Friday, August 28, 2015

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


It’s about time – a meaty BUZZ!


At the company's instigation, the Senate Appropriations Committee has passed a funding bill covering the IRS whose accompanying report instructs the agency to at least quadruple the length of the form that taxpayers fill out to get the Earned Income Tax Credit.”

Of course, IMHO the Earned Income Tax Credit does not belong on the 1040. 
 
And, also IMHO, nobody should ever use Henry and Richard to prepare their tax returns.

* TaxGirl Kelly Phillips Erb does a good service when she explains “As Stocks Tumble, Understanding When A Loss Isn't Really A Loss” at FORBES.COM.

Over the years, when the stock market “corrects”, clients and friends have told me things like “I lost $100,000 today!”.  But did they really?  If the value of their portfolio was $500,000 before a correction, and is $400,000 after the correction, but they actually paid $300,000 to purchase the stock in their portfolio, or contributed $300,000 to the pension plan, they have not lost a penny.  They are still ahead $100,000!

* Attention Tax Professionals - here is a great tool for use in your practice.  Click here for more information.    
 
* Tax Guy Bill Bischoff from MARKET WATCH tells us “Inherited a Retirement Account? Don’t Ignore This Tax-Smart Option”.    

* Jason Dinesen asks, and answers, the question “Does a Sole Proprietorship Need a Balance Sheet?” at DINESEN TAX TIMES.

Jason thinks not.  While I agree that it is not required, I do believe it “couldn’t hurt” and is actually a good practice.  See my comment to Jason’s post.


I certainly agree with Jason when he advises small business owners to “know what you’re getting into before you hire employees”.

* Ellen Chang provides some suggestions on “How to Catch Up on Retirement Savings” at THE STREET.

* Bill Perez answers the question “What to Do if You Contributed Too Much to Your Roth IRA” at ABOUT.COM -

Sometimes, people contribute too much savings to their Roth IRA. There are four ways to fix this problem that are all pretty straightforward. Just pick the solution that works best for your goals.”

* Bill’s colleague at ABOUT.COM Dr. Jean Murray beings us “The Naked Truth about Being Self-Employed”.

I am self-employed.  I work out of a home office.  And I often work at my desk naked!

* The TURBO TAX blog celebrated Thursday with “Happy National Dog Day! How Finding Your New Best Friend Can Save You Money”.

I discussed in detail the tax deduction for fostering a service dog in my 2009 post “Doggie Deductions”.

FYI, National Cat Day is Thursday, October 29.

* After a bit of a hiatus we welcome Trish McIntire of OUR TAXING TIMES back to posting. 

She brings us “Back to School”, which provides a good list of what records you should keep to document education expenses for the variety of education tax benefits, and tells us about the “Kansas Tax Amnesty 2015”.

Welcome back to Trish!

* The BOTZ, DEAL & COMPANY, P.C. blog has some good advice on how to Protect Elderly Parents Against Fraud”.

* I’m glad I got out when I did!  NJ.COM gives us the word that “Jersey City Among Worst Places in America to Retire: Report” –

Finance website WalletHub's recent survey of the 150 largest cities in the U.S. found Jersey City and Newark to be the two worst cities to retire in America.  The report took into consideration each city's affordability, the availability of senior activities, quality of life (including crime rates and weather) and healthcare.

Coming in at No. 149 overall, Jersey City barely edged out Newark by ranking 141st in affordability, 140th in activities, 108th in quality of life and 149th in healthcare.

THE LAST WORD –

In an unscientific test of morals, Honest Tea went to the 27 largest cities across the country and set up stands, selling tea for $1. People were supposed to put a dollar in a box and take a bottle of tea, all on an honor system.

Atlanta was the most honest city – with 100% of those taking a bottle paying the $1.00.

Guess which city was the only one where people actually took money from the box.  Washington DC!  No surprise here. 

DC was not, however, the least honest city.  That distinction goes to Providence, Rhode Island.

Honest Tea had done the same experiment in 2013 – and then Washington was the least honest.  One poor soul in DC had his bike stolen while he stopped to take a bottle (and put in a dollar).

Perhaps Washington DC would have done better if the experiment had been conducted when Congress was in recess.

TTFN

Thursday, August 27, 2015

WHAT DEDUCTIONS WOULD YOU KEEP?


My fellow tax blogger Kelly Phillips Erb – FORBES.COM’s TaxGirl, has a regular feature called “Fix the Tax Code Friday”.  She poses a tax question that concerns a problem with the current mucking fess that is out Tax Code and calls for comments from her readers.

