Tax Returns of the Rich and Famous

America’s first billionaire, John D. Rockefeller, once said that “if your only goal is to become rich, you’ll never achieve it.” But some of us still manage to achieve it, and the rest of us want to know how.

Since 1992, the IRS Statistics of Income Division has issued an annual report examining The 400 Individual Tax Returns Reporting the Largest Adjusted Gross Incomes. I know what you’re thinking — the IRS “Statistics of Income” division is where fun goes to die. But read on — there’s some pretty interesting stuff buried in this year’s 13-page report.

What does it take to join the club? Well, for 2009, you had to report $77.4 million in adjusted gross income. Now, that may sound like a lot. But it’s actually down from $109.7 million in 2008, and down even further from the $138.8 record high in 2007. Of course, $77.4 million just gets you in. The 400 earners averaged $202.4 million. (If that sounds like a lot, it’s actually down from a staggering high of $334.8 million in 2007.)
How do the top 400 make their money? Probably not how you imagine. Just 8.6% of it came from salaries and wages. 6.6% came from taxable interest; 13.0% came from taxable dividends; and 19.9% came from partnerships and S corporations. Once again, capital gains made up the biggest share of the top 400′s income. For 2009, it was 45.8%, or $92.6 million each. In fact, the top 400 individuals reported 16% of the entire country’s capital gains! However, that amount was significantly down from 2008, when the top 400 averaged $153.7 million in gains. Clearly, the 2008 economy and stock market crash took a toll on the super-rich as well as the rest of us.
What do they actually pay? 2009′s top 400 averaged $170.3 million in taxable income and paid $40.9 million in tax. That makes their average tax rate 19.9% — up from the 18.1% they paid in 2008. Why the higher rate? Remember, most of their income consists of capital gains, taxed at a maximum of 15%. When the percentage of their income consisting of capital gains goes down, their average rate goes up.
On average, the top 400 are a generous group. 387 of them reported charitable contributions, with the average deduction weighing in at $16.4 million. The top 400 as a whole claimed 4.0% of the nation’s total charitable deductions, down from 5.2% in 2008. (You’ve got to wonder what goes wrong in 13 people’s lives that let them earn tens or hundreds of millions of dollars without deducting a dime for charitable gifts. Maybe they just want to “give” more to Uncle Sam!)

3,869 taxpayers have appeared in the top 400 list since the IRS started tracking them in 1992. But just 27% have appeared more than once. And only 2% have appeared 10 or more times. It’s worth noting that some of today’s highest-profile earners fall short of this group. Billionaire Warren Buffett, who inspired the “Buffett Rule” that would tax million-dollar incomes at a minimum 30%, reported earning “just” $62.9 million in 2011. He probably won’t make the cutoff. Republican presidential candidate Mitt Romney reported earning $20.7 million in 2010 and $20.9 million in 2011. As rich as that sounds, he’s nowhere near the top 400.

We realize you may find these numbers comical. Who makes $200 million in a single year? But someday when your business catches fire and lands you in the top 400, you’ll get pretty heated at the thought of paying $40 million in tax. That’s when you’ll be glad we gave you a proactive plan for paying less tax, contact us at: 773-728-1500.

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Hot Thoughts

What do Margaret Mitchell, Mark Twain, and Shaquille O’Neill all have in common? None of them like paying taxes, that’s what! Here’s a collection of tax quotes to start your day.

“Death and taxes and childbirth. There’s never any convenient time for any of them.”
Margaret Mitchell

“Blessed are the young, for they shall inherit the national debt.”
Herbert Hoover

“You know we all hate paying taxes, but the truth of the matter is without our tax money, many politicians wouldn’t be able to afford prostitutes.”
Jimmy Kimmel

“The government deficit is the difference between the amount of money the government spends and the amount it has the nerve to collect.”
Sam Ewing

“Basic tax, as everyone knows, is the only genuinely funny subject in law school.”
Martin Ginsburg (Professor, Georgetown University Law Center)

