The Secret IRS Files: Trove of Never-Before-Seen Records Reveal How the Wealthiest Avoid Income Tax

[jonatha]

It’s income if it’s a hedge.

Is this a reference to "carried interest" or what?

Yes. I’m open to learning details, but yes, I bring it up because this is something that is in the news about how certain people gain money from year to year without paying income tax on it.

They do pay tax on it, but they get to treat it as though it's long-term capital gain (20% max rate) instead of earned income (which it arguably should be).

 

[jonatha]

The big question is why is a stock given in remuneration not considered income but virtually everything else is?

Because stock price can go up and down. Are you prepared to give collected taxes back when stock went and stayed down?

Why is that different than the tax I need to pay if my mother gifts me with artwork worth $25,000?
I received something, its value is not fixed, and I have to pay a gift tax for receiving something of value. I now have wealth that I didn’t have before - taxes due. Indeed its value may go down as the people who admired her die off, or if a great deal of her art is dumped into the market at once, exceeding the number of true collectors in a buying moment.

But if my employer gives me stock options, then I get to wait, not pay taxes at the time of acquisition, and see what it’s worth later?

Can I recoup my losses on the gift (income by altruism) tax later?

1) Any gift tax due is paid by the giver, not the recipient. And the gift tax exclusion is so large that it's very seldom owed.

2) Incentive stock options, which is where the big bucks are, are taxed when received, but are usually structured in such a way that the tax is minimal. Then the big payoff when the stock goes up is taxed at the long-term capital gains rate.

 

[Harry Bosch]

The big question is why is a stock given in remuneration not considered income but virtually everything else is?

Because stock price can go up and down. Are you prepared to give collected taxes back when stock went and stayed down?

Why is that different than the tax I need to pay if my mother gifts me with artwork worth $25,000?
I received something, its value is not fixed, and I have to pay a gift tax for receiving something of value. I now have wealth that I didn’t have before - taxes due. Indeed its value may go down as the people who admired her die off, or if a great deal of her art is dumped into the market at once, exceeding the number of true collectors in a buying moment.

But if my employer gives me stock options, then I get to wait, not pay taxes at the time of acquisition, and see what it’s worth later?

Can I recoup my losses on the gift (income by altruism) tax later?

I'm not a cpa, but you wouldn't be taxed on your artwork worth $25,000. Really this debate about timing. The IRS's taxes income yearly. The IRS taxes increases in wealth when it is realized or converted to cash.

 

[jonatha]

Why is that different than the tax I need to pay if my mother gifts me with artwork worth $25,000?
I received something, its value is not fixed, and I have to pay a gift tax for receiving something of value. I now have wealth that I didn’t have before - taxes due. Indeed its value may go down as the people who admired her die off, or if a great deal of her art is dumped into the market at once, exceeding the number of true collectors in a buying moment.

But if my employer gives me stock options, then I get to wait, not pay taxes at the time of acquisition, and see what it’s worth later?

Can I recoup my losses on the gift (income by altruism) tax later?

I'm not a cpa, but you wouldn't be taxed on your artwork worth $25,000. Really this debate about timing. The IRS's taxes income yearly. The IRS taxes increases in wealth when it is realized or converted to cash.

Unless it becomes part of the owner's estate, in which case (under present rules) it is never taxed (as income. It may be subject to the estate tax...)

 

[Harry Bosch]

Why is that different than the tax I need to pay if my mother gifts me with artwork worth $25,000?
I received something, its value is not fixed, and I have to pay a gift tax for receiving something of value. I now have wealth that I didn’t have before - taxes due. Indeed its value may go down as the people who admired her die off, or if a great deal of her art is dumped into the market at once, exceeding the number of true collectors in a buying moment.

But if my employer gives me stock options, then I get to wait, not pay taxes at the time of acquisition, and see what it’s worth later?

Can I recoup my losses on the gift (income by altruism) tax later?

I'm not a cpa, but you wouldn't be taxed on your artwork worth $25,000. Really this debate about timing. The IRS's taxes income yearly. The IRS taxes increases in wealth when it is realized or converted to cash.

Unless it becomes part of the owner's estate, in which case (under present rules) it is never taxed (as income. It may be subject to the estate tax...)

Sure. The theory is that we should be able to pass along some assets to our heirs untaxed. But above a certain point, it gets taxed. (Again, I'm probably butchering this as I'm not a tax expert).

 

[Rhea]

Why is that different than the tax I need to pay if my mother gifts me with artwork worth $25,000?
I received something, its value is not fixed, and I have to pay a gift tax for receiving something of value. I now have wealth that I didn’t have before - taxes due. Indeed its value may go down as the people who admired her die off, or if a great deal of her art is dumped into the market at once, exceeding the number of true collectors in a buying moment.

