Archive for the ‘Tax Loopholes’ Category

The perils of long-term financial planning…

October 4, 2019

Frugal savers bulls-eyed as Congress move to end “stretch” IRAs.


According to a WSJ recap…

Conventional financial planning wisdom has been to put as much money as possible into IRAs and 401Ks … starting early, maxing plan contributions, benefiting from company matches, growing accounts tax-free … and, if you don’t end up spending all of the dough in retirement, pass anything left in the pot to heirs.


While that basic logic still holds, Congress is moving to throw a monkey wrench into the works by substantially increasing the tax burden on heirs.

Here’s what’s going on…


What’s the biggest middle class tax break?

August 8, 2019

Hint: Medicare For All would eliminate it and nobody seems to be talking about it.


Anybody remember the Simpson-Bowles Report?


It was commissioned by President Obama shortly after he was first elected … reported out in 2010 …  and trash-canned shortly thereafter … since it predictably recommended spending cuts and  tax increases.

According to Simpson-Bowles, the “biggest“Federal tax break” is ….


Polls: Near-majority opposes GOP tax plan.

December 18, 2017

Gomer Pyle observes: Surprise, surprise, surprise.

MSM is taking great delight reporting polls that show a near- majority of opposing the emerging GOP tax plan.

Some polls have the opposition as high as 55%.

USA Today reports that 48% oppose it and explains:

“53% of those surveyed predict their own families won’t pay lower taxes as a result of the measure.”



Let’s unpack the survey results ….


Is repatriation of cash really a big deal?

December 14, 2017

The WSJ and FT disagree on the impact.  I disagree with both.


Let’s start with some background …

Currently, when a company earns money abroad, it’s taxed in the local jurisdiction where it’s earned … and then the Feds collect U.S. income taxes when the company brings the cash associated with the earnings back to their U.S. accounts.

Most folks agree that represents punitive double taxation.

So, companies tend to keep the cash associated with offshore earnings parked offshore … deferring U.S. income taxes as long as possible.

Currently, the 50 top overseas cash holders have almost $1 trillion parked outside the U.S.

click for full top 50 list


The GOP tax plan moves towards “territorial taxation” … meaning that U.S. companies will only be taxed in the jurisdiction where money is earned.

That makes complete sense to me.

The GOP tax plan also  includes a one-time “deemed repatriation rate” on earnings now held abroad … that rate is proposed to be 14% to 14.49% … lower than the current corporate rate of 35% or the proposed rate of 20%.

Why not a deemed repatriation rate of zero?

I guess the logic is that the current stockpiles of offshore cash were earned under the old double taxation rules … so the companies “owe” the Feds around 35% … offering a deemed rate of 14% roughly splits the difference between 35% and zero.

Here’s were things get interesting …


What’s the biggest tax loophole ?

December 1, 2017

… and, why isn’t it part of the tax reform conversation?


I’ve been scratching my head over what the Senate & Congress are going after under the “tax reform” umbrella … and, what are being treated as sacred cows.

For example, the deductions for mortgage interest and state & local taxes are on the chopping block … but the biggest “Federal tax break” according to Simpson-Bowles and the Pew Foundation is the tax-free status of employer-paid health insurance.

Real tax reform would put employer-paid health insurance under a microscope: it’s clearly compensation that should be recorded on W-2s and taxed at ordinary income tax rates, right?

And, the loophole creates a severely unlevel playing field.

Think of the small business owner (or his employees).

They have to buy their health insurance with after-tax dollars …

That’s not fair, is it?


Before you hit me with the “healthcare is different (and untouchable)” argument, consider this:


Where does Amazon collect sales tax? Why?

July 28, 2015

One of the things that I about Amazon was that my orders didn’t get dinged with sales taxes.

That was then, this is now.

In 2013, I was disappointed to see Amazon start collecting sales taxes in Virginia (my home state).

But, no collected sales tax in Maryland – next state over – where we have a summer vacation shack. shack and a branch of the family tree.

