(Forbes) Which personal injury recoveries are tax-free? For almost 80 years, Section 104 of the tax code has made many injury recoveries tax-free, whether you settle or go to court. Up until 1996, just about anything qualified, including emotional distress, defamation or invasion of privacy. See Don’t Fail To Consider Taxes When Settling Litigation.

But in 1996, the tax code was changed to say only recoveries for physical injuries or physical sickness qualify. Since then, there’s been no end of litigation about the scope of this tax exclusion and just how “physical” injuries must be to count. Headaches and insomnia? Not enough. Ditto for stomachaches. See IRS To Collect on Italian Cruise Ship Settlements.

The IRS hasn’t issued a formal interpretation of the “physical” modifier but routinely argues in audits and tax cases that there must be “observable bodily harm”–think bruises or broken bones. But many injuries are internal and much physical sickness can’t be observed with the naked eye. See Are PTSD Recoveries Tax Free?

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Robert W. Wood practices law with Wood LLP, in San Francisco.  The author of more than 30 books, including Taxation of Damage Awards & Settlement Payments (4th Ed. 2009 with 2012 Supplement, Tax Institute), he can be reached at Wood@WoodLLP.com.  This discussion is not intended as legal advice, and cannot be relied upon for any purpose without the services of a qualified professional.

Republican presidential candidate Mitt Romney released tax records on Tuesday indicating he will pay $6.2 million in taxes on a total of $42.5 million in income over the years 2010 and 2011.

Bowing to increasing political pressure to provide more detail about his vast wealth, the former private equity executive released tax returns indicating he and his wife, Ann, paid an effective tax rate of 13.9 percent in 2010. They expect to pay a 15.4 percent rate when they file their returns for 2011.

Romney's tax rate is below that of most wage-earning Americans because most of his income, as outlined in more than 500 pages of tax documents, flows from capital gains on investments.

Under the U.S. tax code, capital gains are taxed at 15 percent, compared with a top tax rate of 35 percent for wage earners.

The Tax Lawyer Robert Wood discusses the concept of carried interest.

The Tax Lawyer Robert Wood...Wood LLP in San Francisco

Warren Buffett likes talking tax and knows a lot about becoming wealthy.  But many are wondering if he should stay in Omaha, perhaps even take up peddling mail-order steaks.  His Buffett Rule may be attractive to President Obama and to low income earners who've never heard of the alternative minimum tax—otherwise known as AMT.  Tax me more is also a nice sound bite.

But even if a tax increase is a good idea, many others are wondering whether the Buffett Rule is a good way to do it.

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(Forbes) We don’t like to contemplate our own deaths. But slightly less objectionable are current strategies to reduce exposure to gift tax, get assets in loved ones’ hands, and protect against estate taxes. If your estate is less than $5 million (or $10 million with your spouse) you may think you no longer need to worry about any of this. But we don’t know if that will remain so.

The estate tax could come back with a vengeance in 2013. A “Crummey” trust takes its name from a famous tax case involving Reverend Crummey, who was probably teased mercilessly growing up. See Crummey v. Commissioner. To follow in his footsteps, set up a trust and have it buy a life insurance policy on your life. Someday when you die, the trust will receive the insurance proceeds and pay them out to the beneficiaries listed in your trust.

To pay the annual premiums on the policy, you can put in up to $13,000 per person for your family members. Since you are essentially buying a policy that benefits your family, those premium payments would normally be considered gifts to your beneficiaries. However, done properly, you pay no gift tax on those payments, and when you die the trust will receive the policy proceeds free of estate tax.  Read more

When Cain intones that our tax code has become “ ," what tax lawyer can argue with hisimage via eewmagazine fervent imagery yet plainspoken truth?  Mr. Cain may be guilty of hyperbole, but you have to admit our tax system has spun out of control.  It’s like a pizza on a centrifuge, with all the sauce and toppings spinning off to smack against the walls.  It makes an interesting (if edible) Jackson Pollock, but it’s still a mess.

Some have questioned the provenance of Cain’s , which proposes replacing our current bellicose, bloated idiot of a tax system with a 9% corporate tax, a 9% personal income tax and a 9% national sales tax.  He argues that this simple plan would revive the economy and promote growth.  Some project it would collect as much revenue as our current system, and that its simple ingredients would be easy for everyone to swallow.  Like tomatoes, cheese and dough.

http://www.forbes.com/sites/robertwood/2011/10/13/in-taxes-is-cain-able/

President Barack Obama has said it's time for the wealthy to pay their fair share of taxes.

