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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

Break down the Bush tax cuts

0
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.

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.

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.

Student Loan vs. Mortgage

0
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.

Foreign Tax Payments

2
by on October 22, 2010 at 3:40 pm

Do Mariners write off Foreign taxes?

In these tight times we’re looking for any avenue available to rub two dimes together. I remember when I started shipping there were plenty of decent jobs available. Over the years, work has become tighter. More and more I see clients seeking employment under foreign flags, and or on foreign rigs.

Some Countries require that you pay income taxes

I’ll use Brazil as an example – Under the Brazilian tax law, foreigners working with offshore work visas only have to pay personal income tax (imposto de renda )after having physically been more than 184 days in Brazil. For employees working offshore this takes roughly 1 year, 6 months (=184 days) in Brazil and 6 months outside.

This means if you’re working offshore past that time period you owe Brazil. How does that affect you as a US taxpayer? Are you simply going to be taxes by two countries and not be able to offset either return? Let’s run a few what ifs…

You are required to pay and have paid Brazil $20,000 in income taxes

Section 901 of the Internal Revenue Code states -

(a) Allowance of credit

If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under sections 902 and 960. Such choice for any taxable year may be made or changed at any time before the expiration of the period prescribed for making a claim for credit or refund of the tax imposed by this chapter for such taxable year. The credit shall not be allowed against any tax treated as a tax not imposed by this chapter under section 26 (b).
You’ll probably be able to take a foreign tax credit for the taxes paid. The biggest restriction is that the credit cannot exceed how much you would have owed on the same income in the US.
Things you’ll need -
  • Proof you were working
  • Proof you owed the tax
  • Proof showing how much income was taxed (important and I have seen this overlooked)

You were required to pay and have not paid Brazil $20,000 in income taxes

This is something I am seeing quite a bit of. It isn’t that mariners aren’t paying the taxes due to the foreign country. It’s that the employer is paying the foreign taxes on behalf of the employee. There are two instances of this that appear to be most prominent.

  • Company pays foreign tax due on behalf of the mariner and requires no compensation
  • Company pays foreign tax due on behalf of the mariner and includes it as income on their W-2

What are the requirements for the credit?

The magic language in the Code is “Paid or Accrued”… The internal revenue service states that -

  1. The tax must be imposed on you
  2. You must have paid or accrued the tax
  3. The tax must be the legal and actual foreign tax liability
  4. The tax must be an income tax (or a tax in lieu of an income tax)

http://www.irs.gov/businesses/article/0,,id=183263,00.html

Generally speaking, we’re not encountering issues with parts 1, 3, and 4. It’s the paid or accrued concept… If we don’t pay the amount due personally, can we still be eligible for the foreign tax credit? If it is included as income on our W-2 can we still take the foreign tax credit?

Disclaimer!

A little CYA… Just because a tax position holds water doesn’t mean that you won’t be audited. It also doesn’t mean you will win an audit. Many tax positions, though valid, are dismissed in audit and appeals. The taxpayer is forced to litigate the issue. This can be a costly venture.

Where were we…

The courts have historically shown a strong emphasis on the “liable” portion. There have been many cases over the years where the courts have restated that the taxpayer need be “legally liable” to the tax in question to be eligible for the foreign tax credit. (Riggs v. Comm, Amoco v. Comm, Guardian v. US, Gleason Works v. Comm, Nissho Iwai American Corp v. Comm) The courts also demonstrate the requirement to document liability for the actual tax in question (Wilcox v. Comm)

It seems from the common law that it is irrelevant who pays the tax due… What is relevant is who was liable. That said, taxes paid reported as income may make the transaction seem more concrete but do not seem to be a requirement. The fact that you owed the tax and it was paid has generally been the test from the Court’s perspective….

See Disclaimer above again. There are no guarantees. This is a risky position. Not because of law. Because of the amount of possible revenues that could be collected on audit. A $20,000 credit is a sizable amount. I would assume it would not go overlooked…

Aren’t I even if it’s on my W-2 and I take the credit?

No, you’re way ahead of the game. W-2 income is taxed at your Marginal Tax Rate, say 25%. So $20,000 in income would cost $5,000 in taxes. With the credit you’re still up by $15,000.

That doesn’t seem right… Does this happen elsewhere?

Yes… If you own stocks and receive dividend statements you may have noticed foreign taxes paid as a reporting line. Some mutual funds pass on the proportionate tax payment to you as the shareholder although you never physically paid the tax due.

The most common instance is with mortgages and interest deductions. It doesn’t matter who paid the interest. It matters who is liable (who is on the deed). That is the person who gets the deduction for interest paid. Even though Auntie Sally made the payments.

Summary – plan for rain

This is a fair and valuable tax position. It should be carefully considered. You should make sure to have all necessary documentation before taking this position (especially the amount of income that the foreign taxes were paid on)…. You should try to get it on a corporate report. How many times have we left a company and needed documentation down the line, only to discover they were not very accommodating? And remember, no guarantees. If you’re audited, plan on losing. Remember attorney’s fees generally start at around $5,000 for this type of venture.

Medical Deductions, Fertility Treatment, and FSA Alternatives

1
by on October 12, 2010 at 12:25 am

Should I Save My Medical Receipts?

