Moguls Rent South Dakota Addresses to Dodge Taxes Forever(bloomberg.com)
bloomberg.com
Moguls Rent South Dakota Addresses to Dodge Taxes Forever
http://www.bloomberg.com/news/2013-12-27/moguls-rent-south-dakota-addresses-to-dodge-taxes-forever.html
59 comments
It is bad, but not quite that bad. If you just look at taxes on wages for someone making $250k per year, you will pay about 40% in obvious taxes in California. There are sales and other taxes on top of this and some additional regulatory taxes as well.
Since I have operated companies with substantial payrolls in California and therefore been privy to the cost details, I can say that the total outlay to various government authorities when a paycheck is cut can exceed the total value of the paycheck in California but not much beyond that; maybe 52% to government, 48% to the employee.
In summary, you will only approach 60% if you include all possible taxes on the income including the spending of said income, which does not happen often in practice. Even in California, the worst case is closer to 50% if you manage your income reasonably well.
This still adds up to a lot of money if you compare it to a state like Washington with similar software engineering wages and no income tax, since that adds up to tens of thousands of extra income.
Since I have operated companies with substantial payrolls in California and therefore been privy to the cost details, I can say that the total outlay to various government authorities when a paycheck is cut can exceed the total value of the paycheck in California but not much beyond that; maybe 52% to government, 48% to the employee.
In summary, you will only approach 60% if you include all possible taxes on the income including the spending of said income, which does not happen often in practice. Even in California, the worst case is closer to 50% if you manage your income reasonably well.
This still adds up to a lot of money if you compare it to a state like Washington with similar software engineering wages and no income tax, since that adds up to tens of thousands of extra income.
Say your income is $406,750 (highest federal tax bracket for an individual). Federal income tax is $118,188.75. California income tax is $37,941.45. Effective tax rate is 38%. San Francisco could add 1.5% so now we're at around 40%.
How are you getting to 60%?
How are you getting to 60%?
(Tax advisor here.) You don't get a 60% rate in the US. Anyone who claims otherwise doesn't understand the basic principles of U.S. taxation or is lying to try and make a political point.
State taxes are deductible for federal income tax purposes (meaning that they reduce your taxable income as determined for federal purposes). Also, Medicare and Medicaid taxes are part of payroll taxes (or FICA, for the self-employed), so you don't pay them both.
As every tax advisor in the CNBC article pointed out, Michelson knows diddly squat about taxes. He was taking every single tax rate and adding them together, but he should have been averaging them out. For example, the 20% rate on his capital gains and dividends replaces the 39.6% rate; he's double-counting some of the FICA taxes, and worst of all, he thinks his marginal rate (the highest rate he pays) applies to all of his income.
State taxes are deductible for federal income tax purposes (meaning that they reduce your taxable income as determined for federal purposes). Also, Medicare and Medicaid taxes are part of payroll taxes (or FICA, for the self-employed), so you don't pay them both.
As every tax advisor in the CNBC article pointed out, Michelson knows diddly squat about taxes. He was taking every single tax rate and adding them together, but he should have been averaging them out. For example, the 20% rate on his capital gains and dividends replaces the 39.6% rate; he's double-counting some of the FICA taxes, and worst of all, he thinks his marginal rate (the highest rate he pays) applies to all of his income.
Thank you. I am so tired of seeing this 'federal + state income taxes are cumulative' lie. Not only is it dishonest, it's an insult to the intelligence since anyone who who has ever done their own taxes knows they're deductible just by filling out the 1040.
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> State taxes are deductible for federal income tax purposes.
How does that work, considering federal taxes must be figured before the state?
Edit: looks like itemize and sched A are necessary.
How does that work, considering federal taxes must be figured before the state?
Edit: looks like itemize and sched A are necessary.
Excellent question and here is the answer: http://www.cnbc.com/id/100398096
>>So the maximum Mickelson could pay in state and income taxes, payroll and other income-related taxes would be around 60 percent. But that rate is only if he did absolutely no tax planning or basic deductions.
So it's absolute worse case scenario then. Reading the rest of the article, it sounds like he can get it to below 50% with some moderate effort. Since rich people can afford professional accountants, I conclude he actually could get it to below 50% if he wanted or his accountants could suggest some tax loophole in another state to get it below 50%.
So it's absolute worse case scenario then. Reading the rest of the article, it sounds like he can get it to below 50% with some moderate effort. Since rich people can afford professional accountants, I conclude he actually could get it to below 50% if he wanted or his accountants could suggest some tax loophole in another state to get it below 50%.
