Tag Archives | tax reality

“The Situation” is in a not-so-good tax situation

Did you know that “Jersey Shore” reality show personality Michael Sorrentino, aka “The Situation”, and his brother Marc, grossed almost $9 million in a variety of ventures over four years? Me neither, until I read the U.S. District Court indictment, reported inThe New York Times,charging the brothers with conspiracy and filing false tax returns. Michael was also charged with failing to file a tax return for 2011.

The full amount that the government might try to collect isn’t clear, because the indictment charges the brothers with failing to report all of their income and, as the press release from the US Attorney’s Office puts it , “fraudulently claim[ing] millions of dollars in personal expenses as business expenses, including payments for high-end vehicles and clothing, personal grooming expenses, and distributions – or direct payments – from the businesses to personal bank accounts.”

The brothers face potential penalties of up to five years in prison and a $250,000 fine on the conspiracy charge, and up to three years in prison and a $250,000 fine for each filing of a false tax return. Failing to file a tax return could cost Michael as much as a year in prison and a $100,000 fine.

These are, of course, merely accusations, and the brothers are considered innocent unless and until proven guilty. But this is surely not A Situation that The Situation planned on being featured in.

Bitcoin: IRS says, “It’s property, and it’s taxable!”

A lot of people are still trying to figure out just what Bitcoin is, but the IRS has seen enough to decide: It’s a type of property and not a form of currency.

So what, you say? Here’s what: Because, as The New York Times has reported, the IRS is going to treat Bitcoin as property, people who buy and sell it are going to have to calculate the change in value from when they acquired it, and pay tax (or claim losses) on the difference.

That means you could buy Bitcoin, use it to purchase something, and then have to report a “trade” on the change in Bitcoin value between when you bought it and when you used it.

Oh, and if you’re one of those smart guys or gals who can actually electronically “mine” a Bitcoin, you are going to have to report the market value of the Bitcoin as income.

Make more than $200K? Your taxes are (probably) going up

Remember all the talk after the 2012 election about tax hikes? Well, they’re here–but you’re probably going to be affected only slightly, or not at all, if you are earning less than six figures. However, once you get above $200,000 of total income, you’re almost sure to see a hike in your tax bill this year.

The most significant increases affecting higher-income earners this year include:

–The new 3.8% Net Investment Income Tax on singles with modified adjusted gross income of more than $200,000 ($250,000 for joint filers.) As Brent Hunsberger of The Oregonian points out, this tax on investment income includes real estate income. Remember that real estate income is ordinary income, so this is a 3.8% tax on top of whatever your ordinary marginal tax rate already is. (Department of Shameless Self-Promotion–Hunsberger quotes Yours Truly in his article.)

–A Medicare Tax increase of 0.9% . You are subject to this if you have wages and/or self-employment earnings of more than $200,000; $250,000 for joint filers. Note: Because employers don’t know all of your sources of income, they cannot withhold this additional tax. You’ll be reporting it yourself on the all-new Form 8959.

–An increase in the top rate on long-term capital gains and qualifying dividends to 20%, instead of 15%. This hits people with taxable income above $400,000; $450,000 for joint filers.

–An increase in the top marginal tax rate, from 35% to 39.6%. Again, only the highest earners–people with more than $400,000 of taxable income, $450,000 for joint filers–are affected.

The biggest problem for folks who are affected by all of these increases? Maybe it’s figuring out where the few people are with whom you can commiserate. As this handy-dandy calculator from Kiplinger’s shows , people with adjusted gross income for $400,000 or more are in the top 1% of income earners nationwide.

Super-rich have super-low tax rates, in super times or bad ones

Let’s stop a moment to reflect on the tax lives of the 400 highest-earning Americans, and how they suffered in the Great Recession of 2008-2009.

Oh, wait a minute—they didn’t suffer. As James B. Stewart points out in The New York Times, the fortunate 400 still averaged $202 million apiece in adjusted gross income in 2009. Perhaps even more extraordinary, they paid an average federal income tax rate of less than 20%–less than people in the top 1% (adjusted gross income of at least $344,000) and quite possibly less than you.

How did they do it? Well, more than half of their income came from capital gains and qualifying dividends, which were taxed at the preferential rate of 15%, compared to wages and other income that could be taxed as high as 35%.

Is there any sound reason for taxing earnings from capital at half the rate or less than earnings from one’s labor? Not really. No less a financial heavyweight than Pimco mutual fund co-founder Bill Gross wrote in his November investment outlook that, “The era of taxing “capital” at lower rates than “labor” should now end.”

If that ever happens, we’ll be back to one of the features of The Tax Reform Act of 1986, under which capital gains and wages were taxed equally. That bill was promoted and signed by that well-known enemy of the wealthy . . . Ronald Reagan.

Now that’s a home run: McCourts back in court over billion-dollar Dodgers franchise

Nasty multi-million dollar divorces make for some great financial insights, especially when they wind up in court.

Today’s lesson: How profitable it can be to own a professional sports franchise, and how the tax code’s preferential rates for capital gains benefit the super-wealthy.

Frank McCourt owned the Los Angeles Dodgers. When he and his wife Jamie divorced, Jamie got $131 million as a settlement.

They were back in court this week. The reason: Shortly after the divorce, Frank sold the Los Angeles Dodgers for $2.15 billion. Jamie’s lawyers say the settlement should be thrown out because she was misled about the value of the team. (Isn’t it entertaining when people fight over hundreds of millions of dollars?)

The tax angle: Court documents show that Frank made $1.278 billion on the sale. His lawyers say he has paid more than $460 million in state and federal taxes on the sale.

If you’re keeping score at home, that’s a combined federal-and-state tax rate of about 36%, or roughly the same percentage that a single person in California would have to pay on ordinary taxable income of more than $90,000.