Hmmm …

The arbitrage opportunity evaporated in 2014 when Amazon started collecting sales tax in Maryland.




Some recent purchases sparked my curiosity .  What’s going on?  Are there still arbitrage opportunities?


Is that Warren Buffett driving BK’s getaway car?

August 27, 2014


This one is too good to be true.

Burger King is planning to buy Tim Hortons – a Canadian coffee-and-doughnut chain.

Forget for a second that this is 2014 and doughnuts are, shall we say, a bit out of fashion,

Conventional wisdom is that BK isn’t strategically driving thru the doughnut hole left by Krispy Kreme’s woes.


Though the company denies it, BK seems aimed at turning things upside down tax=wise.

You know, “invert” itself into a Canadian company so that it doesn’t have to pay U.S. taxes on money it earns outside the boundaries of the U.S.

Here’s where things start to get interesting ….


Tax havens … and tax hells.

July 18, 2013

According to a  Cato Institute recap

A couple of economists at a German think tank put together a “tax attractiveness” ranking based on 16 different variables.

They looked at the statutory tax rate  … and, they also considered policies such as “the taxation of dividends and capital gains, withholding taxes, the existence of a group taxation regime, loss offset provision, the double tax treaty network, thin capitalization rules, and controlled foreign company (CFC) rules.”

Drum roll …

Out of 100 nations, the German economists rated the U.S. #96 … in the pack with Indonesia, Philippines,  Zimbabwe, Japan and Egypt.


Here are the rankings for all nations assessed …


Taxes: Ravens’ Flacco moving to Puerto Rico?

March 12, 2013

Oops.  Got the stories crossed.

It’s John Paulson moving to PR.

Flaaco just signed a contract making him the highest paid NFL player ever.

Well, kinda  … more on that below.


It’s being reported that hedge fund legend John Paulson is considering leaving New York to go to Puerto Rico, where a tax loophole would let him reduce taxes on the $9.5 billion he has in his own hedge fund.

Bloomberg reports that several wealthy Americans have already taken advantage of the year-old Puerto Rican law that lets new residents pay no local or U.S. federal taxes on capital gains.

Note: The marginal tax rate for affluent New Yorkers can exceed 50 percent.

Back to the Flacco story … (more…)

Outta Here: Tina Turner bolts for Switzerland.

January 26, 2013

Last week it was Phil Mickelson … the pro golfer said he was considering relocation options to mitigate high tax rates.

Phil – a white, conservative, male – got blasted by the liberal press for his apparent unwillingness to be patriotic and pay his fair share.

Yesterday, the story got more interesting.

Rock icon Tina Turner announced that she’s renouncing her U.S. citizenship to become a Swiss-miss.

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As you may know – or can see above – Tina is not a white, conservative, male.

So the press coverage has been, shall we say, “gentle”.

To that point …


Uh-oh: Buffett isn’t going to like this …

December 10, 2012

Several companies have announced that they’ll pay special dividends this year while investors are still be taxed  “only” 15% on them.

My favorite had been Costco since co-founder and former CEO Jim Sinegal  lambasted the rich at the Democratic National Convention, saying that they aren’t paying their fair share!

Shortly after, Costco then rushed to save its investors some taxes by announcing a special dividend to be paid before year end.

Glance at Yahoo Finance’s list of beneficiaries:


Yep, there’s the holier-than-thou Mr. Sinegal atop the leader board.

I guess he means other rich people should pay more.

Recognize the name coming in 5th at Costco?

Charles Munger is Warren Buffett’s sidekick.

Which provides a nice transition.


Following Costco’s lead, the Washington Post will pay its 2013 dividends before the end of this year to try to spare investors from anticipated tax increases.

Guess who’ll benefit from that tax avoidance move …

Yep, no other than Warren “You Should Pay More Taxes” Buffett.

You see, Buffett’s firm Berkshire Hathaway is reported to be the WaPo’s largest shareholder with an estimated 1.7 million shares … and will get a dividend payment of roughly $17 million .

C’mon man, walk the talk … or shut-up !

