California Logic

In California it might soon be illegal for waiters and waitresses to place a straw on your table without being asked first (AB 1884). It may also soon be a requirement to have a backup battery system for your home garage door opener and failure to have one will result in a $1,000 fine (SB 969). So, in this bastion of rationality we call The Golden State it should come as no surprise when the legislature decides to create an unnecessary retirement plan for all residents.

Never mind the fact that a federal version already exists and is in place and was designed to provide a safety net for those not covered by any other form of retirement savings(aka Social Security). And overlook the Federal tax incentives set up to encourage those not covered by employer plans to set funds aside themselves in the form of deductible IRA contributions, Roth accounts, and the Federal Savings credit. Also, the ability to purchase annuities on the open market is available to anyone so inclined.

Let’s further pretend that the state would be a good shepherd of your retirement monies and that the California Public Retirement system covering state employees and California State Teacher’s retirement system covering teachers aren’t severely underfunded.

Nope, what we need is another state run retirement system, this one for all residents.

The California Secure Choice program would be voluntary (but private sector workers would be automatically enrolled) and ostensibly will serve to provide retirement plans for those underserved by all the other options available. There are two big issues with this:

First, the costs to taxpayers is huge. The program has requested a “loan” from the state of $170 Million for startup staff, consultants, and overhead. Ask yourself this: If this loan were to actually be repaid, where would it come from? Answer: fees assessed the savers.

Second, it’s illegal. According to experts, the Secure Choice plan appears to violate the Federal law known as ERISA. President Obama issued a regulatory interpretation that some argue allows for an exception for the California plan, however President Trump rescinded that regulation. So at this point in time the program appears to violate Federal law, and for Congress to change ERISA to allow such plans is highly unlikely.

So, what we are going to get, “good and hard” as H. L. Mencken might have said, is a new program to fleece the public and benefit a group of consultants and bureaucrats for a period of time. Then when its proven to be unworkable, it will be someone else’s fault.

Craft Beer Drinkers rejoice!

Another tidbit buried in the new tax law is an excise tax on beer, effective 1/1/2018. Now before you go all Boston Tea Party on this, read further. Under the new law, there is to be an excise tax on beer at the rate of $16 per barrel. This applies to domestic and imported beer producers who produce in excess of 2 million barrels annually. 

However, for domestic producers who produce less than 60,000 barrels annually the tax is only $3.50 per barrel. There is a $7 rate in between, but bear with me for a moment. The little guy gets a break.

So let’s distill this down to what it means to the average Joe Sixpack. If there are 31 gallons of beer in a barrel, and 128 ounces in a gallon (I had to look that up too), with the average bottle of beer being 12 ounces, that equates out to a whopping five cents per bottle at the higher rate, and only one cent for the small brewers.

Now, I admit I didn’t retain much from my year of economics classes in school. But I do recall that all business excise taxes are ultimately born by the business’s customers. Therefore this new tax ultimately hits drinkers of big production brews for a nickel a can, but if you are inclined to support microbreweries and craft brewers, you’ll only pay one penny a pop to do it, and you’ll be drinking better beer! So put down that can of Bud Lite, pick up a bottle of Ritual Red Ale, and you’ll be paying less in taxes. Be sure and have plenty on hand in April too – it might make writing tax checks a bit easier.

Cheers!

BTW – I made a misleading statement in yesterday’s Blog (my 100^th published blog!) about tax credits. The California scheme would entitle you to a California tax credit and a Federal deduction, not federal for both. Sorry if I confused you.

Aren’t we special?

The new tax law has a lot of stuff in it, some of it very complex and yet to be fully fleshed out. One provision that has received much press and dialog is the cap on state and local tax (SALT) deductions for individuals at $10,000. This provisions has elicited much wailing and gnashing of teeth in California and New York, where extremely high state income taxes as well as property taxes are the norm.

 To counter the perceived impact, the wise leaders in Sacramento have proposed a law (SB 227) that will allow CA residents the ability to pay into a “CA Excellence Fund” to be distributed amongst various state agencies. Taxpayers would take a Federal tax credit AND a donation deduction for the amount. If this were to stick you could pay $100 into this fund and receive $137 in tax reductions. What a deal!