“You’d be surprised at the frivolous things people spend their money on. Taxes, for example.”
Nuveen Investments (Advertisement)

“If you sell your soul to the Devil, do you need a receipt for tax purposes?”
Mark Russell

“I shall never use profanity except in discussing house rent and taxes.”
Mark Twain

“Last time I looked at a check, I said to myself, ‘Who the hell is FICA? And when I meet him, I’m going to punch him in the face. Oh my God, FICA is killing me.’”
Shaquille O’Neill

“The invention of the teenager was a mistake. Once you identify a period of life in which people get to stay out late but don’t have to pay taxes — naturally, no one wants to live any other way.”
Judith Martin (“Miss Manners”)

We hope you enjoyed these quotes. But please remember this: there’s nothing funny about paying more tax than you legally have to. If this summer’s heat has your blood boiling about taxes and you’re looking for a plan to pay less, call us today: 773-728-1500!

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You’re Fired! The story of an IRS auditor!!

Nobody really likes paying taxes. Sometimes, even the folks who work for the IRS resent paying the taxes that go towards funding their own salaries. Usually they just grumble about it and then go on with their day. But sometimes they try a little “self help.” So now let’s look at what one auditor did when she wanted to minimize her taxes.

Jacynthia Quinn spent 20 years as an IRS auditor in El Monte, California. The IRS audited her and her husband for 2006 (when she claimed $23,549 in charitable deductions and $22,217 in medical expenses) and 2007 (when she claimed $24,567 in charitable deductions and $25,325 in medical expenses). The Service disallowed those charitable and medical deductions, among other write-offs, and the case wound up in Tax Court.

You’d think an IRS auditor would be the first to know how to avoid an audit! So, how did Quinn do on the other end of the hot seat? Well, let’s look at those charitable contributions first:

“Petitioner proffered ‘receipts’ purportedly confirming charitable contributions. They were inconsistent and unreliable. Representatives from seven different charitable organizations credibly testified that the receipts were altered or fabricated. For example, petitioner offered a receipt purportedly substantiating $12,500 of charitable contributions to a religious organization. The purported receipt, however, identified individuals other than the couple as the donors. The organization’s records did not reflect any contributions made by the couple and confirmed that the other identified individuals had contributed $12,500.”

That doesn’t sound good. Bad enough if one donor testifies your receipts are faked. But seven? How about those medical deductions? Any better luck there?

“Petitioner similarly failed to substantiate the claimed medical and dental expenses. Some of her documentation also suffered from authenticity problems and appeared to have been ‘doctored.’ Petitioner offered three documents purportedly issued by Dr. Christopher Ajigbotafe or his staff confirming more than $9,000 in medical expenses for Mr. Quinn. Each document, however, spelled the doctor’s last name differently (‘Ajigohotafe,’ ‘Ajibotafe’ and ‘Ajigbotafe’). One ‘statement’ was dated in January 2006 and estimated expenses for the upcoming year. The amount of expenses for 2007 contained in another ‘statement’ was contradicted by a letter purportedly from the doctor’s staff.”

Keep in mind here that Quinn is an IRS auditor, with 20 years of training and experience auditing exactly these sorts of deductions! Naturally, the Tax Court didn’t show her a lot of sympathy — they sided with the IRS on every issue and even smacked her with a civil fraud penalty. In fact, the IRS Restructuring and Reform Act of 1998 requires the IRS to fire any employee who willfully understates their federal tax liability (unless they can show the understatement is due to “reasonable cause” and not “willful neglect”). Since Quinn’s own “excuse” is on a par with the dog eating her homework, she’s likely to lose her job as well.

It’s certainly entertaining to read about cases like Jacynthia Quinn’s. It’s satisfying to see a cheater get her comeuppance. And it’s great to see the IRS enforcing the same rules for its own employees as it does for us. But there’s a valuable lesson here, even for the majority of us who don’t cheat. Dotting the “i’s” and crossing the “t’s” is important for everyone. That’s why we don’t just outline strategies and concepts to help you pay less tax. We work with you toimplement those strategies and document them to survive scrutiny. And remember, we’re here for your family, friends, and colleagues too, so give us a call: 773-728-1500.

