Posts Tagged ‘wall street journal’

My father-in-law came to visit this week, and over Friday night pizza, the conversation turned to politics; specifically, Mitt Romney’s much-ballyhooed 13.9% effective tax rate in 2010.

Being a tax guy, I wanted my father-in-law to understand exactly why Romney’s rate was so low given his $21,000,000 of AGI, which required a primer on the taxation of carried interest. [For your own primer, click here.]

As the discussion advanced, my father-in-law understandably struggled to understand why the profits received by private equity fund managers on their carried interest were taxed any differently than, say, the wages he earned over his 40-year career working for an insurance carrier.

Even after I advanced the standard arguments for a 15% rate on carried interest — the equity fund manager’s risk, the uncertainty of the profit stream, the “sweat equity” element, etc… — my father-in-law’s opinion remained blissfully simple:

“It still sounds like compensation to me.”

Now, my father-in-law is a staunch Republican in every way, shape and form. But yet, he failed to see how a 15% tax rate is justified on the income received by fund managers to do what they do: manage funds. Of course, my father-in-law is not the final arbitrator on such matters: after all, this is the same man who once advised me to buy a house located squarely within the Delaware River’s floodplain.

So perhaps you should decide for yourself. To facilitate your decision-making process, the Wall Street Journal has published this point/counterpoint on the carried interest tax issue, with Michael Graetz, a professor of tax law at Columbia Law School, arguing for carried interest to be taxed as ordinary income, while David Tuerck, executive director of the Beacon Hill Institute and a professor and chairman of the economics department at Suffolk University in Boston, argues that the preferential capital gains rates should be preserved.

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I’ve never been what one would call a skilled prognosticator. In the past year alone, I told anyone who would listen that Bin Laden would never be caught, Cam Newton would be a bust and the Kardashian-Humphries union would be a long and happy one, complete with a litter of vapid, talentless children. Wrong on all counts.

Unfortunately, as a CPA — and in light of the uncertain political and economic climate we find ourselves in — clients often look to me to foretell the changes that may impact their tax liabilities in the future, a role I’ve never been entirely comfortable with in light of my putrid track record.

While I may be loathe to predict this country’s tax future, luckily others aren’t so cowardly. Laura Saunders over at the Wall Street Journal recently asked some two dozen tax experts to predict what the tax rates will look like come 2013.

Of particular note:

  • The top individual tax rate will remain at 35%, though some experts see it climbing to 40%.
  • The long term capital gains rate will stay at 15%, with a few experts predicting a 20% rate.

Now, those predictions aren’t overly novel, but then again, what did you expect? CPAs are not risk-takers. 

Well, except for this group. They’re cleary nuts. Dance like that on the wrong subway car, and you’re just begging to get shivved.  

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The WSJ’s Tax Report published a one-two punch of  articles containing year-end tax planning tips for today’s uncertain tax environment.

Lawmakers have a lengthy to-do list. The 2% Social Security payroll-tax cut for employees expires at the end of 2011. So do a host of other provisions, including a fix to keep the alternative minimum tax from expanding to millions more taxpayers in 2012, and an extension of the popular IRA charitable contribution for people older than 70½.

Other changes are set to take effect at the end of next year, including the expiration of the tax cuts enacted in 2001 and 2003. The top tax rate on wages would reset to 39.6% from 35%, and the top rate on long-term capital gains would rise to 20% from 15%. The special 15% rate on dividends would lapse, as would the current generous estate-tax provisions. As many 10 million lower-income families and individuals would also be restored to the tax rolls, according to the nonpartisan Tax Policy Center.

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