If you don’t want to pay capital gains taxes, work for the President…or have lots and lots of kids.
In the biggest stock sale of his life, former Treasury Secretary Hank Paulson didn’t pay one dollar of capital gains tax. Nearly $500 million worth of Goldman Sachs shares – a profit of hundreds of millions of dollars – and not a red cent went to the IRS. Paulson’s Treasury predecessors Robert Rubin and Paul O’Neil enjoyed a similar tax dodge themselves…as did many other familiar Washingtonians over the last 20 years, like Donald Rumsfeld and Donald Evans.
You could enjoy the shade of this shelter too. All it takes is the President’s blessing.
President George H. W. Bush is the originator of this refuge for the political elite. His Ethics and Reform Act of 1989 – ironically – was a soft-core crackdown on abuse of privilege in government…no more honoraria for federal employees (except Senators, of course), post-employment restrictions on Congressmen, increased financial disclosure and so on. But the Act also introduced Section 1043 of the Internal Revenue Code, a tax shelter available to those that need it the least.
Under the guise of not wanting to “discourage able citizens from entering public service,” Section 1043 is an alteration of the government’s conflict of interest rules. Before 1043, executive appointees (mostly high-up cabinet members and judges) had to sell positions in certain companies to combat conflict of interest – like say, a former Goldman Sachs CEO-turned Treasury Secretary with millions of GS shares. After Sec. 1043, the appointee gets a one-time rollover. Upon their appointment, he or she can transfer their shares to a blind trust, a broad market fund or into treasury bonds. They’ll have to pay taxes on the position one day, but not immediately after the sale… like the rest of us.
So if you were Hank Paulson, sitting on 3.23 million shares of Goldman Sachs in 2006, the chance to defer tens of millions of dollars of taxes was a pretty sweet deal. Paulson, along with almost every executive appointee (and their spouses and kids!), have been granted a tax shelter that is totally unattainable for the everyday investor. Section 1043 goes beyond leveling the playing field for public servants. In fact, it incentivizes service. It puts appointed officials on a higher playing field than their constituents.
Many investors will, if they haven’t already, experience a moment where they’re desperate for a free pass out of one investment and into another. Imagine getting willed a million shares of Enron in 1999, or being on the verge of retirement in 2007. Your editor had shares of PNC passed down in his family for decades… Dad took a notable tax hit when he sold before the credit crisis. Too bad he wasn’t Secretary of the Treasury. He could have rolled those shares of PNC into a money market fund – largely what Hank Paulson did – and enjoyed income on subsequent gains BEFORE being taxed on the original investment.
(All of this underscores the oddity of the US capital gains tax. It’s not a tax on gains, but a tax on transactions. What does an investor truly “gain” from moving out of one position and into another? The capital gains tax should only be exacted when an investor truly cashes out of a position. Otherwise, it’s tax on changing your mind. It’s a tax on diversification and rebalancing. In other words, the government is giving you incentive to “buy and hold,” a principle that has been just terrific for American mainstay stocks like GM, Bank of America or General Electric.)
So what’s a humble investor to do?
If you really feel like wasting your time, write your Congressman. Otherwise, maximize the potential of our absurdly complicated tax code. It’s damn hard, if not illegal, to get a pass on capital gains tax the way Hank Paulson did. But you can take the edge off.
One of the most popular – and legal – ways is giving appreciated stock to your child. Each child can get a “gift” of up to $13,000 a year from each parent, tax free. Unless you’ve got a very entrepreneurial kid, he or she is probably in the lowest tax bracket. So you can give them the stock and they can sell it at a much lower tax rate.
There are other, more complicated ways, too – some of which involve forming corporations or trusts. Charitable remainder trusts, for example, produce tax benefits, while also providing funds for charitable endeavors. Of course the money won’t belong to you anymore, but at least you would have the chance to finance the charities of your choosing, rather than the pork-barrel projects of the government’s choosing.
Either way, don’t just sit back and assume that paying the full tax is the fair consequence of investment success. You’re in this mess to make money for you and the people you care about. Hank Paulson and his executive branch buddies found a shortcut – so should you.
My understanding of American tax law is far from comprehensive. Think of it like skydiving… I’m comfortable explaining the basics, but you wouldn’t want me packing your parachute. If you want to minimize your capital gains taxes, find a good accountant.