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Show Me the Money!

The week before last, while most of America was still digesting news of the Supreme Court’s decision on healthcare reform, more news hit the wires. That’s right, Hollywood A-listers Tom Cruise and Katie Holmes, better known as “TomKat,” are calling it quits after nearly six years of marriage. Of course, Tom has been down this road twice before. But this split has already spawned far and away the biggest headlines, and tinseltown gossips are working overtime. How long has Katie planned her escape? What role does Cruise’s association with the controversial Church of Scientology really play? Are Tom’s lawyers really letting Katie “play the media” while they ready his reply?

News of the split comes at nearly the same time as Forbes naming Cruise the world’s top-earning actor. His latest blockbuster, #4 in the Mission Impossible franchise, pulled in a whopping $700 million, powering Cruise to a $75 million year. So naturally, we want to know what the divorce means for the IRS!

Divorce is usually pretty straightforward, at least from the taxman’s perspective. Property settlements between divorcing spouses are generally tax-free. Alimony or spousal support is usually deductible by the payor and taxable to the payee — which lets the divorcing couple shift the tax burden on that income from the higher-taxed “ex” to the lower-taxed ex. Child support is both nondeductible and nontaxable — it’s strictly an after-tax obligation. And legal fees are a nondeductible personal expense, except for amounts allocated to figuring alimony payments.

But celebrity divorces can be risky business. Sometimes it’s hard for outsiders to understand the stakes, which can be as different from ordinary splits as night and day. Katie has hired a top gun New York attorney to represent her, one who knows all the right moves where celebrity divorce is concerned. You can be sure the tabloids are rooting for a war of the worlds — we just hope daughter Suri, age 6, doesn’t end up as collateral damage.

The Cruises have a prenup, of course. It reportedly gives Katie $3 million for each year of marriage, plus a 5,878 square foot house in Montecito, CA, where Oprah Winfrey, Kevin Costner, and Rob Lowe also have homes. And last year, Cruise deeded Holmes an apartment in Manhattan. We’re sure the firm that drafted TomKat’s prenup did a fine job. Of course, golfer Tiger Woods also had a prenup limiting wife Elin Nordegrin to $20 million — but she wound up walking away with five times that amount.

What sort of romantic prospects will the couple enjoy after the divorce? Well, Cruise should be fine. He’s already a legend — he can sit back with a cocktail and audition new starlets for the role of Wife #4. And as for Holmes, she’s still young, so we’re sure she can still attract at least a few good men who want to show her the color of their money.

So Hollywood is playing “Taps” for Tom and Katie’s storytale romance. It wasn’t endless love after all. Who do you think will “win” the PR battle? Or will they settle quietly and let the story fade into oblivion?

If you look carefully at this email, you’ll find references to seventeen Tom Cruise movies. Can’t find ‘em all? Send us an email at info@taxcutters.com . We’re experts at finding hidden opportunities, especially where it comes to taxes, so if you have questions call us: 773-728-1500!!

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The Cost of Reform – Medicare Tax

By now, of course, you’ve heard the news that the U.S. Supreme Court upheld the Affordable Care Act, also known as “Obamacare.” The Court ruled that the controversial individual mandate is constitutional under the government’s power to tax, rather than its power to regulate commerce.

We’re not here to debate the merits of the Court’s decision. If that’s what you want, turn on any cable news network and you’ll find various assorted bloviators from both sides, bloviatingright now. (Try it. It’s fun!)

