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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

Secret Tax Deductions…

0
by on January 6, 2011 at 6:36 pm

You just never know

Here are three unique deductions you’d think the IRS would laugh at — but instead they approved.

  1. The “significant other” deduction. When a man hired his live-in girlfriend to manage some of his rental properties, the Tax Court allowed him to deduct $2,500 of the $9,000, which he paid her as a business expense. Her duties included finding furniture, overseeing repairs and, of course, running his personal household.
  2. The moving the family pet deduction. Whether your pet is a dog, a bird or even an Oriental Yeti, it’s OK to deduct the cost of moving said pet from your old residence to your new abode if you can pass a couple of simple tests.
  3. The body oil deduction. Just as carpenters can’t be expected to work without their tools, bodybuilders can’t be expected to compete without their … body oil. While the Tax Court balked at letting a pro bodybuilder write off buffalo meat and special vitamin supplements, it did allow him to deduct his ample supply of body oil as a business expense.

Lesson learned…

Never dismiss a deduction, no matter how silly it may seem.

Tax Advisor’s for Transportation Workers

5
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?

2
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.

Understanding 529 Plans

2
by on November 5, 2010 at 2:04 pm

529 Plan Benefits in Massachusetts under the Pension Protection Act

College PlanningWhether you’re a parent with future educational obligations for young ones, or perhaps a loving aunt, uncle, grandparent, or stepparent, now more than ever 529 plans are an attractive tool for the escalating costs of education, as well as for income and estate planning purposes. This is because one of the hidden gems of the new Pension Protection Act of 2006 (signed into law on August 17, 2006) is a provision that makes permanent the income-tax-free growth of Section 529 plans used for qualified higher education expenses. Prior to this new law, these provisions would have expired December 31, 2010.

Planning Tip: The new Pension Protection Act makes permanent the income-tax- free growth of 529 plans, but only for withdrawals used for qualified higher education expenses. Funds used for other expenses are tax deferred (like an IRA) and subject to a 10% penalty.

Most wealth planning professionals (and clients for that matter) understand the value of investing in 529 plans. 529 plans are by far the most popular college savings vehicle, but they’ve just become even more popular. According to a recent survey, 54% of parents with young children who do not currently own a 529 account are more likely to open one now, due to the new law, and 36% who already own a 529 plan say they are now more likely to increase the amount they contribute to existing plans. And another recent survey confirmed that older clients may want to learn more about college savings.

Income Tax Benefits

While many clients understand the educational savings benefits, many do not understand the benefits of investing in 529 plans for income tax purposes. Just like with an IRA, the power of tax-deferred growth makes 529 plans worthwhile even if not used for educational expenses. The ability to frontload up to five years of annual exclusion gifts, or $60,000 per beneficiary ($120,000 per beneficiary for married couples), without paying gift tax creates the ability to grow a significant amount of money tax free. In addition, many states offer residents a state income tax deduction for an investment in their state’s 529 plan.

Planning Tip: Clients should consider an investment in a 529 plan even if it is not anticipated that the funds will be used for educational purposes. The income tax benefits alone of 529 plans make these very worthwhile investments.

Estate Planning Tax Benefits

529 plans are unique in that you can invest in a 529 plan, retain absolute control over the assets, and yet remove those assets from your estate for estate tax purposes. This type of control typically means that the asset would be subject to estate tax at a 46% rate (in 2006) at death, but not with a 529 plan. Thus, clients can invest up to $60,000 per beneficiary ($120,000 per beneficiary for married couples) without paying gift tax and, if the client lives for at least five years, all of these assets will not be subject to estate tax. More importantly for many clients, a 529 plan allows them to use the 529 plan assets in a financial emergency.

Planning Tip: Clients should also consider 529 plans for estate planning purposes to remove significant wealth from the estate tax while retaining the ability to use the assets in a financial emergency.

Educational Trusts

Many 529 plans permit a trust to be the owner and beneficiary of accounts set up under that states plan. A 529 plan combined with an Educational Trust may provide more flexibility to ensure that the 529 meets the client’s objectives by, for example, moving assets between siblings or providing a smooth transition should the client become incapacitated or die.
This combination of 529 plans and specially designed trusts can also provide divorce and creditor protections, even for those states’ 529 plans that do not provide their own asset protection; for example, to ensure that the 529 plan’s assets do not end up in the hands of a former son-in-law or daughter-in-law. And the client still retains the ability to use the funds in a financial emergency.

Planning Tip: Consider combining 529 plans with Educational Trusts to provide the greatest flexibility and to ensure that the 529 plan assets meet each client’s particular planning objectives.

Conclusion

Now more than ever, clients and attorneys should consider 529 plans for educational savings, income tax benefits and estate tax benefits; and when combined with a carefully-crafted Educational Trust, they will provide added flexibility to control this asset and to ensure that it meets your planning objectives.