Archive for the ‘New Jersey’ Category

IRS To New York, New Jersey, and California: We Weren’t Kidding

Tuesday, June 11th, 2019

Today the IRS issued rules and guidance on charitable contributions as a workaround to the new limits on state and local taxes. Unsurprisingly, the IRS said exactly what I thought they would: both substance over form and quid pro quo apply.

There’s a fundamental rule in tax: The substance of a transaction determines how it’s taxed, not what it’s labeled. Suppose I pay you to perform services for me, but I send you a Form 1099-INT (for interest income). What I pay you is service income, not interest income, no matter how it’s labeled. Consider state taxes. Suppose a state (say, New York) offers you the ability to contribute to the “Support New York Fund” instead of state taxes. Well, the substance is that you’re paying state taxes by contributing to that fund.

Another issue is “quid pro quo;” that’s Latin for ‘something for something.’ And if you get something for a charitable contribution, that portion isn’t charity. Consider a donation to some foundation for $50 and you receive a blanket worth $10; your charitable contribution (that you can take) is $40. This rule has been around for some time. It applies to these workarounds, too.

Put bluntly, the IRS isn’t amused with the workarounds. The Tax Code is law; until Congress changes it, federal deductions for state and local taxes are limited.

We’re Not Gonna Take It

Thursday, August 23rd, 2018

The IRS issued proposed regulations today on charitable contributions as it relates to state and local tax credits. Here’s a hint to politicians in Connecticut, New Jersey, and New York. The IRS is telling you:

Here’s an excerpt from the IRS press release:

The proposed regulations issued today are designed to clarify the relationship between state and local tax credits and the federal tax rules for charitable contribution deductions. The proposed regulations are available in the Federal Register.

Under the proposed regulations, a taxpayer who makes payments or transfers property to an entity eligible to receive tax deductible contributions must reduce their charitable deduction by the amount of any state or local tax credit the taxpayer receives or expects to receive.

For example, if a state grants a 70 percent state tax credit and the taxpayer pays $1,000 to an eligible entity, the taxpayer receives a $700 state tax credit. The taxpayer must reduce the $1,000 contribution by the $700 state tax credit, leaving an allowable contribution deduction of $300 on the taxpayer’s federal income tax return. The proposed regulations also apply to payments made by trusts or decedents’ estates in determining the amount of their contribution deduction.

There’s a de minimis exception for tax credits of no more than 15% of the payment amount.

This proposed regulation isn’t a surprise. Indeed, it’s hard to see under the Tax Code how tax credits as charitable contributions would succeed. As for the current lawsuit against the IRS regarding the new tax law, that has even less of a chance of success in my view. But it sounds good, so the lawsuit happened. The idea of a state like New York changing their tax laws to lower their tax rates apparently hasn’t occurred to New York politicians.

We’re Not Gonna Take It…

Saturday, July 21st, 2018

You may have heard that earlier this week four states sued to stop parts of the new tax law from going into effect. The states–New York, New Jersey, Connecticut, and Maryland–don’t like the new $10,000 cap on deducting state and local taxes on federal tax returns. I believe this lawsuit is doomed; there’s no right in the Constitution to allow deducting of such taxes. This isn’t just my opinion; Ilya Somin at the Volokh Conspiracy notes what I think:

They argue not only that the 2017 cap is unconstitutional, but that the federal government has a general obligation to exempt “all or a significant portion of state and local taxes” from the federal income tax. The problem with this argument is simple: nothing in the text or original meaning of the Constitution supports it. To the contrary, the Sixteenth Amendment gives Congress a general power to power “to lay and collect taxes on incomes, from whatever source derived.” There is no mandated exemption for income used to pay state or local taxes. There is also no support for the states’ position in Supreme Court precedent, or in the American constitutional tradition more generally.

