WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENNIN’

* Peter J Reilly discusses an interesting issue in his post “Something To Watch Out For If You Have Investment Interest Expense - Possible Refund Opportunity” at FORBES.COM – whether or not to make the election to treat qualified dividends and long-term capital gains as ordinary income for purposes of deducting investment interest.

I very rarely make the election.  Thinking long term, I do not want the client to lose the benefit of the lower tax rate.  But I do always say that when there are options on how to treat an item on the t040 one should do the calculations under all options and carefully review.

Peter provides an example of how an accounting firm (I expect a CPA firm) really FU-ed up a Form 1041 by not thoroughly checking the return that was spat out by a tax preparation software package.  He knows me well, and correctly predicted that I was “gleefully laughing at another comeuppance of an accounting firm” upon reading of the FU.  I continue to scorn “the expensive and unreliable software the rest of us use”.

* Tim Maurer, Pete Reilly’s colleague at FORBES.COM (who writes “about the dynamic and vital intersection of money and life”) gives us “5 Tax Myths Debunked”.

He is basically saying, as I have been saying for years, “don’t let the tax tail wag the dog”.

Or, as I put it on the list of “my best tax advice” - THE FIRST CRITERIA FOR EVALUATING ANY TRANSACTION, STRATEGY OR TECHNIQUE YOU ARE CONSIDERING SHOULD ALWAYS BE FINANCIAL.  TAXES ARE SECOND.

Let us look not at his 5 tax myths, but at his five “bottom lines” -

1. You should never carry a mortgage for the primary purpose of having a tax deduction.

2. You should never hold an investment with the avoidance of taxes as the primary determinant.

3. You should never purchase an investment for the primary reason that it will benefit you from a tax perspective.

4. The amount of a tax refund has absolutely no bearing on whether or not the taxes were optimally computed.  Take full advantage of the tax law and adjust your withholdings so you neither write nor receive a huge check at tax time.

5. Most people would be best served by having a professional Certified Public Accountant prepare their taxes. 

Tim and I are on the same page on the first 4.  I agree with these statements.

However, when it comes to #5 we part company.  Tim makes the same mistake that so many journalists do when it comes to writing about taxes.  They erroneously assume that a CPA is automatically a 1040 expert by virtue of simply possessing the designation.  This is not true. 

A particular CPA may be a 1040 expert, like, for example, Joe Kristan of THE ROTH AND COMPANY TAX UPDATE BLOG.  But it has nothing to do with the fact that the initials CPA follow his/her name.  It is because of the specific education (including continuing), training, and experience of that unique individual. 

The 5th statement should read “You are best served by having a Registered Tax Return Preparer (RTRP) prepare your taxes”.

I do agree with the following statement he makes under this category -

“Your tax preparation software is only as good as the preparer, and don’t forget that our own Secretary of the Treasury, Tim Geithner, couldn’t get TurboTax to work properly!”

Tim (Maurer, not Geithner) also has a post of “5 Tax Rules That Work” – and I fully agree with all 5.

* Continuing the above discussion, the question “Is Your CPA REALLY the Right Person to be Completing Your Tax Return?” is addressed over at the QUICKBOOKS FOR CONTRACTORS blog by Sunburst Software Solutions, Inc.

The post’s bottom line (highlight is mine) -

“This is a problem when people are able to prepare your returns and not be required to keep up with tax law changes, or even tax topics in general, and are held with more esteem in regards to taxing issues then those who spend all their time learning all there is about tax to get you the most accurate return prepared that is possible because they have spent the time learning tax law updates along with tax topics. Not to mention they are required to have CPE in tax law and tax law updates.”

Right on!

* Darren Mish elaborates on “Three Cardinal Rules for Your Taxes” at his IRS PROBLEM SOLVER BLOG – “three simple rules to follow to avoid problems with the IRS”.   

They are -

“1. Always separate your business from personal expenses.

2. Always keep up-to-date records.

3. Check all 1099s.”

Three excellent rules indeed.

* MISSOURI TAXGUY Bruce MacFarland gives some good tips on how to “Get the Better of Your Mortgage”.

* The IRS has a brief YouTube video that introduces you to a #tax law change that affects employers who hire #veterans in 2011 and 2012.  Click here.

TTFN

WHERE THE FAKAWI?

Sorry for the lack of non-BUZZ posts these past weeks – but I have been busy learning QuickBooks (via a 2-day class) and setting up my own and various client companies on the system, dealing with client and IRS/NJDOT correspondence, and trying to catch up on other non-GDE tax stuff.

