Tuesday, November 12, 2013

Tax Breaks for Astronauts Who Die in Space

To answer the question on the mind of everyone who has ever seen the movies Armageddon or Gravity, there are two excellent tax breaks for (spoiler alert!) astronauts who die in the line of duty.

Internal Revenue Code section 692 provides that such astronauts literally do not have to pay any federal income taxes for two years -- the year of their death in the line of duty and the year before.  It doesn't matter if they made a billion dollars selling gold or bitcoins.  Zero taxes.  If some federal income taxes were withheld from their paycheck, they get that money back from the IRS.

But an even better tax break is that the same astronauts are subject to a top estate tax rate of 20%, rather than the usual top estate tax rate of 40%.  Since the estate tax applies only to those who die with over $5.25 million in assets (in 2013), wealthy multimillionaire astronaut-hopeful Lance Bass can rest assured that his estate tax bill is cut in half if he were to have a fatal accident, thanks to Internal Revenue Code section 2201.

The above tax breaks were enacted in November of 2003 by the Military Family Tax Relief Act, and they apply retroactively to all astronauts who died after December 31, 2002.  The provisions were specifically addressing the seven astronauts (six Americans and one Israeli) who died in the Space Shuttle Columbia disaster of February 1, 2003, at least one of whom presumably had over $1 million in assets (the 2003 estate tax threshold). 

While some pundits (Foreign Policy) may bemoan that Americans are falling behind the Chinese in the technological space race, Americans are still way ahead in the tax policy space race.

Friday, November 8, 2013

Media Appearance

Your humble blogger has made a media appearance on Politico.com:

"Tax oddities live on amid budget impasse"

The U.S. government will give you a tax break for buying college football tickets.
And hunting whales. And if you happen to be a foreign professional golfer. Or a college professor. Or if you get divorced.
Other provisions would seem to be obsolete. A Cold War-era law allows communists to avoid paying the Social Security tax (they don’t get benefits either). That came after congressional outrage over reports that a jailed communist had continued to receive Social Security checks, said Libin Zhang, a tax lawyer.

“Obviously, that’s not as big of issue nowadays, but the statutory provision is still there,” he said.

Friday, November 1, 2013

It Is Hard to Bowl as a Business

The income tax is a tax on net income, so tax deductions are allowed for business expenses, such as salaries, rents, and interest (though some liberal commentators complain about businesses deducting their interest expenses paid to a bank). 

In order to prevent people from deducting every type of spending, the tax deduction must be for a business and not for a hobby or not-for-profit activity.

In the landmark case of Phillips v. Commissioner [pdf], the Tax Court concluded the taxpayer's bowling activities were not a for-profit business activity.  As a result, the taxpayer could not deduct his $30,000 of annual bowling expenses against his regular salary from being a full-time postal worker.

The Tax Court found that the taxpayer did not conduct his bowling activity in a business-like manner, did not maintain accurate books and records, and did not attempt to improve the activity's profitability by research or coaching.  While the taxpayer did earn some money initially from bowling tournaments, he did not win any tournament for most of the later years.  It did not help that Mr Phillips derived some "recreational benefit from his bowling activities."

In general, taxpayers who try to deduct expenses from their money-losing businesses should be careful that the business does not look too much like an enjoyable hobby that the taxpayer would continue to do in the absence of a profit, like horse racing or bowling.  Activities that are unlikely to be considered recreational hobbies include drywall construction, sewage plumbing, and preparing tax returns.