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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

2011 Social Security Tax Cuts

1
by on December 29, 2010 at 5:40 pm

What to expect -

There will be a 2% decrease in Social Security withholding in 2011. We are normally taxed at 6.2% up to the first $106,800 earned. The benefit comes out to about $20 per thousand. This could mean a maximum savings of $2,136 (per spouse).

Irony -

  • Since we’re losing the making work pay credit, low income households may very well see a decrease in tax benefits in comparison to last year.
  • Isn’t Social Security underfunded as it is? How will this help to catch up?
  • By lowering Social Security withholding instead of providing an untaxed credit, they are able to still tax all of your savings – aka – social security wages and non social security wages are subject to the Federal Income Tax. The making work pay credit is not…

Great job guys… Please don’t become air traffic controllers :)

Making Gifts From Your IRA

0
by on December 28, 2010 at 5:45 pm

Wish I had this problem…

The provision itself is simple–at least as tax rules go. It allows a taxpayer who is 70½ or older to contribute a total of $100,000 in IRA assets to one or more qualified charities. The payout can satisfy the required minimal distribution. The donor gets no deduction, but neither does he or she have to report the payouts as income.

That last point is key: If the donor had to claim the payout as income and then deduct it, there could be problems. The deduction itself could be limited because of other tax rules, or else the donation might swell the donor’s reported income, possibly raising Medicare premiums or taxes on Social Security payments. Instead, the donation bypasses tax calculations altogether.

via Tax Report: Making Gifts From Your IRA – WSJ.com.

Mariners last minute tax checklist…

2
by on December 28, 2010 at 5:36 pm

Shipped out all year?

That’s a lot of dough… With four days left in the year you may be wondering how much you’ll be owning when you file your return next spring. You might be able to substantially reduce your tax bill if you act now. But when the ball drops at midnight – game over… There’s one golden rule – time deductions in December and income in January….

Here’s a few helpful last minute tips…

  1. Do you pay State income taxes? Did you make your estimated payments? Did you make your 4th quarter payment? Do it now… You get the deduction in the year the taxes are paid. By writing a check out for $5,000 in December, you’ll get a deduction for Tax Year 2010. If you wait until 2011, you’re out of luck.
  2. Homeowner? If so, two things. Make your January mortgage payment and pay your property tax bill. Again, you’ll get the property tax and interest deduction for Tax Year 2010.
  3. Are you due vacation pay? Don’t file until next year! That way you hold the money for the year before you pay.
  4. In the Union? Paying down an initiation fee? Pay it down. Or pay your dues for that matter.
  5. Need to take license? Pay the fees now.
  6. Need a certification class? Sign up and pay.
  7. Flying to a hall to look for work? Buy your ticket.
  8. Have some loser stocks? Dump em… Up to a $3,000 net loss.
  9. Energy credit is still in effect. If you were going to upgrade your home anyways, might as well get the tax benefit.
  10. There are still several hybrid credits available as well.

Things I didn’t mention

  1. Close on the house you’re buying… You won’t see any benefit until next year.
  2. Pay medical expenses. With the 7.5% limitation, there’s rarely a recognized benefit.
  3. Donate that old junk car. I applaud charitable tendencies. But from a tax perspective it’s not very beneficial. Odds are you won’t get more than a $500 deduction (about $150 cash). If you can sell it for $500 on craigslist, you’re in better shape… Again, I’m not discounting donations, just not solely for tax purposes. It’s more of a fringe benefit.

Gambling Income and Various Windfalls

0
by on December 28, 2010 at 4:53 pm

Bite the Bullet?

I remember the night as though it was yesterday. I was in Vegas… At Caesar’s…. I walked up to the slots in the far corner of the casino. I had changed a hundred in quarters (yes, they were still using actual coins then). I was playing 5 coins a pull. A few spins, and nothing…. And then – lights, bells, and excitement… I hit the jackpot…. 10,000 coin payout ($2,500 in cash)…. I was overwhelmed with excitement. But then I had a realization…

It wasn’t the taxes

I realize that would be the conclusion in this forum… But taxes were the furthest from my mind. See I was 18 then. And besides attracting a ton of attention, the high jackpot hits come with a visit from the casino staff. They need to issue a W-2 on the spot. But again… Taxes were the furthest from my mind.

I’d like to say I walked out with the cash… But all they handed me was my 5 quarters back from the winning pull. Lesson learned.

Hindsight

I’ve rarely had the good fortune of a huge payout at the casinos since that day. I’m also more apt to frequent the blackjack and poker tables now a days. But what happens? What can we do when we hit the big jackpot? Several things. Let’s go through a few scenarios.