 What they aren’t telling you is that IRS could disallow said credit and deductions for several reasons, such as receiving a “quid pro quo” benefit for the charitable donation, or on grounds the transaction is a tax sham solely to defraud the federal government and lacking economic substance or donative intent. Alternatively, Congress could simply pass a law making tax credit arrangements for charitable purposes illegal.

 If you were to enter into one of these arrangements and a year or two later find yourself in front of an IRS examiner assessing you back taxes, penalties and interest, do you really think that our CA politicians will be anywhere around to help then?  When the credits and deductions are disallowed do you think the state will cheerfully refund your money? If so, I have a bridge out in the desert I’ll sell cheap.

 This issue really isn’t the big deal that many make out of it. SALT deductions have been reduced or denied to the middle class for years due to the effect of Alternative Minimum Tax (AMT). If you have paid AMT on your taxes, you probably weren’t getting the benefit of SALT deductions anyway, so the loss of these deductions, offset by the lowering of rates, may not be felt much by many people.

New tax proposal saves marriages!

The tax revamping proposed by the Trump Administration certainly grabbed headlines. However, many who have been asking for meaningful tax simplification might now be sorry that they asked. These proposals will be a good example of “be careful what you ask for”, as many favorite deductions and exclusions are slated to disappear. Who knows how this will ultimately finish out, as the legislative process works through hammering out what ultimately will be a final version. However, a prudent taxpayer can do a couple things to help ease any anticipated pain.

Example: If the mortgage interest deduction might be limited to only interest on $500k in debt, you probably don’t want to start house hunting right now for that million dollar home unless you plan on putting down at least 50%. The deduction for state income taxes and medical expenses is proposed to go away. If you have discretion over when to pay these, you might consider paying them in 2017 before a repeal takes effect. But maybe not, depending on your individual tax situation. These things may do you no good in 2017 either.

 Another example of things you can do to change your tax profile is not getting divorced. Right now the tax code actually encourages the opposite, as there is still a marriage penalty built into the rate structure, and often times two single filers will pay less tax than a married couple with the same incomes. In addition, Alimony payments are fully deductible against gross income, making it easier to support a former spouse. But that could be changing. With a contraction of the rate brackets the marriage penalty could be reduced for many. And that payment to the Ex? It’s proposed to be nondeductible, making it much more expensive for people getting divorced in the future.

There are too many provisions that are on the cutting board to go over them all here, but let it suffice to say that a projection of your 2017 tax situation before it is cast in stone is an important starting point. This will enable you to make some decisions on how or if to respond to pending law changes.

 

a new scam

Ok, so this isn't a tax topic, but it did occur in our CPA firm so I'm gonna say it qualifies. It seems that there is just no limit to what thieves will do in this new cyber age. 

This episode happened to our office manager last week. She answered her cell phone and was greeted by a man who knew her name. He told her that he had her daughter and that he was going to kill her if she did not do exactly as he said. He said he was going to start by cutting off her ear. While he his telling her this over the phone, a woman is in the background screaming bloody murder as if she is being tortured and yelling “ Mom Please do what he says!” . Lots of emotion and yelling on the phone.  My office manager panicked and hung up. She called the police and had them on the line when the man called back. The girl in the background is moaning and screaming, he is yelling he will kill her if he doesn’t get what he wants, and the cops are telling her it’s a scam, but given that 1) she doesn’t know the whereabouts of her kids and grandkids at that moment, and 2) the guy used her name, and 3) there is someone screaming as if she really is being murdered, it was all very stressful.

 

Ultimately she hung up and was able to reach out to confirm that all her family was safe and that it was a scam, but it left her an emotional wreck.

 

Given that the Equifax breach may have compromised some or all of our personal names and contact data, we should be aware that there are a lot of ways scammers will use that info. We should be very suspicious of contacts from the phone or internet. If you get a call like that one, just hang up and call the cops. Even better, use your caller ID religiously. If you don't recognize the number, don't answer the phone, and let them leave you a message. Most (but not all) of the junk calls will disappear. 

