12 worst pieces of tax advice from financial planners

LifeHealthPro:

Benjamin Franklin supposedly said, "The only things certain in life are death and taxes." Yet every year, thousands of Americans seek to prove the old sage wrong by using the most tenuous, illogical and even illegal tactics to eliminate or reduce their taxes.

Unfortunately, there are always financial advisors -- sometimes under the guise of knowledgeable accountants, lawyers, and planners -- who willingly indulge and encourage these fantasies. Read on to find out the worst of the worst.

Exaggerated deductions

Since earned income is the basis for most income tax and is documented by external W-2s and 1099s, the most common technique to reduce taxable income is increased deductions claimed by a taxpayer. Bad advice from your planner includes the following:

Tax Deduction (Photo credit: OhKyleL)

1. Claiming extra dependents ...[The] tax laws are very clear about who is a "dependent" and the criteria that must be met in order to have a legal claim for deductions. Divorced parents need to be particularly careful that they are not "doubling up" their legitimate exemption and deductions.

2. Exaggerating your deductible expenses Since the IRS audits a very small percentage of filed returns (1.02% of returns for filers making $200,000 or less), the urge to fudge the numbers can be irresistible. Claiming larger charitable deductions than you actually made, a home office that doesn't exist, and mileage or entertainment expenses as business that were actually personal are the most likely areas where fiction can affect the numbers.

If you're tempted to exaggerate, remember that all returns are electronically audited to identify unusually high deductions for certain expenses.

3. Investing in dubious or abusive "tax shelters" Legitimate shelters are designed to either transfer income from one accounting period to a later, presumably lower-taxed, period, or to convert income that would otherwise be taxed at ordinary income rates to the lower long-term capital gains rate. ...

... Simply stated, you cannot deduct amounts for which you have neither invested cash nor assumed debt for which you are personally liable.

Pseudo transfers of ownership

Some phony tax advisors specialize in fake transfers of ownership, so that income you might receive appears to be transferred to other parties who pay no taxes or taxes at a lower rate. Their advice might include any of the following tactics:

English: Map of the Cayman Islands. Information from CIA MAP, Yahoo Map, http://www.wordtravels.com/images/map/Cayman_Islands_map.jpg Can be translated through version 1 here, although text must be converted to path due to rendering problems. (Photo credit: Wikipedia)

4. Setting up secret offshore accounts ... Transferring ownership of income-earning assets to an anonymous account in the Cayman Islands, the Isle of Man, or dozens of other countries where taxes and reporting requirements are nonexistent is a scheme often promoted by unscrupulous advisors.

If you're tempted to create an offshore account, recognize that you are required by law to report any income from foreign bank accounts and file an annual form TD F 90-22.1 by June 30th each year disclosing the location and other details about any foreign financial account with an aggregate value of more than $10,000. Failure to do so can lead to criminal charges being filed against you.

5. Transferring your business to a business trust A business owner transfers his business to a trust in return for receiving shares of beneficial interests. The income of the trust (the former business) is then sent to the beneficial interest owners as deductible distributions, thereby eliminating any business or self-employment taxes that would normally be due.

Effectively, there is no meaningful change in control over the business assets, nor any business purpose other than the elimination of income taxes. The IRS is constantly on the alert for such strategies and aggressively challenges such arrangements in court if necessary.

6. Creating a family residence trust Say a homeowner transfers the title of a property to a trust at a stepped-up basis in return for trust certificates of indeterminate value. The former owner asserts that, since the value of the trust certificates cannot be determined, there is no taxable transaction. The trust claims to be in the "rental" business and rents the house back to the former owner in return for services to the trust so that no rent is actually paid. If rent is paid, the trust offsets the income by depreciation of the property and the expenses of maintenance (utilities, repairs) that would be nondeductible by the property-owning resident.

This is clearly a sham transaction that has no economic purpose other than the reduction of taxes for the homeowner. Entering into this kind of transaction may lead to severe penalties under the 2010 Revenue Reconciliation Act, with an added 40% penalty to any underpayments of tax that result.