Quick answer – hopefully not! Medical expenses have to exceed 7.5% of adjusted gross income (AGI) before they have the ability to start counting.

If your AGI was $100,000, you would need $7,500 in medical expenses before you could take a tax deduction. KEEP IN MIND – this doesn’t mean you will be deducting the entire amount. Only the amount that EXCEEDS the limitation. So in this case, medical deductions totaling $7,501 would allow a $1 deduction.

When are deductions likely?

  • On a very low income year. Ironically, income would probably be so low that you wouldn’t recognize a substantial benefit.

A low income year can lower the AGI threshold. AKA 7.5% of $20,000 is $1,500. This is a much easier amount to surpass. When examining disabled and elderly taxpayers, remember some income is not used in arriving at AGI – certain amounts of Social Security, disability, etc…

  • Taxpayers do not have medical insurance

A very tricky situation. If I was personally not paying expenses, this would be my last to go. If you are in this situation where you cannot afford insurance you should check with your State to see what assistance programs they may have available. More and more States are requiring all residents to maintain adequate health insurance. They have programs that provide assistance for those who cannot afford it on their own.

If you’re on unemployment, you should also check to see if there are cobra or other medical insurance subsistence programs available.

  • Taxpayers incur a substantial amount of uninsured medical expenses within a year

Generally these are elective surgeries or similar. A common high level expense is fertility treatments. Bills can pile up in the tens of thousands. Most medical insurance programs do not cover these expenses. This is one scenario where you may be able to recognize a medical deduction within a high income year…

Tips and tricks

  • Remember – a big stack of bills does not mean you have a deductible medical expense. It means you have bills you haven’t paid. Unless you have paid the expenses or have a secured loan they will most likely not be deductible.
  • A surrogate is not a medical expense. This is becoming more common these days. A surrogate mother will carry a child to term. Since the surrogate did not have an ailment (she was able to bear children) it is not deductible.

Best financial medical defense is the FSA

If you know you are going to incur substantial medical expenses (your deductible is $3,000 and you’re going to have a baby that year) use your FSA. An FSA (flexible spending account) allows you to set aside earned income to cover certain medical expenses. This income circumvents Federal, State, Social Security, and Medicare taxes. This is a huge benefit! My average client saves 30-35 cents on a dollar with their FSA

Keep in mind that FSA’s are a use it or lose it system. If you haven’t spent the money by the end of the allocated expense period you lose it. So never allocate more than you’re certain you’ll spend. As FSA rules and regs become more lax, there are more and more items that they can be used to purchase. OTC drugs, acupuncture, perhaps reiki. Look to your plan provider regarding availability and allowable expenses. Federal regs give the individual employers a great deal of leeway in administering the plans.

Sailors want a fair shake

0
by on September 26, 2010 at 8:46 pm

Tax Planning Never Goes Out of Style!

If there is one common trait we all share it is in taxation. There’s rarely a movement “by the people… for the people” to increase taxes. We occasionally feel cheated and wronged. We voice our outrage when we discover officials trusted with our hard earned tax dollars have squandered them away. We stand dumbfounded when businesses responsible for catastrophic economic downturns are fronted billions… of which they hand out bonuses.

We’re okay with a “fair share”

In my experience, mariners are generally content in paying taxes. Most see it as a civic duty. I’m not saying they run into my office dancing for joy at the possibility of owing Uncle Sam another mortgage payment. Only that they accept it as a part of citizenship. But we also share another common trait. No one wants to pay more than their fair share. (more…)

Deductible opportunities in education for mariners

0
by on August 25, 2010 at 1:50 pm

Pursuing Higher Education Underway

Technology has certainly changed the way we do business! It has also drastically changed learning. I have taught many e-learning classes where I never come in contact with the students. This is daunting to say the least. As an instructor this poses new challenges. “How do I get my point across without being in a classroom?” This is similar to the time tested exercise – “write down instructions on how to tie a shoe lace” I’m standing by the bunny ears approach…
E-Learning has opened up many avenues that were not available to professionals in years past. People don’t have to lose valuable time commuting to a class room. More importantly, people in areas without higher learning institutions can pursue their educational goals. Hopefully it will only be a matter of time before E-Learning becomes an integral part of the maritime community. (more…)

Appeal Affirmed For Government – UNITED STATES v. KAPP – US 9th Circuit

0
by on September 23, 2009 at 6:52 pm

Examining compliance requirements on accountants…

If you’re related to the maritime industry and are here reading you’ve heard the story. CPA in California won a fight for mariners, gaining them income tax deductions. One tax court case fueled a deduction frenzy that resulted in the US Department of Justice stepping in to correct what they saw as errors.

Kapp is a Certified Public Accountant who specializes in preparing federal income tax returns for individuals employed in the transportation industry. ? This case relates to his preparation of federal tax returns for mariners who work on oceangoing ships and who are at sea for long periods without returning to port (“deep sea mariners”), and mariners who work on tug boats and barges (“tug and barge mariners”), which return to port more frequently. ? Deep sea mariners are provided meals by their employer while working on board the ship. ? Tug and barge mariners also typically do not incur meal related expenses. via No.?07-56408. – UNITED STATES v. KAPP – US 9th Circuit.