Tax Act 2017: Tax Planning for Global HNW Investors

January 02, 2018  |   Posted by :   |   High Net Worth Investor,International Tax Planning   |   0 Comments

The December 20, 2017 Tax Act has been portrayed as a massive tax cut for Americans. Yet, it increases the federal deficit by nearly $1.5 trillion (which is now at $20.6 trillion). The ramifications are simple, the higher the federal deficit the more money spent for interest due on the national debt (which has become one of the biggest expense items in the federal budget). Contrary to the public pronouncements of a major tax cut, investors and wage earners may on a case by case basis pay more in tax than previously paid in prior tax years.

For Fiscal Year 2017 (ending 9/30/17), the U.S. Government projects it will pay out approximately $474.5 billion in interest. The U.S. Government estimates that in 2017 they will collect taxes of $3.21 trillion and spend $3.65 trillion, a shortfall of $443 billion. So the shortfall ($443 billion) is primarily due to $474.5 billion in interest due on the federal deficit (the interest due on the national debt is how much money the federal government must pay on outstanding public debt each year).

The FACT TANK (8/17/17: Drew DeSilver) stated: at the end of President Clinton’s 2nd term there were huge multi-billion budget surpluses; it was projected that at the end of 2012 (based on then projections) the entire federal government debt would be paid off. Instead of being paid off in 2017, the national debt is over $20 trillion and projected to go to $22 trillion. The U.S. debt is now bigger than the entire U.S. Gross Domestic Product (as of 2nd Qtr 2017 the U.S. GDP was estimated to be $19.23 trillion).

The time bomb is the rate of interest paid. Currently in 2017 thru 7/17 the rate of interest paid was 2.28%. If the rate of interest is once again restored to historic levels (5-7%) then the interest paid on the national debt may go to well over $1 trillion per year (which is nearly 1/3 of current budget outlays). The rising rates of interest are a time bomb in synchronicity with a $20 trillion+ national debt.

So the 2017 Tax Act may present an unexpected tax increase for Global HNW investors due to a confluence of tax changes:

1. For wage earners who divorce, the alimony paid (decided by state laws which governs the divorce) will no longer be tax deductible after 12/31/18. So the payor of alimony will now have two problems: the alimony due, and no offsetting income tax deduction (for alimony paid) which means they will owe more in taxes (not less);

2. For residents of New York and California who can no longer deduct an unlimited amount for either state or local income/property/sales taxes (which are now capped at $10,000) effectively their taxable income subject to tax may now be higher with greater federal tax due (than prior years);

3. Homeowners who purchase new homes will be limited to a $750,000 mortgage deduction (not the current $1,000,000) for interest paid, which effectively means their taxable income will increase for the $250,000 mortgage interest no longer allowed.

Investors may be cheered by favorable tax provisions: federal top tax rate of 37% (no longer 39.6%), and a 20% tax deduction for pass-through income paid by an LLC, S-Corp or Partnership. However, if the 37% rate is on a higher taxable income because of the loss of tax deductions for alimony, state/local taxes, or reduced home interest mortgage deduction the actual income tax may be higher than prior tax years.

Additional provisions, e.g. repeal of IRC Sec. 165 casualty losses may further actually increase taxable income (for personal property lost under IRC sec 165 (c) (3)), are now limited to national disaster areas (however, if the loss from fire, storm, shipwreck, theft or other casualty is for funds which were invested for profit than under IRC 165 (c) (2) the losses may still be tax-deductible).

For those U.S. taxpayers who hold their investments in revocable trusts (like many investors) they will not get the benefit of a 20% income tax deduction for pass-through entities.

Many of the tax reductions promised, or increased capital investments, or new hiring by U.S. companies, whose corporate income tax rate is reduced from 35% to 21%, is neither guaranteed nor even recommended (a low percent of U.S. companies, i.e. less than 15% have made plans to increase their spending on capital investments or jobs). Rather, as in the 1986 Tax Act and the 2004 Tax Act, the funds realized from tax savings were used to repurchase the company stocks and boost their share prices which advantage the shareholders only.