But if my employer gives me stock options, then I get to wait, not pay taxes at the time of acquisition, and see what it’s worth later?

Can I recoup my losses on the gift (income by altruism) tax later?

I'm not a cpa, but you wouldn't be taxed on your artwork worth $25,000. Really this debate about timing. The IRS's taxes income yearly. The IRS taxes increases in wealth when it is realized or converted to cash.

Unless it becomes part of the owner's estate, in which case (under present rules) it is never taxed (as income. It may be subject to the estate tax...)

Confused then - the gift tax is on items over $14,000 per person per year. Is it not?

And regardless of who pays it - the transaction results in a tax payment.

 

[Harry Bosch]

Unless it becomes part of the owner's estate, in which case (under present rules) it is never taxed (as income. It may be subject to the estate tax...)

Confused then - the gift tax is on items over $14,000 per person per year. Is it not?

And regardless of who pays it - the transaction results in a tax payment.

Here's a good quote: "Two things keep the IRS’ hands out of most people's candy dish: the $15,000 annual exclusion in 2020 and 2021, and the $11.58 million lifetime exclusion in 2020 ($11.7 million in 2021)."

https://www.nerdwallet.com/article/taxes/gift-tax-rate

 

[Rhea]

Unless it becomes part of the owner's estate, in which case (under present rules) it is never taxed (as income. It may be subject to the estate tax...)

Confused then - the gift tax is on items over $14,000 per person per year. Is it not?

And regardless of who pays it - the transaction results in a tax payment.

An example: I pay my kids’ college tuition. This is far more than $15K/year. If I made the mistake of giving them the money and having them pay it, (instead of me paying directly,) that would be seen as a gift of $60K per year. And would trigger the gift tax. They get money that they didn’t have before, the transaction triggers a tax.

 

[Rhea]

Unless it becomes part of the owner's estate, in which case (under present rules) it is never taxed (as income. It may be subject to the estate tax...)

Confused then - the gift tax is on items over $14,000 per person per year. Is it not?

And regardless of who pays it - the transaction results in a tax payment.

Here's a good quote: "Two things keep the IRS’ hands out of most people's candy dish: the $15,000 annual exclusion in 2020 and 2021, and the $11.58 million lifetime exclusion in 2020 ($11.7 million in 2021)."

https://www.nerdwallet.com/article/taxes/gift-tax-rate

Yeah, I was reading that. All kinds of triggers for people like me. Which, hoestly, I am not against, as long as it is consistent with other ways income is derived.

My argument is that if you have something you didn’t have before - it’s income. That’s not the current definition. But I feel like it should be because of how many ways vast amounts of money are transferred from one person to another and claimed, “but that’s not ‘income’ because I didn’t turn a wrench for it.”

I don’t care what you did to get it; turning a wrench, polishing a chair with your butt, looking cute, or making a phone call. If you have wealth that you didn’t have before - it’s income.

 

[jonatha]

Unless it becomes part of the owner's estate, in which case (under present rules) it is never taxed (as income. It may be subject to the estate tax...)

Confused then - the gift tax is on items over $14,000 per person per year. Is it not?

And regardless of who pays it - the transaction results in a tax payment.

The giver owes gift tax on transfers to any one entity exceeding $15,000 per year. (Gifts to charity, to one's spouse, or directly to an educational institution or a medical provider to pay someone else's bills are exempt.)

If gift tax is owed, the giver files a gift tax return. The giver has a lifetime exclusion amount of $11.5 million (this is the gross amount given, not the tax due) and any gift tax due is subtracted from the lifetime exclusion amount. Only when (if....) that is used up is any tax payment made.

 

[Rhea]

Unless it becomes part of the owner's estate, in which case (under present rules) it is never taxed (as income. It may be subject to the estate tax...)

Confused then - the gift tax is on items over $14,000 per person per year. Is it not?

And regardless of who pays it - the transaction results in a tax payment.

The giver owes gift tax on transfers to any one entity exceeding $15,000 per year. (Gifts to charity, to one's spouse, or directly to an educational institution or a medical provider to pay someone else's bills are exempt.)

If gift tax is owed, the giver files a gift tax return. The giver has a lifetime exclusion amount of $11.5 million (this is the gross amount given, not the tax due) and any gift tax due is subtracted from the lifetime exclusion amount. Only when (if....) that is used up is any tax payment made.

Then why the rules about spreading a gift out over 5 years, if you always get to spread it out over a lifetime anyway?

 

[jonatha]

The giver owes gift tax on transfers to any one entity exceeding $15,000 per year. (Gifts to charity, to one's spouse, or directly to an educational institution or a medical provider to pay someone else's bills are exempt.)