 

late night musings

We are in the heat of tax season, and while I should be focusing on the Piles o’ Files on my desk and office floor, I’m done for the day and need a distraction. Enter Bill Gates.

Bill Gates (of Microsoft fame) recently sparked a discussion when he suggested that robots soon will be replacing many more workers, and as a result those unemployed workers would no longer be tax paying members of society. His suggestion is to tax robots to replace the revenue loss to the government.

Albert Einstein once quipped to his Accountant that the hardest thing in the world to understand is the Income Tax. Let’s take as a granted that Mr. Gates is a very intelligent man. However, I suspect he may fall into the same category as Albert Einstein in this matter.

If I as a business buy a robot to replace a worker, the two desired outcomes are 1) I pay some company to sell me the robot, and 2) I lay off workers that will be displaced and my business will save money. In the first action, I have bought a product that was built by another business and sold to me at a profit (for them). That business employs robot builders and makes a profit, paying taxes on their profits and paying wages to the robot builders. No different than any other manufacturing job.

In the second action, I lay off workers and reap savings to the company in the amount of wages I no longer have to pay. However, those savings become profit to my company. That profit is taxed to the company, so where is the loss in tax revenue? There is none. Granted it has shifted from the worker to the company, but if tax rates were equal there would be no net change. This is an argument for equal tax rates between businesses and individuals.

There is some leakage due to payroll taxes that are assessed on employers and employees based on wages paid, but these taxes could be abolished and provide incentive for employers to hire more workers as the cost declines.

The social implications are more visible. What do you tell the unemployed worker? File for unemployment? Perhaps he/she could become a robot builder. This is the real question and it isn’t just theory. What happens to cab drivers when Uber and Lyft take over? And then to those drivers when we have driverless cars and trams? What happens to UPS drivers and their trucks when drones start dropping boxes on your porch?

These kinds of change are not new. “Creative Destruction” wherein some new technology develops that makes life better, but destroys older methods and industries in the process is the reason we no longer ride horses to work, or have to bury ice in the ground during winter to use in the summer. It should be embraced, not impeded.

A new Tax world!

All the talking heads are now speculating what changes will be made to the tax code as a result of the Trump victory. Since NOTHING is certain at this point I can only list the things that others have said will likely happen.  Here’s a partial list:

All the taxes brought in with Obamacare will go away when that law is shot out of the saddle, which will happen sooner rather than later. The Net Investment Income Tax, Cadillac Plan Tax, and the penalties for having no insurance will evaporate.

The top corporate tax rates (which usually hit small businesses hardest) will be reduced to some level on par with what the multinationals end up paying. Trump has suggested 15% but it will probably end up around 28%

Small business income that is passed through to owners such as S Corp or LLC income will be taxed at lower rates in the hands of the owners, in an effort to square the rates with large C corporations.

Individual rates will drop, but whatever that top rate is (33%?) you will arrive there sooner.

The Alternative Minimum Tax (AMT) will be repealed, but total Itemized deductions will be capped at some level.

Trump has called for the repeal of the estate tax, but talk is that the current system may be retained with higher exemptions or tossed out but with a capital gains tax on appreciated assets over a certain threshold. The proposed Regulations curtailing some valuation discounts that were to be effective 1/1/2017 will be pulled.

There will be changes to the system of taxing multinational corporations to encourage them to bring their profits into the country rather than leaving them offshore to avoid tax.

Any changes to the tax code, regardless as to when they enact the law(s), will be retroactively effective to 1/1/2017.

I personally think you will see some big changes at IRS.  John Koskinen, the embattled IRS Commissioner, will likely resign. I would not be surprised to see the IRS’ budget restored to better levels. Without the burden of the ACA on its back that alone will free up a lot of resources, but after a period of time the Republicans in Congress who have been choking off the IRS in response to the Tea Party scandals will likely relax their grip, and a businessman in the White House will likely figure out that funds used for enforcement and to track down scofflaws is money well spent.