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Why not separate business income on 1040s?

December 3, 2012

Given Obama’s obsession with increasing tax rates on the “millionaires & billionaires” making more that $250,000 … and, given the GOP’s rhetoric that they want to protect small businesses … I can’t figure out why they don’t just treat business income reported on 1040s differently than ordinary income.


Specifically, in a prior post  we said:

  • Separate business income reported on 1040s from all other income … then cap the business income portion at 25% … allow losses to offset ordinary income.
  • Then, since Obama is obsessed with raising rates on “millionaires & billionaires” who make more than $250k, I  add some brackets with high rates for folks making more than $500,00, #1 million, etc

= = = = =

A loyal Homa Files reader – who is a part-owner of a relatively small business — that will have his company hammered by Obama’s proposed tax rate change.

Here’s a paraphrase of his real life perspective:

“Personal income” should be just that, the take-home pay and revenue received by the individual worker and should exclude income listed on the K-1 in the personal tax return.

  • Note: Income from S-Corps, LPs, etc., is conveyed via K-1s.  The “corporate income tax” is, in effect, paid by the equity-holders and partners as personal income.

Example: Say an individual “earns” $250,000 and owns 5% of an S-Corp that earns $5MM

The individual gets allocated $250,000 (5% times $5 million) of the S-Corp’s earnings via a K-! … that $250,000 is rolled into the individual’s 1040 return.

  • Important: the individual didn’t get any cash from the S-Corp, just an allocation of earnings.

Having broken the magical $250,000 threshold, Obama’s tax scheme  would certify the individual as a “millionaire or billionaire” and jack up his tax rates to 39.6% … plus 3.8% in ObamaCare taxes since the income is “unearned”.

Think about that.

The highest corporate tax rate is 35% … the average corporate tax rate is much lower.  Think, GE’s zero-percent rate.

But, under Obama’s plan this small business owner gets slapped with a tax rate of over 44%.

Does that sound right to you?

To make matters worse, the individual didn’t get any cash … just an allocation of earnings.

To pay the tax bill, he has to reach into personal funds … which are probably limited since he’s thrown his dough into the company … or, the S-Corp will have to distribute dividends to partially cover the individual’s tax liability.

If the S-Corp pays out dividends to partially fund the owners’ tax liability, the company has less money to invest in the business.

Does that make any sense?

Thanks to ST for feeding the lead

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Follow on Twitter @KenHoma                    >> Latest Posts

Will ObamaCare close the biggest tax loophole?

November 28, 2012

First, what’s the biggest tax loophole?

Answer: The non-taxable payments that companies make towards employees health insurance premiums.

These days, the policy to cover a husband, wife and a couple of kids is about $15,000.

Employers typically pick up about 2/3s of the bill … call it $10,000.

The $10,000 is tax deductible for the company, and isn’t taxed as employee compensation – even though it’s clearly part of an employee’s compensation package.

In total, the health insurance loophole amounts to over $170 billion annually … about twice the mortgage interest deduction … and about twice the “Bush tax cuts for the wealthy”.

Source:  Credit Suisse,  Neal Soss

= = = = =

So, how might ObamaCare close this loophole?

Buffett proposes his own “Buffett Rule” … we like our’s better.

November 27, 2012

Warren Buffet was back at it yesterday, venting his conscience by repping in an NYT op-ed for higher taxes on wealthy folks.

As part of his treatise, he argues that investors aren’t swayed by after-tax returns … pre-tax is what moves them.

Say, what?

Keep reading for his other thoughts and Ken’s proposed Buffett Rule …

Per Simpson-Bowles … go ahead and limit the mortgage interest deduction.

November 16, 2012

Since I think Simpson-Bowles will be the template for the fiscal cliff resolution, I’ve been thinking about its provisions … starting with taxes (of course).


