Broker Check

Here’s The Situation

          On September 24, 2014, brothers Marc and Michael Sorrentino, also known as “The Situation” from MTV’s popular reality television series “The Jersey Shore” were indicted on charges of filing false tax returns for 2010, 2011 and 2012 and conspiracy to defraud the United States by impeding, impairing, obstructing, and defeating, through deceitful and dishonest means, the lawful functions of the Internal Revenue Service.  The indictment alleges that the brothers failed to pay income tax on $8.9 million of income during the years in review. 

          According to the court documents filed in the United States Court District of New Jersey, the income was generated by personal and television appearances, a partnership interest in a vodka company, ownership of an online clothing business, publication of an autobiography and comic book starring The Situation as a superhero and product endorsements of vitamins, clothing, sunglasses, jewelry, tuxedos and DVDs.  The allegations state that the brothers understated their businesses’ gross income, among other things, by not reporting the full amount of income that was paid to their businesses in cash for personal appearances, and that the businesses deducted fraudulent or disallowed business expenses, such as luxury vehicles and high end personal clothing and grooming expenses that were disguised as legitimate business expenses. 

          The brothers are alleged to have intentionally failed to provide their accounting firm with the correct income earned and the true nature of the business deductions.

Pied A Terre Tax

          You’ve heard that New York State and City are seeking more tax revenue.  The newest proposal to provide additional revenue has been revealed.  In late September, a real estate tax dubbed the ‘Pied A Terre’ Tax was introduced.  This is a tax of up to 4% of the fair market value of homes, if it is valued at greater than five million dollars, which are owned by non-residents in cities with a population greater than 1 million people.  Homes that are used as primary residences would be exempt.  You guessed it; foreigners and non-New York City residents who have vacation homes and pied a terres in New York City face an additional tax on their property value if this bill is passed!  Homes with a value between five and six million dollars would be assessed a tax of 0.5%.  The tax gradually escalates to a maximum of 4% charged on homes valued over $25 million.  A six million dollar apartment would pay an additional annual tax of $5,000.  A $25 million dollar apartment would pay an additional annual tax of $370,000!

          Those in favor of the bill argue that the non-residents who own second homes in New York City but are not City residents escape City income tax and pay low property taxes due to tax abatements or credits.  The tax on the fair market value of their home, to the extent it exceeds $5 million dollars, would increase the City’s tax revenues.  

          Investors from unstable foreign countries have recently looked to New York as a stable environment to invest their money by purchasing real estate.  This includes investors from Asia and Europe.  Would this tax, if passed, increase New York City tax revenue but at the same time put an end to foreign investment in New York City real estate?    Maybe the investments will go to New Jersey, only a PATH ride away from midtown.

New Back Door Roth IRA Contributions

          Taxpayers with incomes above the Roth IRA contribution limit now have an additional ‘back door’ route to contribute money to a Roth IRA.  In the recent IRS Notice 2014-54, the IRS determined that taxpayers can roll over after-tax contributions to a Roth IRA without allocating the rollover amount between taxable and non-taxable amounts.  The taxpayer can separate the funds and choose only to rollover after-tax contributions to Roth IRAs.  There is no tax impact as a result of this transaction and significant upside, since the funds can grow tax-free in a Roth IRA for decades, if not multiple generations.  This is an opportunity that high income taxpayers should not take lightly.  Consider making after tax contributions of as much as $34,500 to a 401k plan, if the plan document permits.  Further, if the plan allows in-service rollovers, the after tax contributions can be rolled over to the Roth IRA at any time.  If the plan does not allow in-service rollovers, taxpayers must wait until they separate from employment, terminating their participation in the plan and enabling them the ability to rollover over their 401k funds.

          If you have questions about any of the topics discussed in this newsletter, please feel free to call us. 

          Remember, We’re Here For You.