Thursday, July 31, 2014


Dear Graduate:

1.  Claim Single-1, or Single-0, on your Form W-4 for federal and state withholding.  Do NOT claim more than 1 exemption.

2.  Participate in your employer’s 401(k) or 403(b) plan.  If cash-flow permits, contribute the maximum, which for 2014 is $17,500.  If you cannot contribute the maximum try to contribute at least enough to qualify for the maximum amount of any employer matching contribution.  If your employer offers a ROTH 401(k) or 403(b) option choose this option.  As an alternative, if you are contributing the maximum put 50% in a “traditional” account and 50% in a ROTH account.

3.  If you contribute toward the cost of employer-paid group health insurance premiums via payroll deduction, and you are offered an option, elect to have your contributions be treated as “pre-tax”.

4.  Participate in your employer’s medical expense Flexible Spending Account (FSA).  Be conservative and start with $1,000.  You can increase your contribution in subsequent years once you get a handle on your annual out-of-pocket medical expenses.

5.   If you have any cash from graduation gifts left over open a ROTH IRA account and use this money to fund your 2014 contribution.  The maximum you can contribute to an IRA, “traditional” and ROTH combined, for 2014 is $5,500.

6.  Take an empty coffee can, or other form of “piggy bank”, and put it in your bedroom.  Each week put $10, $20, or $50 in this “bank” (if you choose $20, but $20 in each week).  On January 2nd of 2015 take the money that has accumulated in this “bank” and contribute it to your ROTH IRA for tax year 2015.  Continue this practice for 2015 and subsequent years.  


Tuesday, July 29, 2014


* Have you seen my new website yet – FIND A TAX PRO?  Check it out!

* The IRS has released draft versions of new tax forms related to the Obamacare health insurance premium tax credit.

Form 1095-A is the “Health Insurance Marketplace Statement”  that will be sent to those who have received an advance credit (via premium reduction) during the year and Form 8962 (“Premium Tax Credit”) is used to reconcile the advance credit received to the actual credit allowed based on AGI and calculate any pay back of excess advance credits.

The Form 1040 draft has also been released, with new lines for the premium tax credit.

More work, and agita, for tax preparers.  And the taxpayer must reduce the actual benefit received from the premium tax credit by the additional cost to prepare his/her/their tax return.

* Rick Kahler tells it like it is when he says “Fame Does Not Equal a Good Source for Financial Advice” at the RAPID CITY JOURNAL –

When a financial advisor, someone with a radio or television show, or an author of financial books becomes well-known, it's easy to assume you can trust that person's advice. This isn't necessarily the case.”

As I have said before, take any advice from a celebrity “financial guru” with several grains of salt – and check with your own trusted financial advisor before taking any action.  This is especially applicable to tax advice.

* He’s back!  Joe Kristan returns from vacation with “Tax Roundup, 7/28/14: Out of the Wilderness Edition”.  I, for one, am glad he is back to blogging.

* Jean Murray provides a primer on “Self-Employment Tax and Taxes From Employment” at ABOUT.COM.


Have you noticed the gratuitous proliferation of the word, or syllable, “shit” in scripted basic cable dramas lately?

It appears to me that the executives at the TNT network have issued a memo to the producers of all their original scripted shows requiring that shit, or some variation, be uttered at least four times in each episode.

I am certainly not offended by the word.  And there are times when such use of language is acceptable, and even appropriate, within the context of character, situation, and story.  But what I have found is unnecessary and gratuitous use – having characters say “shit”, or a variation thereof, for no other reason than that they can.


Monday, July 28, 2014


I just created a new website titled FIND A TAX PROFESSIONAL!

The purpose of the site is to help a taxpayer find the right tax preparer for his or her individual situation.

Actually now is a good time to begin looking for a professional to prepare your 2014 tax returns.  You should not wait until next January or February.  Preparers have more time now to spend talking to you. 

This new website has links to several searchable databases of professional tax preparers, and a collection of invaluable articles, by me, to help with your search.

These articles include:

ALPHABET SOUP - What do all the initials mean?
DON'T ASSUME - A CPA is not automatically a 1040 tax expert, and Henry and Richard Ain't Cheap!