A recent question was -

If we scrapped all of the deductions under the Tax Code except one, which one would you want to hold onto?

My answer -

I would keep many of the current deductions, although none of the current credits (FYI – click here for my series of TWTP posts on how I would rewrite the Tax Code).  Specifically I support keeping the deduction for state and local income taxes, and real estate taxes and “acquisition debt” mortgage interest on a principal personal residence (owner-occupied housing).  But my reason is not to encourage home ownership. 

Here is how I explained my reasoning in a post at THE WANDERING TAX PRO back in 2013 -

The Internal Revenue Code taxes Americans based on income measured in pure dollars. However it is a fact that the “value” of one’s level of income differs, sometimes greatly, based on one’s geographical location. A family living in the northeast or California that has an income of $100,000-200,000 (apparently considered “upper-income taxpayers”) may be just getting by, while a similar family that resides in “middle America” lives like royalty on the same level of income. Many components of the Tax Code are indexed for inflation, but nothing is indexed for geography. To be honest I have no idea how one would even begin to index for geography.

It costs an awful lot to live in, for example, New York, certainly New Jersey, Connecticut, Massachusetts, and California. State and local income and property taxes are the highest in the country. The cost of real estate is also excessively high. As a result one must earn a lot more money to be able to live in these states – and salaries are arbitrarily increased to reflect the increased cost of living. Yet $150,000 in income is taxed by the federal government at the same rate in New York City as it is in Hope, Arkansas.

Real estate and state and local income taxes and the cost of a home, and therefore also the amount of “acquisition debt” mortgage interest paid on a residence, are higher in the Northeast, and California. Since we pay taxes on “net income” after deductions, allowing an itemized deduction for these items would help to somewhat geographically “equalize” the tax burden.

I do believe that the itemized deduction for real estate taxes and mortgage interest on secondary personal residences and the itemized deduction for “home equity” mortgage interest (not used for “substantial” home improvement) should be eliminated.

I have two questions for my readers (especially the tax professionals)  

First – how would you answer Kelly’s “Fix the Tax Code Friday” question?

And second – what do you think about my suggestion, and the issue of “geographical equalization” in general?

TTFN

Tuesday, August 25, 2015

TRY TO REMEMBER . . .


The summer is almost over – and year-end tax planning time will soon be here.

Just thought I would provide some 1040-related reminders –

MORTGAGE INTEREST

Basically there are two types of mortgage debt –

1) Acquisition debt - debt acquired after October 13, 1987, that was used to buy, build, or substantially improve a main residence or a qualified second home. A “substantial improvement” is one that adds value to the home, prolongs the home’s useful life, or adapts the home to new uses.  And

2) Home equity debt – debt acquired after October 13, 1987, that is secured by a main residence or a qualified second home that is not used to buy, build, or substantially improve the property.  There is no restriction or limitation on what the money can be used for; you can use it to buy a car, to pay for college, or to pay down credit card balances. 

You can deduct interest on acquisition debt principal of up to $1 Million.  But you can only deduct interest on home equity debt principal of up to $100,000.  When you refinance a mortgage, or consolidate mortgage debts, any closing costs that are added to the principal of the loan are considered to be home equity debt.

It is very important that you keep good records of their separate acquisition debt and home equity debt so that the correct amount of mortgage interest is claimed on Schedule A. 

ALTERNATIVE MINIMUM TAX

Speaking of home equity interest - in calculating the dreaded Alternative Minimum Tax (AMT) only interest on acquisition debt – mortgage loan proceeds used to buy, build, or substantially improve a primary and one secondary residence - is deductible.  Interest on home equity debt is not deductible. 

It is very important that you keep good records of their separate acquisition debt and home equity debt so that the correct amount of mortgage interest is claimed on Form 6251. 

{FYI - my “Mortgage Interest Guide” - available from my DOLLAR STORE - includes worksheets, with complete instructions and detailed examples, for keeping track of acquisition debt and home equity debt.}

ADDITIONAL STATE TAX DEDUCTION

You can deduct mandatory employee contributions to a state unemployment (SUI), disability (SDI), and/or family leave fund (FLI) which are withheld from your paycheck, as is the practice in Alaska, California, New Jersey, New York, Pennsylvania, Rhode Island, and Washington, as state income tax on Schedule A. 

The amount of the withholding is usually reported on your W-2 in Box 14.  If not you can find the amount on your year-end cumulative paystub.