= = = = =

Mortgage Interest Deduction

Currently, income tax payers who itemize are allowed to deduct mortgage interest subject to some liberal restrictions:

  • Mortgages for both primary and second homes are allowed up to a combined mortgage balance of $1 million
  • Home equity loans— up to $100,000 are allowed with some restrictions on use of the funds

Simpson-Bowles proposed that:

  • The mortgage deduction be eliminated and replaced by a non-refundable tax credit.
  • The non-refundable credit would be equal to the interest on a primary home mortgage up to $500,000
  • No credit would be provided for interest on second home mortgages and home equity loans

Let’s do an example.

Say somebody is holding $1 million in mortgages carrying a 5% interest rate … annual interest paid = $50,000.

  • Under current tax regs, the $50,000 is tax deductible … so, if the taxpayer is in the 35% bracket, the deduction is worth $17,500 in tax savings.
  • Under Simpson-Bowles, only $500,000 of the mortgage qualifies … the imputed  interest on the $500,000 is $25,000 … so, the tax payer – regardless of his tax bracket would get a $3,000 credit against his taxes (12% times $25,000 = $3,000)

On balance, I side with with Simpson-Bowles on this one.

In fact, I’d probably be even more aggressive and phase the mortgage interest tax advantage out entirely over, say, 10 years.

My basic logic: Why should home owners get a tax break that’s not available to the 35% of people who rent the place where they live?

Said differently, why should renters who pay income taxes subsidize my mortgage?

And, it’s hard to say, with a straight face, that vacation homes deserve a tax break.

So, I say: start the process of eliminating the mortgage interest deduction.

What do you say?

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Per Simpson-Bowles … go ahead, eliminate the deduction for state & local taxes.

November 15, 2012

Since I think Simpson-Bowles will be the template for the fiscal cliff resolution, I’ve been thinking about its provisions … starting with taxes (of course).


= = = = =

State & Local Taxes

Currently, income tax payers who itemize are allowed to deduct state & local taxes.

Primarily, that includes state & local income taxes and local real estate taxes.

I benefit from both.

Still, I side with with Simpson-Bowles on this one.

My basic logic: Why should Federal income tax payers is relatively low tax & spend states (think FL, TX) be forced to subsidize folks in high tax & spend states (think CA, NY, NJ, MD, DC).

If a goal of tax reform is fairness … that’s not fair!

So, I say: eliminate the deduction for state & local taxes.

What do you say?

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Limit the home mortgage interest deduction … outrageous!

October 16, 2012

Not really … and, it might come up in tonite’s debate.

First, keep in mind that 2/3’s of tax filers take the standard deduction rather than itemizing deductions … so they’d be unaffected.

And, keep in mind the roughly 1/3 of folks rent the place they live … they don’t get a direct mortgage interest deduction … though, economists argue, they get an indirect deduction since their landlords get to deduct mortgage interest as a business expense. So, the playing field would be leveled for home owners and renters.

So, what about limiting the deduction for those folks who currently own a home and  itemize deductions?

Well, for openers, the home mortgage interest deduction is already limited … there’s already a  $1 million cap on the size of a family’s mortgages that qualify for the deduction … the cap is $500,000 for individuals filing separately.

Interest paid on second homes can be included in the deduction, subject to the caps.

Note that the deduction isn’t a direct cap on the amount of interest that can be deducted … it’s a cap on the size of the mortgage(s) … so, a max’ed out family with a $1,000,000 mortgage @ 6% gets to deduct $60,000 … a family with a $1 MM loan at 4% gets to deduct $40,000.

With that as background …

Tightening the limits on the home interest mortgage deduction would be a fairly simple thing to do …

Specifically, what I’d do if I were Mitt:  Slide the limit down to, say $500,000 – which is about double the median home value in the country … disallow mortgage interest on second homes … and do not raise the cap with inflation… that way, the nominal value of the deduction would stick around forever, but “real” value of the deduction would slowly vanish over time … without jolting the real estate market.


BTW: I’d get hammered by this change … but still, I think it would be a right thing to do.