You won $5,000

Nice… Depending on where you’re gambling they may withhold Federal taxes on the spot. Someone with a $75,000 income won’t be horribly effected by this type of windfall. If you’re already itemizing remember that you can deduct gambling losses up to the extent of winning. I’d figure about a $1,200 Federal tax hit without gambling losses (the State will depend on where you reside). In Massachusetts, 5 cents on the dollar is fair. States like Massachusetts don’t allow you to deduct gambling losses (only the price of the winning ticket), so you will face the tax blow here.

You Won $50,000

This is a slightly different playing field. Clients don’t generally have $50,000 in gambling write offs so it presents a predicament. This will nudge you into another bracket most likely. Probably fair to say about $13,000 in Federal taxes before write offs. The $75,000 baseline income is going to be severely jarred by this increase in income. Odds are that income will not be this high again in the next five years. That makes this is a prime year to allocate offsets and deductions. Several approaches…

  1. Track your gambling. See accepted logging methods later in this article.
  2. Dump a loser – no not the relationship type… If you have stocks with built in losses unload enough to have a $3,000 overall loss. This will help lower the brunt of the tax blow in this uniquely high marginal tax rate.
  3. 401(k)/IRA’s – I’m not the type to jump out of my chair when it comes to for AGI retirement planning. But in this case it is offsetting high bracket income.
  4. Are you already itemized and past the 2% floor? This could be a good year to load up necessary business expenses.
  5. Did you pay the State???? If you’re the type of person who doesn’t pay their State taxes until the following year, think twice… State taxes paid are Deductible!!!! Actually if you overpaid the State it would probably help even more. Just make sure they have the check by Dec 31. Recapture will be in a lower tax bracket – never mind the time savings.
  6. Married? Engaged? Not that this is a SOLE reason to tie the knot, but depending on respective earnings it could certainly lessen the blow.
  7. Got Kids? Want some? I know this sounds off the wall. But perhaps your sister, brother, uncle, or girlfriend who has been living with you brought a few bundles of joy along as room mates. Point being, you might meet all requirements to claim the kids (and relatives for that matter)… If you do, this certainly would be a good year to investigate this.
  8. Do you own a rental property or other passive interest with suspended losses? This might be a good year to sell. When $$$ is too high we have to wait until complete disposition to put the suspended losses on the books. A superheated tax return may be enough of a straw to break that camels back.

What doesn’t help?

Less helpful approaches -

  1. Medical expenses – with a 7.5% floor, you’re most likely not going to be able to recognize any deduction whatsoever.
  2. Partnership and trust hedging… Depending on the bottom line this may or may not be effective. Fact is that as income increases we lose the ability to deduct passive losses. You may well be having suspended losses carrying over to a year when your income and tax bracket are lower. Many of these half cocked ideas come from substance. The problem is that the income has to be within the entity (the books are balanced within the trust, partnership, s-corp, etc….) Otherwise there are too many roadblocks.
  3. And many more – You really need to examine these instances on a case by case basis

You won $1,000,000 +

It does happen! Several clients have won large lump sums… Several have also taken out structured payments (annuities)

Things to remember -

  • Liability protection – with this type of income, a trip to a decent estate planner is warranted. People tend to slip in fall in a millionaires driveway more often than normally. Specific trust and estate planning may shield you from severe liability down the road.
  • Married? Be warned… As the lottery cash payouts exceed the five million mark the percentage of couples who REMAIN married exponentially approaches zero. Wives initiate divorce proceedings on a 2 to 1 ratio.
  • Debating between a lump sum and cash payout? Throw this onto the fire. That annual payment would be considered part of your estate for medicaid purposes. Meaning 20 years from now, the State will take it. I’ve worked with several clients who had their annuities purchased at a large loss.
  • Beware of the propositions… Many companies will pitch you with various tax schemes stating they can substantially reduce your overall liability. These normally turn out to be bogus. The IRS doesn’t care… They will keep you on the hook for the balance due, interest and penalties….

I won a prize?

I had a client who won a lamborghini several years back. Problem is he still doesn’t have it. He won it in Vegas and was required to prepay the taxes before receiving the prize.

  • Remember you can offset these winnings with eligible gambling losses
  • Unless this prize is something you would have purchased regardless, consider a buyout option. You will be paying taxes on the retail version. You may well be better off with an addition on the house as opposed to a helicopter.

Recordkeeping -

We all know about keeping receipts. Gamblers are also permitted to log their gambling activity to account for losses. Keep in mind that these logs are not given Cohen rule leeway and have been historically been scrutinized with a fine tooth comb. Make sure your logs are properly documented according to standards.

Professional Gambler

A possibility. Advantages? You’re able to offset losses above the line on a Schedule C (not subject to limitations). You have to meet profit and business standards. You’re not a pro just because you dropped $20,000 in the casino.