I deduct these withholdings as “other tax” on Line 8 of Schedule A to separately identify them.

If you elect to deduct state and local sales tax instead of state and local income tax you cannot deduct these withholdings.

CHARITABLE CONTRIBUTIONS

If the total amount donated to a church or charity is more than $250.00 you must have a “contemporaneous” written acknowledgement from the organization with its name and address, the date of the contribution, and the amount donated.   

To be able to claim a deduction for the full amount of your contribution the acknowledgement must state “No goods or services were provided in exchange for the donation.  It is very important that this statement is included on your receipt or acknowledgement.  And the receipt or acknowledgement must be received from the church or charity before the earlier of the date the original tax return is filed or the extended due date of the tax return.

{FYI – my DOLLAR STORE also has a “Charitable Contributions Guide” with worksheets.  Order any 2 guides from the Dollar Store by September 15th and receive “Surfing USA” free!}

BUSINESS TRAVEL

If you use your car for business you must keep “contemporaneous” records of your business mileage. This means that you should record the information on the day the trip occurs.  Record each individual business trip separately. Enter the date, location, business purpose and miles driven for each trip in some kind of diary, account book, or expense log. If you do not have EZ Pass you should also note any toll expenses. If you do have EZ Pass, you can identify tolls for business trips on the monthly statement.

I use a pocket date book as my travel log.  I also enter in my travel log the quarter I put in the parking meter while visiting a client.

{You guessed it – the DOLLAR STORE also has a “Business Expense Guide”.}

TTFN

Monday, August 24, 2015

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’ – SPECIAL MONDAY EDITION


Since there was no BUZZ installment last Friday I am a day early this week.  Still not much BUZZ to report.

* Tax pros – have you seen the new post at THE TAX PROFESSIONAL yet?  PLEASE do – and tell your colleagues about it.  

* And, tax pros, here is a great tool for use in your practice.  Click here for more information.    

* Have you ever wondered “Why is Self-Employment Tax Based on 92.35% of Self-Employment Income?  Jason Dinesen explains at DINESEN TAX TIMES.  

* Check out the AFFORDABLE COLLEGES ONLINE online "Guide to College Savings and 529 Plans".

Doug Jones from the site tells us –

Only about 48 percent of parents are saving to pay for their children's tuition, but we believe that number can (and should) increase significantly. With the help of two leading college savings experts, we created this guide to help parents and students better understand 529 plans and other college savings strategies. Key elements of the guide include:

 - An in-depth look at what 529 plans are and how they work,
 - An extensive comparison of 529 and other savings plans,
 - A list of savings tips and tricks from the experts.”

* Here is the word on the Homestead Benefit (formerly the Homestead Rebate) from the New Jersey Division of Taxation -

The Division of Taxation has begun mailing applications for the 2013 Homestead Benefit.  Applications are being mailed to homeowners over the next three weeks according to the schedule below. The deadline for filing is Friday, Oct. 30, 2015.

The Homestead Benefit application delivery dates by county are:

Gloucester, Mercer, Middlesex, Passaic - Aug. 25
Camden, Hudson, Hunterdon, Salem, Somerset - Aug. 28
Bergen, Burlington, Cumberland, Warren - Aug. 31
Morris, Ocean - Sept. 3
Atlantic, Essex, Monmouth, Sussex - Sept. 5
Cape May, Union - Sept. 9

Most homeowners will receive their 2013 benefit payment as a credit on a future property tax bill. They can expect to receive a property tax bill or advice copy from their tax collector reflecting the amount of the benefit.  Homeowners who indicated when filing that they no longer own the property or those whose principal residence was a unit in a co-op or continuing care retirement community will receive their benefit by check (or direct deposit).”

THE LAST WORD -

The circus that is the Trump Presidential campaign reminds me of a number from the musical CHICAGO – “Give em the Old Razzle Dazzle”.

Billy Flynn tells Roxie Hart –

It's all a circus, kid. A three ring circus.  These trials- the whole world- all show business.”

In the song that follows Billy goes on to say –

What if your hinges all are rusting?  What if, in fact, you're just disgusting?  Razzle dazzle 'em and they'll never catch wise!

And –

Long as you keep 'em way off balance, how can they spot you've got no talents?  Razzle Dazzle 'em.”

Disgusting.  No talents.  That sounds like Trump to me.

TTFN

Wednesday, August 19, 2015

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


A day late – but not necessarily a dollar short.   

