Featured

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

Read More
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

Read More
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

Read More
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”

Read More
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

Read More
Maritime Tax Preparers and the Alternative Minimum Tax

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…

Pay up Blade!

0
by on November 23, 2010 at 6:37 pm

Blade and New Jack City actor Wesley Snipes is prepping to get hauled off to federal prison over his tax evasion charges after appealing it on several occasions.Wesley Snipes who got his start alongside Goldie Hawn in the 1986 movie Wildcats based off the real-life Memphis Coach Shirley McCray, has been battling his tax evasion case for the last two years and it seems U.S District Judge Terrell Hodges, who has been lenient to Snipes who has also been out on bail the past two years, now feels that Snipes has had a fair review of his case.On Friday, it was ordered for Snipes to begin serving his three-year sentence, however there was no surrender date set although he is listed as in transit awaiting the judge’s ruling.

in IRS Updates

New Customer At Helga’s House of Pain

0
by on November 22, 2010 at 7:44 pm

Billionaire Warren Buffett rebutted claims that the Obama administration is unjustly hurting business orders with high taxes by saying that in fact, the wealthy have never had it so good.”I think that people at the high end, people like myself, should be paying a lot more in taxes. We have it better than we’ve ever had it,” he told ABC’s Christiane Amanpour in a clip played on “This Week” on Sunday.When Amanpour pointed to critics’ claims that the very wealthy need tax cuts to spur business and capitalism, Buffett replied, “The rich are always going to say that, you know, ‘Just give us more money, and we’ll go out and spend more, and then it will all trickle down to the rest of you.’ But that has not worked the last 10 years, and I hope the American public is catching on.”

via Warren Buffett: I ‘Should Be Paying A Lot More In Taxes’.

in Investing

Why the housing bulls are wrong

0
by on November 22, 2010 at 5:15 pm

Four reasons by housing is still not a good investment

A number of notable investors presented thoughtful and well-researched ideas at the Value Investing Congress last month. The one idea that we would take the other side of, though, was one from Bill Ackman of Pershing Square Capital, which was unveiled in a presentation titled “How To Make a Fortune”: to go long U.S. housing. To state it bluntly, we think Ackman is wrong on housing.

According to several reports, his thesis on U.S. housing focuses on a few key points. First, affordability is at its highest level in decades due to low mortgage rates. Second, household formation will rebound and go back to long-term trends, which suggest growth in demand. Third, supply of housing, which Ackman admits is high, will start to decline since builder production rates are as low as they have ever been. Finally, he believes the downside in housing is limited because at a certain price, institutions could step in and soak up the excess inventory.

via Why the housing bulls are wrong – Fortune Finance.

in Investing

Earning their paycheck

1
by on November 22, 2010 at 12:41 pm

Senate Finance Committee Chairman Max Baucus (D., Mont.) plans to propose renewing a slate of tax breaks that have expired or are about to expire, Senate Democratic aides said.

Included are popular items such as a measure protecting millions of middle-class taxpayers from the alternative minimum tax, as well as a college-tuition tax break. The proposal also includes dozens of corporate-tax reductions benefiting specific industries and companies.

via Routine Extension of Tax Breaks Poses Test of Deficit-Cutting Resolve – WSJ.com.

in IRS Updates

IRS Seeks to Return $164.6 Million in Undelivered Checks to Taxpayers

0
by on November 18, 2010 at 4:14 pm

The Internal Revenue Service is looking to return $164.6 million in undelivered refund checks. A total of 111,893 taxpayers are due one or more refund checks that could not be delivered because of mailing address errors.

“We want to make sure taxpayers get the money owed to them,” said IRS Commissioner Doug Shulman. “If you think you are missing a refund, the sooner you update your address information, the quicker you can get your money.”

A taxpayer only needs to update his or her address once for the IRS to send out all checks due. Undelivered refund checks average $1,471 this year, compared to $1,148 last year. Some taxpayers are due more than one check.

via IRS Seeks to Return $164.6 Million in Undelivered Checks to Taxpayers; Recommends E-file and Direct Deposit to Eliminate Future Delivery Problems.

in IRS Updates

Municipal Bonds Falter After a Long Winning Streak

1
by on November 18, 2010 at 4:12 pm

That is the question investors are asking after munis — those old faithfuls of investing — took their biggest hit since the financial collapse of 2008.

Concern over the increasingly strained finances of states and cities and a growing backlog of new bonds for sale overwhelmed the market last week. After performing so well for so long, munis and funds that invest in them fell hard. One big muni fund, the Pimco Municipal Income Fund II, for instance, lost 7.5 percent. The fund is still up 6.75 percent so far this year.

While the declines were relatively small given the remarkable gains in these bonds over the last two years, the slump was swift enough to leave investors wondering if this was a brief setback or the start of something worse. For months, some on Wall Street have warned that indebted states and cities might face a crisis akin to the one that brought Greece to its knees.

“I think it’s too early to say that it’s more than a correction,” said Richard A. Ciccarone, the chief research officer of McDonnell Investment Management.

via Municipal Bonds Falter After a Long Winning Streak – NYTimes.com.

in Investing

Bipartisan vow: We’ll fix AMT and other fairy tales

1
by on November 16, 2010 at 7:13 pm

On Tuesday, the Democratic chairmen of the House and Senate tax committees teamed with those committees’ top Republican members to tell the IRS they are working on a bill to provide taxpayers with temporary relief from the Alternative Minimum Tax.

They advised the agency to “take all steps necessary” to adjust tax forms to reflect the anticipated changes.

“We will work to craft the AMT provision so that, in the aggregate, not one additional taxpayer faces higher taxes in 2010 due to the onerous AMT,” the lawmakers wrote in a letter to IRS Commissioner Douglas Shulman.

Putting a temporary “patch” on the AMT to shield middle- and upper-middle-class taxpayers has become an annual event for Congress, although lawmakers have left this year’s fix to the last minute.

via Bipartisan vow: We’ll fix AMT – Nov. 9, 2010.

in IRS Updates

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.