U.S. corporations will now no longer be taxed on worldwide income. They will be taxed on a territorial system of tax, i.e. they won’t owe tax on income made offshore (outside the U.S.). Instead, U.S. companies will be required to pay a one-time lower tax rate on existing offshore profits (upon repatriation) of 15.5% for cash and 8% on non-cash assets (e.g. equipment which was purchased with offshore profits). However, there is no assurance that these funds will not be used solely for stock buybacks to boost stock prices of the company.

The tax consequences of the 2017 Tax Act are still not known and will not be for several years from now. What is known is that what has been represented as a tax break for all Americans may not be the case and should be reviewed on a case by case basis. Global HNW investors should not be remiss and assume tax savings are coming, but instead should project their new 2018 and 2019 taxes in light of the tax law changes and then evaluate whether they will indeed pay more not less income tax.

Immediate tax planning may include:

1. Shift all investment assets from ownership by revocable trusts to pass- through entities (S-Corporations, Partnerships and Pass-through entities) to take advantage of the new 20% income tax deduction for pass-through income.

2. For income tax deductions for theft losses (IRC 165) defined under state law (and may include blackmail, burglary, embezzlement, larceny, robbery, kidnapping for ransom, fraud or misrepresentation) these losses will no longer be deductible under IRC 165 (c) (3) as uninsured non-reimbursed losses. However, they may still be income tax deductible if they qualify under IRC 165 (c) (2) involving a transaction entered into for profit (e.g. victims of Ponzi schemes like ”Madoff victims”).

3. A focus on gift tax planning. Under the 2017 Tax Act the exemption is raised to $10.98 million for an individual taxpayer and twice that ($21.96 million) for husband and wife. A key tax planning strategy may include gifting assets up to the exemption amounts so they will not be included in the estate at death (40% tax rate). Under this tax planning, the future appreciation is not subject to estate tax. So if $22 million is gifted, and the value of those assets appreciates by $10 million, so at the time of death, they are worth $32 million, then the $10 million appreciation is not subject to 40% estate tax and the investor saves $4 million (40% of $10 million).

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Looking Glass Symposium and Party

December 27, 2017  |   Posted by :   |   Panama Papers,Paradise Papers   |   0 Comments

The Wolfe Law Group is pleased to announce that Gary Wolfe is going to be one of the Speakers at the 14th Annual Looking Glass Symposium on January 16, 2018 in Camarillo.

Gary’s topic is The Panama (Paradise) Papers: The IRS Audits (FATCA/FBAR) Civil & Criminal Issues. If you would like to attend for CLE credit please contact Dena Jenson at .

The Looking Glass Symposium in Camarillo is being held at the following location: California State University Channel Islands, 1 University Dr., Camarillo, CA 93012

In celebration, Gary has decided to throw a party at the nearby Four Seasons Westlake Village. From 5:30 – 8:00 pm Gary (and friends) are hosting a wine tasting (hosted by award winning Paso Robles winery, Pomar Junction) and tapas party (by a Michelin star chef) at the Four Seasons Hotel Westlake Village , 2 Dole Dr, Westlake Village, CA 91362.

You are invited to attend but we have limited spaces and a waiting list. Gary has reserved 20 VIP spaces so if you wish to come please send him an email since I’ll be accommodating those in order of receipt of their request.

For those with spouses (or significant others) they are welcome, too.

For those with children we are setting up an adjacent room for an art contest (the first annual Picasso art contest featuring versions of the famous Picasso painting “The 3 Musicians”). Kids of all ages are welcome to compete after their dinner (burgers, hot dogs, milk and cookies).

Hope to see you January 16, 2018. Happy Holidays!

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New Hampshire Resident Pleads Guilty to Tax Evasion Scheme

December 20, 2017  |   Posted by :   |   Tax Evasion   |   0 Comments

New Hampshire tax payer Gary P. Borak will serve 2 years in federal prison pay $168k in restitution to US government and have 3 years of supervised release or defrauding the US treasury out of $168k taxes due.

