| How to Pay No Taxes |
| Saturday, 16 April 2011 11:03 |
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Intro: "For the well-off, this could be the best tax day since the early 1930s: Top tax rates on ordinary income, dividends, estates, and gifts will remain at or near historically low levels for at least the next two years. That's thanks in part to legislation passed in December 2010 by the 111th Congress and signed by President Barack Obama."
How to Pay No Taxes16 April 11
Eleven shelters, dodges, and rolls - all perfectly legal - used by America's wealthiest people.
"This is clearly far and away the most generous tax situation that's existed," says Gregory D. Singer, a national managing director of the wealth management group at AllianceBernstein (AB) in New York. "It's a once-in-a-lifetime opportunity." For the 400 U.S. taxpayers with the highest adjusted gross income, the effective federal income tax rate - what they actually pa - fell from almost 30 percent in 1995 to just under 17 percent in 2007, according to the IRS. And for the approximately 1.4 million people who make up the top 1 percent of taxpayers, the effective federal income tax rate dropped from 29 percent to 23 percent in 2008. It may seem too fantastic to be true, but the top 400 end up paying a lower rate than the next 1,399,600 or so. That's not just good luck. It's often the result of hard work, as suggested by some of the strategies in the following pages. Much of the top 400's income is from dividends and capital gains, generated by everything from appreciated real estate-yes, there is some left-to stocks and the sale of family businesses. As Warren Buffett likes to point out, since most of his income is from dividends, his tax rate is less than that of the people who clean his office. The true effective rate for multimillionaires is actually far lower than that indicated by official government statistics. That's because those figures fail to include the additional income that's generated by many sophisticated tax-avoidance strategies. Several of those techniques involve some variation of complicated borrowings that never get repaid, netting the beneficiaries hundreds of millions in tax-free cash. From 2003 to 2008, for example, Los Angeles Dodgers owner and real estate developer Frank H. McCourt Jr. paid no federal or state regular income taxes, as stated in court records dug up by the Los Angeles Times. Developers such as McCourt, according to a declaration in his divorce proceeding, "typically fund their lifestyle through lines of credit and loan proceeds secured by their assets while paying little or no personal income taxes." A spokesman for McCourt said he availed himself of a tax code provision at the time that permitted purchasers of sports franchises to defer income taxes. For those who can afford a shrewd accountant or attorney, our era is rife with opportunity to avoid, or at least defer, tax bills, according to tax specialists and public records. It's limited only by the boundaries of taste, creativity, and the ability to understand some very complex shelters. The 'No Sale' Sale Cashing in on stocks without triggering capital-gains taxes An executive has $200 million of company shares. He wants cash but doesn't want to trigger $30 million or so in capital-gains taxes. 1. The executive borrows about $200 million from an investment bank, with the shares as collateral. Now he has cash. SELLER BEWARE The IRS challenged versions of these deals used by billionaire Philip Anschutz and Clear Channel Communications co-founder Red McCombs. A U.S. Tax Court judge last year ruled Anschutz owed $94 million in taxes on transactions entered into in 2000 and 2001. He is appealing the decision. McCombs settled his case last month. Despite the court cases, such strategies "are alive and well," says Robert Willens, who runs an independent firm that advises investors on tax issues. The Skyscraper Shuffle Partnerships that let property owners liquidate without liability Two people are 50-50 owners, through a partnership, of an office tower worth $100 million. One of the owners, let's call him McDuck, wants to cash out, which would mean a $50 million gain and $7.5 million in capital-gains taxes. 1. McDuck needs to turn his ownership of the property into a loan. So the partnership borrows $50 million and puts it into a new subsidiary partnership, which contributes the cash to yet another new partnership. SELLER BEWARE Wealthy Boston real estate developer Arthur M. Winn used a version of this transaction. In 2008 a U.S. Tax Court judge ruled that one aspect of the deal was perfectly legal. Other aspects of the transaction are being settled with the government. The Estate Tax Eliminator How to leave future stock earnings to the kids and escape the estate tax A wealthy parent with millions invested in the stock market wants to leave future earnings to his kids and avoid the estate tax on those earnings. 