* There is still time to take my TAX PROFESSIONAL SURVEY at THE TAX PROFESIONAL.  A new post will be up later this morning.

* How would you answer Kelly Phillips Erb’s (aka FORBES.COM’s TaxGirl) “Fix the Tax Code Friday” question from last week -

If we scrapped all of the deductions under the Tax Code except one, which one would you want to hold onto?

Actually this question will serve as the basis for my new post at THE TAX PROFESSIONAL.

* Want to know “How High Are Property Taxes in Your State?  Check out the map from the TAX FOUNDATION.

It is no surprise to anyone who lives, or lived, in the “Garden State” that it is #1 on the list.  New Jersey has the highest effective rate at 2.38%”.  NJ is “followed closely by Illinois (2.32%), New Hampshire (2.15%), and Connecticut (1.98%)”.   

The item also points out that New Jersey “impose{s} high property taxes alongside high rates in the other major tax categories.”

Hawaii has the lowest effective rate at 0.28%, and is followed closely by Alabama (0.43%), Louisiana (0.51%), and Delaware (0.55%).”

My new home state of Pennsylvania is #13 on the list.

* Oi vey!  An “Extra 220,000 Hit by IRS ‘Get Transcript Breach’” Daniel Hood from ACCOUNTING TODAY tells us.

* THUMBTACK has released the results of its “2015 Small Business Friendliness Survey” – a report card on such components as –

§  Overall friendliness
§  Ease of starting a business
§  Ease of hiring
§  Regulations
§  Health & safety
§  Employment, labor & hiring
§  Tax code
§  Licensing
§  Environmental
§  Zoning

How did your state do?

* Can you get a “Tax Deduction with No Cash Outlay?  Barbara Weltman says yes at BARBARA’S BLOG.  She explains –

But under a special rule called domestic production activities deduction (DPAD), you can deduct 9% of your qualified domestic production activities income (after taking into account certain allocable costs).

This write-off is also called the Sec. 199 deduction and it’s on top of deductions you’ve already taken to generate the income. In effect, you get to double dip in tax breaks.”

* Let me leave you with “10 Facts You Need to Know About Required Minimum Distributions” from Sarah Brenner at THE SLOTT REPORT.

TTFN

Friday, August 14, 2015

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


* From the NJ Division of Taxation summer newsletter -

"The following jurisdictions are conducting tax amnesty programs. During the designated amnesty period, taxpayers have a chance to pay back taxes with reduced (or eliminated) penalty and/or interest. For more information, including eligibility requirements, or to obtain an application, visit the jurisdiction’s website.

Arizona  =  9/1/15 – 10/31/15  =  www.azdor.gov/Home.aspx
Indiana  =  9/15/15 – 11/16/15  =  www.in.gov/dor/amnesty/
Maryland  =  9/1/15 – 10/30/15  =  www.marylandtaxes.com
Missouri  =  9/1/15 – 11/30/15  =  http://dor.mo.gov/
Oklahoma  =  9/14/15 – 11/13/15  =  http://www.ok.gov/tax/#"

* The NJDOT newsletter also reported –

P.L. 2015, c.73, signed into law on July 6, 2015, and effective immediately, amends the New Jersey Gross Income Tax Act to increase the amount of the New Jersey earned income tax credit from 20 percent of the federal earned income credit to 30 percent for tax years beginning on and after Jan. 1, 2015.”

FYI, it is my belief that the Earned Income Credit does not belong on either the federal Form 1040 or the NJ-1040.

* Dr. Jean Murray’s recent online newsletter on business taxes from ABOUT.COM covers “S Corporations and Single-member LLCs”.

* Bill Perez, also from ABOUT.COM, shares some advice on how to “Communicate Effectively with Your Tax Preparer”.

* Barbara Weltman makes a good point in “Time Cards for Owners?” at BARBARA’S BLOG –

The question I raise is should every business owner clock in and out each day? From a tax perspective, it can’t hurt.”

* Check out “The Jason Dinesen Plan for Preparer Regulation” at DINESEN TAX TIMES.

Jason feels that the IRS is already regulating tax preparers via the PTIN program – and that is enough.

I do not support regulation of the tax preparer industry by the IRS or any other government agency, and agree with Jason that PTIN registration is sufficient.  But I do support the establishment of a universally accepted independent voluntary tax preparer credential – not to “regulate” tax professionals but to provide a way to acknowledge their competence and currency and to help the taxpayer public identify competent and current preparers.  

