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The Worst Celebrity Tax Problems

This article was written by Flexo in Taxes. 10 comments.

It’s with a tinge of schadenfreude that people are fascinated with the failures and foibles of famous celebrities. Every year, the IRS chases people who evade or underpay federal income tax, and actors and popular figures in the media, who often don’t manage their own finances, make the news.

The latest is Lindsay Lohan. You may remember her from such films as Mean Girls, Freaky Friday, and Herbie Fully Loaded. TMZ has discovered that the IRS has obtained against Lindsay for almost $100,000, representing tax she didn’t pay for her income in 2009. Like many busy people, Lindsay employs an accountant to handle her finances, and she says the oversight will be handled immediately.

Lindsay Lohan The sum Lindsay owes is small compared to the problems other celebrities have had with the IRS.

Wesley Snipes failed to pay up to $17 million to the IRS for his income taxes, not including penalties and interest. After his trial and a failed appeal, he was sentenced to prison for three years.

Nicolas Cage also blamed his accountant for his failure to pay a $14 million tax bill in 2010; even more recently, Nic failed to pay over $600,000 for a gift tax.

Pamela Anderson owed $2 million to the IRS and to the state of California.

Annie Leibovitz isn’t a movie star, but she is at the top of the list of famous modern photographers. She owed $2.1 million in back taxes, and pledged to sell her ownership of her photography to pay the bills.

Martha Stewart owed $220,000 to New York for taxes, but she believed she didn’t need to pay this tax because she didn’t spend time in that state.

Celebrities often have tax situations that differ from people who aren’t performers or professional athletes. They need to handle state tax returns for every state in which they’ve earned income each year, just like all taxpayers, but in any given year, performers may have earned income in a large number of states. Celebrities will almost always be too busy to handle their own tax returns, so they trust accountants to handle the paperwork and the payments.

On the other hand, it’s safe to say that some famous individual who owe the government money for failure to pay their tax bills are aware of the situation and are trying to skirt the law as much as possible, until they are forced to pay.

Photo: Rafael Amado Deras
TMZ via Don’t Mess With Taxes, New York Times, UPI, Back Taxes Help

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Don’t Take Out a Loan From Your 401(k)

This article was written by Flexo in Best Of, Debt Reduction, Investing. 43 comments.

As a very last resort, employees with active 401(k) retirement accounts have an option to take out a loan against their future. Borrowing money is never a good position to be in, but if you’re borrowing money from yourself, you ease the pain. 401(k) plans permit borrowing at interest, and paying interest to yourself can help improve your finances in retirement.

The existence of a 401(k) account is often used as an excuse for not creating an emergency fund; if a loan is available at any time, why settle for low high-yield savings accounts when your money could be put to better use? This isn’t a valid argument as elucidated by the dangerous drawbacks of 401(k) loans.

Most people who take out 401(k) loans stop contributing new earnings to their 401(k) plans. Not only is the withdrawn loan not earning more or increasing value in your retirement account, you’re not adding new investments.

One of the most popular emergencies requiring more cash is the loss of a job. If you lose your job, you won’t be able to take a loan from your 401(k). Additionally, if you already have a 401(k) loan when you lose your job, it will be due within 60 days or less. At the same time you need cash, you’ll need to pay back your loan or suffer income taxes plus a 10% penalty. According to a recent study by Aon Consulting, 70 percent of workers who lose their jobs while having an active 401(k) loan default on that loan (pdf).

Even if the 401(k) loan is paid back in full, there’s another drawback. The interest on the loan is considered income, and therefore taxed, twice. When you pay interest back to the 401(k) account, it is paid with your regular income, which would be included on your tax return as taxable income. Once that interest is in your 401(k) account, it is mixed in with the before-tax contributions, if your loan was from the before-tax portion of your 401(k). When you retire and you withdraw your funds, the full amount of your before-tax contributions and their earnings will be subject to income tax. You could also argue that the principal portion of the loan payback amounts are taxed twice as well, because a 401(k) loan payback is not considered tax-advantaged and does not reduce your taxable income like a 401(k) contribution.

Congress is currently mulling legislation to limit 401(k) loans. If the law passes as it currently stands in bill form, employees could only take three loans against their 401(k) at a time. Repeated borrowing just sounds like trouble. The law would allow employees to continue contributing to 401(k)s while a loan is outstanding. I would think if any extra money is available, it would be better served paying off the loan rather than making new investments. I suppose it could be more tax efficient this way, but paying off debt should be a priority, even if the borrower is the same individual as the lender. Third, the law would ban 401(k) accounts from issuing debit cards that allow investors to use retirement funds as a transaction account. This sounds reasonable.