WHAT TO ASK A PREPARER - Questions to ask a potential tax preparer.

THE COST OF TAX PREPARATION - How much will a tax preparer charge?

WHAT TO GIVE YOUR TAX PROFESSIONAL - Make sure you provide your tax pro with everything he/she needs to properly prepare your return.

YOU ARE RESPONSIBLE! - Regardless of who prepares your return you are responsible for everything on it.

It also has links to books and publications and online resources to help with tax planning and preparation.

Check out FIND A TAX PROFESSIONAL and let me know what you think.


Friday, July 25, 2014


Better late than never!

* I didn’t realize I was chortling so loud.  At times my joy in discovering tax return errors made by CPAs (this happens more often than they would like you to think) can be described as “orgasmic”. 

Case in point, and, as Peter points out, another of many instances of CPAs proving they are not 1040 experts, the situation discussed by Peter J Reilly of FORBES.COM in his post “Social Security Disability Taxation - Curious And Confusing According to Tax Court”.

* Jason Dinesen talks about something that I had never even thought about before – “Taxation of Credit Card Benefits”.  

* Kay Bell, the yellow rose of taxes, reports that “two federal court rulings this week differed on just who is eligible for the {Obamacare premium} credit” in her BANKRATE.COM post “No Change Yet in Obamacare Tax Credit”.

“{IRS Commissioner} Koskinen said that until the courts settle the matter definitively, the IRS plans to continue granting advance premium tax credits to individuals who acquire insurance through the federal exchange.”

If the purpose of Obamacare is to attempt to provide universal health insurance coverage by assisting those who cannot afford the premiums with “upfront” tax credits, who gives a rat’s arse where the policy is acquired?  A person who would otherwise have remained uninsured is now covered.

* And at her DON’T MESS WITH TAXES blog Kay tells us “Mississippi Kicks off the Summer 2014 Sales Tax Holiday Season” –

Mississippi's annual sales tax holiday is this Friday, July 25 {today!}, and Saturday, July 26.”


Wednesday, July 23, 2014


A recent “issue” of the National Association of Tax Professional’s TAXPRO WEEKLY email newsletter included the following item (the highlight is mine) -

The following is from Rev. Proc. 2014-42:

‘Revenue Procedure 81-38 is modified and superseded for tax returns and claims for refund prepared and signed (or prepared if there is no signature space on the form) after December 31, 2015.

Unenrolled tax return preparers may not rely on Revenue Procedure 81-38 to represent taxpayers during an examination of a tax return or claim for refund prepared or signed after December 31, 2015.’

This essentially means that after December 31, 2015, if you don’t volunteer to participate in this program and you aren’t an EA, CPA or attorney, you can’t correspond with the IRS about tax law on a return you prepared unless your client is present.”

First – “you can’t correspond with the IRS about tax law on a return you prepared unless your client is present”.  According to Mirriam-Webster the applicable definition of correspond is “to communicate with a person by exchange of letters”.  Does this mean that I can write a letter to the IRS if my client is in the room with me when I do so?  Does my “correspondence” with the IRS need to include a certified statement from the client that he/she was looking over my shoulder as I typed the letter?

I contacted the NATP publications editor, for whom I have written in the past, and asked how this affects the “check the box” Third party Designee procedure.  Here is the answer I received –

The volunteer program did not change the procedures or rules for naming a third party designee. Anyone can be named as a third party designee. Carol Campbell told me that herself.”

That is good news.

What is “check the box”?

On the bottom of Page 2 of the Form 1040, under the heading “Third Party Designee” taxpayers are asked “Do you want to allow another person to discuss this return with the IRS?”  You would “check the box” to indicate yes.  I have the client “check the box” on all returns I prepare, indicating “Preparer” as the “designee’s name”.  This option is also available on many state returns, like NJ and NY.