 

This week-end (Friday thru Sunday) I will be working away on the NJ Property Tax Reimbursement applications (even though the June 1^st deadline is always extended each year, I do not want to rely on the State of New Jersey being consistent) and work on the GD extensions for which I have all the necessary information to complete (I want all such GDEs completed and in the mail by the end of May). 

 

Monday I will take time off to watch the 12-hour PERRY MASON marathon on the HALLMARK MOVIE CHANNEL.

 

So again – no time for posting.

 

During the last days of May I will be posting a series of “summer-reruns” of summer-related posts, with updates as appropriate.

 

The Memorial Day week-end has always been the “official” start of summer.  One would rent a summer house or cabin from Memorial Day through Labor Day (as I did with high school and college friends for several years in the mid-1970s – each year the house getting bigger).  And television’s summer rerun season is already in its second or third week.

 

I will continue to post the twice-weekly BUZZ.

 

TTFN

WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENNIN’ – WEDNESDAY EDITION

* Russ Fox has a good warning for small business owners in “CPA Allegedly Practices Theft of Funds” at TAXABLE TALK.

The post discusses two CPAs who had clients make payments for federal and state tax liabilities directly to themselves, with the assumption that they would submit the payments to the appropriate tax agency.  Instead they just kept the money.

Russ tells us –

“I haven’t met an accountant who would want you to make checks for your taxes payable to the accountant. If that’s what your accountant wants, be afraid.”

He also points out –

“Finally, I’d like to point out that Mr. Voltz, like Mr. Murray before him, is a CPA. He presumably has taken his ethics requirements. That hasn’t stopped him from being accused of what anyone would call a serious violation.”

While Russ is saying that registration/licensing of tax preparers will not stop tax fraud, with which I agree, my take is that forcing all preparers to sit through 2 hours of ethics classes each and every year will not turn a crooked preparer honest.

* Russ also warns us “Beware: Lots of Incorrect IRS Notices”.

He tells it like it is (highlights are mine) -

“Many IRS notices are wrong. Indeed, of the CP2000 notices I’ve seen this year at least 80% are wrong. Yet I have clients who just want to pay the IRS to get them off their backs. I cannot overemphasize that most IRS notices are not reviewed by a human before they’re sent to you. You will be the first person to read the notice. Do not assume a notice is correct just because the IRS says so.”

This is nothing new – I have been saying for years that more than half (I was being conservative) of IRS notices are wrong.  And when it comes to state tax notices, especially NJ, the percentage is higher.

* The title of this IRS release says it all – “IRS Announces More Flexible Offer-in-Compromise Terms to Help a Greater Number of Struggling Taxpayers Make a Fresh Start”.

This is the program under which certain “tax resolution” companies advertise you can settle your IRS debt for “pennies on the dollar”.  It ain’t necessarily so.  However a reputable tax pro can use an Offer In Compromise to reduce your tax debt.

* Another self-explanatory IRS release title – “IRS Releases the Dirty Dozen Tax Scams for 2012”.

“The Dirty Dozen listing, compiled by the IRS each year, lists a variety of common scams taxpayers can encounter at any point during the year. But many of these schemes peak during filing season as people prepare their tax returns.”

* Over at the CHICAGO TRIBUNE Steve Rosen provides us with “Kids and Money: A Primer on Tax Deductions”, which discusses “some of the importantissues that summer workers and parents need to know”.

TTFN

WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENNIN’

* Prof Annette Nellen provides us with a sign of hope in “Congressman Camp Seeking Comprehensive Tax Reform” at 21^st CENTURY TAXATION.

She quotes from a recent speech by House Ways & Means Committee Chairman Dave Camp of Michigan –

"If we are to unlock new opportunities for job creation and strengthen the economy, then we must take even larger steps toward comprehensive tax reform.  At the Ways and Means Committee, we have established a framework for comprehensive reform that brings the corporate and the individual rate in line at a top rate of 25 percent on both sides."

Camp wants to “Collapse the six rates on the individual side to two rates of 10 and 25 percent” and “Eliminate the AMT, which should have been named the ‘alternative maximum tax’”.

* Trish McIntire of OUR TAXING TIMES warns us of a new “Energy Scam” – and gives some excellent advice -

“Bottom line, any time you hear of a government program giving you a credit, talk to a tax pro. If it’s legitimate, we should know.”

* Jason Dinesen answers the question “You Hired A Nanny – Now What?” at the DINESEN TAX TIMES. 

