To me the most interesting thing about Mitt Romney’s finances is how, with the same contribution limits as everyone else his 401k got to be over $100,000,000. Apparently when you put an investment partnership into a 401k you can set the value yourself and it doesn’t have to have any connection to the actual market value of the entity. That seems like a useful tool.
I can’t comment on how it works in Britain, but here in Ireland income from criminal activity is taxable.
“Profits that arise wholly or partially from an unlawful source or activity, or that arise from a source or activity that is unknown to Revenue, are fully taxable.”
Trying to respond but mindful of the accelerating hijack. …
The rules are arcane and frankly not all airlines are totally diligent about following them. Even more so for airlines that aren’t US based, like alliance members.
When I or my wife fly free or at reduced rate there is no taxable event. When I extend a cheap non-revenue ticket to an extended family member or a friend there is a taxable event *to me *for the FMV of the ticket.
The “FMV” is a bit of an artificial calculation since the airline doesn’t actually sell a product with the same features (namely standby with zero rights) identical to the non-rev ticket. So there’s some regulatory IRS-approved formula to derive a pseudo-FMV. Whatever that number turns out to be it goes right on my monthly pay statement and into my W2.
AIUI, all this is an airline-specific carve-out embedded in the IRS laws/regs as an exception to the general rule that all discounted purchases of your employer’s product or ancillary services (e.g. cheap lunch in the company cafeteria) is a taxable event.
I believe this overall situation is a bit like in-state “use tax” on out-of-state retail purchases. Even if your employer neglects to account for your taxable bennies you’re supposed to include them on your tax return and pay the appropriate tax. How many taxpayers know about this or comply with this is a separate question.
The way he did that was not put existing partnership interests into the 401k or use arbitrary values. Rather, money already in his 401k would become the equity he put into a particular leveraged deal. However the way private equity guys get paid is to put a small % into the deal, say 1% for argument’s sake, but they get a 20% (say) stake in the upside of the deal. That’s what carried interest actually means, that form for compensation. When people say ‘carried interest loophole’ they mean the fact that carried interest compensation in a taxable account gets capital gains treatment. In this case Romney put up money from a tax deferred account as his share of the deal. But it essentially meant directing his entire compensation (on those deals at least, and aside from any nominal salary) directly into the 401k bypassing the contribution limit (although note that would be self employed limit, currently $53k/y not the smaller employee limit).
However, that’s not actually a free lunch. When Romney reaches 70, this year it happens, he has to start withdrawing that money like anyone else, and paying the ordinary income tax rate on the withdrawal. IOW he deferred capital gains tax treatment in return for ordinary income treatment eventually. Not everyone thinks that made sense on a financial basis, politics aside. It would make more sense if the tax law was changed to require ordinary income treatment of carried interest income when received, as has because a cause celebre, even on the populist right. So unless other rules are made to prevent it, the Romney maneuver would probably become more common if carried interest tax treatment is changed to ordinary income.
HRMC certainly have caught on to the idea. There is no distinction between legal and illegal income in English and Welsh law. Commissioners of Inland Revenue v. Aken, 63 TC 395, [1990] STC 497.
The problem is that criminals rarely report their ill-gotten earnings, not that the government doesn’t want to tax them.
Yes, once you are withdrawing close to $10M a year, what’s the point of a tax-sheltered savings? The usual logic is that the income saved and earned on savings would otherwise be taxed at a high rate, but if you don’t pay tax until your other income is only SS, you save a lot of tax - comparatively. Once you’re kicking around income in the millions before and after retirement, that few thousands in saved taxes is relatively insignificant. Mitt probably spent more on lawyers and accountants to get this sorted out.
A friend of mine is an partner in a CPA firm, and he told me there are many ways, all legit for executives to put more away for retirement than regular people with their 401(k). They have to be highly compensated, but there are other plans.