If gift tax is owed, the giver files a gift tax return. The giver has a lifetime exclusion amount of $11.5 million (this is the gross amount given, not the tax due) and any gift tax due is subtracted from the lifetime exclusion amount. Only when (if....) that is used up is any tax payment made.

Then why the rules about spreading a gift out over 5 years, if you always get to spread it out over a lifetime anyway?

Not sure what rule you're referring to...

 

[Rhea]

The giver owes gift tax on transfers to any one entity exceeding $15,000 per year. (Gifts to charity, to one's spouse, or directly to an educational institution or a medical provider to pay someone else's bills are exempt.)

And that’s another part of my point. That’s a loophole.
I’m giving each of my kids an enormous gift and a significant life advantage by paying for their college. My kids get to receive this gift - this income - without paying taxes on it.

That’s a loophole.

We can talk about whether that’s appropriate, but we should not pretend it’s not a loophole.

 

[Rhea]

The giver owes gift tax on transfers to any one entity exceeding $15,000 per year. (Gifts to charity, to one's spouse, or directly to an educational institution or a medical provider to pay someone else's bills are exempt.)

If gift tax is owed, the giver files a gift tax return. The giver has a lifetime exclusion amount of $11.5 million (this is the gross amount given, not the tax due) and any gift tax due is subtracted from the lifetime exclusion amount. Only when (if....) that is used up is any tax payment made.

Then why the rules about spreading a gift out over 5 years, if you always get to spread it out over a lifetime anyway?

Not sure what rule you're referring to...

From the nerdwallet link,

Spoiling the grandkids with college money
If Grandma or Grandpa put, say, $60,000 in a 529 plan for a grandchild, Picciurro gives as an example, that may trigger the gift tax exclusion because it's over the limit.
A special rule allows gift givers to spread one-time gifts across five years’ worth of gift tax returns to preserve their lifetime gift exclusion.

 

[jonatha]

Not sure what rule you're referring to...

From the nerdwallet link,

Spoiling the grandkids with college money
If Grandma or Grandpa put, say, $60,000 in a 529 plan for a grandchild, Picciurro gives as an example, that may trigger the gift tax exclusion because it's over the limit.
A special rule allows gift givers to spread one-time gifts across five years’ worth of gift tax returns to preserve their lifetime gift exclusion.

That appears to be a provision specific to 529 plans (see Internal Revenue Code 529(c)(2)(B)). It does not apply to gifts in general as near as I can tell.

 

[Toni]

The giver owes gift tax on transfers to any one entity exceeding $15,000 per year. (Gifts to charity, to one's spouse, or directly to an educational institution or a medical provider to pay someone else's bills are exempt.)

And that’s another part of my point. That’s a loophole.
I’m giving each of my kids an enormous gift and a significant life advantage by paying for their college. My kids get to receive this gift - this income - without paying taxes on it.

That’s a loophole.

We can talk about whether that’s appropriate, but we should not pretend it’s not a loophole.

It allows is for parents (or grandparents) to directly pay for their offspring's (over 18 yo) educational expenses and/or medical expenses without having to pay an additional tax on that 'gift.' It is quite likely that such expenses, which are almost always beyond the ability of any student to pay, will reach or even exceed $15000/year.

The best way to eliminate such a 'loophole' is to make education and health care much less expensive.

Note: It is not uncommon for childcare costs to reach or exceed $15,000/year. I don't regard making childcare expenses deductible in part or totally to be a loophole or an unjustifiable deduction.

 

[Rhea]

The giver owes gift tax on transfers to any one entity exceeding $15,000 per year. (Gifts to charity, to one's spouse, or directly to an educational institution or a medical provider to pay someone else's bills are exempt.)

And that’s another part of my point. That’s a loophole.
I’m giving each of my kids an enormous gift and a significant life advantage by paying for their college. My kids get to receive this gift - this income - without paying taxes on it.

That’s a loophole.

We can talk about whether that’s appropriate, but we should not pretend it’s not a loophole.

It allows is for parents (or grandparents) to directly pay for their offspring's (over 18 yo) educational expenses and/or medical expenses without having to pay an additional tax on that 'gift.' It is quite likely that such expenses, which are almost always beyond the ability of any student to pay, will reach or even exceed $15000/year.

I agree that is what it does.
I’m bringing up that it is income to the child that they do not have to pay taxes on. It’s a loophole.

People like the loophole, they think it’s a justified loophole, but it nevertheless is a significant acquisition of wealth by an adult offspring, that is not taxed. My kids will start their working lives with only a token debt (we made each take out a $5K loan). This will give them an income advantage over their peers that lasts decades. To say that they did not receive any income from this is a labeling game, IMHO, meant to avoid taxes.