The instructions for Form 1040 tells us -

If you check the “Yes” box, you, and your spouse if filing a joint return, are authorizing the IRS to call the designee to answer any questions that may arise during the processing of your return. You are also authorizing the designee to:

·      Give the IRS any information that is missing from your return,

·      Call the IRS for information about the processing of your return or the status of your refund or payment(s),

·      Receive copies of notices or transcripts related to your return, upon request, and

·      Respond to certain IRS notices about math errors, offsets, and return preparation.”

There is no doubt that this “check the box” procedure has done much to expedite and streamline the resolution of basic tax return issues.    

Under this procedure, I can call the IRS (which I never have done and never will do) or the IRS can call me (which actually happened once when a client forgot to sign his tax return before mailing it to the IRS), or I can write to the IRS to respond to a question or concern that the Service has about a return I have prepared, or to explain a processing or assumption error that resulted in a notice to a client about a return I have prepared.

I have prepared the client’s tax return, and have an intimate knowledge of what is reported on the return.  Who better to respond to IRS questions or to explain to the IRS the nature or method of calculation of items on the return?

I am glad the IRS did not change the “Third Party Designee” procedure.  Forbidding me from dealing with the IRS in this manner unless I “volunteer” would be stupid. 


Tuesday, July 22, 2014


* Barbara Weltman explains the “Hobby Lobby Case and Your Small Business” at BARBARA’S BLOG.

On June 30, 2014, the U.S. Supreme Court ruled that requiring family-owned corporations (like Hobby Lobby, Inc) to pay for insurance coverage for contraception under the Affordable Care Act violated a federal law protecting religious freedom.

The Court said that a closely-held corporation (the legal entity of the litigants Hobby Lobby Stores, Inc. and Conestoga Wood Specialties Corp.), is a person for purposes of the RFRA {the Religious Freedom Restoration Act of 1993 – rdf}, thus protecting, at least on this contraception issue, the religious liberty of the humans who own and control it.

To me this is totally ridiculous.  Individuals – persons like you and me – have religious freedom, not business entities.  If an individual employee, or shareholder, of Hobby Lobby opposes contraception on religious grounds then that individual should not use contraceptives.  But if a shareholder, or all shareholders, of a corporation opposes contraception on religious grounds he/she/they cannot force their individual religious beliefs on, and deny otherwise required legal medical coverage to, the employees of the corporation who may not share the same religious beliefs.  It is the individual employee, or shareholder, who has religious freedom, not the business.

In this situation religious freedom means that the government cannot force a person to take contraceptives if their religion tells them doing so is wrong. 

* Roger Wohlner, THE CHICAGO FINANCIAL PLANNER, discusses “Required Minimum Distributions – 7 Things You Need to Know”.

* Jason Dinesen wonders “Why is the AICPA Filing a Lawsuit Against Lame IRS Preparer Program?” at DINESEN TAX TIMES.

Jason does a good job of concisely describing the IRS’ new voluntary nonsense (highlight is mine) -

My understanding of the program is that if a preparer sits through 18 hours of continuing education and passes some sort of test administered by a CPE provider, they get a gold star and an ‘attaboy’ from the IRS.”

* Jason also deals with “Deducting Losses in Retirement Accounts” in an earlier post.

* Prof Jim Maule debunks on with a new entry in his “Tax Myths” series.  This myth is “Part XI: Alimony Always Is Taxable”.

The Prof explains examples of when alimony is not taxable.

If I may add another example – when what is called “alimony” is actually disguised “child support”.  I came across this once in my 40+ years.  Perhaps I will write TWTP post on the subject in the near future.


I really miss true variety television.  Thank God for reruns of LAWRENCE WELK on PBS.

With over 200 channels, and too often nothing on but garbage, you would think at least one of them would rerun episodes of the dozens of classic variety shows of the 60s and 70s.


Monday, July 21, 2014


“Qualified residence interest” (i.e. interest on debt secured by the residence), also known as mortgage interest, paid on your primary residence and one secondary residence can be deducted on Schedule A, subject to certain limitations. 

