By BRETT ARENDS
Hey, Harvey Golub -- I'm sorry to hear about your tax problems!
In a rebuttal to Warren Buffett's call for higher taxes on the super-rich, you wrote in Monday's Wall Street Journal: "Of my current income this year, I expect to pay 80%-90% in federal income taxes, state income taxes, Social Security and Medicare taxes, and federal and state estate taxes."
Harvey, you came to the right place. We're here to help.
I don't know your exact financial situation, of course. But I figure you must have at least $100 million in the bank. After all, you were a high-earning corporate honcho for decades, including twenty years of the biggest bull market in history. Over that time you were a senior partner at McKinsey & Co., the chief executive of American Express, and the chairman of Campbell Soup.
According to the American Express proxy statements, you were collected about $50 million in salary, bonus, and stock options just in one year, 1999.
At age 72, you're presumably mainly living off your investments. But I would assume you're earning several million a year.
Here's an action plan to help you out on those taxes.
Fire your accountant
You're paying 80-90% in taxes? Where are you living, Cuba?
The top rate of federal income tax is 35%. Medicare tax is another 2.9%. Social Security is trivial at your level -- it tops out at around $13,000 in a normal year, and $11,000 this year.
Then there is state and local tax. But how high are they? New York City charges a maximum of about 12.8% in state and city income tax. Most other places charge far less.
Let's do the math. I don't know how much you make, but let's say, for the sake of easy calculations, it comes to $10 million this year.
If you live in New York City you will pay just under $1.3 million in state and city income tax, and $3.3 million in federal income, Medicare and Social Security taxes.
Total: $4.6 million, or 46% of income.
If you were to die this year (and of course I hope you don't, but let's just say, for the sake of calculations), then the federal government would take another 35% of what's left in estate taxes. That's another $1.9 million.
The total tax: $6.5 million. That's 65% of your income -- a long way short of "80-90%".
What am I missing? Property taxes?
By my math, to get the total to 80-90% you'd have to pay property taxes equivalent to somewhere between 38% and 63% of your income.
Forget Cuba! Where are you living -- Buckingham Palace? The top ten stories of the Chrysler Building?
Harvey, you need a new accountant. Something doesn't add up here.
Buy a new home
This is a great move right now for all high earners. You can deduct the interest on a $1 million mortgage and another $100,000 home equity loan. With interest rates at 4.5% right now, that can save you $17,300 a year in federal taxes alone. As you are in the top tax bracket, you get a bigger break than people who earn less. And this has to be a good time to borrow money to buy a home anyway. Interest rates are at record lows. Ben Bernanke is probably gearing up for "Quantitative Easing III." And real estate is a bargain in many parts of the country. Check out Palm Beach!
It sounds like you're getting hosed on state taxes. You can save a bundle by moving to a lower-tax state. Why pay through the nose to live in New York City? If you are worried about how much you are paying in taxes, try moving to Connecticut, where the top rate is 6.5%. Or Pennsylvania, where it's just 3.1%. According to tax information company CCH, seven states charge no income tax at all. How do you feel about South Dakota? Wyoming? Alaska? Just think -- living is cheap, there's no state income tax, and you'll never have to meet another "liberal" again! States without income taxes also include Florida, Texas, and Washington. And if you move to Texas, you'll escape U.S. taxes completely once President Perry secedes.
Restructure your portfolio
Harvey, with your wealth, and at your age, I'm guessing most of your income today comes from your investments. And if you are paying 35% tax, it sounds like you're loaded up with bonds, and maybe hedge funds generating a lot of short-term capital gains.
This is nuts. Most hedge funds are a racket. You know this -- you've been around Wall Street long enough. And bonds are paying bupkis: At the moment the Vanguard Bond Index Fund, a mixture of Treasurys and corporate, yields just 2.3%. And those coupons are taxed as ordinary income. Yuck!
The main reason to own bonds here is if you can't handle volatility. But with your level of wealth you can ignore that. You can afford to ride out the market's bumps and invest your family's wealth for the long term.
Move your money into blue chip stocks instead. You can easily earn 3% just in dividends. And those dividends are only taxed federally at 15%. We've just cut your federal income tax by more than half!