The humorous thing (to me) is that blue states normally lead in ‘progressiveness’ of their tax systems (that is, higher rates for individuals earning higher incomes). The cap on deductions will primarily hurt high income individuals. Of course, blue states don’t want out-migration of such high income individuals. Perhaps they might look to lower tax rates. Mr. Somin notes they could remove zoning restrictions. As for this lawsuit, it sounds nice to their constituents but it is almost certainly doomed.

Taxes Matter (2018 Version), Part 1

Thursday, May 3rd, 2018

Those on the left constantly chirp that taxes don’t matter. Those of us who prepare tax returns can state as fact you’re wrong. I moved my business because of taxes and regulations. Here are two other examples from today that illustrate this.

First, the city of Seattle is proposing a new tax on businesses with $20 million in gross receipts (or more): an employee tax of $0.26/employee-hour. Shockingly, Seattle’s largest employer,, has stopped planning on a new 17-story office tower in downtown Seattle. Are the two related? Drew Herdener, an Amazon Vice President told FoxBusiness,

I can confirm that pending the outcome of the head tax vote by City Council, Amazon has paused all construction planning on our Block 18 project in downtown Seattle and is evaluating options to sub-lease all space in our recently leased Rainer Square building.

From the Wall Street Journal comes a headline, “My Clients Are Fleeing NJ Like It’s on Fire.” An excerpt:

That headline arrives via email from a money manager in northern New Jersey. The Garden State already has the third largest overall tax burden and the country’s highest property tax collections per capita. Now that federal reform has limited the deduction for state and local taxes, the price of government is surging again among high-income earners in New Jersey and other blue states. Taxpayers are searching for the exits.

Read the whole thing (note: Pay Link).

For those who say taxes don’t matter, you’re wrong. From small businesses to large taxes absolutely matter.

Yes, Two States Rank Lower than California

Tuesday, November 17th, 2015

It’s not all bad news in the Tax Foundation’s 2016 State Business Tax Climate Index for California. You could always be in New York or New Jersey. Still, it’s better to be elsewhere.

Two excerpts from the article note why states rank at the top of the list or at the bottom:

The absence of a major tax is a common factor among many of the top ten states. Property taxes and unemployment insurance taxes are levied in every state, but there are several states that do without one or more of the major taxes: the corporate income tax, the individual income tax, or the sales tax. Wyoming, Nevada, South Dakota, and Texas have no corporate or individual income tax (though Nevada and Texas both impose gross receipts taxes); Alaska has no individual income or state-level sales tax; Florida has no individual income tax; and New Hampshire and Montana have no sales tax…

The states in the bottom 10 tend to have a number of afflictions in common: complex, non-neutral taxes with comparatively high rates. New Jersey, for example, is hampered by some of the highest property tax burdens in the country, is one of just two states to levy both an inheritance tax and an estate tax, and maintains some of the worst-structured individual income taxes in the country.

So who are the winners and the losers? Here are the top ten states:

1. Wyoming
2. South Dakota
3. Alaska
4. Florida
5. Nevada
6. Montana
7. New Hampshire
8. Indiana
9. Utah
10. Texas

Here are the bottom ten states:

41. Maryland
42. Ohio
43. Wisconsin
44. Connecticut
45. Rhode Island
46. Vermont
47. Minnesota
48. California
49. New York
50. New Jersey

My home state, Nevada, does very well (ranking fifth overall). It ranks first in individual income tax (there isn’t one), fourth in corporate tax (there is no a gross receipts tax on businesses, but only large businesses and the tax rate is low), seventh in property tax, but 39th in sales tax and 42nd in unemployment insurance tax.

Note that it is possible to have every major tax and still rank highly (Indiana and Utah manage that) if the taxes are broad with low rates. Of course, you can be like New Jersey, New York, and California: have broad taxes at high rates. If you do that, you end up on the bottom.

I should point out that it is possible that New York will rise in the rankings. As the Tax Foundation noted, New York enacted corporate tax reform which should improve its standing. Meanwhile, California is apparently considering more and higher taxes for the future. That, combined with the regulatory environment in the Bronze Golden State, should give legislators pause…but probably won’t.