Some 401(k) plans might be more restrictive than the law. In most cases, borrowing from a 401(k) is just a bad idea. It’s tempting in emergencies, though, particularly for households that have not been able to create an emergency fund. A 401(k) loan should be a last resort. If you get stuck and are unable to pay the loan, the government takes a big chunk. On a $10,000 loan, assuming 25% federal taxes, 5% state taxes, and a 10% penalty, you’ll only be able to keep $6,000.

Have you or would you borrow from your own 401(k)?

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General Motors Paid Back Bailout Loans in Full

This article was written by Flexo in Consumer. 24 comments.

Earlier today, General Motors announced that the company paid $4.7 billion to the U.S. government and $1.1 billion to the Canadian government, fulfilling its obligation agreed to when it received its initial bailout funds. In total, GM received $52 billion from the U.S. government, but only $6.7 billion of this amount was considered a loan. The company already paid back $2 billion, so this $4.7 billion is the last payment.

This doesn’t mean that “Government Motors” is no more. Despite the payback, the government still owns a controlling portion of the restructured GM. The United States will eventually relinquish its ownership, but this will take some time. Even when the new GM completes its initial public offering, the U.S. government will still be an owner for some time.

The CEO of the new GM, Ed Whitacre, wrote an opinion piece for the Wall Street Journal praising his company and its success since bankruptcy, including a feeling of “renewed energy and commitment” and advertisements for more fuel-efficient vehicles, despite losing $4.3 billion in the second half of 2009.

The auto industry may not have fully recovered, but we now be able to realistically consider the auto industry bailout in general. We still may not know exactly what would have happened if the auto industry was allowed to implode, but it would have probably involved significant unemployment and a major redefinition of the global auto industry.

Has temporary government intervention proven to be helpful, or even industry-saving, to General Motors and the other companies receiving public assistance? Should the market have been allowed to reshape itself?

Photo: skiingutah

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Getting Paid Back for a College Education: 15 Top Schools

This article was written by Flexo in Education. 5 comments.

If the only value of higher education is the money you earn throughout your lifetime with your college degree, then SmartMoney’s recent study might help you decide where to matriculate. Ivy League schools don’t pay off as much as one might expect. The magazine surveyed the annual salaries earned by graduates of 50 of the most expensive four-year schools, three years and fifteen years after graduation. The data were used to determine a “payback ratio.” You can compare payback ratios of different schools to get an idea of whether and how fast the cost of tuition will pay off in terms of income earned.

Here is what SmartMoney has to say about this survey’s approach:

Ultimately, we weren’t trying to measure the quality of education or colleges’ selectivity. Other rankings take ample care of that, and dedicated students will thrive at any of these fine schools. But with boutique private colleges coming under heavy criticism for spiraling costs, our payback numbers certainly raise questions about the actual “return” on an educational investment.

“Return” is more than the financial benefits you receive from an education, and putting that aside to look just at the dollars creates an interesting comparison. But this shouldn’t be the only factor or the deciding factor when choosing a college. There is a tendency for business-minded folk to measure everything through “ROI” (return on investment) or to look purely at numbers through a “cost/benefit analysis.” Decisions based on pure financial anlysis don’t necessarily result in happiness or satisfaction with long-term goals.

Here are the top 5 public schools, liberal arts schools, and Ivy League schools based on SmartMoney’s “payback ratio.”

Top 5 public schools

University of Georgia: 338%
Texas A&M: 315%
University of Texas, Austin: 306%
Georgia Tech: 263%
University of Washington: 225%

Top 5 liberal arts schools

Washington and Lee: 145%
University of Richmond: 130%
Lafayette College: 115%
College of the Holy Cross: 114%
Bucknell College: 114%

Top 5 Ivy League schools

Princeton: 132%
Dartmouth College: 131%
Yale University: 127%
Harvard University: 124%
University of Pennsylvania: 124%

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Want to Make $450,000 a Year? Become a Portfolio Manager

by Sasha

When we last met, I was crowing about having paid off $52,050.74 in student loan principal. I’m still mighty proud of that particular achievement, but this morning, an article from Ignites, an electronic publication available to corporate subscribers only, crossed my path and completely changed my perspective. The article? Average Portfolio Manager Pay Tops $450K. ... Continue reading this article…

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Student Loan Consolidation: The Countdown Begins

by Flexo

As I mentioned last week, it’s time to consolidate your student loans. The U.S. News & World Report has a timely article about conslidation as a way of cutting back your costs. Student loans are basically a way of life for many college graduates. Lately, the interest rates have been so low it’s practically free ... Continue reading this article…

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