Figure 4). We can also estimate the average property tax burden in these counties using average state-level property tax rates.

As Dennis Lee calculates, “assuming that all of these homeowners are taxed at a marginal rate of 39.6%, we find that the increase in tax burden during the first 12 months of homeownership driven solely by the mortgage interest and property tax deduction caps varies from $0 for the county with the 20th highest median home price (San Miguel County, Colorado) to approximately $7,200 for the highest-priced county (San Francisco County, California).” Barclays’ conclusion: these counties – all of which are largely pro-Clinton – would need a 0-11% decline in their median home prices to keep the after-tax monthly mortgage and property tax payments the same for would-be buyers.

https://i0.wp.com/www.zerohedge.com/sites/default/files/images/user5/imageroot/2017/10/21/barc%20real%20estate%202_0.jpg

And that’s how Trump is about to punish the “bi-coastals” for voting against him: by sending their real estate values tumbling as much as 11%, while serving them with a higher tax bill to boot.

Source: ZeroHedge

PS:

The MBA (Mortgage Bankers Association) sent a letter to the House Committee on Ways and Means regarding its recently released tax reform proposal. Given the tax proposal, the MBA reports (using its analysis of 2016 HMDA data) that only 7% of first lien home purchase mortgage balances originated in the US in 2016 exceeded $500,000. ($500,000 is the proposed maximum balance on which mortgage interest would be deductible in the House Republican proposal.) The Senate’s version, on the other hand, is expected to keep the $1 million mortgage cap unchanged.