Boehner Piles On FB Founder

There is so much inaccurate and misleading information floating around about Facebook Co-Founder Eduardo Saverin and his tax avoidance that it is time to point out a couple of things.

1. Renouncing U.S. Citizenship does not help you avoid taxes up to that point.  In other words, Mr. Saverin still had to pay capital gains on his FB shares based on the value on the date that he renounced his citizenship.  Which means that he owed (or already paid) hundreds of millions of dollars in capital gains taxes upon his exit.

2. He will have to pay the taxes that have accrued no matter where he lives.  In other words, he is paying his “fair share” on what he earned as a U.S. Citizen.  What he earns after that is between him and his new home country.  The fact that he owns U.S. assets (FB shares) would make it rather easy for the IRS to collect the taxes that he owes.  If he doesn’t pay, they can put a tax lien on his remaining FB ownership.

“There’s already a law on the books, George,” John Boehner said to George Stephanopoulos . “But this is outrageous. This is absolutely outrageous — that somebody would renounce their citizenship to avoid paying taxes. And yes, it’s already against the law.”

Senators Chuck Schumer and Bob Casey have been on the case for a while now.  “Mr. Saverin has decided to ‘defriend’ the United States of America just to avoid paying his taxes,” said Schumer. “We aren’t going to let him get away with it so easily.”

“This guy just thinks he can rip us off by engaging in this scheme,” Casey, D-Pa., said.

“Saverin has turned his back on the country that welcomed him and kept him safe, educated him and helped him become a billionaire,” Schumer, D-N.Y., said. “This is a great American success story gone horribly wrong.”

ABC New’s entitled their article, “Facebook’s Eduardo Saverin ‘Spits in the Eye of the American People.’

Well, I don’t feel like Mr. Saverin “spat in my eye.”  He earned money here and paid taxes on it (and will pay more if he hasn’t already).  If he wants to leave then I think it is his loss.  But, I think that if Mr. Saverin wanted to come back and start another Billion dollar company he should be welcomed back.  Senator Schumer says that this country educated him and helped him become a billionaire.  That is true.  But, without Mr. Saverin’s money, Facebook may never have gotten started.  It was his family money that financed Facebook from the beginning.  Now, look how many Americans have become billionaires because of Mr. Saverin.

Let’s be clear.  I do think that everyone should pay their fair share of taxes.  But, there are two issues here worth mentioning:

1. We live in a Global Economy.  Thus, we have to compete globally.  The U.S. is the only country in the world that taxes it’s citizens on worldwide income no matter where you live.  If someone leaves because U.S. taxes are too high that should tell us something.  Also, the reporting requirements for U.S. Citizens living abroad are cumbersome.  Just to have a foreign bank account means that you have to report the information to the IRS every year on Form TD F 90-22.1.  Not reporting it results in a fine of $10,000 per occurrence.  Just that requirement alone would make someone consider renouncing their U.S. Citizenship.  Think about it.  If you live overseas and you have two checking accounts, a savings account and business account and you forget to report those accounts to the IRS for two years, you could owe $80,000 in penalties, just for not letting them know that “hey, I have some foreign bank accounts.”   And, of course, living overseas means that you have to pay taxes in the country where you live and to the U.S.  Sure, you can exempt about $100,000 or so, but for the high income earners that doesn’t help much.  Singapore doesn’t have a capital gains tax which could be the reason that Saverin chose that country.  But, Singapore will benefit from him living there in other ways because of the money he will spend and invest in their country.  Thus, Singapore is competing in the Global Economy by offering incentives, whereas Schumer is competing by trying to force people to stay.

2. If he owes taxes, he should have to pay them.  I haven’t heard anyone report that Mr. Saverin said he isn’t going to pay the taxes that are actually due.  But, to try to pass a new tax law just because of him?  Come on.  That is a little ridiculous.

In a time where we should be encouraging overseas investment into our economy, new laws like the one Senator Schumer is espousing would only discourage people from doing business here.

As far as Speaker Boehner is concerned, he would be much better served focusing on cutting the Federal Deficit by cutting spending instead of attacking Mr. Saverin.  Perhaps if our Congress would focus more time and energy on finding ways to cut spending and finding ways to bring ex-patrioted dollars back into the U.S. instead of trying to squeeze every last dollar of possible taxes out of people on the other side of the world we wouldn’t be in the financial position we are in.

The Flawed Earned Income Credit

A single mom, whom we’ll call “Mary”, works hard without support from her ex to provide for her child, and makes about $35,000 per year.  Unfortunately, she makes too much money to qualify for the so called “Earned Income Tax Credit.”  During 2011, she lost her job due to company downsizing.  But, since she lost her job in October, her earnings for 2011 were still close to $30,000 – still too high to qualify for the EITC (with one child).  If she had lost her job in July or maybe August, her earnings would have been low enough to qualify.

Unfortunately, qualifying for the EITC has a lot to do with timing.