What we are here to discuss is how the Court’s decision affects your tax bill. That’s because the original legislation that the Court upheld makes care affordable in part by imposing several new taxes — in addition to the “tax” or “penalty” imposed by the individual mandate — that will now go into effect as already scheduled:

  • On January 1, 2013, the Medicare tax on earned income, currently set at 2.9%, jumps to 3.8% for individuals earning over $200,000 ($250,000 for joint filers, $125,000 for married individuals filing separately).
  • Also on January 1, there’s a new “Unearned Income Medicare Contribution” of 3.8% on investment income of those earning more than $200,000 for individuals or joint filers earning more than $250,000. (Doesn’t that sound better than “tax”?)
  • Beginning January 1, 2014, there’s a $2,500 cap on tax-free contributions to flexible spending accounts.
  • Also beginning January 1, 2014, employers with more than 50 employees face a penalty of $2,000 per employee for not offering health insurance to full-time employees.
  • Finally, the threshold for deducting medical and dental expenses rises from 7.5% of your adjusted gross income to 10%. You probably don’t get to deduct your out-of-pocket medical expenses anyway — but the new, higher threshold will just make it that much harder.

These new taxes raise new planning questions. How can we structure your investment portfolio to avoid the new “Unearned Income Medicare Contribution”? (Doesn’t that sound better than “tax”?) What role should flexible spending accounts play in your finances? Should we look at a Health Savings Account or Medical Expense Reimbursement Plan to write off newly-disallowed medical expenses?

And the new healthcare taxes aren’t the only challenge we face this Independence Day. We’re six months away from what some wags are calling “Taxmageddon.” On January 1, the Bush tax cuts are scheduled to expire. And the 2% payroll tax “holiday” expires as well. These mean higher taxes for everyone, not just “the 1%.” But with Washington geared up for elections, there’s little hope for quick or easy resolution.

Together, these new developments make for some real planning challenges. But when the going gets tough . . . the tough get going. So count on us to get going on today’s most pressing planning questions. And remember, we’re here for everyone just give us a call at: 773-728-1500.

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Less Rich. Less Famous. Less Tax.

Back in 1969, Treasury Secretary Joseph Barr was shocked to discover that 155 Americans had earned over $200,000 that year, yet paid nothing in tax. Zip. Zilch. Nada. ($200,000 isn’t bad money now — back then, it had about the same buying power as $1.2 million today.) Washington huffed and puffed, then passed the “Alternative Minimum Tax,” or AMT. In 1970, the new tax surprised 18,464 unhappy taxpayers. No one could have foreseen it growing into a complete “parallel” tax system, a many-headed Hydra that millions every year.

Fast-forward to today. With the AMT firmly in place, the IRS has just released a 61-page reportrevealing that in 2009, 20,752 taxpayers earned over $200,000 and paid — you guessed it — zero tax. That’s one out of every 189 Americans earning above that amount. And the number ofnontaxable high-income returns is growing fast — five years earlier, there were just 2,833 tax-free winners.

How do they do it? The IRS identified “four categories that most frequently had the largest effect in reducing taxes”:

  1. Tax-exempt interest: Municipal bond interest income is exempt from federal and most state income taxes (although income from “private activity” bonds is subject to AMT). If you’re paying significant tax on interest income, we can help you decide if municipal bonds can help cut your tax.
  2. Medical and dental expenses: These are deductible to the extent they top 7.5% of your adjusted gross income (going up to 10% next year, unless the Supreme Court strikes down that part of the Affordable Care Act). Medical deductions include far more than just the obvious doctors, dentists, and prescriptions. If you suffer from arthritis, for example, you might write off the cost of a swimming pool your doctor prescribes to relieve your symptoms.
  3. Charitable contributions: Charitable gifts let you do well for yourself while you do well for others. They’re deductible up to 50% of your adjusted gross income. We can help you make the most of your gifts, especially noncash contributions and appreciated property.
  4. Partnership and S corporation net losses: “Pass-through” entities let you report business losses on your personal return. We can help you decide if these are right for your business.

There you have it. Four ways to turn $200,000 into zero tax — and 20,752 stories to help inspire you. We’re pleased that you take time to read these weekly emails. But it’s not enough just to give you the news. Our real job is to help you put it to use to pay less tax yourself. And don’t forget, we’re here for your family, friends, and colleagues too, contact us at 773-728-1500.