Must reading for anyone who has just done so – especially if you want to run for office or be appointed to the Supreme Court or as a cabinet official in the future.  

* Paul Neffer reminds us to “Make Sure You Get Written Confirmation of Donation!” at FARM CPA TODAY.

* And TaxGirl Kelly Phillips Erb reminds us that “National Ride Your Bike to Work Day Offers Chance to Lower Tax Bill” at FORBES.COM.

“Under the Tax Code, your employer can provide to you – tax free – a de minimis transportation benefit. . . . One of those de minimis transportation benefits is the qualified bicycle commuting reimbursement.”  

TTFN

WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENNIN’ – WEDNESDAY EDITION

* At the invitation of blog author Peter J Reilly I provided my 2+ cents on his earlier post “Divorce Lawyers - Frequently Not the Best Tax Advisors” with a guest post titled “Wandering Tax Pro On The Tax Aspects of Divorce”.

* Kay Bell reports on a recent analysis by Thumbtack.com that tells us “Friendliest States for Small Businesses? Idaho,Texas, Oklahoma and Utah” over at DON’T MESS WITH TAXES.

“Small businesses are made the most welcome in Idaho, Texas, Oklahoma and Utah, according to a recent analysis by Thumbtack.com, in partnership with the Ewing Marion Kauffman Foundation.

Those four states each got an A+ grade from small business owners and managers.

Disappointing report cards went to California, Hawaii, Vermont and Rhode Island, each of which received an F.

New York eked out a D.”

For a change NJ was not last on the list, although “small businesses rank New Jersey among the top ten least friendly states for small business”. It got a grade of D+, which is better than NY!  Perhaps Chris Christie is making some progress.

* And Kay also tells us “Tax Refunds Smaller in 2012”.

This is actually misleading.  I believe the main reason for the reduced refunds is the disappearance of BO’s Making Work Pay credit, which was replaced for 2011 (and 2012) returns by the 2% reduction in employee Social Security withholding, and the mess it made of withholding. 

When taking the 2% reduction into consideration taxpayers actually put more money “in pocket”.  I found that many of my clients got twice as much or more via the reduction – and some taxpayers who did not get the credit due to level of income got $4,000+ “in pocket” via the reduction!

I posted on this topic on Tuesday at my THE TAX PROFESSIONAL blog.

* Trish McIntire provides a good overview of “Limited Parnerships” at OUR TAXING TIMES.  She ends the post with some good advice (highlight is mine) –

“Limited partnerships are not for most investors. They are tax complicated and too often the broker selling them really doesn’t understand what they’re selling. It’s easy to get drawn in by the guaranteed distribution and assume that your investment is increasing in value when it’s actually decreasing because you’re just getting your money back.

Investor Beware!”

Regular visitors to TWTP know that I hate Limited Partnerships because waiting for the K-1 often delays the return, and carrying the various K-1 items over to the various schedules and forms of the1040 is often a real PITA for the tax preparer. 

* Bruce, the MISSOURI TAX GUY, provides a “Blog Guide for New Small Business Owners”.

While you are there you should visit his Store.

* Prof James Maule discussed the new book “Tax Cheating: Illegal – But Is It Immoral?” by Donald Morris in his post “Tax Cheating and Tax Complexity” at MAULED AGAIN.

Jim once again eloquently describes the trouble with our current Tax Code (highlight is mine) -

“There is no doubt, as Morris and many others assert, that the tax law is woefully complicated. There is no doubt it ought not be so complicated and need not be so complicated, and that at least some of the complexity is attributable to the campaign and other political games played by the legislators entrusted with the fiduciary duty of providing the nation with the best possible tax law. There also is not doubt that the pervasive complexity of the tax law causes taxpayers to make mistakes, even when they are putting forth their best efforts to comply.”

* Mary Beth Franklin provides some good advice in “Retirement: Avoid the IRA Tax Trap” at CHICAGO TRIBUNE BUSINESS.

She correctly points out that “when it comes to taxes, not all income sources are created equal” and joins many financial advisers in recommending “you diversify the taxability of retirement assets by spreading them among taxable, tax-deferred and tax-free accounts to manage cash flow during retirement”.

* If you suffer from BUZZ withdrawal between the Wednesday and Saturday entries there is always Joe Kristan’s “Tax Roundups” over at THE ROTH AND COMPANY TAX UPDATE BLOG.

THE LAST WORD:

Monday night Jay Leno told us about a study that indicates talking about oneself can provide as much pleasure as eating or sex.

