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Recent Tax Court decision could wreak ha

Glover v. Comm, a recent tax court decision, presents several issues to Merchant Mariners. Mr. Glover worked for Reinauer Transportation. His tugs pushed oil coastwise as far as Virginia. The tugs wou

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Recent Tax Court decision could wreak havoc on Mariners

State Taxes and Mariners

Suz asked this question So, what about if you live in one state (TN) and work as a merchant mariner in another state (HI), 45 days on/45 days off rotation? Do you pay HI state taxes, or does the payro

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State Taxes and Mariners

Mariner Tax Update January 2011

E-Filing alert! How many times have you read that mariners cannot E-File? How many websites have posted this. Year after year. And then all of a sudden preparers start proclaiming “mariners can

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Mariner Tax Update January 2011

Employee vs. Non-Employee LLC and S-Corp

I’ve been a client of yours for a few years now and I had a general tax question concerning my wife’s job status. She currently works full time for a marketing firm in “Deleted”

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Employee vs. Non-Employee LLC and S-Corp Planning for Mariners and their families

Maritime Tax Preparers and the Alternati

What they don’t want you to know… This video points out the tremendous effect of the AMT on merchant mariners. Seamen taking business deductions and offsets may very well be realizing litt

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Maritime Tax Preparers and the Alternative Minimum Tax

White House Gives In On Bush Tax Cuts

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by on November 13, 2010 at 4:30 pm

WASHINGTON — President Barack Obama’s top adviser suggested to The Huffington Post late Wednesday that the administration is ready to accept an across-the-board, temporary continuation of steep Bush-era tax cuts, including those for the wealthiest taxpayers.

via White House Gives In On Bush Tax Cuts.

in IRS Updates

Integrated Financial Partners – Time to Get Back to RMDs

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by on November 9, 2010 at 1:45 am

Time to Get Back to RMDs

If you took advantage of the temporary reprieve that allowed you to skip required minimum distributions from traditional IRAs and employer-sponsored retirement plans in 2009, be aware that no such exemption exists for the 2010 tax year. The deadline for taking required minimum distributions for 2010 is December 31, 2010.

Even if you didn’t take advantage of the opportunity to skip your RMD in 2009, you may want to keep reading. Failing to take the appropriate minimum distribution from tax-deferred retirement plans carries one of the highest tax penalties in the tax code.

What Is an RMD?

Tax-deferred retirement vehicles allow participants to defer paying current taxes on their contributions and earnings until they begin taking withdrawals, generally in retirement. To ensure that investors don’t postpone their income taxes indefinitely, the tax code stipulates that they must begin taking RMDs from traditional IRAs and qualified retirement plans after reaching age 70½ or face a tax penalty equal to 50% of the amount that should have been withdrawn.

The amount that must be withdrawn in 2010 is calculated based on the account owner’s life expectancy (generally based on an IRS uniform lifetime table) and the account balance(s) on December 31, 2009.

One Time Only

Congress suspended RMDs in 2009 to give investors time to recover from losses they may have experienced in 2008. However, Congress did not extend the suspension of RMDs beyond the 2009 calendar year.

Because RMDs are derived from complex calculations and the tax penalty for mistakes is so high, it may be a good idea to consult a tax professional before taking required minimum distributions. In the meantime, use the table to help calculate the date when RMDs must begin.

via Integrated Financial Partners – Time to Get Back to RMDs : Newsletter: Time to Get Back to RMDs.

An examination of married joint and separate filing status

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by on November 9, 2010 at 12:32 am

With this ring we pay less?

It was July…. Hot summer day. I was in my office trying to close out a couple of projects… Hoping to get to the marina before 6… My phone rings. I’ll never forget. It was one of my clients mothers. She had her daughter on the other line. I’d known her daughter for several years. Smart girl. Loved her career. Took advantage of its’ uniqueness. Bought a rental property at her favorite ski hole. Took the time to enjoy the opportunities shipping provided.

Why was mom calling?

“I need you to do me a favor.” she said. “Can you please explain to her how much she would save in taxes if she got married!!!”

Tricky situation for anyone to be put in. Professionally, I have an obligation to provide an informed opinion within my profession. “What does he do for a living?” I ask. “He sails out too… We make about the same…” she said. “Well then, getting married will probably make the tax burden a little worse.”….

“What!!!” mom screamed, as her plan was crashing through the floorboards. “I’m sorry” I said, “but these two are already prime candidates for the marriage penalty”.