You can only deduct interest on two properties at a time.  If you own a personal residence in New Jersey and two separate person-use vacation properties, one in Florida and one in the Pocono Mountains, and all three properties have a mortgage, you can only deduct the mortgage interest on two of the properties

There are three kinds of deductible qualified residence interest - 

1) Grandfathered debt – debt acquired on or before October 13, 1987, that was secured by your main residence or a qualified second home.  It does matter what the proceeds of the loan were used for, as long as the debt was secured by the property.

2) Acquisition debt - debt acquired after October 13, 1987, to buy, build, or substantially improve your 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.

3) Home equity debt – debt acquired after October 13, 1987, that is secured by a principal residence or 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 debt. 

The amount of principal on which interest can be deducted is limited –

  Grandfathered debt is not limited.  Interest on grandfathered debt is deductible in full as mortgage interest.  

  Acquisition debt is limited to $1 Million ($500,000 if Married Filing Separately). Qualified acquisition debt cannot exceed the cost of the home and any substantial improvements.  The $1 Million (or $500,000) debt limit is reduced by any grandfathered debt.

  Home equity debt is limited to $100,000 ($50,000 if married filing separately).  The $100,000 (or $50,000) debt limit is reduced by any grandfathered debt in excess of $1 Million (or $500,000).

Refinanced acquisition debt actually qualifies as acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing.

If you have done nothing but refinance acquisition debt to get better rates over the years - and you never took out a home equity loan, or opened a home equity line of credit, or refinanced to get cash and used the money for anything other than to buy, build, or substantially improve a personal residence, you still may have home equity debt.  The additional closing costs of each refinance that were added to the principal of the refinanced mortgage represent home equity borrowing. 

The only way you would avoid home equity debt in this case is if you literally refinanced only the principal from each old mortgage and paid all closing costs in cash.

John and Mary purchased a home in 2011.  They have one mortgage, from the original purchase, and no home equity debt.  They want to refinance their original mortgage in 2014 to get a better rate.  The principal balance on the original mortgage is $197,374.  The principal balance of the new mortgage will be $200,000.  They did not take any money “out”, and actually paid a little over $1,000 at the closing.  The difference is the closing costs for title insurance, inspections, fees, etc. etc.  John and Mary now have acquisition debt of $197,374 and home equity debt of $2,626. 

None of my clients have purchased homes for anywhere near $1 Million, and I doubt no more than a handful of my readers have.  So excess acquisition debt is not an issue for me.  But I have had several clients who have constantly refinanced over the years, often using additional borrowings to pay down credit cards or other debt or to purchase a car or pay for college.  Here is where the potential problem lies.

To be perfectly honest, I do not know of a single taxpayer, client or otherwise, who actually keeps track of acquisition debt and home equity debt from purchase through all refinances and borrowings. 

So, while it is clearly the responsibility of the taxpayer to keep track of acquisition and home equity debt, if anyone is actually doing this it is the professional tax preparer.  More work for us, thanks to complexity in the Tax Code that has been provided by the idiots in Congress.

I expect that at least 90% of all taxpayers who “self-prepare” their return, either by hand or by using tax preparation software, simply deduct the gross amount of mortgage interest reported in Box 1 of each Form 1098 they receive, regardless of the amount of their acquisition and accumulated home equity debt.  I also expect that at least two thirds (66.67%) of all tax preparers also do this.

Congress has successfully placed the burden for maintain records of the cost basis of investments (going forward) on the individual broker or mutual fund house.  Would it be possible to place the burden for maintaining records of acquisition and home equity debt on the banks and mortgage companies? 

A mortgage applicant would need to certify, under some kind of penalty, the purpose of the borrowing.  And the Form 1098 could include four separate entries for mortgage interest paid-

1. Covered Qualified acquisition interest
2. Covered Qualified home equity interest
3. Non-Deductible mortgage interest
4. Non-Covered mortgage interest

“Non-covered mortgage interest” would be interest on loans that originated before the inception of the new rules.

I doubt this will ever happen.  You can bet that the banking and mortgage lobby would line the pockets of the idiots in Congress aggressively combating such requirements.

Oh well, I can dream, can’t I?   

In an upcoming TWTP post I will discuss the rules for determining the amount of mortgage interest that can be deducted and some ways to get around the acquisition and equity principal limitations.