State Financial Health: Alaska, Dakotas on Top, Illinois, New Jersey, Massachusetts and Connecticut on the Bottom

Tuesday, July 7th, 2015

The Mercatus Center at George Mason University released a study today ranking the 50 states on their financial health. Here are the top six states:

1. Alaska (8.26)
2. North Dakota (2.97)
3. South Dakota (2.84)
4. Nebraska (2.75)
5. Florida (2.74)
6. Wyoming (2.67)

These six states have “Fiscal Condition Index” scores that are significantly higher than all the other states. Of course, where there’s good there’s also bad; here are the bottom seven states:

50. Illinois (-1.86)
49. New Jersey (-1.86)
48. Massachusetts (-1.84)
47. Connecticut (-1.83)
46. New York (-1.49)
45. Kentucky (-1.42)
44. California (-1.41)

Why are states ranked low?

High deficits and debt obligations in the forms of unfunded pensions and health care benefits continue to drive each state into fiscal peril. Each holds tens, if not hundreds, of billions of dollars in unfunded liabilities—constituting a significant risk to taxpayers in both the short and the long term.

Think unfunded pensions and you have one of the huge issues facing states. Illinois leads the way (which isn’t a good thing for the Land of Lincoln). There’s a reality: Whatever you make, spend less. Some states follow that creed; others give it lip service. California may have a “surplus,” but when you look at unfunded pensions things don’t look so good. Sooner or later, that bill will come due.

It’s an interesting analysis, and well worth your perusal.

New Jersey Tries Hail Mary on Sports Betting; Will IRS Intercept?

Tuesday, September 9th, 2014

Yesterday, Governor Chris Christie of New Jersey announced that New Jersey would not prosecute any casino or race track that offered sports betting. This is in spite of a federal court ruling that New Jersey’s sports betting law was unconstitutional. My suspicion is that the federal courts will not look favorably on this, and Governor Christie’s actions will be for naught. Indeed, the attorney crAAKer posted on his blog that this is unlikely to succeed.

But let’s assume that somehow the courts allow this. There’s an issue that will put New Jersey at an extreme disadvantage to Nevada’s legalized sports betting: taxes. Specifically, the Excise Tax on Wagering.

Yes, there are a whole bunch of federal excise taxes. And there’s an IRS publication dedicated just to them. One day you might need to know about the tax on arrow shafts (I’m not making this up). But I digress….

The excise tax on wagering is summarized as follows:

IRC 4401(a)(1) imposes a 0.25 percent tax on the amount of any wager authorized under the law of the state in which accepted.

IRC 4401(a)(2) imposes a 2 percent tax on the amount of any wager not described in IRC 4401(a)(2) (i.e., those not authorized by state law).

This doesn’t apply to all betting in the US; it applies to:

IRC 4404 provides that the tax applies to wagers:

• Accepted in the United States, or
• Placed by a person who is in the United States with a U.S. citizen or resident, or in a wagering pool conducted by a U.S. citizen or resident.

As noted in an IRS analysis on this tax, this tax applies just to sports betting (and wagering that involves a sports bet). An interesting issue is whether this tax applies to fantasy sports, such as daily fantasy sports. I suspect it does, but that’s another issue for another day.

So let’s say you place a bet at the Bellagio sportsbook, betting $100 that the Chicago Bears will beat the San Francisco 49ers. Out of the Bellagio’s “juice”–your bet will typically cost you $110 or $120, with the house (Bellagio) keeping that extra money–Bellagio must pay the 0.25% wagering tax. On a bet of $100, that’s $0.25. The Bellagio remits the tax using Form 730.