What is the marriage penalty?

In the beginning – which is 1913 from the Federal Income Tax perspective, there was a general “bucket” for all types of taxpayers – be it single, head of household, married, etc… There have been many changes to the structure of filing status for the income tax over the years. Our current revision of filing types took form under tricky Dick in 1970.

Point being, married status was made during a different period. In 1970 $10,000 was a fair salary, a high end Ford Mustang convertible ran about $4,000, a new house was about $23,000, and e-mail was a postage class… There was one other aspect that plays a key role from the tax perspective – a married household had one wage earner on average. The structure of filing married was developed under the assumption that only one spouse worked.

Back then if I earned the average household income of $10,000, I could have owned the house and the Mustang outright in less than 3 years. Now days we have an average household income of $50,000, a high end Mustang runs $40,000, and a new house (sparingly) runs at $250,000. The same purchase will take just short of six years. The time to acquire the assets has doubled. This is one reason that everyone works in 93% of modern American households.

Pitfalls of married joint

A single income household will recognize a large benefit from filing married jointly. The tax rates are lower, threshold phase outs for many credits and deductions are higher, refundable credit allowances are higher, etc…

Three big issues -

  1. When we combine a two income household, one income gets stacked on top of the first – meaning it will be taxed very aggressively. It can effectively neutralize the benefit of the lower tax brackets.
  2. The higher phase outs for credits and deductions is not “twice” as big as it would be if you were single. Generally the factor used is 1.5 – meaning a dual income household will pass the phase out point quicker than comparable single filers.
  3. We don’t get a higher range or phaseout on everything. Two examples are capital and passive losses. If we sell stock and have a net capital loss of $50,000, we can deduct a maximum of $3,000 annually – single or married…. Passive loss limitations stay at $25,000 regardless as well.

So I’ll Just File Married Single?

Not the same. A common misconception. First, there is no married filing single status. It is married filing separate. Second, it is not the same as filing single. Deductions and phase out limitations have to be allocated between the two separate returns. It is generally more expensive to file this way.

The main reason couples file married separate is that they do not want to have any involvement in their spouses financial or tax matters – aka married Tony Soprano :)

When does it become a concern

We could fill books with statistics and histories. Here’s the readers digest approach… If both spouses work, things will get more difficult past an AGI of $110,000 and will be outright miserable as you approach and pass $200,000.

So start planning now. See what you can do to offset income before it becomes an issue. Just like sailing – preventative maintenance eliminates the need for damage control.

Break down the Bush tax cuts

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by on November 9, 2010 at 12:19 am

Will mariners be affected?

Tax Cuts For MarinersMost likely. Let’s examine two important aspects…

Capital Gains/Dividends

Preferable capital gain rates would rise back to 20%. Dividends would be treated as ordinary income. This could mean a 25% swing for some taxpayers.

Tax Brackets

Not only for the wealthy! Even the 10% tax bracket will be raised to 15%.

Marriage Penalty

Back in force. Especially painful will be pretty much 50% cutback on the Alternative Minimum Tax exemption. Individuals with a large amount of State, Real Estate taxes and employee business deductions (aka mariners and tradesmen) will be especially effected.

Easy way to see it

If you paid taxes before – you’ll pay more after. Many individuals do not pay taxes at all. This can be due to a multitude of facts and circumstances. Primarily income.

Hopefully something will be done. A family who was scraping by with the current economy – say 150,000, house, two kids in college (sorry no financial age for you), lot of AMT expenses…. They would be prime candidates. If they had been scraping by, something would have to give to pay the mortgage.

Mariners have flexibility finding residences

1
by on November 7, 2010 at 3:53 pm

How you live plays a factor

Studies have evolved to encompass the “individual” factors in financial decision making. State tax rates can be quite deceiving if we don’t account for all taxes imposed. A mariner examining only the State’s income tax is ignoring many other taxes the State may impose on their specific lifestyle.

A smoker wanting to save some dough might prefer to live in South Carolina, which charges just 7 cents a pack — as opposed to the state tax average of $1.19. A heavy drinker might want to move from Oregon, where hard liquor is taxed at the rate of nearly $21 a gallon, to Maryland or Washington, D.C., which have the country’s lowest liquor taxes, $1.50 a gallon.

Are you a lottery devotee? You’ll keep more of your winnings in Rhode Island, which takes a tax of 22 cents on the dollar, and the least in West Virginia, with a 61-cent tax.