7. Organizing a faux charitable trust Simply put, in this scenario the creator sets up a charitable trust for charitable benefit, thereby claiming any payments to the trust as charitable deductions. In reality, the charity is primarily the educational, living, recreational expenses of the creator and his family. The law is clear that supposed charitable payments are not deductible where payments are for the benefit of the creator or his or her family. The same law and penalties apply as for the Family Residence Trust.

Claims regarding the obligation to pay income tax

Over the past centuries, tax protestors have proposed a variety of theories why the requirement to pay income tax is either voluntary, inapplicable, or limited to certain specific individuals due to their status or residence. These theories have been tested in federal court and found invalid. No legitimate financial planner should make any of the following claims:

8. The filing of tax returns, the payment of federal income tax, or compliance with an IRS summons is voluntary. Based upon an incorrect interpretation of the IRS statement that "the tax system is voluntary," some misguided advisors recommend that, in lieu of filing a complete tax form, they send the following communication from the Family Guardian Fellowship publication "The Great IRS Hoax: Why We don't Owe Income Tax, version 4.53":

"... Prove to me that the Internal Revenue Code is enacted positive 'law' that applies to me ... and I will gladly pay what you say I owe... ."

Variations of this same idea would be filing a "zero tax due" return or asking the IRS to prepare a return. All of these theories are misguided and may result in civil and criminal penalties.

9. Some sources of income are not taxable. ... [Tax] protesters have argued that the exchange of "labor" for money does not produce taxable income, since the value of the labor is equal to the value of the money received ... Others argue that only foreign income is subject to tax or that payments received in Federal Reserve Notes is not valid currency and cannot be taxed.

Numerous federal court cases have determined that such arguments are "frivolous." According to IRS Revenue Ruling 2004-28, "The Service will take vigorous enforcement action against such taxpayers (attempting to use such arguments to avoid taxes) and against promoters and return preparers who assist taxpayers in taking these frivolous positions."

10. Income taxes are not constitutional. The Sixteenth Amendment to the United States Constitution provided the legal basis for the federal government to tax its citizens on their income when it became ratified in 1913. Since then, protestors have claimed that the amendment was never properly ratified by the requisite 38 states necessary to be passed.

Federal court cases have repeatedly and consistently repudiated that argument ... Protesters have made similar arguments on the basis of the Fifth Amendment (taking of property without due process of law; self-incrimination) and the Thirteenth Amendment (involuntary servitude) with [lack of] court success... .f.

11. Taxes are required only from a defined group of people. Some tax protesters have claimed that ...[only] federal employees or residents of Washington D.C., federal territories such as Guam and Puerto Rico, or federal lands such as American Indian reservations or military bases are required to pay federal income taxes, so the theory goes.

Some advisors even argue that the term "person" defined by the Internal Revenue Code doesn't apply to humans, but corporations and trusts. Most tax experts consider such arguments delusional.

12. Taxes can be reduced or eliminated on religious grounds. ... In 1982, Supreme Court case United States v. Lee 455 U.S. 252, the justices ruled, "The tax system could not function if denominations were allowed to challenge the tax system because tax payments were spent in a manner that violates their religious beliefs because the broad public interest in maintaining a sound tax system is of such a high order, religious belief in conflict with the payment of taxes affords no basis for resisting the tax."

If you disagree with the acts of the government, protest in the voting booth or peacefully in the streets.  Failing to pay your taxes is akin to an old adage: Don't cut off your nose to spite your face.

About the Author

Michael Lewis

Michael Lewis is a former corporate executive who writes about financial planning, taxes and economic policy for the online resource, Money Crashers PErsonal Finance.

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As fiscal cliff looms, Americans face hefty tax hike

CBS News MoneyWatch October 1, 2012, 2:17 PM

By CONSTANTINE VON HOFFMAN

Play VIDEO What is the "fiscal cliff?"

