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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

Bracket Hedging

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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…)

Gambling Income and Various Windfalls

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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…

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.

Student Loan vs. Mortgage

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by on November 4, 2010 at 9:46 pm

Should I keep my student loans or should I roll them into my existing mortgage? How much lower should my mortgage rate be for it to make a difference?

Usually this is a quick yes… If all the stars are right. If you were refinancing and were able to pay off a student loan, it’s probably a good idea.

Loan Factors

If rates aren’t hurt because of this and closing costs aren’t increased drastically you’re saving in the long run by lowering the effective interest rate.

Interest Spread

How much lower should the new rate be before you decide? Actually the rate could be higher and still be effectively less. ??? You are only allowed to deduct a maximum of $2,500 in student loan interest on your income tax return. You start to lose this deduction at $55,000 (single) and $110,000 (married). So a married couple earning $150,000 annually would not be able to deduct any student loan interest on their income tax return.

What is the cash value of the lost deduction?

It depends. Ironically, the folks you earn more are in higher tax brackets and would benefit more. If we assumed the married couple earning $150,000 is in the 25% tax bracket we can assume a 25% return on deduction if they were already itemized.

Let’s do an actual example -

Single Attorney Earns $120,000, and is in the 25% bracket after deductions. He has $100,000 in student loans at 6% for 15 years. Making things simpler we’ll apportion the interest evenly over the life of the loan.

The total interest paid would be approximately $51,894. That’s $3,459 a year (cheating for simplicity). 25% of that is $865.

So over the life of the loan the interest deduction would have been worth $12,974 (865*15 years)

That said – The cost of the Student Loan at 6% is $64,867 (interest plus the lost tax deductions)

If we had the same loan as a mortgage or equity loan at 7%, we’d pay $61,789 in interest. Essentially we maintain a financial advantage refinancing at a higher rate!

Financial Decision Making

This shoe doesn’t fit everyone perfectly. You should consult with your tax advisor to see how you fit into this equation. There are other factors that need to be weighed before making this decision. For example, refinancing and paying off student loans would not be wise if it raised the overall interest rate. You would end up paying a higher rate on the entire mortgage.

This is definitely something to put under consideration and mention to your tax planner.