Of course, even Ted Taxpayer and Debbie Deduction, two people making the same salary and living in the same neighborhood, pay different amounts in taxes. For example, Ted’s house is worth more, so he pays higher property taxes; Debbie buys fewer goods and services, thus saving on sales taxes; Ted drives a gas hog and commutes farther to work, costing him more in gas taxes; Debbie doesn’t drink or smoke, so she saves on so-called sin taxes.

via The best and worst states for taxes – MSN Money.

Bush tax cuts: Obama will negotiate – Nov. 6, 2010

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by on November 7, 2010 at 3:33 pm

The look of compromise

So what kind of tax-cut extension could both parties live with?

Two Washington tax policy analysts — Clint Stretch of Deloitte Tax and Anne Mathias of MF Global’s Washington Research Group — believe the most likely compromise will be a temporary extension for everyone for one or two years.

Mathias believes Obama “will not veto a bill that extends them for all.”

Stretch said that a temporary extension for all carries less political risk for Republicans than other scenarios floated, such as a permanent extension for the middle-class but a temporary one for the rich.

“If the Republicans really care about high-income taxpayers, they can’t let them get separated from the middle class,” Stretch said.

Democrats, meanwhile, can frame a temporary extension as a way to give everyone time to figure out how to slow growth in the U.S. debt, much like what House Majority Leader Steny Hoyer suggested this summer, Stretch said.

via Bush tax cuts: Obama will negotiate – Nov. 6, 2010.

in IRS Updates

Tax Advisor’s for Transportation Workers

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by on November 5, 2010 at 8:56 pm

Dr. Emery says,

Intuition can supplement logic in problem solving and decision making but it has been unjustifiably ignored in modern times.

http://www.drmarciaemery.com/about.htm

Does this mean we should follow our gut when choosing a tax advisor? Certainly not. But be sure not to ignore that voice as well. Sometimes that little voice in the back of our head is quite wise. But sometimes we’ve been in an engine room without ear protection for too long and are hearing things.

What issues does a transportation worker encounter?

Colleen’s email sums it up pretty well -

When I graduated from Mass Maritime I heard rumors about “tax breaks” for mariners. I didn’t want to miss out. I found a preparer who seemed to be popular with transportation workers, specifically performing tax services for mariners. My returns were expensive to prepare. But I was told the tax savings were far beyond the cost. Not only was I audited for 3 years. He never answered my calls when I was looking for advice. I misunderstood the law when I bought my first house. I thought retirement money would be tax exempt. It was the first year I owed. $8,168 – I’ll never forget. Then after the audits I owed an additional $9,300. Then I was hit with interest and penalty charges. Where was my preparer? I still don’t know. I was told he no longer supports the deductions he once took. I was also told that he’s now pushing the same deductions on pilots.

The “but for” test will take you a long way…

But for test? Yes… It’s a staple of taxation, and it’s quite valuable decision making tool. In tax, a deduction or shelter is not valid if it fails this test. “No one would take this deduction BUT FOR the tax advantages”. There needs to be a primary purpose for the transaction before the tax benefit. Yes, you can receive a tax benefit. But that is not your #1 reason for entering into the arrangement. A rental property can show a net loss. The Primary purpose is property management. The net loss is a secondary effect.

How would Dr. Emery approach Colleen’s situation?

She would probably ask Colleen has certain she was about the write offs her preparer was taking. Had Colleen heard any scuttlebutt about audits, lawsuits, and things as such? Or did Colleen ignore the little voice in her head – sign and mail the return – putting blind faith in the preparer? Probably. But that’s common. It’s why we trust professionals. It’s also why professionals are held to higher standards in their field.

Merging intuition with maritime logic…

Do your own but for test…

  1. Does this advisor have many clients outside of the maritime or transportation industry. – a well rounded preparer would have advised Colleen regarding her real estate transaction properly. This could have saved thousands.
  2. Does the advisor offer planning updates throughout the year?
  3. Is the advisor willing to sit down with you to discuss future planning?
  4. Does the advisor become cryptic when explaining their process for preparing transportation workers returns? This is a big flag!
  5. What community ties does your advisor have? How are they connected to your industry? Dr. Emery might say there was an intuitive issue from the onset. Why are they targeting this industry?

Would they have a business “but for” the maritime and transportation aspect? If you think not, remember…. If they can’t operate “but for” the niche income, they have to keep it going. This is quite often when honest people begin crossing lines. Gambling on audit probability. Hoping their numbers won’t drop too drastically.