Mary is still unemployed and looking for a job.  It could be March or April before she lands a good job.  In other words, she could start working “just in time” to NOT qualify for the EITC again in 2012.  Even though she will have been out of work for 6 months, since those 6 months are split between 2011 and 2012, she doesn’t get the EITC for either year.  This is what you call a “wacky” system that only someone in D.C. could have come up with.

A single parent, claiming 3 dependents, can hit the “sweet spot” of EITC by earning between $12,750 and $16,650 during the year.  They can get EITC of up to $5,751 added on to their Income Tax Refund.  For 2 dependents the EITC is $5,112.

Another single mom that I know has supported 2 children on only about $17,000 per year for the past few years.  Unfortunately, last year she got a second job at a gas station and made an extra $5,000.  This extra income significantly decreased her EITC this year.  Only someone in D.C. could devise such a system that punishes a single mom for getting a second job.

The third situation is about two divorced parents living together with each having children of their own.  They each are providing for their own “household” and paying for each of their children’s expenses.  Thus, they both claim Head of Household and the EITC.  They each get $3,000 – $5,000 per year from EITC.  Then they get married.  Suddenly they no longer qualify for the EITC at all because together they make “too much money” to qualify for EITC.  Again, only a bureaucrat in D.C. could devise a system that encourages co-habitation and punishes married people.

All three of these situations are actual situations and I know all of these people personally.  The EITC is one of the many flaws in our current tax system that needs to be fixed.

Here is how it could be fixed:

1. If you’re going to have EITC at all, allow people to apply for EITC any time during the year using the past 12 months of income.  This could be done on an amended Form 1040X.  They would need to wait 12 months before applying again.

2. In order to not “punish” someone for getting a second job, allow people to take an average income over the past 3 years to determine their EITC.  Putting this in place would help those people who didn’t realize that they were going to be “punished” for working a second job and would allow them to decide going forward, after meeting with their tax professional, if they want to keep working the second job.  When you consider child care, social security and medicare taxes and the decrease in EITC it is hardly worth it for someone to work a second job.

3.  Allow married couples to file as “Single” if they so choose with only one being allowed to file as “Head of Household”.  And, no longer allow people living together to each file as “Head of Household”.  There should only be one “Head of Household” filing per physical address.

Romney Releases 2010 Tax Return

Image by agrilifetoday via Flickr

Mitt Romney released his massive 203 page 2010 tax return yesterday.  The big story is the 14% tax rate that he pays.  But, to me, as a tax professional, my eyes went to Schedule A, Line 22, Tax Preparation Fees.  I’m always curious what high profile individuals pay for tax preparation services.  And, guess what?  The line is blank.  Is this a mistake?  Did Pricewaterhousecoopers LLP do it for free?  He was way over the 2% threshold so the tax preparation fees would have been a dollar for dollar deduction.  Oh, well,  I guess I’ll focus on the 14% issue.

Here are the facts:

1) His income was about $21.6 million

2) The majority of his income was from Capital Gains ($12.5 million)

3) The next largest portion was from Dividends ($4.9 million)

4) The third largest portion was from Interest ($3.3 million)

Capital gains are taxed at 15%.  There is a reason for that.  It encourages investment.  Raise the capital gain rates and you discourage investment.

Dividends are also taxed at 15%.  The reason for this is because they have already been taxed at the Corporate Income Tax rate of 35%.  Corporations don’t get a deduction for dividends.

Interest is taxed as ordinary income which means Mitt Romney paid 35% on his Interest Income.  This is because Corporations DO get a deduction for interest payments and therefore don’t have to pay taxes on it.

5) He gave $3 million to charity.  This helped reduce his taxable income and, of course, his overall tax rate.

6) He earned $593K from speaking fees, director fees, etc.  He reported this on Schedule C and paid the FULL Medicare Tax on it.  He could have run it through an S-Corporation, paid himself a reasonable salary, and then taken the rest of it as a distribution, like Newt Gingrich did, but he didn’t .   Not that there is anything wrong with the way Newt did it.  I’m just pointing out the facts.  Romney should at least get some points for that.

There is a lot to this tax return and I’m not going to spend the time going through all the forms.  I’ll just stick with the basics.  But, I don’t see anything big here.  The only ammunition will be for those who want to play class warfare.

How To Really Stimulate the Economy

Image via Wikipedia

What motivates people?  Well, money, for one thing.  If you’re familiar with the book “Carrots and Sticks”, or the web-site StickK.com, you’ve probably noticed that money motivates people to do something more than just about anything else.  So, how do you stimulate the $14 Trillion mammoth economy of the United States?

9-9-9 Would Probably Double Your Taxes

Image by agrilifetoday via Flickr

Herman Cain’s 9-9-9 is certainly attracting a lot of attention and has given him a huge boost in popularity and poll numbers.  Proponents of the plan claim it’s simplicity will end the need for complicated tax returns, stimulate the economy and still raise the revenue necessary for the fed.  Opponents of the plan claim it will put a much larger tax burden on the poor and middle class while at the same time giving the government yet another way to tax us via a national sales tax (who says it will remain at 9%).

Since I prepare tax returns for a living, I have a lot of raw data to test this scenario out myself.  Here is what I did: