Wednesday, January 31, 2007


Yesterday afternoon I had two almost back-to-back telephone interviews with journalists who had by various means come across my website and/or this blog.

One was with a gentlemen from the Kansas City Star, who will be including my comments in an article in this Sunday’s MONEYWISE business/personal finance section. You should be able to find it on Sunday in the online edition at

The second was from one of the editors of, whose column on my tax practice, blog and website (“Tricks of the Trade”) appears today.



This coming tax filing season, which from my point of view officially begins tomorrow on February 1st, will by my 36th one as a paid tax preparer.

It was 35 years ago this coming February (I do not remember the exact date) that I, a college freshman at St Peter’s College, first walked into 59 Sip Avenue, the office of my uncle’s accountant James Patrick Gill. I had absolutely no knowledge of tax returns, and had never prepared even my own before that night (Jim always said he wanted to get a student before he had taken the college tax course, with no preconceived ideas about taxes).

After introductions, Jim brought me to a desk. He gave me an attaché case with a client’s current year “stuff” and a copy of the prior year’s return and said, “Jump in and swim!” I recall that the client was one of several insurance agents working for Allstate, all clients of Jim, who shared an office around the corner from us. I still prepare the returns for one of the agents from that office.

I learned how to prepare 1040s the absolute best way possible – by preparing them. When I had a question about a return I would ask Jim and he would stop what he was doing and explain the tax issue or concept to me.

We obviously did not have computers back then, and prepared all returns by hand. For the first few years, before we had a copy machine, we did the returns on carbonized forms purchased from Accountant’s Supply House. To this day I have never prepared a tax return using computer software!

I learned everything I know about taxes, and most of what I know about life, from Jim Gill. While I eventually started my own tax practice in the 1980s, I still worked with Jim on Sundays and during the last two weeks of each season.

James Patrick Gill went on to his final audit in October of 2000, after having turned over his tax practice to me two years earlier (he still came in during the last weeks to help me) and only a few months before what would have been our 30th tax season together.

I have Jim’s picture, hard at work, hanging in my home office. I am sure that he is somewhere “up there” looking down on me from February through April while enjoying a “perfect” Bourbon Manhattan.


Tuesday, January 30, 2007


* Kay Bell of DON’T MESS WITH TAXES discusses turning in tax cheats for fun and profit in her posting on “Ratting Out Tax Cheats”.

* Here is some promising new from yesterday’s CCH daily tax news email:

“Two long-time opponents of outsourcing tax collection, Reps. Steven R. Rothman, D-N.J., and Chris Van Hollen, D-Md., introduced legislation on January 24 to terminate the IRS's privatization initiative.

Their bill, HR 695, would repeal the IRS's authority to contract with private debt collectors. Rothman and Van Hollen predicted at a news conference sponsored by the National Treasury Employees Union on January 25 in Washington, D.C., that the new Democratic-controlled Congress will vote to end the controversial privatization initiative. Similar legislation, Sen 335, has been introduced in the Senate.”

* An interesting article in this past Sunday’s Star Ledger reported that according to the NJ Hospital Association it is estimated that New Jersey hospitals will spend $275-$300 Million treating uninsured illegal immigrants.

* I was forwarded the following email message yesterday:

“JUST A REMINDER...8 days from today, all cell phone numbers are being released to telemarketing companies and you will start to receive sale calls. YOU WILL BE CHARGED FOR THESE CALLS. To prevent this, call the following number from your cell phone: 888-382-1222. It is the National DO NOT CALL list. It will only take a minute of your time. It blocks your number for five (5) years. HELP OTHERS BY PASSING THIS ON TO ALL YOUR FRIENDS OR GO TO”

I don’t have a cell phone, but if you do I would suggest you add its number to the DO NOT CALL list.

* An article in USA Today provides an update on the late 1099s I warned about in an earlier posting. Morgan Stanley, Merrill Lynch, Wachovia Securities, Edward Jones and Raymond James will be mailing out their 1099 statements late. While Fidelity and A.G. Edwards plan to mail 1099s on time, they do say information may need to be corrected.


We are all inundated with offers of "pre-approved" credit cards, both via postal and "e" mail. The weekly offers my father receives from Capital One, both at his address and my address, is a running joke.

But it really is no joke. These constant offers are not only annoying, but they bring the potential for identity theft. All a criminal has to do is to intercept your mail and fill out one of the pre-approved applications and send it in. Then they just need to watch your mailbox for the actual credit card and when it shows up.

What can you do to stop the multitude of credit card offerings? A 1040 client of mine has informed me about the website You can go to this site to "opt-out" of receiving these offers, similar to the way you can sign on to a "do not call" list for telephone solicitations.

The major credit card reporting companies (Equifax, Experian, Trans-Union and Innovis) are permitted to include your name on lists they sell to credit card and insurance companies. The credit card and insurance companies use the lists to send out solicitations. Under the Fair Credit Reporting Act (FACT) you have the right to prevent the credit card reporting companies from selling your credit file information for this reason. You can go to to opt-out from receiving these offerings for either five years or permanently. I would recommend you elect to opt-out permanently.

The website reports that the “optoutprescreen” site is not a scam. The site is secure, and it is ok to provide your Social Security number, which is necessary to verify your identity. You can read more about the site at.

Electing to opt-out is not the same as signing up for a "do not mail" list for solicitations from credit card and insurance companies (which, unfortunately, does not yet exist), so it will not stop all such mail solicitations, but is should help to reduce the number.


Many taxpayers wait until the last minute and make their annual IRA contribution in March or April for the preceding year (i.e. in April 2007 for tax year 2006), as allowed by law. When making your IRA contribution by mail make sure you clearly identify the tax year to which you want the contribution applied.

Write “2006 IRA contribution” in the memo section of the check. If you are enclosing a payment voucher or coupon provided by the trustee make sure that the correct tax year is marked.

Follow up by checking your next IRA account statement to verify that the contribution was applied to the proper year. If you find that the contribution was applied to the wrong tax year contact the trustee immediately.

IRA trustees must report contributions to the IRS. If your contribution is applied to the wrong tax year (made in April 2007 for 2006 but applied to 2007) you may receive a balance due notice from the IRS 18 months down the road.


Monday, January 29, 2007


The 85th Carnival of Personal Finance has arrived at FIVECENTNICKEL.COM, which is described as "the money musings of a thirty-something family man".

I especially enjoyed the posting by THE STUBBORN CAPITALIST
on the difference between frugality and just being cheap. According to the author, if you are frugal you become an accountant. If you are cheap you become a lawyer.

Oh yes, my posting on “Get Your Free Credit Report Today” is included.


Most taxpayers concentrate on ways to reduce their “taxable income”. However, it is your “Adjusted Gross Income”, or AGI, that is the most important number on your tax return.

Many tax credits and deductions are phased-out, or altogether eliminated, based on your AGI, or in some cases a “Modified” AGI (no gift from this MAGI), and several items of income are increased and some deductible losses are reduced as this number grows.

The Tax Reform Act of 1986 started the ball rolling by limiting the allowable rental loss deduction for taxpayers with an AGI in excess of $100,000 and phasing-out the amount of IRA contributions that could be deducted based on an AGI threshold. The Budget Reconciliation Act of 1990, the Taxpayer Relief Act of 1997 and the many tax Acts passed under George W all continued the trend of limiting credits and deductions based on AGI.

Items that are affected by your AGI (or MAGI) include:

· the taxable portion of interest on US Savings Bonds used to pay for education,
· losses from rental real estate activities with active participation,
· the taxable portion of Social Security and Railroad Retirement benefits,
· deductible traditional and spousal IRA contributions,
· the ability to contribute to a ROTH IRA, and to convert a traditional IRA to a ROTH,
· student loan interest,
· the deduction for tuition and fees,
· medical and dental expenses,
· charitable contributions,
· casualty and theft losses,
· job expenses and most other “miscellaneous” deductions,
· total Itemized Deductions,
· the deduction for personal exemptions,
· the dreaded Alternative Minimum Tax (AMT),
· the Credit for Child and Dependent Care Expenses,
· the Credit for the Elderly or Disabled,
· the HOPE and Lifetime Learning education credits,
· the Retirement Savings Contributions Credit,
· the Child Tax Credit,
· the Adoption Credit,
· the Earned Income Credit,
· Coverdell Education Savings Account contributions, and
· the safe harbor amount for quarterly estimated tax payments.

Each of the items listed above has a separate set of AGI thresholds. For some items, such as the education credits and the deductions for student loan interest and tuition and fees, the amount for joint filers is twice that for unmarried taxpayers; for some it is not. For the reduction of Itemized Deductions the threshold is the same whether you file as Single, Head of Household, Married Filing Joint or Qualifying Widow(er). In some cases married taxpayers filing separate returns are not allowed the deduction or credit at all; in others the threshold for separate filers is half that for joint filers.

While qualifying dividends, capital gain distributions and long-term capital gains are taxed separately at a lower rate, both for the regular tax and the AMT, these items of income are included in your AGI, as well as your Alternative Minimum Taxable Income (AMTI), and can reduce or eliminate the various deductions and credits affected by AGI, and cause you to become a victim of, or increase, the AMT.

Because of the way the taxable portion of Social Security and Railroad Retirement benefits is calculated for every additional $1.00 of AGI you could be taxed on as much as $1.85. For a taxpayer in the 15% federal tax bracket who finds himself in this situation a $1,000 increase in AGI could increase the tax liability by $278 – almost 28%.

There are several moves you can make to reduce your AGI:

· Maximize “pre-tax” contributions to your 401(k), 403(b) or other pension or deferred compensation plans, including any “catch-up” contributions for participants age 50 or older.

· Maximize the amount of wages set aside in an employer-sponsored “pre-tax” medical expense or dependent care flexible spending account.

· Postpone the receipt of a year-end bonus until next year.

· Postpone billing clients until January, accelerate or prepay business expenses at year-end, and maximize contributions to a SEP, SIMPLE or Keogh plan if you are self-employed.

· Accelerate or prepay expenses at year-end if you own rental property.

· Sell investments as a loss to take advantage of the maximum $3,000 net capital loss deduction.

· Maximize deductible contributions to a traditional IRA, including catch-up contributions.

· Instead of deducting the total fee for tax preparation as a “miscellaneous” deduction on Schedule A, allocate a portion of the fee, if applicable, to Schedule C and/or Schedule E.

· Invest in tax-free municipal bonds or tax-deferred US Savings Bonds instead of bank CDs (remember that tax exempt interest is included in the calculation of taxable Social Security and Railroad Retirement benefits).

Let us look at an example where reducing AGI by $1,000 could result in $913 less federal tax – a 91.3% tax savings!

John and Jane Q. Taxpayer had an AGI of $130,450 for 2006. They were in the 25% tax bracket. John and Jane had three dependent children, two under age 17 and one who was a college freshman. They paid $5,000 in college tuition and their miscellaneous deductions were more than of 2% of their AGI.

If J and J had given $1,000 more to charity before year-end they would have saved $250 in federal income tax. If, instead, they could reduce their AGI by $1,000 they would put an additional $913 in their pocket.

By reducing their AGI from $130,450 to $129,450 they would be able to deduct an additional $2,000 in tuition and fees as an “adjustment to income”, which would further reduce their AGI. This brings their total AGI reduction to $3,000. As a result they would be able to deduct an additional $60 in miscellaneous deductions on Schedule A. The taxable income on their 2005 Form 1040 would be reduced by $3,060, which would translate to $763 less income tax.

The Child Tax Credit is phased-out by $50 for each $1,000, of part thereof, that a couple’s AGI exceeds $110,000. By reducing their AGI by $3,000 John and Jane would increase the credit by $150. The total tax savings would be $913 - $763 in reduced tax liability plus $150 in increased Child Tax Credit.

Any questions?


Sunday, January 28, 2007


* Once again I refer you to a posting on the BLUEPRINT FOR FINANCIAL PROSPERITY blog.

I first discovered this blog when twenty-something recent college grad Jim, the blog’s author, submitted a posting on historical tax rates to the TAX CARNIVAL I was guest hosting.

Jim describes BLUEPRINT FOR FINANCIAL PROSPERITY as “a personal finance blog where I plan to discuss matters of shopping, insurance, investing, retirement, loans, credit cards, mortgages, bargain hunting and other issues related to personal finance. What you will find at Blueprint is a personal finance novice struggling to understand some pretty complex and confusing topics. I’m by no means an expert on anything and I don’t claim to be - you will learn as I learn, struggle as I struggle, and hopefully, together, we can avoid some of the common mistakes we would otherwise fall prey to.”

In a January 24th posting Jim weighs in on the subject of Refund Anticipation Loans, stating, quite correctly, that “Refund Anticipation Loans Are Rip-Offs”.

Jim’s bottom line is “You should avoid these paystub or refund anticipation loans like the plague because that’s what they are.”

I believe that there is absolutely no reason, short of the threat of having your knee caps broken by a loan shark, why anyone should take out a paystub or refund anticipation loan. If you need the money that bad it is cheaper to take a cash advance from your credit card (as long as you pay it back when the refund arrives).

* Oi vey! A story from Friday’s Accountants World daily headline email advises PA taxpayers not to use the 2006 Form 1099-G you received from the Pennsylvania Department of Revenue this week. The forms mistakenly report the 2004 state income tax refund received in 2005 instead of the 2005 state income tax refund received in 2006!

The computer tape from the wrong year was used to prepare and mail 900,000 forms. The Department of Revenue promises, “"We're working overtime to mail corrected forms. They will be marked 'corrected' in red letters."

Taxpayers who itemized in 2005 and claimed a deduction for PA state and local income taxes paid must include in taxable income (on Form 1040 Line 10) any state tax refunds received in 2006 to the extent they received a “tax benefit” from the refund. See my “Getting Ready to Prepare Your Return” posting.

This follows a FU earlier this year by the Wisconsin Department of Revenue, which sent out 170,000 annual tax return packages with the individuals' Social Security numbers printed on the labels.

The errant labels were blamed on a computer error. As Key Bell of DON’T MESS WITH TAXES pointed out in her blog on the subject, “One benefit of our total dependence on technology: Now machines instead of lower-level, lower-paid employees -- committers of the proverbial ‘clerical error’ -- bear the brunt of office blunders.”

* Friday’s CCH daily Tax News email brought to my attention some not so surprising news from the IRS.

According to an IRS press release, some early filing taxpayers have requested "large and apparently improper amounts for the special telephone tax refund”.

The IRS checked a sample of returns filed through mid-January and found that some individual taxpayers requested telephone tax refunds that appear to be excessive:

· In some cases, taxpayers appear to be requesting a refund of the entire amount of their phone bills, rather than just the three-percent tax on long-distance and bundled service that they are entitled to.

· Some individuals are making requests for thousands of dollars, indicating that they had phone bills topping $100,000 – an amount exceeding their income.

· Some tax preparers are helping their clients file apparently improper requests.

The IRS is investigating potential abuses in this area and will take prompt action against taxpayers who claim improper refund amounts and the return preparers who help them.

See my posting on “An Update on the Telephone Excise Tax Refund". BTW, Kay Bell over at DON’T MESS WITH TAXES discusses some of her readers’ experiences trying to calculate the actual telephone excise taxes paid in “No Good Tax Break Goes Unpunished.”

* The IRS Oversight Board has released its 2006 Annual Report.

The report states that the IRS made steady progress last year towards “transforming itself into a modern institution that provides efficient and effective tax administration services to America’s taxpayers.” However, “the IRS must still meet a number of challenges before it can achieve the vision of a 21st Century tax administration agency described in the IRS Restructuring and Reform Act of 1998.”

The Oversight Board is a nine-member independent body charged to oversee the IRS in its administration, management, conduct, direction, and supervision of the execution and application of the internal revenue laws. The IRS Oversight Board was created by the IRS Restructuring and Reform Act of 1998.

* William Perez at Taxes.About.Com answers a reader’s question on “Reporting Income from a Home-Based Business”. The answer includes some good resources on business expenses of freelance professionals.

* The NJ Division of Taxation has announced that New Jersey will follow the IRS and extend the due date for NJ state income tax returns and payments to April 17, 2007.

Under N.J.S.A. 54A: 54A:8-1, the Director of the NJ Division of Taxation may extend either the filing or payment due date, or both, for any return under the New Jersey Gross Income Tax Act to coincide with a similar extended filing or payment due date established for federal personal income tax returns and may adopt the same terms or conditions specified by federal law or regulation for any such filing extension or payment due date.

Therefore, the due date for filing and payment of the 2006 New Jersey Gross Income Tax returns corresponds with the Federal Income Tax of April 17, 2007. Any New Jersey income tax form, instruction or publication that currently shows an “April 16, 2007” due date should now be read as “April 17, 2007”.

* The Tax Foundation reports that, based on information from the Congressional Budget Office’s Budget and Economic Outlook, “Spending Increases Cause Deficits” [Duh!].

According to Friday’s Foundation blog posting, “Tax cuts on wages such as those enacted in 2001 have certainly reduced tax revenue from the level it would hypothetically have reached absent tax cuts. But despite those rate cuts, revenue has grown considerably since 2001. Spending, meanwhile, has risen almost twice as fast since 2001.”


Saturday, January 27, 2007


It seems that just about every tax blog has made some comments on George W’s health insurance proposals. I guess I should add my 2 cents.

First, let’s look at how health insurance premiums are treated for tax purposes under current law.

(1) The days of employer-provided health insurance coverage are pretty much gone. Most workers in the private sector pay for part, or all, of their health insurance coverage, either directly or via payroll deduction. Any portion paid by the employer is tax-free. In many cases, when an employee pays for his health insurance premiums via payroll deduction the amount withheld is treated as “pre-tax” under a “Section 125” (aka “cafeteria”) employee benefit plan. The employee payment is deducted from taxable wages, thus reducing his Adjusted Gross Income (AGI), as well as from Social Security and Medicare wages and in many cases state wages (although not NJ state taxable wages), on the W-2.

(2) A self-employed individual, and a 2% sub-S corporation shareholder, can claim an “above-the-line” deduction for 100% of the health insurance paid, up to the amount of net earnings from self-employment reduced by ½ of the self-employment tax paid. This deduction reduces his AGI, but not self-employment tax.

(3) An employee who pays his own health insurance, either directly to the insurance company or via payroll withholding that is not pre-tax, first must be able to itemize on Schedule A to claim a deduction for the amount paid. If he can itemize, health insurance premiums are included in total medical expenses, which are subject to a 7½% of AGI exclusion.

The employee with employer-provided or pre-tax health insurance, (1) above, comes out the best of all under current tax law. Any premiums he pays reduces his federal, and possibly state, income tax, his Medicare, and possibly Social Security, tax, and, as it reduces his AGI, could increase the tax benefits of items affected by AGI.

The self-employed individual, (2) above, comes out second best. The premiums paid reduce his federal, and possibly state, income tax and could produce side benefits from a reduced AGI. They do not, however, reduce self-employment tax. However, a Schedule C filer can get a “back-door” reduction of self-employment tax if he employs his spouse and pays family health insurance premiums as an “employee benefit”.

The taxpayer who pays for health insurance directly, or is not a participant in a Section 125 plan, (3) above, is basically screwed. Depending on the amount of the premiums and his income he may be able to deduct some of the premiums from federal, and possibly state, income tax. But they do not reduce his Medicare or Social Security tax or his AGI.

Many lower income taxpayers who pay for health insurance directly, and there are a lot who have absolutely no insurance coverage at all, get no tax benefit because they already pay no federal or state income tax.

George W has proposed taxing employer-provided health insurance, doing away with pre-tax treatment of employee-paid premiums, and providing a new standard deduction for health insurance.

The taxpayer in category (1) loses slightly because the premiums paid no longer reduce his Medicare and possibly Social Security tax.

The taxpayer in category (2) is basically unaffected.

The taxpayer in category (3) comes out the most ahead, assuming his income is such that he gets a tax benefit from the new standard deduction.

Taxpayers in all three categories could end up with a few more bucks in their pockets if the standard deduction amounts of $7,500 and $15,000 are more than the actual amount of premiums paid, or provided by an employer.

The low-income taxpayer who already pays no federal income tax continues to be screwed. So does the lower-income taxpayer with no insurance coverage who pays tax at the 10% or 15% bracket. If he does not have insurance because he cannot afford it, a tax benefit of from $750 (Single at 10%) to $2,250 (family at 15%) will barely make a dent in the cost of health insurance. This is especially true in New Jersey where the cost of high-deductible, and I do mean high, health insurance premiums ranges from $4,000+ for single coverage to $12,000+ for family coverage.

In addition, the George W proposal would do away with employer-sponsored “flexible spending accounts” (FSA) for medical expenses and the itemized deduction for medical expenses, after the 7½% exclusion, for everyone except Medicare beneficiaries. This is not good.

So I would say, “Thanks, but no thanks” to Dubya. There has got to be a better way. While his proposal will help some taxpayers who pay for their own coverage, those in category (3), it does nothing whatsoever to address the real problem – the growing number of Americans who cannot afford health insurance.

So what do you think?


Friday, January 26, 2007


Don’t be surprised if you do not receive the 2006 Consolidated 1099 Statement(s) from your broker(s) by February 1st. You may not receive the forms until mid-February.

An article at reports that several brokerage houses, including Morgan Stanley and Wachovia Securities, have requested permission from the IRS to send out the 1099 statements up to 30-days late in order to avoid the confusion of corrected copies (remember my earlier posting on “Don’t Be In Such A Hurry”?).

According to Patricia McClanahan, Vice President and Director for Tax Policy of the Securities Industry and Financial Markets Association, “Brokers reasonably decided to apply for this extension for extra time to mail out their 1099s and sit back and wait for the first wave of corrected information to come in from mutual funds and real estate investment trusts and others, and wait to send out their first 1099s to customers."

What a year. First Congress extends tax breaks after the IRS has gone to press with the forms and instructions, which resulted in the IRS stating that they will not be able to process tax returns that include the extended deductions until February 3rd. Then the IRS changes the due date of 2006 returns from April 16th to April 17th. And now brokers will not be sending out certain 1099 statements until mid February.


When filing separate returns, each spouse will report as income his/her wages and net earnings from self-employment, the income (interest, dividends, capital gains, rents) from separately-held assets (bank accounts, investments, rental property), and one-half of the income from jointly-held property.

There is an exception for married couples living in “community property” states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin). In such states each spouse usually must report one-half of the total “community income” (income from community property and wages for services of either spouse) unless the couple lived apart (i.e. maintained separate residences) for the entire year.

Each spouse can deduct only those expenses that he/she has actually paid, and for which he/she is legally responsible. Expenses paid from separate funds (i.e. the wife’s separate checking account) are considered to be paid by that spouse, while expenses paid from joint funds (a joint checking account) are considered to be paid equally by each spouse unless they can prove otherwise.

The wife makes a $500.00 charitable contribution from her separate checking account. She can claim the entire $500.00. The couple makes monthly contributions of $100.00 to their church from a joint checking account. Each spouse can deduct $600.00.

Medical expenses are deducted by the spouse that makes the payment, regardless of which family member incurred the medical costs. A wife can deduct medical bills for her husband that she paid from her separate checking account, even if she is not legally responsible to do so.

If real estate is owned by only one spouse (vacation property owned by the wife), only that spouse can deduct the related property taxes, and only if that spouse has actually paid the taxes. Property tax paid on jointly-owned real estate is deducted under the guidelines discussed above.

Mortgage interest is only deductible by a person who is legally liable for that mortgage. For a mortgage on jointly-held property, where both names are on the mortgage, each spouse can deduct the amount of interest that he/she has actually paid, using the guidelines discussed above. In the case of more than one jointly-held property (personal residence and vacation property) each spouse can deduct the mortgage interest on one home, unless both spouses agree (in writing) that one spouse will deduct the interest on both properties.

In the case of claiming dependents, the only guidance I have been able to find on allocating exemptions between the spouses is in Internal Revenue Service Publication 555 – Community Property. Here is the example provided in Pub 555:

“Ron and Diane White have three dependent children and live in Nevada [a community property state - rdf]. If Ron and Diane file separately, only Ron can claim his own exemption, and only Diane can claim her own exemption. Ron and Diane can agree that one of them will claim the exemption for one, two, or all of their children and the other will claim any remaining exemptions. They cannot each claim half of the total exemption amount for their three children.”

There seems to be no set rule for determining which spouse can claim which dependent on separate returns. In the above example, Ron could claim 1, 2, 3, or none of the children, with Diane allowed any of the children not claimed by Ron. This example is not new, and has appeared in Pub 555 for many years. While it is written specifically for a community property state, the same rule should apply in other states. If a tax professional reading this can offer any other guidance on how to allocate dependents on separate returns please send me an email, or provide a “comment” to this posting.

If the spouse with the lower Adjusted Gross Income claims the dependent children there may be additional tax savings due to an increased Child Tax Credit. You should do multiple calculations and allocate any dependents in a manner that will provide the greatest overall tax savings.

Of course in the case of spouses who live apart during at least the entire last six months of the year, the “custodial” parent will get the dependency exemption. In some cases the custodial parent may also be able to file as Head of Household.

Any questions?


Thursday, January 25, 2007


The IRS has officially announced that the official deadline for filing your 2006 federal income tax return and paying any tax due has been pushed back one day to April 17, 2007.

You will have extra time to file and pay because April 15 falls on a Sunday in 2007, and the following day, Monday, April 16, is “Emancipation Day”, a legal holiday in the District of Columbia.

The entire country has an April 17 deadline. Previously, the April 17 deadline applied just to individuals in the District of Columbia and six eastern states who are served by an IRS processing facility in Massachusetts, where Patriots Day will be observed on April 16.

The new April 17, 2007 deadline will apply to any of the following:

· 2006 federal individual income tax returns, whether filed electronically or on paper.

· Requests for an automatic six-month tax-filing extension, whether submitted electronically or on Form 4868.

· Tax year 2006 balance due payments, whether made electronically (direct debit or credit card) or by check.

· Tax-year 2006 contributions to a Roth or traditional IRA.

· Individual estimated tax payments for the first quarter of 2007, whether made electronically or by check.

· Individual refund claims for tax year 2003, where the regular three-year statute of limitations is expiring.

By law, filing and payment deadlines that fall on a Saturday, Sunday or legal holiday are satisfied if met on the next business day. Under a federal statute enacted decades ago, holidays observed in the District of Columbia have impact nationwide on tax issues, not just in D.C. Under recently-enacted city legislation, April 16 is a holiday in the District of Columbia. The IRS realized that the new Emancipation Day holiday fell on April 16th after most forms and publications had gone to press.

Joe Kristan of ROTH AND COMPANY TAX UPDATES points out that “Emancipation Day” commemorates Abraham Lincoln signing the bill outlawing slavery in the District of Columbia in 1962. “How strange that it would extend the filing season bondage of tax preparers 145 years later.”


The “marriage penalty” is alive and well and thriving in our federal tax code!

Because of the way the tax rate schedules are constructed, dual-income married couples generally pay more federal and state income tax than they would if they were filing as two Single taxpayers. This is known as the “marriage penalty”. George W’s early tax cuts attempted to address the problem, and did provide a fix for lower income taxpayers who do not itemize. But it remains a real issue for most middle and upper middle- class taxpayers.

You may be able to slightly reduce the penalty by electing to file as Married Filing Separately.

Because of the 7½% of Adjusted Gross Income (AGI) exclusion for medical expenses and 2% of AGI exclusion for miscellaneous deductions, if one spouse has excessive deductions in either category applying the % exclusion to the separate AGI could produce a lower combined separate taxable income.

Let’s say a couple had $8,000 in deductible medical expenses for 2006, $6,000 of which was for dental work for the wife and $2,000 was for glasses and doctor bills for the husband. Their combined AGI is $100,000, of which $60,000 applies to the husband and $40,000 to the wife. If they filed a joint return they could claim a deduction for $500.00 of medical expenses ($8,000 less $7.500). If they filed separately, the husband could not deduct any medical expenses, as 7½% of his AGI ($4,500) is more than his $2,000 in medical bills. The wife, however, can deduct $3,000 ($6,000 less $3,000). By filing separately they get to deduct $2,500 more in medical expenses.

If the husband was an outside salesman and had $2,500 in net unreimbursed “employee business expenses” and the wife was a secretary with no job-related expenses, and they paid $100 in tax preparation fees for a joint 2005 return, they would be able to deduct $600 in miscellaneous expenses on a joint return ($2,600 less $2,000). On a separate return the wife would have no miscellaneous deduction, but the husband could deduct $1,350 ($2,550 less $1,200) - $750 more than on a joint return.

New Jersey married residents who both work can often save several hundred dollars in state income tax by filing separate state returns. This is because the state tax table for Married Filing Separately is the same as for Single taxpayers. In addition, as NJ allows a deduction for medical expenses, filing separately could produce a higher combined separate deduction for medical costs. However, you generally must use the same filing status on your NJ-1040 as you do on your federal 1040. In such a case it could pay to file separate federal returns even if doing so resulted in a slightly higher combined federal tax liability. You may pay $200 more in federal income tax, but save $300 in NJ state income tax.

As I stated in my January 20 posting on CHECK OUT ALL YOUR OPTIONS, if you find yourself faced with choices you should do separate tax calculations to see which one will result in the lowest tax. In this situation you will need to calculate three (3) sets of federal and state tax liabilities, one for a joint return and one each for the husband and wife’s separate returns. If you live in NJ and work in NY be sure to include New York state tax calculations. Because the dreaded Alternative Minimum Tax (AMT) increases the AGI exclusion for medical expenses to 10% and does not allow a deduction for miscellaneous deductions you should calculate the AMT as well as the “regular” tax when doing your tax liability comparisons.

In certain situations you will not be able to receive a specific tax benefit, or you will receive a reduced benefit, if you file separate 1040s -

· You cannot claim the Credit for Adoption Expenses, the Credit for Child and Dependent Care Expenses, the Earned Income Credit, the Credit for the Elderly or Disabled, or the HOPE or Lifetime Learning Education Credit.

· You cannot claim an Adjustment to Income for tuition and fees, student loan interest, or a spousal IRA.

· You will probably be ineligible for a ROTH IRA or a deductible IRA if an active participant in an employer pension plan.

· You will not be able to exclude from income savings bond interest used for qualified educational expenses.

· A greater amount of your Social Security benefits may be taxed.

· The maximum net loss deduction is limited to $1,500 for each spouse.

· You will not be able to deduct a loss on rental property.

· One spouse’s passive loss cannot be used to reduce or wipe out the other spouse’s passive income.

· You will not be able to convert a traditional IRA to a ROTH IRA.

In such situations if you wanted to file separately to save on NJ state taxes the additional federal tax cost of filing separate returns could far outweigh any state tax savings.

If the husband and wife lived apart for the entire year, or in certain cases for the last 6 months of the year, they will be able to file separately and still receive the full tax benefit for some of the items listed above.

If one spouse claims itemized deductions on a separate return, the other spouse must also itemize. One spouse cannot itemize and the other claim the standard deduction.

If increased medical or miscellaneous deductions are not an issue, you will generally receive the greatest combined federal and NJ state tax savings from filing separate returns if the individual taxable incomes of the spouses are relatively equal. As the spread between the two separate incomes increases the net tax savings will decrease until eventually filing separately will produce a higher net combined tax liability.

Most tax preparers will automatically prepare a joint return without comparing the options. If you use a paid preparer and you think you may be able to pay less net tax by filing separately, ask him/her to calculate the federal and state tax both ways. It will cost a bit more, but it may end up putting more money in your pocket.

Unfortunately, you cannot file an amended return to change your filing status from joint to separate after the initial due date for that return has passed. If you file a joint 2006 Form 1040 in February you can change to separate in March, but you cannot change to separate after April 16, 2007.

Tomorrow – how to allocate income and deductions between the spouses.


Wednesday, January 24, 2007


* Dan Meyer of TICK MARKS is a day late for making the TAX CARNIVAL! I certainly would have considered his Monday, January 22nd posting “Try That Funky Tax Deduction, White Boy (on second thought don’t)” for the lagniappe section of Tax Carnival #10. The posting refers to an article on “The Craziest Tax Write-offs” by Jay MacDonald of

One of the items discussed in the article concerns a legitimate tax deduction with a special personal twist:

"We were going over their tax information and the tax manager asked the gentleman, 'Now what about the mortgage interest deduction for the condo in Utah?' Unfortunately, the wife didn't know about the condo in Utah, where he had set up his mistress. It was a big 'oops' moment."

I recall a similar incident recounted by then Director of the NJ Division of Taxation Bob Thompson while addressing the NJ chapter of NATP on the subject of sales and use tax audits. It seems that the Division had acquired the records of a New York state jeweler and was contacting all customers who had items shipped to a New Jersey address without paying sales tax on the purchase. The Division was looking to collect NJ “use” tax on the purchases.

The Division auditor had called the home of a NJ doctor who had purchased two identical diamond bracelets. The doctor’s wife answered the phone. After the auditor explained the situation the wife replied, “But sir, you must be mistaken. My husband only bought one diamond bracelet!”

The auditor never did find out who got the second bracelet, but he had a pretty good idea it wasn’t the doctor’s mother.

* The Small Business Taxes and Management website has posted a Special Report on “Federal Tax Provisions Expiring 2006-2020”. It seems that 42 separate items will expire in 2007 – the year with the biggest list. I would have thought that 2010 would have had the longest list.

* Andy at MONEY WALKS gives a good introduction for those of you interested in investing in mutual funds in “Mutual Funds 101".

* In light of the new passport rules, Jim at Blueprint for Financial Prosperity has provided some helpful instructions on "How To Get A Passport."


Under the Fair and Accurate Credit Transactions Act (FACT) you are entitled to obtain a free copy of your credit report once every 12 months from each of the three nationwide consumer credit reporting companies – Equifax, Experian and TransUnion.

To request your free credit reports go to Do not use any other web "address". There are many other sites with similar names that claim to offer free credit reports. Beware - these sites either want to sell you something or steal your personal information.

You can view your individual credit reports online through this site, or find out how to request the reports by phone or mail.

It is important that you review your credit report each year to verify the accuracy of the information it includes. Banks, finance companies and credit card issuers use this report to determine your "credit worthiness" when you apply for a loan or credit card. If you discover an error on your report you should immediately contact the reporting agency to correct the information.

Your free credit reports do not include your "credit score", also known as your "FICO score" (from Fair Isaac and Company, developers of the software). You can purchase your credit score directly from the three consumer credit reporting agencies or at

Many years ago I had paid off in full a $500.00 credit card balance. My credit report indicated that I had defaulted on a $5,000.00 line of credit! I was eventually able to get this FU fixed.


Tuesday, January 23, 2007


I was in 2 other Blog Carnivals yesterday!

My posting on the Telephone Excise Tax Refund was included in the 84th CARNIVAL OF PERSONAL FINANCE at BLUEPRINT FOR FINANCIAL PROSPERITY.

My tale of “How I Made $4,500 By Watching Good Morning America” is in the latest CARNIVAL OF MONEY STORIES at SAVE MONEY by lulugal. I am the last entry in the list, under the category of “Other”. Somewhere I remember hearing that if you can’t get top billing it is better to be the last name on the bill than buried in the middle.

In one of the other entries in the Money Stories Carnival Big Cajun Man of CANADIAN FINANCIAL STUFF complains “
Rant: Buying Cheques From a Bank, I am a Shmuck”, saying, “Why am I paying this much to buy cheques from my bank?” He should click on the link to in the right hand margin!

Thanks for including me in your Blog Carnivals!


I certainly don’t think you should wait till the last minute to prepare your tax return. Unless, of course, it is some kind of a tradition. We used to have two clients, a Jersey City cop and a Port Authority cop, who would always come on literally the last day, usually April 15th. The city cop would consistently be the last client on the last day, and when we saw Wally coming in the door we knew it was finally over.

I also don’t think you should rush to be among the first taxpayers of the year to have your taxes done.

For me the “tax filing season” officially begins on February 1st. I tell my clients not to come to me until then, and rarely prepare a tax return before the 1st of February unless both the client and I are sure that he/she has received everything necessary to properly prepare the return.

The reason I chose February 1st is because, under federal law, all W-2s, 1099s and 1098s are required to be furnished to taxpayers by January 31st (unless the 31st falls on a week-end). The instructions for these forms state that the “furnish” requirement will be met if the form is properly addressed and mailed on January 31st.

While I spend Christmas Eve and New Years’ Eve typing the W-2s for my business clients, most businesses wait until the end of January to get their W-2s in the mail. Actually, even though all my W-2s are available on January 1st, my biggest client does not hand them out until the last week of January. We have found from past experience that when the W-2s were handed out too early several employees had lost them by the time they were ready to have their tax returns prepared, and I had to waste precious time during the “season” to type duplicate copies.