(MoneyWatch) Taxes for nearly 9 of 10 Americans will rise by an average of $3,500 a year if Congress and the White House fail to reach a deal that avoids the so-called fiscal cliff.

Income Tax Cocktail (Photo credit: Kenn Wilson)

The Brookings-Urban Institute Tax Policy Center, a Washington research group, said in a new report that the planned elimination of tax breaks at the end of the year would affect 88 percent of U.S. taxpayers, with most seeing tax hike in 2013 of 5 percent. It would also boost federal tax receipts by a total of $536 billion, or 20 percent, next year.

Most of the increase would come from the scheduled expiration of tax cuts enacted in 2001 and 2003 during the George W. Bush administration. The expiration of President Obama's payroll tax holiday, which shaves 2 percentage points off payments to Social Security, would also contribute to the rise.

… "It's just a huge, huge number," said Eric Toder, an Urban Institute scholar, in a conference call to discuss the report.

The top 20 percent of income-earners -- those with mean annual earnings of more than $170,000 -- would experience the highest tax increase, at 5.8 percent (see chart at bottom). That would push the average federal income tax rate for taxpayers in this bracket to 30.9 percent. As a result, they would end up paying 60 percent, or $300 billion, of the additional revenue from the rise in rates.

A middle-class household, with income between $40,000 and $64,000, would see its taxes rise by about $2,000. The bottom 20 percent of earners -- those with mean income of less than $15,900 -- would pay the least in total dollars, at $16.1 billion.

Earned Income Tax Credit (EITC)35 (Photo credit: Antonio Villaraigosa)

But low-income earners would see the largest increase in the percent of their income they pay in taxes, with that figure slated to rise to 4.3 percent, from the current average of 0.6 percent. Specifically, they would feel the greatest financial impact of expiring tax breaks that were part of Obama's 2009 economic stimulus package, the Institute found. They would lose an expansion of the earned income tax credit and the child tax credit for working families. A $2,500 credit for college tuition also would shrink to $1,800 and be available for only two years, instead of the current four.

US taxes as a percent of income in 2008. (Photo credit: Wikipedia)

… The number of people subject to the alternative minimum tax also would increase to 21.7 million households, up from 4 million this year.

Although most lawmakers say they favor extending the income tax cuts, there is bitter partisan dispute over for whom. Republicans generally want to preserve all the income and estate tax cuts for 2013, including for top income-earners, arguing that the resulting decline in government revenue can be plugged by eliminating tax loopholes. Democrats, including President Obama, want to let most of of the tax cuts lapse for the top 2 percent of households, or individuals making more than $200,000 a year and married couples making more than $250,000.

English: Plot of top bracket from U.S. Federal Marginal Income Tax Rates for 1913 to 2009. Data are from http://en.wikipedia.org/wiki/Income_tax_in_the_United_States#History_of_progressivity_in_federal_income_tax (Photo credit: Wikipedia)

According to the Tax Policy Center, households at the top of the income range are most affected by the income taxes and the tax increases on unearned income, such as capital gains that were enacted under the 2010 health care law and that take effect in January.

Another potential side effect of the fiscal cliff: Growing skepticism that Congress will reach an agreement on taxes and spending could lead to a large sell-off of stocks and other financial assets later this year as people try to avoid the higher capital gains rate.

"If investors really believe that the tax rate they face on capital gains is about to go up significantly, some of them will choose to realize accumulated gains this year rather than next year," said Donald Marron, one of the authors of the study.


BROOKINGS-URBAN INSTITUTE TAX POLICY CENTER
© 2012 CBS Interactive Inc.. All Rights Reserved.

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Court Ruling Lets More Than $800 Billion In Higher Taxes Proceed

Financial Advisor magazine




U.S. Supreme Court building. (Photo credit: Wikipedia)

(Bloomberg News) The U.S. Supreme Court's decision to uphold the bulk of the 2010 health-care law means wealthy investors may sell assets before the end of the year as taxes in the overhaul remain in place and will take effect next year. …

Some of the taxes affect high-income individuals. Others will come directly from companies in health industries such as pharmaceutical makers, medical-device manufacturers and health insurers.