How Do I Change My Residence?

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by on November 5, 2010 at 7:06 pm

Should I move to a no-tax State

This is one of my favorites. It’s certainly something that’s worth considering. But it isn’t necessarily cut and dry. There are additional factors you should consider.

Moving Issues

  1. Do I want to move? Honestly this plays a big part. If you’re going to pick up and move for the sole purpose of tax benefits, it may well be a short lived venture.
  2. What is the cost of living where I’m moving to? Property taxes, transportation, utilities and such can suppress the tax benefit derived from moving.
  3. What is my current state tax burden? Ask your tax advisor to explain your current and projected recognized state income.

When Does Changing Residence Make The Most Sense?

I would say a target area for moving would be someone who is a New York City Resident. They are paying both State and City income taxes. My personal issue with this is if you’re shipping out, you’re not enjoying the benefits of being a city resident year round. You’re paying a premium. Half of the year you’re standing watch.

Other States such as California and Maine have aggressive tax rates (especially for Upper Middle Class earners). A residence change could eliminate an aggressive tax burden. In dollars and cents a mariner earning $120,000 could save upwards of $10,000 annually if they move from a high tax State to a tax free State.

More Fuel For The Fire

Family considerations will be a factor as well. Do you live in a State where your kids will receive tuition discounts for college if they are in State residents? Do they receive better consideration for admission? Where does your spouse work? Will this fit into the equation? Are you considering transitioning to a shore side position in the future? How is the job market in the State you are considering moving to?

Drivers License To Prove Residence?

Stay away from snake oil salesmen! Residence is uniquely defined by each State individually. But there’s one common trait. You need to RESIDE in the State in order to be a Resident. Not to be all inclusive – here are some factors considered

  1. When you get off of the vessel, where do you go first?
  2. Where do you own property?
  3. Where have you signed leases?
  4. Where is your family and ties?
  5. Where are your bank accounts, management accounts?
  6. Where are you registered to vote?
  7. Where are your vehicles insured?
  8. Where do you spend your time when you’re not working?

Not an absolute list. But it gives an idea. If your prior State comes looking asserting you are still a resident, the burden is on you to demonstrate otherwise. With the poor economy, States are feeling the blow as well. They are less likely to be agreeable with uncertainty.

Moderation is generally a good approach. Before leaping to another State of residence, examine the benefits. Be sure to see if there are actions you can take in your current State of residence to lower the tax burden. In some cases, moving 1 mile within the same State can save thousands.

Do Mariners Pay State Taxes?

2
by on November 5, 2010 at 6:50 pm

Does Residence Determine Liability?

First, let’s start with the basics. If you weren’t working as a Merchant Seaman and you worked in a State, you would be liable for State income taxes to the state you worked in.

Say Billy is a plumber. He lives in Massachusetts and works in Rhode Island. He would file and pay taxes to Rhode Island as a non-resident.

Does Billy Get Taxed Twice Then?

Usually not. Your State of residence generally allows a credit for taxes paid to another State. There’s two instances where this could be an issue.

  1. You live in New Hampshire and work in Massachusetts. You would pay Massachusetts income taxes as a non-resident. You wouldn’t be able to deduct the taxes paid in New Hampshire as that State has NO income tax.
  2. You live in a State with a lower tax rate than the State you work in. Generally your credit can only equal the amount that would have been due in your State of residence.

Then why aren’t mariners taxed this way?

Understand it isn’t because you have a Z-Card. It is because of the nature of your employment. When we dive into USCS Section 46 we find a section that specifically addresses the State taxation of mariners.

(a) Withholding.– Wages due or accruing to a master or seaman on a vessel in the foreign, coastwise, intercoastal, interstate, or noncontiguous trade or an individual employed on a fishing vessel or any fish processing vessel may not be withheld under the tax laws of a State or a political subdivision of a State. However, this section does not prohibit withholding wages of a seaman on a vessel in the coastwise trade between ports in the same State if the withholding is under a voluntary agreement between the seaman and the employer of the seaman.

(b) Liability.–

(1) Limitation on jurisdiction to tax.– An individual to whom this subsection applies is not subject to the income tax laws of a State or political subdivision of a State, other than the State and political subdivision in which the individual resides, with respect to compensation for the performance of duties described in paragraph (2).
(2) Application.– This subsection applies to an individual–

(A) engaged on a vessel to perform assigned duties in more than one State as a pilot licensed under section 7101 of this title or licensed or authorized under the laws of a State; or
(B) who performs regularly-assigned duties while engaged as a master, officer, or crewman on a vessel operating on the navigable waters of more than one State.