Give to your family
This is a great time to make gifts to your family, says Janet Tighe, a financial planner at Mintz Levin Financial Advisors in Boston. Until the end of 2012 you can give $5 million, tax-free. If you are married, your wife can give another $5 million. These limits used to be just $1 million each. In addition you can give $13,000 a year to each recipient -- each child or grandchild -- and a spouse can do the same. So a married couple with, say, three children and eight grandchildren can give another $286,000 a year, on top of that one-off $10 million. Over ten or twenty years that really adds up. Your heirs won't have to pay a penny in estate or income taxes on the loot.
Put your grandkids -- and great-grandkids -- through college
This is a tax-free gift. Money paid directly to schools or colleges escapes estate taxes. It's like you're getting 35% off! If they've all finished their bachelor's degree, send them to grad school. And how lucky for them! Right now most children are struggling to afford college. Many are going to graduate tens of thousands of dollars in debt. Your grandchildren will get a college education, completely free -- and will save on the estate taxes as well! (You can also pay their medical expenses. Give them all braces! Botox! Nips, tucks and silicone implants!)
Buy life insurance
This is a great maneuver. The proceeds are tax-free to your heirs. The original rationale was to help widows and orphans, but even the super-rich can use it to cut their estate taxes. There a few wrinkles to make it work, says Linda Campbell, a financial planner at Budros, Ruhlin & Roe in Columbus, Ohio. "Typically you put the policy in an Irrevocable Life Insurance Trust," she says. "The premiums that you pay annually are gifts to the beneficiaries." And when you die, "the proceeds of the policy go to the trust, for the beneficiaries, free of estate tax."
What about you? New York Life tells me that a 72-year-old man in excellent health could buy a $1 million permanent life insurance policy for premiums of $37,000 a year.
Talk to an estate planner
There are other moves that can cut your estate tax, too. A Qualified Personal Residence Trust can slash the estate taxes on a residence. A Grantor Retained Annuity Trust, or GRAT, can slash them on an investment portfolio. So, too, can setting up a Family Limited Partnership. Financial planners say this is a great time to put investments -- like stock -- into a GRAT. The IRS has slashed a key interest rate it uses to calculate future GRAT gains to just 2%. "It limits the future appreciation, for estate tax purposes, to 2% a year," says Susan Elser, a planner in Indianapolis. Anything above that passes to your heirs tax-free, she says.
How does it work? Let's say you put $100 million into a two-year GRAT, says Linda Campbell. Over the next two years you withdraw $104 million -- the principal, plus $2 million a year. But if the investments earn, say, 7% a year, what's left over -- nearly $7 million -- passes to your heirs completely free of estate tax. What a deal!
Your heirs will benefit so long as the money earns more than 2% a year. And, Harvey - if you can't earn more than 2% a year on your investments, fire your investment manager.
Give to charity
You could give money to the American Enterprise Institute, where you serve on the board. Or you could even give to the needy. How much does it cost to save a life in Somalia right now? Fifty bucks? So if you cut a check for $5 million you could save the lives of maybe 100,000 children. And that money comes off the top of your estate. Melissa Labant, at the American Institute of CPAs, says this is a particularly good time to make charitable donations. That's because right now the old phase-outs on your income tax deductions have gone. They were eliminated as a result of the Bush tax cuts, and who knows how long this will last? (There are still limits to the amount of your adjusted gross income you can deduct each year.) Harvey, you can make your own choices, but if were 72 and I had $100 million, I couldn't imagine anything better to do with my next $5 million than saving the lives of 100,000 people. How many Ferraris can you drive?
Get some perspective
I hate to talk semantics, but please stop pretending that "you" will have to pay estate taxes. You won't, because they won't kick in until you are dead. Technically your "estate" will pay them -- which actually means that your heirs will. And while you earned this money they didn't. My father's estate, I suspect, was a lot less than your annual income, but we paid hefty estate taxes, and it never occurred to me to complain -- I didn't earn the money, so anything I got was a windfall anyway. Taxes have to come from somewhere: I'd rather pay tax on an inheritance I didn't earn than a salary I did. If your children and grandchildren don't understand that, the most valuable thing you could do for them right now is to pass on some wisdom instead of just money.
Spend the money
If you really don't want to help pay the country's bills after you're dead, why not just enjoy the money now? Spend it! You've seen Brewster's Millions. Go one better! Hire Placido Domingo to walk behind you, singing your praises! Pay Steven Spielberg to make a movie of your life. Go smoke a cigar in Mike Bloomberg's office. Who cares about the fine? Or maybe you could vindicate Marie Antoinette, at long last: Open your own bread factory, and hire staff to hand out free cake to the poor. You earned the money. Enjoy it! And all that spending will help the economy anyway.