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Is Apple A Tax Dodger? What About You?

Introduction:

I have to admit that I am somewhat of a news junkie. I spend a lot of time on various websites checking out what's going on in the world.

Recently, Tim Cook, the CEO of Apple (NASDAQ:AAPL) was called to appear before a Congressional committee to explain why his company is not paying all of the Federal income tax that it should be paying.

Senator Rand Paul was a little vexed by having Cook appear before Congress and he issued the following statement:

'I'm offended by a $4 trillion government bullying, berating and badgering one America's greatest success stories,' the Kentucky Republican told the committee. 'Tell me what Apple has done that is illegal?'

'If anyone should be on trial here, it should be Congress,' he insisted. 'I frankly think the committee should apologize to Apple. I think that the Congress should be on trial here for creating a bizarre and Byzantine tax code that runs into the tens of thousands of pages, for creating a tax code that simple doesn't compete with the rest of the world.'

What You Should Know:

There were a couple of very interesting articles that were published on Seeking Alpha that discussed this hearing and each author gave his own take on this event.

Felix Salmon wrote an article: "Tim Cook's Improbable Victory in Washington" https://seekingalpha.com/article/1453101-tim-cook-s-improbable-victory-in-washington

Califia Beach Pundit wrote: "Thoughts on Tim Cook's Testimony" https://seekingalpha.com/article/1458571-thoughts-on-tim-cook-s-testimony

The response to both articles was very lively and "spirited." I think you might enjoy both articles, if you haven't had the chance to read them.

What I Know:

In the article mentioned above, "Thought On Tim Cook's Testimony," Califia Beach Pundit says:

Apple has amply demonstrated the absurdity of our tax code by borrowing $17 billion to avoid paying taxes twice on money it has earned overseas. Apple is essentially engaging in an arbitrage in which it will pay less than 2% a year in order to avoid paying 35% on any overseas profits it might otherwise repatriate. When such a huge arbitrage exists (otherwise known as a "wedge" to economists) it is a sign of markets and regulatory structures that are seriously dysfunctional and inefficient. This is a compelling argument for reforming our tax code and sharply reducing the corporate tax rate. At the very least, the U.S. corporate tax rate should be no higher than it is in majority of the countries in which our businesses compete, and we should never impose a tax on money that has already been taxed in another jurisdiction.

I guess the question should be: "Did Apple (AAPL) do anything illegal in any of its tax strategies?" I mean, Apple is not unique in using this particular tax strategy to avoid Federal taxes. Many companies are doing exactly the same things that Apple is doing.

What Exactly Is Our Obligation When It Comes To Taxes?

The reality of the situation is summed up in a quote I came across by Judge Learned Hand who wrote in an opinion while he sat on the 2nd Court of Appeals:

"Anyone may arrange his affairs so that his taxes shall be as low as possible; he is not bound to choose that pattern which best pays the Treasury. There is not even a patriotic duty to increase one's taxes. Over and over again, the courts have said that there is nothing sinister in so arranging affairs as to keep taxes as low as possible. Everyone does it, rich and poor alike, and all do right, for nobody owes any public duty to pay more than the law demands."

Let's face it. We have one of the most complicated tax systems in the world. If you spend any time doing your own personal taxes you can understand just how complicated the system is.

The IRS itself acknowledges that Americans spend more than 7.6 billion hours preparing both business and personal taxes and things are so complicated for the average American that 80% of individual tax payers use professional tax preparers or tax software to complete their own taxes.

Our tax code is complicated, confusing, intimidating, and full of provisions that continue the process of making it even more so. Until Congress gets the "political will" to change our tax code, we are stuck with what we have--a real mess.

Conclusion and Summary:

I tend to side with the thoughts of Judge Learned Hand. I believe that each of us should pay the taxes that we owe and not a single penny more. In order to do that, some of us use a CPA, some use a tax preparation company such as Jackson Hewitt etc., others purchase tax software like Turbo Tax.

In doing any of these activities, our goal, if we are honest, is to minimize our taxes using every deduction, exemption, and credit that is available to us. In that way, we hopefully end up paying exactly what we owe and not a penny more.

Some of my favorite tax savings opportunities are:

1. Participating in my company's 401k plan. I can shelter from current taxes up to $17,500 of income if I am under age 50 and for those over 50 the new contibution can be $23000.

2. Participate in a Roth or Traditional IRA if you qualify for those. In either case, the contribution limits are $5500 for those under age 50 and $6000 for those 50 and above. Contributions to a Roth are made with after tax dollars, but earnings in the Roth accumulate tax free while IRA contributions are pre-tax dollars and are a deferral of current tax liability on that money.

3. If you like to trade stocks, it would be better to do it in a tax deferred account, in my opinion. Since withdrawals from the tax deferred accounts will be eventually taxed as "ordinary income" the gains you would have from trading would accelerate the value of the portfolio.

4. As a DG investor, I purchase dividend stocks and tend to hold them. I reinvest dividends and occassionally will pare a holding that becomes overbalanced. While collecting dividends in that account, I am avoiding taxes now, but will pay taxes on withdrawals as ordinary income.

5. For income earners who have a large income, perhaps Municipal bonds (tax free) would make sense. I do not own any municipal bonds as I do not have a large income from work.

While there are many other ways to reduce your current tax liabilities, this article is intended to open discussion with investment programs that are tax friendly.

Take the time to sit down with a good tax professional to see which programs will work for you and to find ways that your current situation might be helpful in reducing taxes in other ways. You could turn a hobby into a business, for example. I have with my cattle business. We started small, but are growing every year. There are many tax provisions that are very favorable to that particular business and many others. Check them out.