So Mariners pay their State of residence?

Usually, yes. Foreign articles are rarely an issue. Coastal Voyages meet criteria as well. There’s a few instances where there can be an issue.

  1. You work on a harbor tug. It never leaves the harbor of a city. It is not engaged in interstate transport.
  2. You work on a ferry that never completes a foreign voyage and stays in one state.
  3. You work on a drill platform that does not constitute a foreign voyage.

By definition, these can cause issues in determining exemption from liability. Maritime professionals working in the Gulf of Mexico should also be aware that the Gulf Zone Opportunities Act may provide additional aid in obtaining specific tax status.

Long Term Care Insurance

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by on November 5, 2010 at 3:21 pm

Choosing Long Term Care Insurance

I have many clients who have long term care insurance, and many who don’t.  From what I’ve seen, my clients with long term care insurance have many more options when it comes to choosing care and choosing where they live than my clients who don’t.  The New York Times has a recent article about how to choose a long term care insurance policy.
One of the first questions people always ask about long term care insurance is “how much does it cost.” The costs vary widely depending on the age you are when you obtain the policy, how much the policy will cover (they usually cover a certain dollar amount per day) and how long the policy will pay for care.  Other policies may give you a “bucket” of money and your coverage lasts until it is gone.
Long term care insurance covers things that traditional Medicare and health insurance don’t – medical care in the home, longer term care at a nursing home, and even pay for assisted living costs.
The time to start looking into policies is in your 50′s, since the premiums will be lower than if you start later, and there is less of a chance that you will suffer from a health problem that could cause your premiums to be extremely high or prevent you from getting coverage all together.
A long term care insurance policy will kick-in when the policy holder is unable to perform one or more activity of daily living (bathing, dressing, eating, walking).  Check your policy since they can vary in terms of how many ADLs you must be unable to perform before coverage will start.
Things to look for in a policy:

  • Where can the care be provided? Home, nursing home, assisted living.  Most people want flexible options.
  • What types of caregivers can be paid by the policy? The article recommends a policy that covers
  • “skilled, intermediate and custodial care,” which would include someone who could assist with laundry and meal preparation.
  • What illnesses are covered? Be sure that illnesses such as Alzheimer’s aren’t excluded from coverage, which was common in some of the older policies.  Read the list of exclusions on any policy before you buy it.
  • Does the policy provide inflation protection? What seems like adequate coverage now, may not be what you need in 20 or 30 years if it doesn’t keep up with inflation.

To control the costs of the policy, the article has the following tips:

Avoid lifetime benefits. Opt instead for a policy that covers a set amount of time, like four or five years, suggests Ms. Driscoll. The average nursing home stay is two to three years, she points out, and only 12 percent of patients live longer than five years once they enter.

Look for a policy that pays a monthly sum. Most policies specify a daily benefit — anywhere from $50 to $500. Recently insurers have begun using a monthly amount so you have the flexibility to receive more care on some days, when no family member is available, for example, and less care on others.

Consider a front-loaded policy. With these, you pay the entire cost of the premiums before you retire. You’ll pay more upfront, but payments will end just as your income decreases.

Look into cash benefit policies. Once benefit payments kick in, these policies will send you a regular cash payment, say $200 a week. Instead of filing claims for specific care (with specific requirements to qualify for coverage) you are free to use the payout however you see fit.

You may still pay the nursing home or home health care attendant with the money when the need arises. But you can also use the cash to pay a family member for care, pay travel expenses for a visiting relative and take care of other expenses that would not be reimbursed under a traditional policy. You’ll pay more for these policies, but some families find the extra flexibility is worth it.

Find a good agent. You’ll need someone who is experienced in long-term care, Ms. Driscoll says. This might be the same insurance agent who sold you your life and auto policy, or you may need to find a specialist. Either way, make sure the person fully understands your needs and is active enough to be selling at least a dozen policies a year.

Paying for in-home or nursing home care privately can often exhaust a person’s resources leaving them far fewer options when their funds run out.  By obtaining long term care insurance, a person often can remain in their home far longer than without the insurance, and make sure that a spouse or other family member doesn’t become impoverished by the cost of care.  In addition, many people find that it allows them to preserve assets to pass on to the next generation, and that it fits in well with their overall estate plan.