P.S.  As I’ve said before, I’m also in favor of axing the deduction for state & local taxes … if states want to tax high and spend much, that’s their perogative … but, let residents of those states foot the bills … don’t lay off the cost to those of us living in fically responsible staes.  This change would fly politically for Romney since the high tax & spend states are blue ones that won’t vote for him any way … in most red states, Mitt’s proposed rate reductions would offset the loss of the deductions.

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Romney’s $17,000 tax fix … I like it!

October 3, 2012

According to ABC News, Mitt floated an elegantly simple idea for cleaning up the tax code:

Cut every bracket’s marginal rates and  limit deductions to $17,000.

Specifically, Romney said:

“As an option you could say everybody’s going to get up to a $17,000 deduction; and you could use your charitable deduction, your home mortgage deduction,  your healthcare deduction… to fill that bucket, if you will, that $17,000 bucket that way

And higher income people might have a lower number.”

For the record, the idea would hurt me personally since I carry a couple of jumbo mortgages and make charitable donations.

Still, I think the idea is GREAT.

It simplifies the tax code … and levels the field, say, between renters and home owners.

I’ll continue to give to charities … so will Mitt … so will most current donors.

If charities don’t have powerful enough value propositions to raise money, that’s their problem.

I really like that the change would screw folks in high tax Blue states – e.g. NY, CA – since the deduction for state & local taxes would fall under the cap.

There’s less of an impact on folks in well run states (like VA) … that’ll give tax & spend states more motivation to clean up their own acts.

Sure, there are plenty of details to be worked out (e.g. how to handle child credits) … but, I think this simple plan might be a game-changer.

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How much can a family with 2 kids earn and still pay zero Federal income taxes?

September 25, 2012

The  answer is about $45,000

Reminder: Median household income is just a tad over $50,000

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Here’s an analytical walk-through from the non-partisan Tax Foundation

Start with the answer: assume  a family of four making $45,000 in adjusted gross income.

Subtract a standard deduction of $11,600 and personal exemptions of $14,800 (four times $3,700) and the family’s taxable income is reduced to $18,600.

The family is taxed at 10 percent on their first $17,000 of income and at 15 percent for their remaining $1,600 of income, giving them a total tax liability of $1,940.

But, they allowed to deduct two tax credits of $1,000 for each of their two children.

And, they’re allowed to deduct an additional $214 due to the Earned Income Tax Credit, which is a credit designed to financially assist low to
moderate income working families.

Subtracting these tax credits from the family’s tax liability brings their $1,940 liability below zero.

However, since the child credits and Earned Income Tax Credit are so-called refundable tax credits, the family ends up receiving a check for $274 from the IRS for the remaining value of their tax credits.

For families who are eligible for other credits such as the child care credit, education credit, or the tax credit for purchasing a hybrid vehicle….. AGI can go higher than $45,000 with no tax liability.


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Ironic Twist

The same George Bush that the left demonizes is the President who signed the 10% marginal tax bracket, boosted the child credits, and introduced the refunable tax credits.

The irony: liberals should be praising him and conservatives should be dissing him.

If it weren’t for the evil Bush tax cuts, we wouldn’t be at the now famous 47% level of folks not paying Federal income taxes.


Tomorrow: Who pays taxes and who gets the benefits?

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Buffett Rule passes the House … now, you’re talking.

September 20, 2012

What gridlock in Washington?

Yesterday, the House of Reps passed a Buffett Rule that should put an end to Warren’s carping about how his taxes are too low.

According to the Washington Times:

The House passed Republicans’ own version of the Buffett Rule, which allows wealthy Americans to voluntarily pony up to reduce the deficit.

The bill, labeled the Buffett Rule Act, passed by voice vote, meaning Democrats and Republicans agreed with it.

Under the legislation, taxpayers can check a box on their taxes and send in a check for more than they owe to the IRS.

“If Warren Buffett and others like him truly feel they’re not paying enough in taxes, they can use the Buffett Rule Act to put their money where their mouth is and voluntarily send in more to pay down the national debt, rather than changing the entire tax code to inflict more job-killing tax hikes on hard-working Americans.”