Always keep in mind that the regs change daily. We usually don’t want to think about collateral effects when we have a big win. It’s certainly worth investigating your options – before December 31… After that – all bets are off…

Foreign Earned Income

5
by on December 1, 2010 at 7:40 pm

Mariners and the Foreign Earned Income Exclusion

Let’s use an extreme example to get the point across

Joe Sailor. He lives in Singapore. His wife lives there. He owns property in Singapore. He has children in Singapore. He hasn’t been in the US for years. He works for a foreign flagged shipping company. The vessel never enters US waters. It runs from Singapore to South America. He is a US Citizen. Questions are -

  1. Is he required to file a US Income Tax return?
  2. If yes is he able to use the Foreign Earned Income Exclusion on all of his shipping income?

Non Resident Citizens

Yes he HAS to file a non-resident return. He may allocate foreign tax credits for taxes payed to Singapore, but a U.S. Citizen would be required to file a return.

U.S. citizens are generally taxed on their worldwide income unless a specific exclusion applies. Sec. 61(a) (“gross income means all income from whatever source derived”); Cook v. Tait, 265 U.S. 47, 56 (1924); Specking v. Commissioner, 117 T.C. 95, 101-102 (2001), affd. sub nom. Umbach v. Commissioner, 357 F.3d 1108 (10th Cir. 2003), affd. sub nom. Haessly v. Commissioner, 68 Fed. Appx. 44 (9th Cir. 2003).

Income Earned in International Waters – via US Tax Court

Section 911(b)(1)(A) defines an individual’s “foreign
earned income” as “the amount received by such individual from
sources within a foreign country or countries which constitute earned income attributable to services performed by such individual”.

The term “foreign country” when used in a geographical sense includes any territory under the sovereignty of a government other than that of the United States. It includes the territorial waters of the foreign country (determined in accordance with the laws of the United States), the air space over the foreign country, and the seabed and subsoil of those submarine areas which are adjacent to the territorial waters of the foreign country and over which the foreign country has exclusive rights, in accordance with international law, with respect to the exploration and exploitation of natural resources.

Under general principles of international law, international waters are not under the sovereignty of any nation. United States v. Louisiana, 394 U.S. 11, 23 (1969). Thus, international waters are not a “foreign country” for purposes of section 911, and income petitioner earned while traveling in international waters is not “foreign earned income” excludable from gross income. See Plaisance v. United States, 433 F. Supp. 936, 938-939 (E.D. La. 1977).

In Clark v. Comm the petitioner argued that Section 863(c) provides special sourcing rules for certain transportation income when that transportation begins or ends in the United States or one of its possessions. Because U.S. citizens are subject to tax on their worldwide income, sourcing rules are generally not relevant to U.S. citizens. See Great-West Life Assur. Co. v. United States, 230 Ct. Cl. 477, 678 F.2d 180, 183 (1982); sec. 1.1-1(b), Income Tax Regs.

The Court concluded that section 863(d) would require petitioner to include income earned in international waters as income from “ocean activities” sourced in the United States. See Arnett v. Commissioner, 473 F.3d 790, 797 (7th Cir. 2007), affg. 126 T.C. 89 (2006).

They expanded in saying

SEC. 863(d). Source Rules for Space and Certain Ocean Activities.–
(1) In general.–Except as provided in regulations, any income derived from a space or ocean activity–
(A) if derived by a United States person, shall be sourced in the United States ** *
*******
(2) Space or ocean activity.–For purposes of paragraph (1)–
(A) In general.–The term “space or ocean activity” means–
*******
(ii) any activity conducted on or under water not within the jurisdiction (as recognized by the United States) of a foreign country, possession of the United States, or the United States.
*******
(B) Exception for certain activities.– The term “space or ocean activity” shall not include–
(i) any activity giving rise to transportation income (as defined in section 863(c))
For purposes of the Internal Revenue Code, the definition of “United States person” includes any citizen of the United States. Sec. 7701(a)(30)(A). Although he resides in Scotland, petitioner is a U.S. citizen. His income earned in international waters is income from a “space or ocean activity” as defined in section 863(d)(2). Thus, that income is sourced in the United States. Sec. 863(d)(1)(A).

Bottom line – Income from International waters is considered sourced to the U.S

I’m sure we’ll receive a comment along the lines of “But I have a friend I ship with who lives in Singapore and he doesn’t HAVE to pay U.S. taxes… WRONG… The correct thing to say is that he DOESN’T pay U.S. taxes. It’s difficult to track foreign income. It’s difficult to examine all tax returns for invalid exclusions and deductions. This DOES NOT mean that you’re right. It means you haven’t been caught – yet… No one can know if you’ll be audited or not. But professionals need to be duly informed and provide advice and guidance within the law. Too many preparers play the statistical audit game. Assuming they will lose x percent of client because of audits annually.

Bottom line – income earned by U.S. Citizens in international waters is considered U.S. Source Income. Period…