Sure, that's just the start.
A further improvement could be to move from California to say Nevada and pay no state tax at all. The next step would be reorganizing the business structure to keep most income / assets in the offshore jurisdictions. So on, so on, so on...
See, you are starting to justify cutting the tax rate from 60% to 50%, but why stop there?
The problem is created by the government/public asking for 60% to begin with and creating the sticker shock.
A further improvement could be to move from California to say Nevada and pay no state tax at all. The next step would be reorganizing the business structure to keep most income / assets in the offshore jurisdictions. So on, so on, so on...
See, you are starting to justify cutting the tax rate from 60% to 50%, but why stop there?
The problem is created by the government/public asking for 60% to begin with and creating the sticker shock.
1) Yes, but if you legally reside in California [edit] or continue to do business in California, you still owe California taxes. Indeed, California will treat you as having not actually left California--and the federal courts would agree with them. (These jurisdictional principles have basic tax law worldwide for more than a century.) If you don't pay your income taxes to the jurisdiction(s) in which it is owed, you've committed a felony, and you'll end up paying all of the taxes owed, plus penalties and penalty-rate interest. There's also the potential for jail time.
2) There are many tax-regimes that are specifically targeted to prevent the movement of business assets offshore. In the US, running afoul of these rules is a minimum of $10,000 per violation (depending on the circumstances, potentially meaning per asset), plus the possibility of criminal sanctions. Moreover, locating assets offshore doesn't eliminate tax jurisdiction--you still owe income taxes in the jurisdiction in which you earn the income. (Basic international tax law.) All you really accomplish is to make yourself subject to additional income taxes in another jurisdiction, and worse--you may have rendered yourself out of eligibility for tax treaties that would have eliminated the double taxation.
3) Stop spreading FUD. The government isn't asking for 60%. And that's besides the point. Before the Reagan "Revolution", the marginal rate was greater than 60%. Right now, taxes are at near-historical lows. If you would prefer not to pay taxes, you could always move to a zero-tax haven like Somalia. I hear it's a lovely place this time of year.
2) There are many tax-regimes that are specifically targeted to prevent the movement of business assets offshore. In the US, running afoul of these rules is a minimum of $10,000 per violation (depending on the circumstances, potentially meaning per asset), plus the possibility of criminal sanctions. Moreover, locating assets offshore doesn't eliminate tax jurisdiction--you still owe income taxes in the jurisdiction in which you earn the income. (Basic international tax law.) All you really accomplish is to make yourself subject to additional income taxes in another jurisdiction, and worse--you may have rendered yourself out of eligibility for tax treaties that would have eliminated the double taxation.
3) Stop spreading FUD. The government isn't asking for 60%. And that's besides the point. Before the Reagan "Revolution", the marginal rate was greater than 60%. Right now, taxes are at near-historical lows. If you would prefer not to pay taxes, you could always move to a zero-tax haven like Somalia. I hear it's a lovely place this time of year.
" If you would prefer not to pay taxes, you could always move to a zero-tax haven like Somalia. I hear it's a lovely place this time of year."
Dubai is a pretty lovely place this time of the year (21C/70F temperature), and you'll pay exactly zero income and corporate tax.
Dubai is a pretty lovely place this time of the year (21C/70F temperature), and you'll pay exactly zero income and corporate tax.
Dubai is a lovely place as long as you love empty desert visas, sandstorms, and you don't mind not having many of the freedoms or safeties that you would enjoy in the US, Europe, or even most of Asia.
For example, public kissing is a felony in Dubai. A woman walking around in public "indecently clothed" is a felony (though exceptions are provided for hotel guests and beach visitors). Drinking is a felony, though hotels and other tourist spots are excepted. There is no free speech in the UAE. If you badmouth the royal family, you've committed a felony. If you badmouth Islam, you could be put to death (but most likely would be killed by religious zealots long before trial). Worse, for expatriates--if you aren't a UAE citizen and you commit a violation of your employment agreement, you've committed a felony and your visa is subject to destruction, effectively barring you from leaving the country without the assistance of your embassy.
Oh...and by the way...if you're a foreign corporation, you end up paying a 50+% income tax. While there technically is no income tax in Dubai, all companies doing business in any UAE member state must be at least 50% owned by a local company, and by law, all eligible local companies are owned by the state or a member of the royal family.