"In this whole uncertain environment, it's one piece of the puzzle where we'll start to get some clarity" around taxes for individuals and companies, said Edward Karl, vice president of taxation for the American Institute of Certified Public Accountants in Washington. "We can start to remove some of the clouds that are following us around this year."

Unearned Income
The largest taxes on individuals in the Patient Protection and Affordable Care Act are scheduled to take effect at the beginning of 2013. Married couples earning more than $250,000 a year and individuals earning at least $200,000 face a 3.8 percent tax on their "unearned income," including capital gains, dividends and private-equity managers' profits on leveraged buyouts. Those high earners would be subject to an additional 0.9 percent levy on their wages exceeding those income thresholds starting next year. …

An estimated 4.1 million households, or 2.4 percent of Americans, would pay one or both taxes, according to the Tax Policy Center, a nonpartisan research group in Washington.

‘Big Deal'
"The 3.8 percent Medicare tax is a big deal" for wealthy investors because of the variety of unearned income it covers, said Elizabeth Kessenides, a tax attorney in New York who represents people in financial services including private-equity and hedge-fund managers. "For private-equity fund managers, it was a significant item due to its potential application to the carried interest."
The share of profits private-equity managers receive from investments is known as carried interest. It is often taxed as capital gains, which carry a lower rate than ordinary income and would fall under the new Medicare levy, Kessenides said.

"It could have some people triggering capital gains that they were thinking about doing next year," said Tim Steffen, director of financial planning at Robert W. Baird & Co. based in Milwaukee. "That's the most obvious repercussion."

High-income taxpayers considering large transactions with capital gains such as selling a business or second home have more reason to close deals this year with the 3.8 percent tax still scheduled to take effect next year, said Elda Di Re, partner and area leader of the personal-financial services tax division at Ernst & Young in New York.

Stock Options
High earners also may accelerate income from stock options or bonuses into this year to avoid the additional 0.9 percent tax on their wages exceeding the thresholds scheduled for 2013, Steffen said.
Sue Stevens, chief executive officer of Stevens Wealth Management based in Deerfield, Illinois, said she may seek ways to keep clients below the $200,000 or $250,000 thresholds by staggering the taxable income they receive over several years if possible.

Wealthy investors also may buy municipal bonds because income from them is exempt from the 3.8 percent levy on unearned income, said Tim Speiss, chairman of the personal wealth advisers practice at EisnerAmper LLP, an accounting and advisory firm in New York.

Greater Consequences
The effect of the levies in the health-care law will have even greater consequences for wealthy taxpayers if tax cuts first enacted during the presidency of George W. Bush expire as scheduled at the end of 2012. Unless Congress acts, the top rate on long-term capital gains and dividends, now 15 percent, would go to 20 percent and 39.6 percent, respectively. For high earners who exceed the threshold, that means the health-care tax would bring the levy on dividends to as much as 43.4 percent.

Investors shouldn't overreact to the Supreme Court decision as several months remain before the end of the year to make investment decisions and consider market performance, said Steffen. The results of the presidential election in November also may change tax policy, he said.




English: Depiction of the House vote on H.R. 3590 (the Patient Protection and Affordable Care Act) on March 21, 2010, by congressional district. Democratic yea Democratic nay Republican nay No representative seated (Photo credit: Wikipedia)

Republicans in Congress have already voted to overturn the law and plan another House vote on repeal the week of July 9, according to the chamber's majority leader, Virginia Republican Eric Cantor. Democrats control the Senate, and President Barack Obama would have the ability to veto such a bill.

Industry Fees



The health-care taxes in the law also included industry- wide fees on pharmaceutical makers and health insurers, plus a 2.3 percent excise tax on medical devices that aren't sold directly to consumers, such as hip implants and cardiac stents. The House of Representatives voted 270-146 on June 7 to repeal the medical device tax, which is scheduled to take effect in 2013. Combined, those three industry fees and taxes were expected to generate $107.1 billion by the Joint Committee on Taxation.