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A BIG Auch!!

The English novelist and playwright Henry Fielding once wrote that “a rich man without charity is a rogue; and perhaps it would be no difficult matter to prove that he is also a fool.” But sometimes you can be rich, charitable, and foolish, all at the same time. And that can make for some really expensive mistakes.

Joseph Mohamed is a California real estate broker and appraiser who has made a fortune buying, selling, and developing real estate. In 1998, he and his wife Shirley set up a charitable remainder trust for the benefit of the Shriners Hospitals for Children, the Sacramento Food Bank & Family Services, and the Pacific Legal Foundation. Then, in 2003 and 2004, he donated six California properties to the trust: four adjacent street corners in Rio Linda, a 40-acre subdivided parcel south of Sacramento, and a shopping center in Elk Grove.

Mohamed prepared his own taxes for those two years—definitely not standard operating procedure for someone in his shoes. When it came time to fill out Form 8283, “Noncash Charitable Contributions”, he skipped the instructions because “it seemed so clear that he didn’t think he needed to.” The form said the description of the donated property could be“completed by the taxpayer and/or appraiser”. And Mohamed was an appraiser, right? Of course he knew what his own properties were worth. How hard could it really be? He attached statements to his returns explaining how he valued the two biggest parcels. Then he deducted $18.5 million for the gift, satisfied that he had done all he needed to substantiate his write off.

It turns out, though, that the IRS wants a teensy bit more than just your say-so before handing out eighteen million in benefits. In fact, they have some pretty specific rules for deducting anygift of property worth more than $5,000. You need a “qualified” appraisal, made no sooner than 60 days before the gift and no later than the due date of the return reporting the gift itself. It has to be signed by a certified appraiser — not the donor or the taxpayer claiming the deduction. And the appraisal has to include specific information about the property itself, your basis in the property, and how you acquired it in the first place.

The IRS started auditing Mohamed’s 2003 return in April, 2005. You can probably imagine how charitably inclined they were toward his self-appraisal. So Mohamed went out and gotindependent appraisals showing the properties were worth over $20 million — two million morethan he deducted. And the trust actually sold the 40 acres south of Sacramento for $23 million. You would think that would be enough. But you would be wrong. The IRS held firm, and the case wound up in Tax Court.

Last month, the Court issued their 26-page opinion in Mohamed v. Commissioner. They ruled that none of Mohamed’s appraisals were “qualified” under Section 1.170A-13(c)(3)(i) and shot down his entire deduction. The Court confessed that

“We recognize that this result is harsh — complete denial of charitable deductions to a couple that did not overvalue, and may well have undervalued, their contributions — all reported on forms that even to the Court’s eyes seemed likely to mislead someone who didn’t read the instructions […] the problems of misvalued property are so great that Congress was quite specific about what the charitably inclined have to do to defend their deductions, and we cannot in a single sympathetic case undermine those rules.”

So, ouch. Big, big ouch. Eighteen million bucks worth of deductions, lost because someone didn’t dot the i’s and cross the t’s. Six million in actual tax savings, down the proverbial drain.

We realize it sounds self-serving to tell you to come to us before you make a big financial move. But Joseph Mohamed’s case emphasizes how important this really is. You may not have millions riding on doing it right. But are you really willing to risk tax benefits you truly deserve by doing it yourself?

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Something to Scream About

It’s one of the most recognizable images in all of art. It’s Norwegian artist Edvard Munch’s iconic vision The Scream:an agonized figure —little more than a garbed skull and hands — set against a background of blood-colored sky. And last month, it sold for a record-setting price. But could it have been inspired, at least in part, by his tax return?

Munch grew up in Oslo, son of a dour priest. At 16, he enrolled in college to become an engineer. He did well, but he quickly dropped out, disappointing his father, to study painting, which he saw as an attempt “to explain life and its meaning” to himself. At 18, he enrolled at the Royal School of Art and Design of Christiana, where he began painting portraits. His personal style addressed psychological themes and incorporated elements of naturalism, impressionism, and symbolism. He wound up studying in Paris and exhibiting in Berlin before painting the first of four versions of The Scream in 1893.