Now let’s consider if the Borgata Hotel in Atlantic City were to accept the same bet. Again, the federal excise tax clearly applies. However, the tax rate will be the 2% rate rather than the 0.25% rate because New Jersey has not legalized sports betting. Indeed, Governor Christie vetoed such legislation earlier this year. While New Jersey would argue that the previously passed Sports Wagering Act allows for sports betting, federal courts have ruled that it could not be put into effect.

New Jersey argues that federal law sort of allows any state to conduct sports betting. From crAAker’s analysis:

New Jersey seeks to avoid the licensing problem by asserting that the licensing provisions can be severed from the statute. Severability is a common law doctrine which permits a court to invalidate one section of a statute while leaving the remainder in force. In this case, the statute contains an explicit legislative endorsement of severability (Section 5:12A-2(g)), which expresses the legislature’s intent to have a court attempt to enforce the statute in the event the statute was found to violate PASPA and creates a legal presumption in favor of severability.

Since New Jersey has not authorized sports betting–the only law that was passed by New Jersey was not allowed to be put into effect by the federal courts–the higher 2% rate applies. That means that the Borgata would owe $2 to the IRS rather than the $0.25 that Bellagio owes on a $100 sports bet.

A fundamental principle of economics is that all government fees and taxes are passed on to the consumer. The additional $1.75 that a New Jersey sportsbook would have to pay would be passed on to the New Jersey sports bettor. That will make betting more expensive in New Jersey than Nevada. Even if somehow the courts were to allow sports betting in New Jersey, it will be at a higher price to the consumer than in Nevada.

I suspect the courts are going to throw buckets of cold water on the idea of legal sports betting in New Jersey. However, even if they don’t the IRS would make it a bad bet.

Former Chairman of Woodland Park, NJ Democratic Committee Bribes His Way to ClubFed

Sunday, March 2nd, 2014

The IRS has its problems, but accepting bribes isn’t one of them. The former chairman of the Woodland Park, New Jersey Democratic Committee found that out the hard way.

Michael Kazmark didn’t pay his 1997-2005 federal taxes; he owed just under $100,000 (including interest and penalties) by 2010. When you owe a large amount and cannot pay one avenue that’s open to you is an Offer In Compromise (OIC). In an OIC, you ask the IRS to settle your debt for pennies on the dollar. About 15% of OICs make it through and are accepted; it usually takes over a year for the process to play itself out. Mr. Kazmark offered to pay $48,800 of the $98,046 he owed; he sent the required deposit of $9,800 with his OIC application.

Mr. Kazmark wanted to make sure his OIC went through. Now, most of us might consult with a tax professional who could make sure the OIC had the best chance of being approved. Mr. Kazmark had another idea: bribery. From the Information in his indictment:

5. It was part of this bribery scheme that on or about October 5, 2010, in Passaic County, defendant MICHAEL KAZMARK offered, promised to make and made a $1,000 bribe payment to UC1 and UC2 in exchange for their official assistance in transferring MICHAEL KAZMARK’s offer in compromise file to UC2 so that UC2 could accept defendant MICHAEL KAZMARK’s April 18, 2010 offer in compromise.

6. It was a further part of this bribery scheme that on or about October 5, 2010, in Passaic County, New Jersey, defendant MICHAEL KAZMARK offered and promised to make a $17,500 bribe payment to UC1 and UC2 in exchange for their official assistance in accepting defendant MICHAEL KAZMARK’s April 18, 2010 offer in compromise, and thereby resolving defendant MICHAEL KAZMARK’s federal tax liability, for the amount of the check that he had already paid to the IRS, namely $9,760, as opposed to the $48,800 that defendant MICHAEL KAZMARK had initially offered.

Mr. Kazmark pleaded guilty last year; he was sentenced on Friday to two years at ClubFed. He was lucky in that federal sentencing guidelines suggested a three-year term. In any case, bribery is a strategy that is a very poor choice.

The Flow of AGI from One State to Another

Saturday, July 20th, 2013

From comes an interesting interactive map showing how money has flowed from state to state. Back when I moved to Nevada from California, I noted this issue. Here’s yet more verification that this is real.