* And Jason continues his tutorial on “Choosing a Business Entity” with a review of the “Partnership”.

* No surprise here – unfortunately Hillary “Clinton Would Tinker With, Not Rewrite, The Tax Code”.

Clinton wants to continue to misuse the Tax Code “as a tool for economic and social policy”.

The purpose of the federal income tax is to raise the money necessary to fund the government – and not to “redistribute wealth” or to distribute social program benefits.

Howard Gleckman, who wrote the piece for FORBES.COM, suggests that, based on what Clinton has proposed so far, “unlike many Republicans, broad-based tax reform is far from the top of her mind”.

* While David Letterman is gone (I, for one, do not miss him), Top 10 Lists continue.  Here is a good one from the IRS – “Top 10 Tips about Tax Breaks for the Military”.

THE FINAL WORD –

It appears that Trump does not just screw his stockholders and lenders.  He screws everyone with whom he does business.

In the early 2000’s a long-time friend and client purchased a condo in NYC for cash and owed a small amount to finalize the deal.  The Trump Organization was the developer/builder.  The money was due to the financing bank.  Of this payment 90% would go to the bank and 10% would go to Trump.  Trump’s lawyer told my client to write a check to the Trump Organization and it would in turn pay the bank.

The bank did not want my client giving anything to Trump – they wanted payment to go directly to them.  The bank’s lawyer told my client that he did not trust the Donald because he had reneged and screwed the bank multiple times in the past.

My client told me -

We later learned that Trump always shorted his sub-contractors by 5 to 10% and didn't care if they sued him.  Ultimately they would settle with him, taking a 5%+ haircut, and Trump always came out ahead.”

TTFN

Thursday, August 13, 2015

ONE REASON YOU SHOULD KEEP COPIES OF YOUR TAX RETURNS FOREVER


One of the most frequently asked questions I get from clients and readers is “How long should I keep my tax returns?”.

I have always said you should keep the paper copy of your tax returns (Form 1040 or 1040A, and corresponding state returns, plus all supporting Schedules, Forms, and worksheets) forever. This provides a permanent record of your financial history. You never know when the information on a prior year’s tax return will come in handy for a variety of tax or financial reasons, or just to satisfy personal curiosity. 

You should also keep copies of all W-2s forever, and, as fellow tax blogger Russ Fox of TAXABLE TALK has suggested, copies of proof of filing and proof of mailing returns.

This advice applies to tax professionals as well.  As a tax preparer I am required by law to keep on file copies of tax returns I have prepared for 3 years.  But I keep copies of every return I have prepared for all current clients.  For some clients I have copies of their returns going back to the early 1970s.

I recently came across an excellent example of the benefit of keeping copies forever.

A long-time client inherited from my mentor, a lifelong NJ resident, is beginning to take annual Required Minimum Distributions from his IRA accounts.  The source of the monies in his IRA accounts includes deductible contributions to Keogh and SEP accounts, eventually rolled over into IRAs, deductible IRA contributions (during the 5 years in the 1980s when everyone with earned income could contribute to an IRA regardless of the amount of their Adjusted Gross Income) and rollovers of employer pension plans partially funded by pre-tax employee contributions.

The RMDs will be fully taxable on the federal Form 1040, as all of his contributions to the various sources were either deductible or “pre-tax”.  However his federally deductible contributions to Keogh, SEP and IRA accounts were not deductible on the NJ-1040, and are “after-tax” for NJ state income tax purposes.  So he has a “basis” in his current IRA accounts for NJ state tax, and part of his RMDs will be non-taxable return of after-tax contributions on the NJ-1040.  The greater the total of employee after-tax contributions the greater the amount of the RMD that will be tax-free to NJ. 

I have copies of this client’s tax returns going back to 1984, so I can add up the amount of his federally deductible contributions to Keogh, SEP, and IRA accounts from 1984 through his retirement in the late 2000s.  However he was making contributions to these accounts in years before 1984. 

I can guess the deductible IRA contributions (everyone with earned income could make IRA contributions from 1982-1986 – so I can assume he made the maximum contribution in 1982 and 1983 based on the fact that he did so in 1984-1986).  But Keogh contributions are based on the amount of net self-employment income, and I would need the actual returns from before 1984 to get the correct numbers.

If the client had kept copies of all his federal tax returns forever I could get the needed information from him.

So, in this case, information from tax returns going back to the late 1970s would help reduce the tax liability on current state tax returns.

TTFN