If you go to a place like finance.yahoo.com and look the Profile for companies it shows the compensation for the top executives in the public traded companies. Most of it comes from stock options, stock grants and bonuses. The salaries are usually a smaller part of what their compensation is like. So when top executives claim the company is in trouble and they are either cutting their own salaries or only taking a dollar or year (or something like that) until the company is back in the black, that really isn’t a hardship to them.
The other thing about stock options and stock grants (they give you stock) is that often times you are required to hold on to the stock for years and can’t easily sell it when you want, and not without making it known you are going to do so. Some of you may recall, that years ago, Bill Gates decided to sell a large part of his shares of Microsoft stock, and he gave a public reason for doing so. It think he said it was to diversify his Portfolio and to build a home which cost many millions of dollars.
A friend of mine worked in a finance company involved with bringing a company public. For his part, as a perk, they gave him a bunch of stock options. But he wasn’t able to exercise them for years. I think it was 3 years or more. Anyway, at one point his unexercised stock would have given him a net sale of about 5 million dollars. Then by the time he was able to exercise them, the company had gotten into serious trouble and went bankrupt and he ended up with getting nothing. Even in his case, he would have had to hold on to the stock for a year after getting it at the exercised price in order to sell it only paying Capital Gains on it. But it would have been doubtful he would have done that, because he would have had to have that much money available to be invested in it, which is at risk too, for an entire year.
The founder of CD Baby, Derek Sivers, sold his company for $20M to a charity organization. In return, he gets a million dollars a year annuity from them for life. Then when he passes, the rest of his estate goes to the charity. This way he avoided paying tax on the $20M since he donated it.
But at some point, having a million dollars a year income, or having many millions of dollars it doesn’t matter what the tax situation really is because you are so fairly insulated from is financial concerns.
Well the attempt to move income to be capital gains is called tax evasion, and the authority may ignore the transcations and still call it income, and penalise you and charge you with tax evasion too.
But the way to do it ?
I guess I am giving a very insipid idea. This might not be the successful way.
Well if instead of paying you income, I paid the money to XYZ LLC/PTY LTD that you own, technically the company has boosted its profits, and if XYZ LLC invested the funds, you could say that XYZ gained in value and thats a capital gains. Well you might also have XYZ pay you dividends instead.
But if this transaction to XYZ is determined to be simply a tax dodgy, they can say its payment of your income …
It isn’t tax evasion if you are still paying taxes by using other methods to be compensated. As the Mitt Romney example, he paid tax on Capital Gains. His financials were fully disclosed when he was running for President and there was no question raised of income tax evasion. Here are the returns.
Romney may not have been tax evasion. But Isilder’s point, no matter how badly stated, still stands.
Somebody like the OP who is trying to invent a subterfuge to restate wages as capital gains is definitely opening himself up to the tax authorities determining that his entire network of economic arrangements is simply a tax dodge. Which is illegal at least in the US.
You’re under no obligation to arrange your affairs to the tax man’s advantage or convenience. But they need to be economically logical on their own ex-tax. Some fig leafs are a little too transparent.
You can’t just give money to a corporation or a person. It’s a transaction with a purpose. Is it a gift? Is it compensation for some activity (your consulting help?)
So XYZ has say, $1M more in cash than before. That’s a profit unless it invests it. If it pays you dividends, it’s paying out profits - on which it pays taxes and then you do - so the total taxes with dividend discounts works out about the same as personal income tax.
So XYZ bought stocks - and a year and a half later, sells them - capital gains is only the amount those stocks went up - the profit. The original purchase price, the original $1M, is still a company asset. Either XYZ buys more stock or again, pays out some of that $1M taxed as profit/dividends. So you see, the $1M is trapped inside the corporation until it becomes profit and then tax in your pocket.
Now, you could sell your shares in XYZ - a company with $1M balance in the bank - and the increase in those share would be profit. But, whoever’s buying the $1M company is also buying that tax liability - sooner or later, they face the same dilemma, how to get the $1M from the company account to his pocket? So your $1M XYZ company is not worth $1M to the guy who buys your shares. It’s discounted by the future tax liability.