I have quite a few clients that operate in Dubai. Without exception, they limit their time in Dubai to strictly what is necessary for their business, because it's a decidedly unpleasant place to be once you've experienced the very limited touristy options.
For example, public kissing is a felony in Dubai. A woman walking around in public "indecently clothed" is a felony (though exceptions are provided for hotel guests and beach visitors). Drinking is a felony, though hotels and other tourist spots are excepted. There is no free speech in the UAE. If you badmouth the royal family, you've committed a felony. If you badmouth Islam, you could be put to death (but most likely would be killed by religious zealots long before trial). Worse, for expatriates--if you aren't a UAE citizen and you commit a violation of your employment agreement, you've committed a felony and your visa is subject to destruction, effectively barring you from leaving the country without the assistance of your embassy.
Oh...and by the way...if you're a foreign corporation, you end up paying a 50+% income tax. While there technically is no income tax in Dubai, all companies doing business in any UAE member state must be at least 50% owned by a local company, and by law, all eligible local companies are owned by the state or a member of the royal family.
I have quite a few clients that operate in Dubai. Without exception, they limit their time in Dubai to strictly what is necessary for their business, because it's a decidedly unpleasant place to be once you've experienced the very limited touristy options.
Free economic zones like the Dubai Internet City exist, where 100% foreign ownership is permitted. I agree that there are many other issues though. Could I have your input on this please (if you have the time): https://news.ycombinator.com/item?id=6904888 .. I'd love to hear your opinion since you have a lot of knowledge in this field.
Unfortunately, due to your admission that you ran the whole thing illegally, and in the EU, I can't make any suggestions (even in general terms) without running afoul of legal restrictions (I'm not an EU lawyer) or my firm's tax practice restrictions (due to the potential illegality of your prior structure/activities). I'm not even allowed to refer you to one of my firm's local offices.
I would suggest that you hire a local (to you) lawyer. Since it appears that you also have accounting needs, you should look for a firm which provides both legal and accounting services.
As for the Dubai Internet City: it's intended for specific business activities within the Free Zone. It's not a panacea that gives you access to the rest of Dubai or the UAE (for that you still need a 50% local owner.) That's great if you want to do business in the Free Zone, but if you're not a local to that region then there are far superior jurisdictions to be located if you plan on having international business operations.
Also, the royal family has a tendency to radically change laws every time a new generation comes into power, so the current business-favorable laws may change for the worse in a few years. If that happens, it could be very difficult to get out.
I would suggest that you hire a local (to you) lawyer. Since it appears that you also have accounting needs, you should look for a firm which provides both legal and accounting services.
As for the Dubai Internet City: it's intended for specific business activities within the Free Zone. It's not a panacea that gives you access to the rest of Dubai or the UAE (for that you still need a 50% local owner.) That's great if you want to do business in the Free Zone, but if you're not a local to that region then there are far superior jurisdictions to be located if you plan on having international business operations.
Also, the royal family has a tendency to radically change laws every time a new generation comes into power, so the current business-favorable laws may change for the worse in a few years. If that happens, it could be very difficult to get out.
Oh please. Your CA income taxes are deductible, IIRC there's a line on the 1040 specifically for you to fill in your state income taxes. And I say that as someone who has filed self-employed for several years and so pay double the payroll taxes (ie picking up the employer's part as well as the employees).
I was trying to figure out where this was myself, digging thru last year's tax forms. Looks like you need to itemize and complete a Schedule A to use it.
35% corporate income tax + 20%-39.6% dividend tax.
You're talking about at least 2 different taxpayers: the corporation, and it's owner(s).
Also, dividends to shareholders are not subject to a 39.6% rate. By definition, any dividend from a U.S. corporation is a "qualified dividend" subject to the 0-20% rates (plus potentially up to 4.3% in Medicare and Medicaid investment taxes).
Also, dividends to shareholders are not subject to a 39.6% rate. By definition, any dividend from a U.S. corporation is a "qualified dividend" subject to the 0-20% rates (plus potentially up to 4.3% in Medicare and Medicaid investment taxes).
Get your facts straight before you go Galt. This story has nothing to do with state income taxes.
Indeed tax rates are out of control for those who work hard, smart and strive for a better life.
When your making say 50k the amount of taxes they take from you is no sweat. Though when your hard work pays off and you start making six figures you wonder huh I'm not making six figures and wont see six figures in my pocket until I start making north of 160K a year.
Ridiculous!