The five biggest losers were:
1. New York ($68.10 billion in annual Adjusted Gross Income (AGI))
2. California ($45.27 billion in annual AGI)
3. Illinois ($29.27 billion in annual AGI)
4. New Jersey ($20.62 billion in annual AGI)
5. Ohio ($18.39 billion in annual AGI)

The five biggest winners were:
1. Florida ($95.61 billion in annual AGI)
2. Arizona ($28.30 billion in annual AGI)
3. North Carolina ($25.12 billion in annual AGI)
4. Texas ($24.94 billion in annual AGI)
5. Nevada ($18.17 billion in annual AGI)

Sure, some of this is retirees moving from the snow belt to the sun belt. But California is anything but part of the snow belt; it’s clear that successful individuals are fleeing high tax states for low tax states. We here in Nevada are appreciative of the $9.59 billion in annual AGI that has moved from the Bronze Golden State to the Silver State.

Interestingly, the interactive map allows you to look county-by-county. The areas that one would think would show AGI growth are losing AGI. The area around Silicon Valley has lost AGI; so have Los Angeles and Orange County. Sure, some of this is retirees moving to the desert (Riverside County, which includes Palm Springs, showed an increase in AGI). However, there is no chance that this is just caused by retirees.

Taxes matter, and individuals absolutely do relocate because of taxes.

Hurry Up and Wait: What the New Jersey Online Gambling Bill’s Passage Really Means

Tuesday, February 26th, 2013

New Jersey Governor Chris Christie signed into law a bill authorizing online gambling in New Jersey. I’ve seen tweets from friends saying things like, “Great! Christie legalizes online poker in New Jersey.” Well, that’s not exactly what happened. While I’d prefer not to throw some cold water on the party, I’m afraid I have to.

What was signed into law is a bill authorizing the New Jersey Casino Control Commission to authorize licensees to run games online. The NJCCC will authorize which games can be run online. While it is virtually certain that poker will be allowed online, the NJCCC still has to vote for it.

Further, licensees of the Commission will need to put together proposals for running the games online. They’ll need to demonstrate that they have the systems in place so that everything works smoothly; that the games are fair; that appropriate measures are in place to prevent cheating and underage gambling; etc. Nevada legalized intrastate online poker nearly a year ago; the first real money virtual poker in Nevada has yet to take place. I suspect it will take at least twelve months in Nevada (fifteen is my guess). It may take slightly less time in New Jersey (companies with Nevada licenses will have more of the processes in place), but it’s a good bet that the first game of New Jersey virtual poker will occur in 2014, not 2013.

I’ve heard some say that New Jersey will be able to partner with sites that are in Europe, so that residents of the Garden State will be able to play poker against Europeans. That’s not going to happen–at least, for now. The US Constitution gives the federal government the sole right to make treaties with foreign countries. That’s in Article I, Section 8, Clause 3:

[The Congress shall have Power] To regulate Commerce with foreign Nations, and among the several States, and with the Indian tribes….

New Jersey can’t make a treaty with, say, Italy. That’s not happening.

It’s even debatable whether interstate poker would be legal. Must their be legislation before, say, Nevada and New Jersey can enter an interstate compact for online gambling? Congress has specifically allowed multi-state lottery compacts (such as Powerball). Must Congress specifically authorize the same kinds of compacts for online poker? It is clear that if Congress authorized such compacts they would be legal; without such legislation, it becomes a question of law.

I don’t know the answer to this question. I’ve heard both yes and no from people well versed in this area of law. It’s the kind of case that could be fought in the courts for years. Interestingly, the states where all gambling is required to be run by lottery commissions (such as West Virginia) could make online poker compacts with other such states; those have a higher likelihood of being legal.

Today’s signing of online gambling legislation is welcome news for American online poker players. It is, however, just one step among many that must be made before legal online gambling is available for all Americans (or even residents of New Jersey).