English: Depiction of the Senate vote on H.R. 3590 (the Patient Protection and Affordable Care Act) on December 24, 2009, by state. Two Democratic yeas One Democratic yea, one Republican nay One Republican nay, one Republican not voting Two Republican nays (Photo credit: Wikipedia)

For individuals, the law also places caps on the amount of pre-tax money that can be diverted to flexible-spending arrangements offered by employers to pay some health-care costs. It required people to obtain prescriptions to use pre-tax dollars in FSAs and so-called health savings accounts for over- the-counter medication. It also made it more difficult for people to take itemized deductions for their medical expenses.

One of the most controversial elements of the law among Democrats was a 40 percent excise tax on what some lawmakers called "Cadillac," or high-cost, health-care plans. While that tax isn't scheduled to take effect until 2018, many employers with generous benefits have already made adjustments to avoid the levy.

High Deductibles
Those moves include offering high-deductible insurance with savings accounts, adopting wellness incentives for employees and increasing the amount that workers pay for medical expenses, said Steven Wojcik, vice president of public policy for the Washington-based National Business Group on Health, which represents mostly large employers.

The Supreme Court decision has "cleared up some of the cloud of uncertainty hanging over the law and employers should go forward preparing for the upcoming provisions that are going to affect employer plans," Wojcik said. …

The law also included a 10 percent excise tax on indoor tanning, stopped paper companies from getting certain tax breaks for making a byproduct called "black liquor" and codified a judicial doctrine against tax shelters.

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How IPO Founders Keep Their Taxes Low

Via a popular way of going public, founding partners can enjoy whopping capital gains without the usual tax bite. Investors may be less than happy about it, though.

CFO.com
Robert Willens -
July 26, 2011

When a partnership goes to the public market for funding, and the offering is successful, the founding partners can enjoy a huge capital gain. …

By means of a popular going-public technique called a tax receivable agreement (TRA), however, the founding shareholders can enjoy hefty tax benefits. … For their part, though, investors may find it hard to factor the effects of TRAs into their calculations of the price of the offering.

TRAs are often used in combination with an "Up-C structure." The Up-C structure enables companies to acquire assets by issuing operating partnership units. Those units may make it possible for the founding owners from whom the company acquires assets to defer recognizing taxable gains until the company disposes of those assets. For example, among many other entities, DynaVox employed this structure in connection with its initial public offering last year.

When a partnership transforms itself into a corporation to make a public offering of ownership interests, the newly formed corporation often becomes a partner in the "operating" partnership. The remaining units in the partnership also continue to be held by the founders of the business. In such cases, the founders will be awarded "high-vote" stock in the corporation — equity that enables them to maintain voting control over the corporation's affairs. For their part, public investors will acquire low-vote stock.

Sometimes the IPO's proceeds will be used by the corporation to buy partnership interests from the founders. In addition, the founders will typically acquire an "exchange right" entitling them to trade partnership interests for low-vote shares issued by the corporation. When these exchanges are separate from the incorporation, they're taxable to the founders because immediately after the exchange the founders aren't in control of the corporation.

But the founders can gain a tax benefit through the use of a TRA. Each time the corporation buys a partnership interest in the partnership, or acquires an interest in a taxable exchange for its stock, the corporation's taxable income derived from the partnership will be diminished (because the purchase increases the amount of amortization and depreciation deductions the purchasing partner will enjoy) and, correspondingly, its tax liabilities will be minimized.

… But the TRA, which is almost standard operating procedure in these types of incorporations, shifts the tax benefits to the persons who transferred the partnership interests to the corporation.

The … TRA … provides that ". . .we will enter into a TRA with our existing owners (the founders) that will provide for the payment by [the company] to our existing owners of 85 percent of the (tax) benefits that [the company] is deemed to realize as a result of the current tax basis in the intangible assets of. . . (the partnership) and the increases in basis resulting from our purchases or exchanges. . . ." The corporation goes on to say that these payments will be "substantial."