"Middle-class families shouldn't pay higher taxes than millionaires and billionaires," Obama said Monday. "That's pretty straightforward. It's hard to argue against that."

The data tell a different story. On average, the wealthiest people in America pay a lot more taxes than the middle class or the poor, according to private and government data. They pay at a higher rate, and as a group, they contribute a much larger share of the overall taxes collected by the federal government.

There may be individual millionaires who pay taxes at rates lower than middle-income workers. In 2009, 1,470 households filed tax returns with incomes above $1 million yet paid no federal income tax, according to the Internal Revenue Service. That, however, was less than 1 percent of the nearly 237,000 returns with incomes above $1 million.

The reality is that much of the income wealthy Americans receive typically comes from capital gains which is taxed at 15% at the moment.

In the United States, individuals and corporations pay income tax on the net total of all their capital gains just as they do on other sorts of income. Capital gains are generally taxed at a preferential rate in comparison to ordinary income (26 U.S.C. §1(h)). This is intended to provide incentives for investors to make capital investments, to fund entrepreneurial activity, and to compensate for the effect of inflation and the corporate income tax. The amount an investor is taxed depends on both his or her tax bracket, and the amount of time the investment was held before being sold. Short-term capital gains are taxed at the investor's ordinary income tax rate, and are defined as investments held for a year or less before being sold. Long-term capital gains, which apply to assets held for more than one year, are taxed at a lower rate than short-term gains. In 2003, this rate was reduced to 15%, and to 5% for individuals in the lowest two income tax brackets. The reduced 15% tax rate on qualified dividends and long term capital gains, previously scheduled to expire in 2008, was extended through 2010 as a result of the Tax Reconciliation Act signed into law by President George W. Bush on May 17, 2006. This was extended through 2012 in legislation passed by Congress and signed by President Barack Obama on Dec 17, 2010. As a result:

• In 2008–2012, the tax rate on qualified dividends and long term capital gains is 0% for those in the 10% and 15% income tax brackets.
• After 2012, dividends will be taxed at the taxpayer's ordinary income tax rate, regardless of his or her tax bracket.
• After 2012, the long-term capital gains tax rate will be 20% (10% for taxpayers in the 15% tax bracket).
• After 2012, the qualified five-year 18% capital gains rate (8% for taxpayers in the 15% tax bracket) will be reinstated.

(Forbes) First, California Governor Jerry Brown signed ABx1 28, the Golden State’s Amazon Tax.  That was a mere three months ago, back in those carefree June days when California seemed to say: “If we tax you, you will (still) come.”

California’s Amazon tax was intended to “clarify” the obligations of out-of-state retailers to collect use tax on sales to California residents.  The law took effect immediately, and like many “clarifications,” it charted new ground.  But just as quickly, it’s gone.

Governor Brown has now signed AB 155 repealing it.  The bill signing was expected, capping Amazon’s late night deal with legislators to delete the tax like a virus.  See How Amazon’s California Tax Romp Will Impact Us All.  The California Amazon tax had the state’s own spin on what it means to be engaged in business in California’s State of Grace.  But now for one more year—until September 15, 2012—Amazon and other online retailers aren’t required to collect California sales or use tax.

http://www.forbes.com/sites/robertwood/2011/09/24/amazon-tax-good-bad-and-ugly/



Tax law contains many important distinctions.  One of the classics is between business and investment.  Which side of the line you’re on has a major impact on your taxes.  Often, you and the IRS will have contrary incentives. 

If you’ve just made a pile of money on a big land deal or stock trade, you want to be an investor not a dealer in the business.  Investors get capital gain treatment, dealers don’t.  Conversely, if you’re incurring legal, brokerage and other expenses, you want to be in business.  Unlike business expense deductions, investment expense deductions are limited, subject to percentage limitations and to alternative minimum tax.  See IRC Section 212.   

You may face even bigger stakes on losses.  If you have investment losses, they only offset investment gains, plus $3,000 per year of ordinary income.  See IRC Section 1211(b).  Business losses are unlimited.  See IRC Section 162.

A good recent example of this classic dichotomy involved wannabe day trader, Richard Kay, Jr.  The Tax Court considered whether he was in business or a mere investor.  Whether investment activities can be elevated to carrying on a trade or business depends on the person’s intent, the nature of the income, and the frequency, extent, and regularity of the transactions.  See Purvis v. Commissioner. 

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