Recent news articles about U.S. tax law changes have prompted dozens of SurvivalBlog readers to contact me with their concerns. Some of these e-mails asked me for advice on how to minimize the impact of these tax law changes.
First let’s go over the changes in the tax law that have been announced:
1.) The Federal income tax rates are increasing starting with tax year 2010, with the top tax rate jumping to 39.6%. Meanwhile they are reinstituting the death tax, creating higher capital gains taxes, and the elimination of some exemptions for people that are married and for those that have children. For a summary of the changes, see a recent post at Investors.com.
2.) There is a new Federal income tax reporting requirement for all goods and services by small businesses and self-employed individuals. This will especially effect coin dealers. This provision was slipped into the massive Obamacare socialized medicine legislative package that was enacted this year.. This new law requires all purchases of in excess of $600 USD to be reported on a IRS Form 1099. This has sparked an uproar. The implications of this new law are huge, especially when you consider the sheer volume of private transactions in the so-called “underground economy.” Perhaps worst of all is that this new is in effect turning private citizens into unpaid IRS agents by putting this new reporting requirement on small businesses. Not only will they have to do this paperwork, but they will have to do it all at their own expense. This will undoubtedly require the hiring of hundreds and hundreds of accountants to handle this mountain of paperwork–the countless thousands of Form 1099s that will need to be filed. This is just another example of Congress not only putting unfunded mandates on the states, but also on private business. I predict that this paperwork requirement might drive some small coin stores and small auction houses out of business. In my estimation it will also destroy the privacy advantage that heretofore has been provided by second-hand (“private party”) and antique (pre-1899) guns. Since most used guns sell for at least $600, their sales will ostensibly have to be reported–perhaps not by serial number, but Big Brother will have a list of known “gun owners.”
The new tax law also sets a dangerous precedent, in lowering the threshold of reportable transactions. For many years car dealers, postal clerks, and an bank tellers have been required to fill out Form 8300 cash transaction reports (CTRs) for the IRS for any cash transactions in amounts of $10,000 or more. Part of this is an onerous requirement to report transactions of less than $10,000 if so-called “structuring” of multiple transactions if they in aggregate exceed $10,000. This lowered reporting threshold has been institutionalized with training programs such as “Know Your Customer”, that encouraged bank tellers to report structured transactions, even if there was just a hint of suspicion. Their training stressed: “If in doubt, report it.” The new law will also necessitate hiring of thousands of new IRS agents to insure compliance on the accurate reporting of 1099s. I have no doubt of that the IRS will conduct undercover sting operations–just as the BATFE now does with Federally licensed gun dealers—to try to catch coin dealers buying more that $600 worth of coins without filling out the Form 1099. Just imagine private coin dealers having to wonder whether or not the “customer” across the counter for them is actually a private party or if it’s an undercover IRS agent attempting to entrap him by asking them to “skip the paperwork.”
Legal Tax Avoidance Strategies
I consulted with tax accountant Mara Helland, for her advice on ways that taxpayers can legally minimize the impact of the changes in the Federal tax law for 2011 and subsequent years. The following was her advice:
Although, in general, I know your position about retirement accounts [such as IRAs, 401(k)s], I still want to mention that retirement contributions are one of the biggest tax breaks the Federal and state governments allow us to have. For example, based on your self-employed income from 2009, you would have been allowed to contribute a maximum of $49,000 to a SEP or Individual 401(k), which would have saved more than $17,000 in combined Federal and state income taxes.
For shorter-term solutions, you might consider any of the following:
- Requesting, wherever possible, income/advances be paid to you by December 31, 2010 rather than early or mid 2011.
- Selling any kind of capital-gain assets in 2010 rather than 2011.
- Deferring part of your charitable giving from 2010 to 2011 (e.g., giving in January 2011 instead of December 2010).
- Looking into charitable trusts or gift annuities. With higher tax rates, charitable gifts will have more value.
Would it be possible to start a ranch or farming operation in the future? Farming losses can directly offset self-employed income.
Is there any other kind of business you’ve thought about starting that might take a few years before you see a profit?
If you need a place to park extra money, you might consider investing in rental real estate. Unfortunately, though, because of your income level, any rental losses incurred would be “unallowed” until you actually sold the property. You don’t lose the rental losses, per se, but you wouldn’t be able to deduct the losses in the year incurred. Accumulated, unallowed losses would reduce any future gain you had at the time of the sale. Rental real estate doesn’t help you with immediate tax savings for the near future, but a lot of my clients do have rental properties as a way to invest their available cash without putting everything into the stock market, bond market or banks.
In some states such as Montana, folks might benefit from paying only the required one-half of property taxes at the end of November, rather than paying for the full year at that time. That could give a taxpayer an extra property tax payment to write off in 2011. Some taxpayers might benefit more by holding off on paying certain itemized deductions until 2011, rather than 2010, where possible.
Also, for small business owners who provide health insurance coverage for employees, they need to make sure they are aware of any Federal and/or state tax credits for which they are eligible. Many states have health insurance tax-credit programs that have been in place for years and do not necessarily have the same qualifications as the Federal program.
Mara Helland’s also had some comments on the new 1099 requirements:
“From what I’ve been reading, the IRS already has its hands full trying to figure out how to implement the sweeping changes to the 1099 reporting rules deemed necessary and appropriate by Congress. I have a lot of small business clients who are still able to use their Social Security numbers for reporting purposes. The idea of Social Security numbers being given out to just about anyone with whom business is transacted (it won’t take much to reach that $600 threshold) seems like high risk to me for all sorts of identity theft schemes and scams. For you, personally (as well as all other sole proprietors), I recommend you obtain (or I can obtain for you) an Employer Identification Number (EIN), to use in place of your social security number for all future 1099 forms being issued to you or by you. Although you aren’t an “employer,” per se, I believe any business entity can obtain on EIN, whether or not the entity has employees.”
While not all of these strategies will be applicable to all of the SurvivalBlog readers in the United States, I hope that many of you will find some utility in them.
Personally, in addition to taking Mara Helland’s advice on income shifting and deferring charitable contributions, I made two key decisions to help minimize the impact of the 2011 tax law changes:
1.) Cashing Out of My IRA
It was a tough call, but I decided to cash out my Gold Coin Individual Retirement Account (IRA) before the end of 2010. This is an IRA that I set up many years ago, through Swiss America. It was established when I worked in the corporate world. Yes, I know that I will be penalized, but I thought it was important to take the IRA distribution income in tax year 2010 instead of tax year 2011, under the higher rates. Thankfully, the value of my gold IRA has gained substantially in recent years. (A large potion of the gold in my IRA was purchased back when gold was less than $375 per ounce.) So even with the withdrawal penalty I’m still coming out well ahead. And again I’d rather pay the tax on the “cash out” at the 2010 tax rate rather than the higher 2011 tax rate. By the way, I had already considered closing out my IRA because of persistent rumors of nationalization of IRAs and 401(k)s, but the recent news of the higher income tax rates for 2011 was the last straw.
2.) Minimizing My Interest Income
I am now more aggressively downsizing my interest-producing investments, and shifting even more heavily into tangibles than I had recommended back in 2007. Since tangibles will be taxed only when I liquidate them, this will reduce my taxable income for 2011 and subsequent years.
Conclusion
I anticipate that the tax situation in the United States will only get worse, as the currently unfolding depression continues. Federal, State, and and local “revenue enhancement” will be the order of the day. Do your best to protect yourself, legally, as the hard times get harder.