I get the benefits of being able to help one’s adult children this way. It’s fabulous, and I’m glad we can do it. But I feel that it is a lie to say it’s not an income they received for being cute.

The best way to eliminate such a 'loophole' is to make education and health care much less expensive.

I feel that’s an unrelated social issue. Very important, but not part of the “what is income” discussion.

Note: It is not uncommon for childcare costs to reach or exceed $15,000/year. I don't regard making childcare expenses deductible in part or totally to be a loophole or an unjustifiable deduction.

Deductibles are also a different discussion than “what is income.”

 

[ZiprHead]

Why is that different than the tax I need to pay if my mother gifts me with artwork worth $25,000?
I received something, its value is not fixed, and I have to pay a gift tax for receiving something of value. I now have wealth that I didn’t have before - taxes due. Indeed its value may go down as the people who admired her die off, or if a great deal of her art is dumped into the market at once, exceeding the number of true collectors in a buying moment.

But if my employer gives me stock options, then I get to wait, not pay taxes at the time of acquisition, and see what it’s worth later?

Can I recoup my losses on the gift (income by altruism) tax later?

I'm not a cpa, but you wouldn't be taxed on your artwork worth $25,000. Really this debate about timing. The IRS's taxes income yearly. The IRS taxes increases in wealth when it is realized or converted to cash.

I have taxes taken out of my paycheck every two weeks. You square things up at the end of the year

As for your last sentence, that just about only applies to stocks. And again I ask the question why are stocks given in remuneration exempt from taxation until they are cashed out? Virtually everything else is subject to taxation. It's a clear and legal tax dodge. It shouldn't be. That's the whole entire point.

 

[Ruth Harris]

Why is that different than the tax I need to pay if my mother gifts me with artwork worth $25,000?
I received something, its value is not fixed, and I have to pay a gift tax for receiving something of value. I now have wealth that I didn’t have before - taxes due. Indeed its value may go down as the people who admired her die off, or if a great deal of her art is dumped into the market at once, exceeding the number of true collectors in a buying moment.

But if my employer gives me stock options, then I get to wait, not pay taxes at the time of acquisition, and see what it’s worth later?

Can I recoup my losses on the gift (income by altruism) tax later?

I'm not a cpa, but you wouldn't be taxed on your artwork worth $25,000. Really this debate about timing. The IRS's taxes income yearly. The IRS taxes increases in wealth when it is realized or converted to cash.

I have taxes taken out of my paycheck every two weeks. You square things up at the end of the year

As for your last sentence, that just about only applies to stocks. And again I ask the question why are stocks given in remuneration exempt from taxation until they are cashed out? Virtually everything else is subject to taxation. It's a clear and legal tax dodge. It shouldn't be. That's the whole entire point.

Nope. Harry Bosch's last sentence applies to ANY type of item sold. Stocks, sure - but also gold, silver, real estate, artwork, even personal items (like a boat or jewelry) that are sold for a profit. And don't forget our individual cryptocurrency holder; if they sell for a profit it is treated the same as the millionaires stock sale. My son was given renumeration for software reviews in cryptocurrency. It was not taxed until he sold it. That is precisely the same transaction that you say should be taxed annually since it was "a clear and legal tax dodge". I disagree completely.

Ruth

 

[Harry Bosch]

Why is that different than the tax I need to pay if my mother gifts me with artwork worth $25,000?
I received something, its value is not fixed, and I have to pay a gift tax for receiving something of value. I now have wealth that I didn’t have before - taxes due. Indeed its value may go down as the people who admired her die off, or if a great deal of her art is dumped into the market at once, exceeding the number of true collectors in a buying moment.

But if my employer gives me stock options, then I get to wait, not pay taxes at the time of acquisition, and see what it’s worth later?

Can I recoup my losses on the gift (income by altruism) tax later?

I'm not a cpa, but you wouldn't be taxed on your artwork worth $25,000. Really this debate about timing. The IRS's taxes income yearly. The IRS taxes increases in wealth when it is realized or converted to cash.

I have taxes taken out of my paycheck every two weeks. You square things up at the end of the year

As for your last sentence, that just about only applies to stocks. And again I ask the question why are stocks given in remuneration exempt from taxation until they are cashed out? Virtually everything else is subject to taxation. It's a clear and legal tax dodge. It shouldn't be. That's the whole entire point.

I'm not a fan of the wealth tax. I agree with Ruth's post 101. The reason why all but three European companies have given up on the wealth tax. And even those three countries have greatly reduced their wealth taxes (far below the rate that Warren is recommending.) A wealth tax is inefficient, hard to measure, difficult to collect, creates incentives to cheat. Secondly, a lot of private companies would just never go public. For various reasons, it's better for society when a private company goes public (probably should be a separate thread.)