In 1908, Munch suffered a brief breakdown, followed by a recovery. That recovery brightened Munch’s art as well as his life, as his later work becoming more colorful and less pessimistic. He finally gained the public approval he had sought for so long; he was made a Knight of the Royal Order of St. Olav; and he hosted his first American exhibit. Munch spent the last years of his life painting quietly and alone on a farm just outside Oslo. Today, he appears on Norway’s 1,000 kroner note, set against a background inspired by his work.
We remember Munch now for his art, not his life. But that life included some frustrating run-ins with the tax man. Apparently, Munch wasn’t any happier keeping timely and accurate records than the rest of us. Here’s part of a letter that his biographer, Sue Prideaux, quotes him as writing, in her book Edvard Munch: Behind the Scream:

“This tax problem has made a bookkeeper of me too. I’m really not supposed to paint, I guess. Instead, I’m supposed to sit here and scribble figures in a book. If the figures don’t balance I’ll be put in prison. I don’t care about money. All I want to do with the limited time I have left is to use it to paint a few pictures in peace and quiet. By now, I’ve learned a good deal about painting and ought to be able to contribute my best. The country might benefit from giving me time to paint. But does anyone care?”

Even without that tortured face in The Scream, most of us can still probably relate to his frustration!
Last month, Sotheby’s auction house in New York sold a pastel-on-board version of The Scream that Munch painted in 1895 for $119.9 million — a new record for art sold at auction. The seller was Norwegian billionaire Petter Olsen; the buyer remains unknown. If the seller had been American, there could have been quite a tax to pay. “Capital gains” from the sale of appreciated property held more than 12 months are ordinarily capped at 15%. (Republican presidential candidate Mitt Romney has proposed eliminating tax on capital gains for taxpayers earning under $200,000; while President Obama has proposed raising them to 20% for taxpayers earning over $250,000.) But paintings like The Scream are classed as “collectibles” and subject to a top tax of 28%. (You would be disappointed if we didn’t say that’s enough to make a collector scream!).

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De-Friending Uncle Sam

Last week, Facebook’s initial public offering hit the market like tickets to the season’s hottest concert. Shares opened at $38, unlocking billions in new wealth for founders and early investors. While shares have actually fallen below that IPO level, investors will probably “like” Facebook for quite some time!

Taxes played a lead role in Facebook’s IPO. The company went public largely so founder Mark Zuckerberg could pay $2 billion in taxes to exercise options on 120 million shares. And six insiders, including Zuckerberg, have set up annuity trusts most likely intended to minimize gift and estate taxes on transfers to future heirs. (In Zuckerberg’s case, those future heirs haven’t even been born — how’s that for advance planning!) But one Facebook founder has taken an even more drastic step to avoid tax — he’s actually renounced his American citizenship!

Eduardo Saverin was born in Brazil in 1982. His wealthy father moved the family to Miami in 1993 to avoid kidnapping threats, and Saverin became a U.S. citizen in 1998. He met Zuckerberg while the two were students at Harvard and, using his family’s wealth, became Facebook’s first investor. But Saverin was squeezed out shortly thereafter, reportedly at the urging of more experienced backers. He sued Zuckerberg, and settled out of court for what appears to be something between 2% and 4% of the company — worth as much as $4 billion at last week’s market close.

Now, Americans like Saverin who give up their citizenship do pay an “exit tax” on the value of appreciated assets as of the time they leave. That means, essentially, you’re taxed as if you sold everything the day before you surrender your U.S. passport. You’ll file Form 8854 to calculate and report your tax. If you can’t afford to pay on the spot, you can even “finance” it as long as you post adequate security.

