Tag Archives | welcome to the real world

“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.

Washington Post’s maps paint a fascinating – and unexpected – picture of the USA

The Washington Post’s “GovBeat” feature is doing some great work, including this story and link to 25 maps and charts of the United States (your first 10 stories a month at Washingtonpost.com are free; then the paywall rises up.)

One, “Finding America’s Uninsured,” (#23) shows that the national problem of people not having health insurance may be strangely localized, with 116 counties (out of more than 3,000 total) accounting for more than half of all the uninsured in the U.S. Another, “Cartogram of Total Disenfranchisement rates by State,” (#16) features a stunningly distended Florida, where more than one out of every five black adults are not allowed to vote because they were at some point convicted of a felony.

On the other hand, it’s worth giving your brain a bit of a break and focusing on the maps of “Where The Breweries Are,”(#5) and “Where the Closest Pizza Joints Are” (#25).

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.

Reverse mortgages have hidden pitfalls for the elderly

An 86-year-old Oregon woman was faced with potentially not having a place to live when the state said it was going to buy her house so it could tear the property down and make way for a new traffic project earlier this year. What was the problem? The woman had taken out a reverse mortgage, so the bank would have received the pay-off for the house. The homeowner would have been left with no home and no money to pay for another place to live.

Unanticipated problems like these with reverse mortgages are likely to occur again. Reverse mortgages are touted as a way for older Americans to tap the equity in their homes without having to move out. But the process is complicated, and there are downsides, most notably the fact that when you die, the lender (and not any of your heirs) gets ownership of the property. As The New York Times reports, the federal government is looking at revising the rules and protections attached to reverse mortgages, which are expected to become increasingly popular as an aging population looks for ways of tapping its home equity to cover the increasing expense of retirement.

As The Oregonian reports
, the state came up with a solution in this case. However, this just highlights the fact that there can be unanticipated consequences with reverse mortgages. If you’re considering one for yourself, don’t just talk with the lender, because its main focus is selling a product: consult an independent financial adviser with experience in this issue, who can inform you fully of the potential pitfalls and represent your interests.

Could government-gathered tracking info show up in your tax audit?

As ProPublica points out, despite the veritable explosion of stories about secret government surveillance programs, there’s a whole lot we still don’t know. We don’t know how long the government has been collecting our phone records or how much is collected. It would be nice to know what government officials think they can do under the Patriot Act, but….that information is classified.

We do know, though, as The Washington Post has been reporting (along with several other outlets), that the government has been engaged in internet data mining of video chats, emails, documents and photos, and is able to track when calls are made, from where, and for how long.

What does this have to do with taxes? Well…what if the data that one arm of government gathers up could be used by another arm…like the IRS?

There’s no evidence that anything like this is happening. But as UC Berkeley sociologist James B. Rules mused in The New York Times, “Imagine that analysis of telecommunications data reliably identified failure to report taxable income. Who could object to exploiting this unobtrusive investigative tool, if the payoff were a vast fiscal windfall and the elimination of tax evasion?”

Wow–there’s a nightmare for you. Do I think this is going to happen? No. But these kinds of questions just reinforce something that I and other tax pros always tell clients: Always keep track of everything that is going to be part of your tax return as if you are going to be audited. Hate to have to give you such a downer of a blogpost, but sometimes That’s The Way It Is.