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Tags: kleinfeld | buffett | tax

How to Plan for the Buffett Tax

Denis Kleinfeld By Monday, 26 September 2011 09:25 AM Current | Bio | Archive

Have you asked yourself these questions?

- How do I avoid paying more tax?

- Why should we accept Warren Buffett as some sort of guiding light when it comes to redistributing wealth?

There are some handy ideas to deal with the tax problem.

How about investing in Berkshire Hathaway shares? It doesn't pay dividends so you, like Mr. Buffett, won't have any dividend income to pay tax on.

This also works quite well if you own a lot of stock and, like Mr. Buffett, you take a very low salary, just enough to cover Social Security tax. A neat way to avoid paying any excess Medicare tax.

If you need money to pay for your credit card charges, mortgage, or alimony, then just borrow against your stock. Borrowing isn’t income.
Otherwise, just sell the stock and pay capital gains tax.

Mr. Buffett's legal eagles have come up with another gambit which allows someone with a lot of money to game the tax system.

Berkshire Hathaway recently made a multibillion dollar investment in Bank of America in a special arrangement involving preferred shares.

The tax benefit is that 70 percent of the dividend is excluded from tax.
That certainly boosts the value of Berkshire Hathaway, which keeps the cash, and doesn't pay dividends.

Bank of America is certainly an interesting investment, as were some of the other investments of Mr. Buffett, like Goldman Sachs Group, US Bancorp, and American Express. I understand that 30 percent of the Berkshire Hathaway portfolio involved TARP-supported companies.

In fact, Mr. Buffett's companies were the fifth largest beneficiary of the TARP government bailout.

Clearly, having the President of the United States as your financing partner can lead to an ever-increasing exposure to estate tax with the stock becoming so much more valuable. So what can one do to save tax?

The solution to that is a tax plan that involves simply setting up a foundation which then makes grants to another friendly foundation.

Donating the appreciating stock to this foundation structure results in the stock being no longer subject to estate, or generation-skipping transfer tax. And there's no gift tax to boot.

But it gets better. When the donation is made, the fair market value of the stock results in a charitable income tax deduction. That will cover a lot of income and save a lot of income tax.

There's another bonus in this sort of tax plan. The cherry on the sundae. Not only can you (or Mr. Buffett) give away the stock, you (or Mr. Buffett) can be on the board of directors of the foundation and thereby still keep control of the stock.

This way, the stock can be given away and kept at the same time.

Now for the question of what credibility should be afforded to Mr. Buffett as to his opinion of proper tax policy for taxpayers of the United States?

It strikes me that to give significant weight to his observations on investments is something he has earned. Certainly, anyone becoming a self-made billionaire is deserving of a great deal of respect for their accomplishment.

But to give Mr. Buffett credibility on issues of estate or income tax, particularly when he has readily apparent vested interests, seems to me to be a classic fallacy of logic. That fallacy is what is referred to as argumentum ad verecundiam or the appeal to authority.

Essentially, we are being asked to accept the "Buffett Rule" on tax credibility based on the credibility of Mr. Buffett as a successful investor without examining the statements he makes.

It's the statements that we need to understand, not the person making the statement. Especially a person who isn’t himself an authority on tax or tax policy.

It is now widely understood that Mr. Buffett was simply lying about his taxes in comparison to his secretary's tax burden. That has been well documented in the press and elsewhere. I do not need to repeat that here.

As to estate tax, there is a Congressional Joint Committee on Tax report in 2006 which states that the estate tax is a net revenue loser for the Treasury.

Raising the estate tax on those successful Americans who have retained enough wealth serves no positive fiscal purpose. It's not good for the Treasury and it's not good for the taxpayers. It is only good for politicians who want to play the class-warfare card at elections.

As to the income tax, as I have mentioned more than once, it is system that the Treasury can no longer administrate and by which the taxpayers can no longer comply.

It is a tax system devised in the early 1900s and doesn't work in the 21st century. Except, of course, for Congress and the President, who use it as an endless source for campaign contributions.

Why would Mr. Buffett put himself in this position? I do not have the answer to that. It is, however, sad that a man of his stature would so easily eschew such an exposed public position of supporting political class warfare at this time in his life.

I do not understand why Mr. Buffett would sacrifice his impeccable reputation and the esteem that the American people have for him by becoming the poster child for the policies of a failed administration. But he has done just that.

Are these public policy positions and fundraisers the quid pro quo to the administration for providing billions of dollars in TARP funds so he could make billions of dollars of profits?

I do not understand why Mr. Buffett would support expanding the estate tax when he has structured his own estate to pay zero in tax — and the estate tax should be repealed in any event.

I do not understand why Mr. Buffett is supporting economic class warfare as a political weapon. Can it be that he believes the productive in our society have too much and need to be forced to give some of their success to the underproductive but voting masses?

I would had retained my respect and admiration for Mr. Buffett had he professed his support for governmental measures that in fact promoted the economic productivity of the United States and the creation of jobs.

Planning for the so-called Buffett Tax is easily done by merely following the tax structures given to us by the Oracle from Omaha.

Dealing with the growing doubts of Mr. Buffett's character and integrity is a far more controversial political problem.

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Have you asked yourself these questions? -How do I avoid paying more tax? - Why should we accept Warren Buffett as some sort of guiding light when it comes to redistributing wealth? There are some handy ideas to deal with the tax problem. How about investing in...
Monday, 26 September 2011 09:25 AM
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