TRAs may be fully legal; however, the entire import of these agreements in the price of an IPO might not be fully appreciated by all investors. To the extent the TRAs are not taken into account by such shareholders, they may lead to market inefficiencies.

Robert Willens, founder and principal of Robert Willens LLC, writes a biweekly tax column for CFO.com.

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Paying back your shareholders

Successful companies inevitably face that prospect. The only real question is how.

McKinsey Quarterly
MAY 2011 • Bin Jiang and Tim Koller



Most successful companies eventually find themselves generating more cash than they can reasonably reinvest in their businesses at attractive returns on capital. … In fact, European and US companies currently hold a total of around $2 trillion in excess cash.¹
… How much cash should they return to shareholders and how much should they retain for investment and for managing volatility? When they do return cash to shareholders, how should they do so—through cash dividends or share repurchases?

Return cash—or invest it?

Some executives and board members argue that returning cash to shareholders reflects a failure of management to find enough value-creating investments. … But in most cases, simple math leaves such companies with little choice: if they have moderate growth and high returns on capital, it’s functionally impossible for them to reinvest every dollar they earn.
Consider this example: a company earning $1 billion a year in after-tax profits, with a 25 percent return on invested capital (ROIC) and projected revenue growth of 5 percent a year, needs to invest about $200 million annually² to continue growing at the same rate. That leaves $800 million of additional cash flow available for still more investment or returning to shareholders.³ Yet finding $800 million of new value-creating investment opportunities every year is no simple task—in any sector of the economy. Furthermore, at a 25 percent ROIC, the company would need to increase its revenues by 25 percent a year to absorb all of its cash flow. It has no choice but to return a substantial amount of cash to shareholders (Exhibit 1).

Exhibit 1: Returning cash is inevitable.

Moreover, concerns about negative signals to the market are misplaced. … As many companies are currently finding, investors typically anticipate distributions to shareholders long before managers decide to undertake them, since it’s obvious that there aren’t many alternatives. …It therefore comes as little surprise that, in aggregate, US companies have returned to shareholders around 60 percent of earnings in dividends and share repurchases each year over the past 50 years (Exhibit 2)—even if some individual companies hold on to more cash than they need for operational purposes.

Exhibit 2: On average, US companies have returned about 60 percent of their net income to shareholders.

Image via CrunchBaseA number of leading companies have adopted the sensible approach of regularly returning to shareholders all unneeded cash and using share repurchases to make up the difference between the total payout and dividends. … Over the five years ending in 2010, for instance, IBM generated $48 billion of cash flow from operations after capital expenditures and acquisitions and returned $56 billion to shareholders⁴ in dividends and share repurchases. …

How to pay it out

While distributions to shareholders, relative to income, have been stable for a long time, the split between dividends and share repurchases has changed significantly. Until the early 1980s, less than 10 percent of distributions involved share repurchases. Now, about 50 to 60 percent do.
Why the shift? … Companies, especially in the United States, have conditioned investors to expect that dividends will be cut only in the most dire circumstances. … So companies are reluctant to establish a dividend level that they aren’t confident of sustaining. They opt, instead, to buy back shares.
Some investors, too, prefer repurchases because they can then choose whether or not to participate. …
Does it matter whether distributions take the form of dividends or share repurchases? Empirically, the answer is no. Whichever method is used, earnings multiples are essentially the same for companies when compared with others that have similar total payouts (Exhibit 3).⁵ Total returns to shareholders (TRS) are also the same regardless of the mix of dividends and share repurchases (Exhibit 4).⁶ …

Exhibit 3: Earnings multiples are not affected by the payout mix.

Exhibit 4: Returns to shareholders are unrelated to the payout mix.