In related news it was announced that Donald Trump is the happiest man on Earth.

TTFN

THE GAY DIVORCEE

Thanks to BO’s recent “endorsement” of same-sex marriage the internet is a-BUZZ with the topic.  This includes the “tax blogosphere”.

 

A few of my fellow tax-bloggers cover the tax aspects of same-sex marriage extensively.

 

Peter J Reilly, author of the blog “Passive Activities” for FORBES.COM (where I have been a frequent guest-poster), writes frequently on the topic.  Click here for his latest gay-marriage post.

 

Also Enrolled Agent Jason Dinesen, who writes “Dinesen Tax Times”.  Jason posts every Monday about gay marriage and taxes.  Click here for his latest related post.

 

Currently the federal government, and the IRS, does not recognize same-sex marriages, as per the Defense of Marriage Act.  From an income tax point of view I expect most same-sex couples would not be better off if they were offered the same filing options as “traditional” married couples.  However there would be potential for substantial benefit when it comes to the federal estate tax.

 

I have very few clients who I either know, or suspect, are a gay couple.  Only one couple would benefit from being able to file tax returns as married.  With the others, both partners are employed and would probably pay more tax, thanks to the “marriage penalty”, by having to file as married taxpayers.

 

In states that recognize same-sex marriages, and permit gay couples to file as married, the fact that these taxpayers cannot file the same way federally causes extra work for the tax preparer, but also generates corresponding additional income.  I have not yet had to deal with this situation in my practice.

I am not opposed to the legal recognition of gay marriage on the federal or state level.  I am also not an active advocate.  I would not campaign against the issue, nor would I campaign for passage of supportive legislation.  If it happens I would be fine with it - but it is not a priority issue for me. 

 

I expect that I would leave the issue to the individual states, and would allow same-sex couples whose tax home is in a state that recognizes the marriage to file federal returns as married couples.         

 

TTFN

BULL TIT

This past tax season has once again proven that IRS information return 1098-T, which is supposed to provide information for claiming the various education tax benefits, is as useful as tits on a bull.

Box 1 of the 1098-T is for payments received “from any source” for qualified tuition and related expenses.  This is the information I need.  However in the years that this form has been in use I have only seen an entry in this box once – and it was incorrect.  It showed only the payments received directly from the student (actually the student’s parents).

Box 2 is for amounts billed for qualified tuition and related expenses.  This is the box that is always filled in.  To be honest, I don’t care a rat’s hind quarters how much was “billed”.  My clients are cash-basis taxpayers – I need to know what was paid during the calendar year, not what was billed.

Colleges will generally bill students for the semester beginning in January of the following year at the end of the current year.  So the amount in Box 2 usually includes this amount.  But parents or students do not always pay this amount until the following year.

In my instructions to clients I ask for not only the Form 1098-T, but also “all the ‘Bursar’s Reports’ for the year”.  Often a student can access his/her financial account history online, and I ask parents to provide me with a print-out of this report.

Thankfully some colleges and universities will provide a supplement to the Form 1098-T mailing that itemizes the various charges and payments made for the year by date, which is extremely helpful.  But unfortunately not all.

This past tax season I received a Form 1098-T for a student who had graduated in 2011.  Box 1 and Box 2 were both empty, but there was an amount for scholarships and grants in Box 5.  Upon questioning the taxpayer I discovered that there were indeed payments made for qualified tuition and fees in calendar year 2011.  These payments had been billed in 2010, and were included in Box 2 of the 2010 Form 1098-T. 

I further learned that the student did not receive any scholarships or grants from anyone in 2010 or 2011.  The amount reported by the school in Box 5 was a payment for tuition and fees made via a student loan.  The school really FU-ed – the amount reported in Box 5 should have been reported in Box 1!  As a result I was able to claim one of the tuition tax benefits.  If I had relied on the Form 1098-T I would have claimed nothing.

If the IRS is going to have a Form 1098-T with a Box 1 asking for payments made from all sources for the calendar year then it should require educational institutions issuing the form to include an entry in Box 1.  Why have this box on the form if it is not required to be used?  And, based on the above experience, perhaps the schools should be required to identify the amounts reported in Box 5 by source somewhere on the return.  

Of course I do believe that there should be no tuition tax benefits on the Form 1040.  These benefits should be distributed as direct student financial aid and administered via the FAFSA.

Thank you for allowing me to rant.  Do other tax preparers feel as I do about the Form 1098-T?

TTFN