Ian Mathiasfor The Daily Reckoning
Ian Mathias is the managing editor of Agora Financial's Income Franchise, where he writes and researches about retirement, dividend and fixed income investing. Much of his work is featured in The Daily Reckoning and Lifetime Income Report, Agora Financial's flagship income investing advisory.
Previously, Ian managed The 5 Min. Forecast, a fun, fast-paced daily look into the future of global markets and macroeconomics. He's also worked in public relations, where media outlets like Forbes, AP, Yahoo! and MSN Money have syndicated his writing. If he's not at work, you'll probably find Ian on a bicycle, racing up and down the "mountains" of Baltimore County. Ian has a BA from Loyola University in Maryland.
That is very useful information. Well-timed for tax season.
I do not like your format now.
It was so much easier to read before.
Now it takes so long cliking on read more every time a person wants to read a full article.
Have you thought about returning to the way it was brfore?
So what’s a humble investor to do?
Since loosing money is so much easier: Why not sell loosing positions and capture the Capital Loss.
Move the remaining money into a Roth IRA (Up to $5k) and buy back the same asset just sold (May be subject to a Wash Sale) or buy another investment with an equal or lesser share price.
Ride the investment back up protected by the Roth. The $5K can be pulled out at a later date without penalty. Any profits would need to remain in the Roth. $3K of the total Capital Losses can be used to offset any future Income, Capital Gains, IRA or 401K rollovers.
Just a thought.
Pingback: DSLR 60D,The Unboxing of EOS digital slr 60 D Still and Video Camera,EOS 60D of Canon Stardom
Pingback: San Francisco North Bay CA
Pingback: Shrewsbury MO
Pingback: SEO Services Outsourcing
Pingback: Toenail Fungus Treatment
Pingback: Locksmith alexandria va │Locksmiths alexandria va │Residential Locksmith alexandria va │Commercial Locksmith alexandria va │ Auto Locksmith alexandria va │ Car Locksmith alexandria va │Unlock alexandria va │Unlock service alexandria va │Bu
Pingback: text your ex back review
Pingback: source wave
Pingback: Bluehost reseller coupon
Pingback: London Escorts
Pingback: contesting my fathers will
Pingback: UK Escorts
Pingback: http://www.youtube.com/watch? v=J01eIs7mKBY
Pingback: how to make money from YouTube
Pingback: Find custom made doors in nc
Pingback: fanpage cashflow
Pingback: Torrance Mortgage Loan, San Pedro Mortgage Loans, Rolling Hills Mortgage Loans, Manhattan Beach Mortgage Loans, Redondo Beach Mortgage Loans, San Pedro Real Estate, Rolling Hills Real Estate, Redondo Beach Real Estate, Manhattan Beach Real Estate
Pingback: Email Processing For Cash Jobs
Pingback: Pool Service The Woodlands
Pingback: Email Processing 4 Cash
Pingback: recommended you read
Pingback: Payday Loans Online For People With Bad Credit
Pingback: Dr. Erik Roach DC
Pingback: Payday Loans Direct Lenders In Canada
Government life support…liquidity injection… or a giant Band-Aid…whatever you want to call it, quantitative easing is the keeping the global economic ship afloat – but for how much longer? Richard Duncan explores…
Ben Bernanke introduced the world to the concept of "quantitative easing" back in 2002. It was an "unorthodox plan" to save the economy from the horrors of deflation. But the monstrous economy it has actually created is in some ways far worse. And as Richard Duncan explains, it's not going to end any time soon. Read on..
While the technical details of Bitcoin may intimidate the novice, they shouldn’t keep him from getting in on a digital currency revolution that -- while taking different forms -- isn’t going away. How do you get the simplest, easiest-to-act-on tips about how to invest, safeguard and grow your digital wealth? Dominic Frisby has more…
The duality is stark. In one hand, we have an energy renaissance underway, in the other, a virus is threatening to wreak havoc on the markets and, potentially, your life. Nothing we’re currently doing to fight the Ebola virus will work in 2014, say the researchers. Nothing we’re currently doing will beat it in 2015, either. We need a new game-plan. Read on…
Lose your shirt in 3D printing stocks this year? Don’t kick yourself. You’re not alone. (Okay, kick yourself a little if it’ll make you feel better.) You need to make sure you don’t lose your 3D-printed shirt in the next tech craze. Because there will be a next time. Look, it’s really not your fault if you got taken for a ride on 3D stocks. Greg Guenthner has more...