Setting the right mix

So how should a company decide between repurchases and dividends? That depends on how confident management is of future cash flows—and how much flexibility it needs.⁷
Share repurchases offer companies more flexibility to hold onto cash for unexpected investment opportunities or shifts in a volatile economic environment. … Thus, managers should employ dividends only when they are certain they can continue to do so. … Share repurchases also signal confidence but offer more flexibility because they don’t create a tacit commitment to additional purchases in future years.⁸ … As you would expect, changing the proportion of dividends to share buybacks has no impact on a company’s valuation multiples or TRS, regardless of payout level.
One argument for share repurchases that doesn’t hold up to scrutiny: share repurchases increase value because they increase earnings per share. … The net effect on share value is zero. Another argument for share repurchases is that companies can repurchase undervalued shares for the benefit of those shareholders who hold on to them. In theory this is correct; however, …more often than not, we see companies repurchasing shares when prices are high.
Successful companies inevitably get around to returning cash to shareholders in some form, if only because they simply can’t reinvest their cash as fast as it accumulates. And while there’s no fundamental difference in the value of dividends when compared with share repurchases, companies need to balance their approach against the flexibility that management needs.

About the Authors

Bin Jiang is a consultant in McKinsey’s New York office, where Tim Koller is a partner.

Notes

¹ “Excess cash” is defined as the amount of cash outstanding over and above operating cash, which is defined at 2 percent of revenue.
² Over and above replacement capital expenditures that, we’ve assumed, equal depreciation. If the company has some debt financing, it could return even more of its profits.
³ The same basic principle applies to different companies, depending on their levels of growth and returns on capital.
⁴ IBM returned $73 billion to investors and received $17 billion from issuing new shares (primarily the exercise of employee stock options), for net distributions of $56 billion. IBM could pay out more cash than it generated from operations because it also generated cash flows from divestitures, borrowing, and changes in cash balances.
⁵ We also examined the value of companies by using statistical techniques and found no impact on the dividend or share repurchase mix once we adjusted for differences in total payouts, growth, and returns on invested capital.
⁶ After adjusting for differences in total payout.
⁷ See Marc H. Goedhart, Timothy Koller, and Werner Rehm, “Making capital structure support strategy,” mckinseyquarterly.com, February 2006.
⁸ The academic research is not conclusive on whether dividend increases or share repurchases send a stronger signal to investors.

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Brinton Eaton Warns of Big Tax Hikes if Congress Doesn’t Act

Non-spouse beneficiaries could experience rates as high as 55%

Advisor One
September 27, 2010 | By Michael S. Fischer

The Bush income and estate tax cuts of 2001 are set to expire in three months, and Robert DiQuollo, president of the boutique advisory firm Brinton Eaton, is more than a little concerned about congressional inaction in the run-up to November midterm elections.

“If the Bush tax cuts of 2001 are not extended, we will witness one of the largest tax increases in history,” DiQuollo said in a commentary released by Brinton Eaton on Friday.

Nine years ago, Congress passed several income and estate tax reductions through a “reconciliation” process that resulted in their being sunsetted after 2010.The commentary noted that, absent congressional action, marginal income tax rates for the top fifth and top income brackets would increase to 36% and 39.6%, respectively, from the current rates of 33% and 35%. Net capital gains rates for these two brackets would go up to 20% from 15%.

Image via Wikipedia

The biggest change, however, would come in the qualified dividend area, which would increase from 15% to a maximum of 39.6% if Congress did not extend the cuts, according to the commentary. Moreover, tax rates for 2013 when the new health care laws are effective would impose an additional 3.8% tax on individual taxpayers whose modified adjusted gross income exceeds $200,000, or $250,000 for married couples filing joint returns.
The estate tax in 2011, and going forward, would also be significantly more onerous if Congress did not act, the commentary said. In 2009, an individual could leave up to $3.5 million to a non-spouse beneficiary without incurring a federal estate tax.

Image via Wikipedia“For the current year, 2010, there is no federal estate tax,” DiQuollo said in the commentary. “You may recall hearing that the heirs of George Steinbrenner, the late owner of the New York Yankees who died in July, saved almost $500 million in federal estate taxes, on a $1 billion estate. This pales in comparison to Dan Duncan, owner of a natural gas processing plants in Texas, whose heirs will inherit over $10 billion with no estate tax.”