When your making say 50k the amount of taxes they take from you is no sweat. Though when your hard work pays off and you start making six figures you wonder huh I'm not making six figures and wont see six figures in my pocket until I start making north of 160K a year.
Ridiculous!
Is it ludicrous to expect most people to do that, when most don't and aren't expected to?
Most don't make much money at all. Many more make none at all. The reason the tax rate is high on the ultra-well-to-do is to help cover the rest.
Most don't make much money at all. Many more make none at all. The reason the tax rate is high on the ultra-well-to-do is to help cover the rest.
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A quote from the article: "Just $1 million invested in a dynasty trust, and earning 12 percent a year, would swell to $1.9 billion in 85 years". So my question is how do I find a investment vehicle that gives me 12% return compounded year after year?
When I read stories like this I often wonder, would I do things any differently if/when I have that much money?
Would you?
Would you?
No, you wouldn't. The thing is that all that top wealth is managed by a group of accountants and lawyers. Highly professional accountants and lawyers. (My friend is an accountant here in Silicon Valley who manages wealth for billionaires in a large accounting firm. He describes me some ways how they manage wealth.) So these people's role role, their only role, is wealth preservation, meaning tax minimization and avoidance. They know all the laws, rules and regulations, and they have fiduciary duty to manage the wealth efficiently and conservatively. Hence they will go to tax heavens and offshore, if needed.
So, every time a story like this comes up, it makes me wonder... Does anyone offer services like this for non-millionaires and non-billionaires?
If you're not in the highest marginal rate bracket, or most of your income is not investment income, it's generally not worth the expense of paying for these services.
Fees for these services generally start at $10,000, and only go up from there.
Fees for these services generally start at $10,000, and only go up from there.
Out of curiosity, is any of this process of moving money around amenable to automation? Can the "rules" be systematized in software?
Yes, but the process of creating and more importantly updating that software would involve so much human input that you wouldn't end up with much of a net gain in terms of time or costs saved.
US federal tax laws change every year, and are so interconnected that quite frequently small changes in one tax law can have massive impacts on entirely different areas of law. And that doesn't even take into account state and local taxes, or the taxes of the foreign jurisdictions you'd be dealing with, or the impacts that tax treaties could have, or even the impact that non-tax laws may have on financial transactions.
US federal tax laws change every year, and are so interconnected that quite frequently small changes in one tax law can have massive impacts on entirely different areas of law. And that doesn't even take into account state and local taxes, or the taxes of the foreign jurisdictions you'd be dealing with, or the impacts that tax treaties could have, or even the impact that non-tax laws may have on financial transactions.
Probably not, because it's not worth their time.
Felix Salmon has an article discussing a couple of such services.
http://blogs.reuters.com/felix-salmon/2013/12/10/how-online-...
http://blogs.reuters.com/felix-salmon/2013/12/10/how-online-...
Sure, but the cost will probably consume your entire savings.
Then I guess the question becomes, you appear in an article in Bloomberg about how you are using this loophole. Now what do you do?
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These guys do:
http://patrioticmillionaires.org
http://patrioticmillionaires.org
This reminds me of an article recently in businessweek about the tax loophole with trusts that Sheldon Adelson uses.
http://www.bloomberg.com/news/2013-12-17/accidental-tax-brea...
http://www.bloomberg.com/news/2013-12-17/accidental-tax-brea...
The article considers the rule against perpetuities to be an obviously good thing, but I have my doubt. Consider this argument for example:
http://www.overcomingbias.com/2010/03/parable-of-the-multipl...
http://www.overcomingbias.com/2010/03/parable-of-the-multipl...
Wow, who would have thought the Rule against perpetuities had actual implications in modern American law! I thought it was more of a trivia question that law professors might ask about in a property law class. Next thing you know, we'll be reading an article discussing the Rule in Shelley's Case!
Sounds like a good strategy. If I had so much money I would hire some of the smartest people in the world to save my taxes whatever way possible as long as the government (read as legal extortion gang) cant put me behind bars for it.
Tax shelters are very tricky. Unlike most other crimes, it's possible to be convicted of tax fraud even if the tax shelter was legal (or at least not illegal) at the time the shelter was put into place. This is generally because many tax provisions look to the facts-and-circumstances of a transaction or an item of income rather than to the strict letter of the regulations.
No wonder the high-income individuals are fleeing high-tax states and "tax-the-rich" ideology is failing to fill the states' coffers. Raising taxes hurts poor people more than the rich. http://www.forbes.com/sites/trulia/2013/02/12/jobs-arent-lea...