In Saverin’s case, that means he pays based on the pre-IPO value when he left in September — but he avoids tax on any appreciation after that date. This could spell hundreds of millions in savings. And where has Saverin settled? Singapore, where he has lived since 2009, and where the tax on capital gains is zero. Zip. Zilch. Nada. The Wall Street Journal reports that Saverin has become a Kardashian-like figure in his new home: “Mr. Saverin is regularly spotted lounging with models and wealthy friends at local night clubs, racking up tens of thousands of dollars in bar tabs by ordering bottles of Cristal Champagne and Belvedere vodka, according to people present on these occasions. He drives a Bentley, his friends say, wears expensive jackets and lives in one of Singapore’s priciest penthouse apartments.”

Saverin is hardly the first American to de-friend Uncle Sam. The IRS publishes a quarterly list of Americans who leave, one that totaled 1,781 in 2011. And, while Saverin denies he left to avoid taxes, outrage has grown over his move. Senators Chuck Schumer (D-NY) and Bob Casey (D-PA) have even introduced legislation that would punish future Saverins — their so-called “Ex-Patriot Act” (“Expatriation Prevention by Abolishing Tax-Related Incentives for Offshore Tenancy”) would impose a 30% tax on future expatriates’ gains after they leave our shores.

Are you working to create the next Facebook? There are lots of ways to pay less tax when you eventually sell, and they don’t require you to give up your citizenship!

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Apple’s strategy!!

For 20 years now, Apple has blazed a reputation for stylish design and innovative products, creating a near-cult following among fans. Apple’s computers appeal to the artists and designers who set so many of today’s trends. Their iPod has helped change how the world listens to music. Their iPad has made online content available nearly anywhere. And their iPhone is helping change the way we communicate with friends, family, and colleagues. (Just a few years ago, your mother-in-law didn’t have a cell phone. Now she sends text messages and “checks in” on Facebook.)

Apple may be the most successful company on earth. At one point last year, they had more cash on hand ($76.2 billion) than the United States government ($73.8 billion). And Apple is currently the most valuable company on the planet, with a “market cap” (total value of tradeable shares) that topped $590 billion dollars on April 10. (That’s right . . . those iTunes you casually download for a buck each have created a company worth over half a trillion dollars.) In fact, Apple’s current market cap is more than the gross domestic products of Iraq, North Korea, Vietnam, Puerto Rico, and New Zealand — combined.

But Apple’s most recent annual report reveals the company’s genius for creating successful marketing strategies also extends to successful tax strategies. How else would you describe a strategy that lets Apple earn billions and pays less than 10% of their taxable income in tax?

How do they do it? Largely by keeping the money they earn outside the United States, outside the United States. Apple owns subsidiaries in tax havens like Ireland, the Netherlands, Luxembourg, and the British Virgin islands. They helped pioneer the “Double Irish with a Dutch Sandwich” strategy that hundreds of other multinational companies have imitated. Apple even maintains a subsidiary in tax-free Nevada — the blandly-named “Braeburn Capital” — to manage that enormous cash haul without paying tax in its home state of California. For 2011, the company paid a worldwide tax of $3.3 billion on $34.2 billion of profit. But one study concludes that Apple would have paid $2.4 billion more without these rules.

Now Apple has become part of the political debate. At the risk of grossly oversimplifying a pretty complicated discussion, Democrats in Washington scoff that taking an extra $2.4 billion in tax last year would have squelched Apple’s creativity. Republicans reply that using the cash to grow the business or distribute more dividends to shareholders will grow the economy faster than if it goes to the IRS. Both President Obama and presumed Republican nominee Mitt Romney have called for eliminating corporate tax loopholes in order to pay for lower rates (28% in President Obama’s plan, 25% in Governor Romney’s). Either way, Apple is likely to become one of the stories — like Warren Buffett paying a higher tax rate than his secretary — that come to define this year’s campaign.

Taxes always play a part in Presidential races. But this time, with the economy still struggling and the Bush tax cuts scheduled to expire in a few short months, taxes will be even more important than usual. Our job, as November approaches, includes helping you understand just what the candidates’ proposals mean for your bottom line.

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