Current law already allows taxpayers to send money to pay down the debt, but the process is a bit onerous.

Under their new plan, taxpayers would have an easy option on their tax returns allowing them to pay more.

Under the legislation, the money would go directly toward reducing the debt.

So, do you think Buffett will put his money where his mouth is?

I’m betting the under.

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TAX WARNING to DINKs: The marriage penalty is coming back …

July 31, 2012

One of the provisions of the Bush tax plan was to eliminate the so-called marriage penalty … the tax rules and rates that had a husband & wife pay more income taxes if they were married than if they stayed single.

I’ve been bemused that in all of the chatter about Obama’s obsession with jacking rates, I haven’t heard anything about the resurrection of the marriage penalty …  at least for evil rich people.


Here’s the rub: Obama’s tax hikes apply to individuals earning more than $200,000 and families earning more than $250,000.

Let’s do a simple example: Sally and Bob – single and living together – each earn $200,000.

So, Obama doesn’t touch their wallets.

But, if Sally & Bob get married … then BAM !

Their income taxes go up about $6,000.


Of their $400,000 combined income, the first $250,000 is immunized from Obama’s tax hikes.

But, the $150,000 over the $250,000 ceiling on fair earnings … gets hit with the roughly 4% increase in the upper bracket marginal tax rates (from 35% to 39.6%).

Simple arithmetic: $150,000 times 4% = $6,000.

Back to the key point: tying the knot costs Bob & Sally about $6,000 annually in added taxes.

On average, that accumulates to about $250,000 in added taxes over their expected lifetimes … just because they got married.

Is that fair?

Note: polls consistently say that singles lean more towards Obama than do married folks.

It’s called economic rationality.

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In the good old days, 88% paid Federal income taxes… not now!

June 6, 2012

OK, you gotta go way back to  1969, but then, 88% of the U.S. population was represented on a taxable return — either as a taxpayer or a dependent.

Now, according to the Heritage Foundation, that number is down to about 50%.


While Obama’s policies (and the recession) have ticked us to a non-taxpaying majority, the blame (or credit, depending on your perspective) belongs to Bush … when he took office in 2001, about 2/3s of the population were represented on taxpaying returns … when he left office in 2009, we were close to the 50 / 50 split.

While the Dems like to harp on the tax breaks to millionaires and billionaires, a whopping 15% of the population benefited by being taken off the tax rolls.

Maybe the economics are sensible, but the political dynamics aren’t …

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Sara Lee splits company … incorporates part in the Netherlands.

March 6, 2012

I bet you missed this one.

It announced on a Friday afternoon, so most folks missed it.  And, it sounds innocuous enough …

According to the WSJ:

Sara Lee Corp. said Friday it will seek a listing for its coffee and tea business on the Amsterdam stock exchange, as part of its plan to split the company in two.

Sara Lee said the business will be incorporated in the Netherlands, where its Douwe Egberts coffee brand is already based.

The new company, which also makes Pickwick Teas, will be headquartered in Amsterdam.

Maybe the move is simply to get company execs closer to the relevant markets.

Call me cynical, but I think we’re going to see quite a few of these offshore splits by U.S. companies.


Simple.  If Team O continues to push for taxation without repatriation of non-U.S. earnings, you can bet that more American companies will split and plant major parts of their companies in non-U.S. locations.

The economics are compelling …

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Best tax loophole: millionaires writing off gambling losses

November 18, 2011

Sen. Tom Coburn issued a report called: “Subsidies of the rich & famous.”

I thought I’d get a couple of posts out it, but it turned out to be old news (Bon Jovi calling his estate a bee farm and paying practically no taxes) … and the result of not means testing Social Security and Medicare.

Two of the subsidies did catch my eye:

1)  Millionaires deducted more than  $20 billion in gambling losses … though, even that’s not such a big deal since they simply offset gambling winning … they don’t deduct from ordinary income.


2) Millionaires copped  almost $21 million in Unemployment Insurance … not a big amount, but c’mon man.


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