Taxpayer amended 2007 and filed delinquent tax returns for 2008 (but never filed 2009 thru 2016).

Taxpayer listed bogus claims on his tax return to receive refunds and pleaded guilty to one count of tax evasion and two counts of making false statements on his tax returns (which are separate felonies for tax crimes; in addition the tax returns filed, if false tax returns are additional felonies).

So the taxpayer has effectively admitted to multiple separate crimes which were charged: tax evasion and making false statements on his tax returns. Additional felonies apparently not charged separately may include: filing false tax returns (3 year felony), obstruction of tax collection (3 year felony).

The IRS position is they are aggressively pursuing these types of cases. In the words of Joel Garland, IRS Criminal Investigation Division, “Our voluntary system of self-reported tax liability depends upon people to honestly report their income. Those who willfully file false tax returns and obstruct the IRS in their collection efforts damage our nation’s system of taxation.

Violators will be prosecuted, punished and obligated to repay the taxes along with applicable penalties and interest, which are substantial.”

Please click here for complete article.

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Annuities and Life Insurance

December 18, 2017  |   Posted by :   |   International Tax Planning   |   0 Comments

Annuities and Life Insurance get a “bad rap” because the commercial products that are sold to the general public lack “NET ROI”  (return on investment) due to costs, fees, and varied returns annually.

Life Insurance Cash Value has highly favorable tax rules which includes no tax due on earnings (while held in the cash value component of the policy), no tax reporting due on annual earnings and no tax on policy earnings withdrawn as a loan, as long as the policy is funded over 5 years as a NON-MEC.

Cash Value buildup is a sophisticated investment tax planning strategy used by Walt Disney (who used his policy cash value loan to finance his dream of opening his theme park DISNEYLAND); Max Foster (who used his policy cash value to purchase an 80 acre Modesto, CA farm which has grown into Foster Farms one of America’s largest chicken providers).

Wells Fargo Bank, America’s 3rd largest, carries over $30B in cash values of life insurance on their corporate books.

For the Global High Net Worth (HNW) Investor a far better tax planning strategy is to use Private Annuity (”PA”)/Private Placement Life Insurance (“PPLI”) to act as two separate tax-planning strategies for the client’s stock and bonds investment portfolio.

Tax Planning benefits for investors include: tax- free annual compounded earnings, no annual earnings reporting Form 1040 tax returns (not reportable as income unless withdrawn from PA), no disclosure of offshore PA or PPLI

Required under IRS form Fincen Form 114 (FBAR) for foreign bank and financial accounts over $10k; or FATCA Form 8938 for foreign financial assets over $50K (which also may require separate FBAR filing).

When combined, the PA/PPLI tax planning strategy for investment portfolios offer portfolio earnings both tax deferral (PA) and tax exempt returns (PPLI; which if a NON-MEC has tax free earnings).  For example, client sales stock held under the PPLI with a $5m capital gain.

Normal long term capital tax in Cal is 34% (blended Federal/CA tax rate) so tax of $1.7m is due on sale. If held by the PA at the time of sale, the tax is $0 (tax savings $1.7m).

No tax due until funds withdrawn from PA but while funds are in PA they compound tax deferred. If the PA then takes the $5m to fund the PPLI (NON-MEC; funded over 5 years) so both the basis and earnings may be withdrawn tax-free (i.e. basis withdrawal of amounts invested in PPLI is tax free, earnings borrowed out as a tax free loan repaid on a leveraged basis; premium paid for death benefit received).

Effectively, on a $5m policy premium ($1m per year), $1.7m of the premium paid (34%) is free $ (paid from capital gain tax savings). Please see my Lorman Education Services article, Doubling Net Investment Returns.

The key to the tax planning is annual, compounded, net tax-free earnings (both the PA and PPLI). Under the tax planning strategy, a client’s portfolio (e.g. $10m) annual earnings (e.g. at 10%; $1m per year) are taxed at $0 per year (unless withdrawn as an annuity at which time earnings are subject to tax). If taxed at 55% (highest blended Federal/CA tax rate), net after tax return is $450,000 ($1m -$550,000). Under the Tax Planning Strategy the net after tax return is $1m (and the additional amount i.e. $550,000 tax savings compounds tax deferred).