1. The parent sets up a Grantor Retained Annuity Trust, or GRAT, listing the kids as beneficiaries. Executives Who Do It GE CEO Jeffrey Immelt The Trust Freeze "Freezing" the value of an estate so taxes don't eat up its future appreciation A wealthy couple wants to leave a collection of income-producing assets, such as investment partnerships that own shares, valued at as much as $150 million, to their children. So they "freeze" the value of the estate at that moment, maybe 20 years before their death, pushing any future appreciation out of the estate and avoiding what could be a $50 million federal estate tax bill. 1. The best approach is an "intentionally defective grantor trust." The couple makes a gift of $10 million - the maximum amount exempt from the gift tax for the next two years - to the trust, which lists the children as beneficiaries. The Option Option Stock options allow executives to calibrate the taxes on their compensation in a big way An executive is negotiating his employment contract for the coming five years. The company might offer millions in shares. But who wants to pay taxes on millions in shares? Better to take options. The executive owns the right to buy the shares at a time of his choosing; he's been compensated, but he hasn't paid any taxes. Gains from nonqualified stock options, the most common form, aren't taxed until the holder exercises them. That means the executive controls when and if the tax bill comes. It isn't just icing, either. Often, it's the cake. Lawrence J. Ellison, CEO of Oracle (ORCL), earned $250,001 in salary in 2010 and was awarded $61,946,500 in options. Executives Who Do It (CEOs or co-CEOs as of 2010) The Bountiful Loss Using, but not unloading, underwater stock shares to adjust your tax bill An investor has capital-gains income from a sold-off stock position. Separately, the investor has other shares that are down an equal amount; if he sold them he'd realize a loss to offset the gains and pay no taxes. But no one likes to sell low. So he wants to use that loss without actually selling the shares. IRS rules prohibit investors from taking a loss against a gain and then buying the shares back within 30 days. 1. At least 31 days before the planned sale, the investor buys an equal value of additional shares of the underwater stock. The Friendly Partner With this deal, an investor can sell property without actually selling - or incurring taxes An investor owns a piece of income-producing real estate worth $100 million. It's fully depreciated, so the tax basis is zero. That means a potential (and unacceptable) $15 million capital-gains tax. 1. Instead of an outright sale, the owner forms a partnership with a buyer. Note: The $95 million is viewed as a loan secured by the property contributed by the seller instead of proceeds from a sale. For tax purposes, the seller is not technically a seller, and so any potential tax bill is deferred. The Big Payback So-called permanent life insurance policies are loaded with tax-avoiding benefits A billionaire wants to invest but doesn't need the returns any time soon and wants to avoid the tax on the profits. A world of tax-beating products is available through the insurance industry. Many types of so-called permanent life insurance - including whole life, universal life, and variable universal life insurance - combine a death benefit with an investment vehicle. The returns and the death benefit are free of income tax. If the policy is owned by a certain type of trust, the estate tax can be avoided as well. "It is a crucial piece of any high-net-worth tax planning in my experience," says Michael D. Weinberg, president of an insurance firm that specializes in planning for high-net-worth individuals. IRA Monte Carlo Tax advisers recommend converting traditional IRAs to Roth IRAs - soon High-income taxpayers can now convert traditional IRAs, which allow contributions to be deducted from taxes but incur taxes on distributions, into Roth IRAs, where the contributions are taxed but the distributions are tax-free. The conversion triggers a one-time tax bill based on the value of the newly converted Roth IRA. As one might expect, tax experts are recommending that high-net-worth individuals convert their traditional IRAs to Roth IRAs before 2013, when ordinary income rates are likely to go up. 1. Let's say an investor has one traditional IRA with a value of $4 million. So in 21 months the investor looks at the performance of the IRAs. Say two of them go up from $1 million to $2 million and two drop from $1 million to zero. Because the IRAs were split into four, the investor can change her mind on the two that went down and revert those back to traditional IRAs. Thus, she owes taxes on only the two contributions that went up in value, and nothing on the two that went down, cutting her tax bill in half. This lops 21 months of risk off the bet that paying taxes now will be paid off with tax-free appreciation later. The Venti Putting a chunk of pay in a deferred compensation plan can mean decades of tax-free growth Executives want generous pay but don't want immediate tax bills from salaries or cash bonuses. Instead, they elect to set aside a portion of their pay into a deferred compensation plan. Such plans allow the compensation, plus earnings, to grow tax-deferred, potentially for decades. Starbucks (SBUX) Chief Executive Officer Howard Schultz had about $88 million in his plan as of the end of 2010, Securities and Exchange Commission filings show. Verizon's (VZ) CEO, Ivan G. Seidenberg, had $62 million. Richard B. Handler, CEO of Jefferies Group, had $225 million. It's their money, they just haven't paid taxes on it yet. Executives Who Do It Starbucks CEO Howard Schultz The Exit Strategy (Not CPA-Recommended) Death and taxes? Not for those who shuffled off to the hereafter in 2010 A parent has tons of money, and kids who might enjoy it. Heirs to billionaires who shuffled off into the hereafter in 2010 enjoyed one small privilege for their sorrow: There was no estate tax in 2010. Executives Who Departed George Steinbrenner, 80 |
| Last Updated on Saturday, 16 April 2011 11:42 |
or the well-off, this could be the best tax day since the early 1930s: Top tax rates on ordinary income, dividends, estates, and gifts will remain at or near historically low levels for at least the next two years. That's thanks in part to legislation passed in December 2010 by the 111th Congress and signed by President Barack Obama.