The commentary concluded that without congressional action, the federal estate tax will be reborn on January 1, 2011, and will tax all inheritances to non-spouse beneficiaries in excess of only $1 million dollars, with progressive rates going as high as 55%. DiQuollo pointed out that if billionaire Dan Duncan had died in 2011 rather than 2010, “his estate would have paid up to $5.5 billion to Uncle Sam (assuming the estate was left to his children) versus the actual amount of ‘zero.’ ”

About the Author

Michael S. Fischer

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Lenders Show Optimism

Lenders say that, spurred by other companies’ success as sellers, and fearing a tax hike, the fourth quarter of 2010 will provide dealmakers with a perhaps unprecedented M&A blizzard.

Mergers & Acquisitions news site

By JONATHAN MARINO

May 6, 2010

Lenders are anticipating a dealmaking flood to cap off an already-frothy 2010.

“I don’t think people realize the size of the wave of M&A that is out there,” said Leonard Tannenbaum, chief executive of Fifth Street Capital. “You may see the biggest fourth quarter [of dealmaking] in history; there is going to be a massive tax hike coming.”

Tannenbaum, speaking on a panel at ACG's InterGrowth conference in Miami, went on to predict that up to $500 billion of deals could unfold in just those three months alone. Others agreed. “We are seeing a flood of sellers,” said Stuart Aronson, vice president with GE Capital.

While the capital gains tax increase has been on the horizon for some time, … the dour markets forced many business owners to hold off. While their window is quickly shutting, the return of the debt markets will accommodate companies looking to sell.

2009’s first quarter saw a paltry $17 billion in new loan volume; this year, that number jumped 225% percent, to more than $55 billion. Still, that figure pales in comparison to every prior quarter—save last year’s.

Lenders are seeing more capital made available; healthy companies can secure high yield debt and even regional banks have gotten back into the act.

“There has been an enormous surge in asset-based lending,” Aronson said.

Clock Ticks On Estate Tax

Financial Advisor Magazine

(Dow Jones) As Congress appears ready to let the federal estate tax lapse on January 1, a dramatic question is what a repeal will do to millions of less affluent taxpayers.
Many who now would owe neither estate nor capital gains tax on inherited assets will owe significant capital gains. And that's just one of the troubling aspects of a repeal.
There are also serious questions about how families with ailing relatives would be affected--a subject of gallows humor since a one-year repeal of the tax was first envisioned for 2010 years ago. …
Under current law, the estate tax disappears for a year in 2010 and then is reinstated in 2011…
For many advisors, the most striking aspect of a repeal is that, along with the estate tax itself, a step-up in cost basis for income tax purposes would go away. …
So, at a relative's death, "families that would not have had to pay the estate or capital gains tax now may have to pay a capital gains tax on assets that have appreciated in value during the deceased person's lifetime," said Warren Racusin, chair of the trusts and estates practice at law firm Lowenstein Sandler in Roseland, N.J.
Racusin mentioned a client whose parents gave him Microsoft Corp. stock when he was younger, purchased for relatively little, that is now worth $6 million. If the man were to die in 2009, his family would not owe capital gains tax on the appreciation. And, with good estate planning by the man and his wife, there might be no estate tax due either, because a couple can shelter up to $7 million from federal estate tax.
If the man were to die on January 1, 2010, however, his wife could owe capital gains of around $340,000 on the $6 million, figuring in a $3 million exemption for spouses, and another $1.3 million exemption for whoever inherits.
As for a retroactive tax, it would likely raise some complications if lawmakers wait too long to enact it. Relatives of some people who die in a prospective estate-tax-free period--after the end of the year but before a new tax is enacted--would surely not be pleased. Quite certainly, some would challenge the constitutionality of the tax, according to tax analysts.
Nonetheless, both the lower courts and the Supreme Court historically have defended retroactive taxes. …
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