In the words of Albert Einstein Compounding is the 8th Wonder of the World.

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10% US Excise Tax

December 11, 2017  |   Posted by :   |   Excise Tax   |   0 Comments

I propose a 10% US excise tax on the commercial sale of addictive, socially useless, taxpayer financed products. These include: Junk Food, Tobacco, Gambling, Prostitution, and Pornography.

“What Prohibition Proved is there can be no way to stop people from doing what they want to do…” – Jimmy Breslin: Damon Runyon A Life

So, what to do:

1. Take a clear-eyed view and see the problem which are the costs to American taxpayers for the commercial sale of addictive consumer products;

2. Impose a 10% excise tax paid to the US government at the time of sale;

3. Use the funds to offset lost revenue from my American Tax Plan for elimination of the corporate income tax, increased size of estate/gift tax exclusion to $25m per US taxpayer, deductibility of payroll taxes (for workers), and making the first $20,000 in income not subject to US income tax (a tax break for all US taxpayers which tax savings may stimulate the US and State Economies.

Regarding the out of control hard drug problem in the US, legalize and tax Cannabis and use the revenues (earmarked) for drug treatment and rehabilitation, first responders, security for our borders from drug trafficking to counter the overwhelming national surge in death and health trauma from heroin, opioids, cocaine and other hard drugs. Turn security over to private contractors working with US educational institutions and State/Local Governments who will create a national security system including video cameras, databases of felons, and local community based policing to eliminate crime infested local areas.

Use targeted tax credits (20% of amount expended) to promote American business internationally (in export zones), inventions (research and development), infrastructure renovation and improvements for roads, bridges, airports, train stations, hospitals, and schools (including state parks throughout America and inner city gardens both edible and otherwise).

Establish a US Sports & Art Authority with 3 subdivisions : Training programs for Sports with Equipped Gyms nationally (that all Americans can use), Technology (Computer/Internet Training Skills) and Worker Retraining for new careers in technology, Art & Music, Literature & Film.

The geography may best work with a template which includes the following:

1. Federal purchase of State Land. A one mile (or more) area is created for a US Export Zone to include the establishment of a Park/Gym, separate facilities for each of the US Sports & Art Authority (3 separate buildings), a day care center for children (with both an indoor component and outdoors, too). All privafe companies who participate may benefit from the targeted tax credits (which also apply to wages paid in these designated areas)

2. US taxpayer designates that up to 25% of their tax payment be allocated to the US Sports and Authority (by checking the box and putting in the % of their contribution eg. on a $10,000 tax paid ; 25% allocation would be $2500 of the tax earmarked by the taxpayers to be paid directly to fund the national Sports and Arts Authority that receives federal block grants and in turn pays them over to the states under a stated formula;

3. The genius of America is when we all “row together”. The inspirational US template of government, higher education, business, labor and community leaders have created an economic miracle in Silicon Valley, CA. Duplicating it across American seems highly timely now. Exports of US products globally becomes the key metric to go from where exports are now 13% of the US GDP (which means 87% of all US made products are sold in the US) to over 50% of US GDP, which quadruples global sales (which given that the US has only 5% of the World’s population is GOOD MATH). Many jobs are created in the US since the products have to be at least 50% US made or no export tax credit.

4. The most successful Public/Private Partnerships to Finance America and create new inventions is Silicon Valley, CA. The “Silicon Valley” miracle should be considered on a state by state basis where the US government authorizes an annual block grant from funds allocated from the 10% US excise tax to go to states based on two criteria: #1) Population #2) Economic Needs so the economically challenged areas in the US are the priority recipients.
States determine how the block grants are distributed in their states under agreed guidelines.

5. Establish an internet US Best Practices Database in which an on-line community posts a Bulletin Board of Best Practices nationally. For example, which city airport has the best customer check in, on time flight arrival and safety… These types of Best Practices affect all industries so each industry should have its own Page on the National Bulletin Board.

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