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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

Mariner Tax Update January 2011

1
by on January 26, 2011 at 1:53 pm

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 now e-file”. But nothing had changed in the law. So why the scuttlebutt?

It’s no surprise that most preparers have come down from the bogus position that merchant mariners cannot electronically file their tax returns. The justifications used over the years have been flimsy and the supporting documentation has been lacking. I actually remember a citation of the IRM (Internal Revenue Manual) to a specific line that stated mariners would have to mail in supporting documentation. I guess they figured no one would ever read the heading that stated these were the procedures for AUDIT AND AMENDMENT and had nothing to do with regular filing.

E-Filing Signature Documents

It’s difficult, I know. You have to get a signed form back to your preparer for them to electronically file you. But it isn’t optional. There could be serious issues with returns being filed without the proper signature documents.

Do not give a preparer signing power

It is a conflict and poor practice. Unless you are physically entering your pin you need to be providing a signature form. These are the rules.

Maguire Taxes

Maritime Tax Preparers and the Alternative Minimum Tax

6
by on January 8, 2011 at 2:40 pm

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 little to no benefit from these offsets. It also examines some alternatives that may or may not assist in alleviating the effect of the AMT. It’s important to examine the short term and long term benefits of tax strategies. Tell your tax planner your short and long term goals.

AMT Effect on mariners incidental per diems

These expenses, like all employee business expenses are subject to AMT limitations. When a mariners income gets to a certain point, these deductions have little to no effect.

Mariners in the situations outlined in the video should pursue long term tax planning strategies to address AMT. Bogus Sailor tax offsets will not be effective.

Bracket Hedging

0
by on January 5, 2011 at 4:29 pm

Mariners should optimize the standard and itemized deduction

You just got a great job off the board. You just got your license. You just started shipping. You just graduated from the Maritime Academy. These events all scream change from a tax perspective. Our tax system takes a reverse psychology approach – the better we do, the more they get. It’s a disheartening blow that we wish we could alleviate. There are some planning tactics that can help. Where should we start looking for tax savings. Let’s look at our Uncle…

You get a very large, free deduction from Uncle Sam

It’s not unique to Merchant Seamen. It’s the standard deduction. Many years ago, our selfless leaders took it upon themselves to provide a deduction that would be representative of the cost of living. Now a days it’s about $6,000 for single individuals. You are allowed to use this deduction on your tax return as an offset.

Basic Tax Formula -

  1. Income – you take any income that is not excluded and combine it
  2. Adjustments – you deduct any adjustments (student loan interest, etc…) that you are entitled to
  3. Standard or Itemized Deduction – you subtract your standard or itemized deduction (whichever is larger) from your adjusted gross income (AGI)
  4. Taxable Income – After the previous offsets we go into the tax tables and determine your tax… We’ll stop at this point…

Important terms…

  1. Marginal Tax Rate (MTR) – the rate at which (more…)

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.

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…

Mariners Beware – Sailor Credits and other bogus Magic Deductions

2
by on November 16, 2010 at 7:08 pm

Too good to be true?

#1 – I went to another preparer and they got me an extra $4,000 back…

Red Flag!!! Short of the original preparer missing a very obvious deduction/deductions/credits this doesn’t happen.

#2 – My tax preparer discovered this deduction – so others don’t know about it…

Just remember – the IRS won’t likely know either…

#3 – Mariners cannot E-File because “special paperwork” needs to be attached to the return

Serious snake oil. Luckily most preparers have jumped off of this band wagon after a lot of insistence. Truth is these preparers felt there was better presentation for their high fees if the returns were mailed in with the unnecessary attachments. Virtually all preparers will be required to E-File in the upcoming years. There’s fewer eyes looking over your private information. You get your refund quicker. And you’re generally informed of errors and issues quicker.

#4 -The IRS called because I owe back taxes and say I have to pay up

Possibly not a scam. But beware… A slick person pretending to be an agent can steal your private information. If they need to verify it’s you, so they want your social, date of birth, address, maiden name, red flag… Even if you did have issues with the IRS I would be wary. There are ways to acquire lists of individuals in financial difficulty. Personally I would insist on calling back on one of the published IRS numbers.

#5 – “payments made by the taxpayer through EFTPS have been rejected”

You’re sent this message in an email. It looks as though it’s linking back to the IRS. It’s actually a shell site looking for your financial information. Again, I’d call.

#6 – “I work with the charity, you can sign the title over to me”

Yes this happens… Folks pretend to be a non-profit and drive away with your car. Go to the charity you’re donating to. Sign the title to the charity. Make sure you have their non-profit info.

#7 – Energy Credits – salesmen aren’t accountants

“But the salesman said I could get it”… Almost as common as the real estate broker saying you probably won’t owe taxes on that vacation property you sold. Many… Actually most boilers (especially oil) that are “energy efficient” do not qualify for the energy credit. You need a very high fuel vaporization efficiency rate to qualify. If the plumber is giving you the deal of the century on the new boiler, you probably don’t qualify.

#8 – The Sailor Tax (luckily this has moved down the list)

We know merchant seamen are different. They have different tax treatment than others regarding specific definitions. First they are generally liable only to their State of residence for State income taxes. Second, they have to pay into California and Rhode Island SDI programs even though they are often considered ineligible for benefits under the Jones act and denied. (Can you tell that one’s personal???) Third, they are generally not considered transients for tax purposes. This lowers certain documentation requirements with respect to employee business expenses.

There is no law that says mariners get deductions for expenses they never had – PERIOD

You have to incur an actual expense in all cases. A preparer stating otherwise is flat out wrong.

An examination of married joint and separate filing status

0
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.

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.

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.