Plus, most banks, brokerages, mortgage companies, colleges and the like are not able to send out 1099s and 1098s until the end of the month because of the volume involved.

One season, when I still had an office open to the public, a long-time client came in on the morning of February 1st to have his return prepared. He had received all the 1099s for interest and dividends for all accounts and investments as well as the 1099s for Social Security and pensions. Upon reviewing the “stuff” he presented to me I found that he had a form for every source of income he had reported on the previous year’s return. He told me he had not sold any stock during the year, and that there had been no spin-offs, mergers or “cash in lieu” for fractional shares. So I prepared the federal and state returns.

He left the office with the completed returns happy in the thought that he was finished with his “uncles” for the year and pleased with himself for being so early. He returned home, signed the returns with his wife, and went directly to the Post Office with stamped envelopes addressed to the Internal Revenue Service and the New Jersey Division of Taxation.

The next afternoon I got a call from the client. He had gotten another 1099-R in the mail that morning! His wife received a pension from Lucent Technologies and, while the amount of the annual pension generally remained constant, early in the year Lucent had made a special one-time distribution to its retirees from a fund other than the regular pension fund, and issued a separate 1099-R for this distribution.

The client returned to my office that afternoon and I prepared amended returns, for an additional fee, to claim the income and withholding from the new 1099-R. I instructed him to wait to mail the amended returns until he received the refund checks from the original returns, so as not to confuse the IRS and NJ by having two returns in the system at the same time.

Needless to say when the next Lucent retiree (and I had quite a few) came in to the office I made sure that they had 2 Form 1099-Rs from Lucent.

Just last year another long-time client – a single mother with a daughter in college – gave me what she thought was all her and her daughter’s “stuff” on January 27th. I cautioned her that she should wait for a few more days to make sure she had received everything – but she assured me she had. She was, of course, in a hurry to get the refunds, which she always had directly deposited into her bank account. Luckily I did not rush to do the return. The next day she called to say that something else had arrived in the mail – a W-2 for her daughter’s work-study, which she dropped off for me. Again I did not rush to put pen to paper. The next day she called again to say that still another tax form had arrived – a Form 1098-T for college tuition. It was a good thing I had waited. I don’t expect to hear from her until February 1st this year.

If you have a brokerage account there is an excellent chance that you will receive at least one, if not two, corrected “Consolidated 1099 Statements” to report taxable dividends, interest and gross proceeds after the initial statement arrives in late January. This is because of the rules concerning the taxation of “qualified” dividends, which became effective with tax year 2004. The final corrected 1099 may not arrive until mid-March.

And don’t get me started on K-1s. These forms from partnerships, LLCs and sub-chapter S corporations are not required to be distributed by January 31st, and many do not arrive until the end of March or beginning of April!

My instructions to clients clearly state:

“Do not give or send me your ‘stuff’ until you have received all the forms and information needed to complete the returns! That means every W-2, every 1099, and every K-1. I do not want to receive your 'stuff' in installments. If you are waiting for an information return such as a Form K-1, for details from your broker on the cost of stock sold during the year, or for anything else, please do not give or send me anything until you have everything in hand!”

So, I have blogged about getting ready to prepare your return and about what to give your tax preparer. My final word to you is don’t give your “stuff” to your tax preparer until you have received everything you need to properly prepare the return.

Any questions?

By the way, I have lost track of Wally, the last client on the last day. He had retired and the last time he was in the office it appeared his mind was beginning to go. Someone had told me a while back that he had gone into a nursing home. And the Port Authority cop who always came on the last day – he was one of the Port Authority emergency rescue team workers that were killed on 9/11. As a result I no longer work on 1040s on April 15th, or whenever the deadline falls (this year is will be April 16th).


Monday, January 22, 2007


Welcome to TAX CARNIVAL #10: PUTTING IT TOGETHER! - if I may borrow the title of a number from Steve Sondheim’s SUNDAY IN THE PARK WITH GEORGE. I was happy to oblige when the Carnival’s regular hostess Kay Bell, the Yellow Rose of Taxes, asked me to act as “guest host” so she can have some time off. I hope I can live up to her high standards.

January is the time when W-2s, 1098s, 1099s, and K-1s start to arrive and most tax filers begin to gather together their cancelled checks, bills and other documents to prepare for the task of “rendering unto Caesar”. Today’s TAX CARNIVAL will deal with getting ready to prepare your 2006 federal tax return.

Let’s start off with the basics. Gina L. Gwozdz of GINA'S TAX ARTICLES answers the question “Do I Need To File a Tax Return?”.

William Perez of TAXES.ABOUT.COM provides an excellent comprehensive review of one of the most important tax documents you'll need when preparing your tax return in “Understanding Your W-2”.

As I have noted in a previous posting, in addition to a Wandering Tax Pro the “blogosphere” also has a Tax Man, a Tax Girl, a Tax Mama (is there a Tax Papa?), a Tax Playa, a Tax Prof, and a Tax Guru. I expect any day now to come across a blog by Deducto the Tax Dog or Ira the Tax Cat, not to mention the Tax Monkey. The TAX PLAYA helps to answer the age old question ‘To Itemize or Not To Itemize’ in his posting on “Itemized Deductions: Taxes for Grown-Ups”.

At literally the last minute Congress extended some tax breaks that had expired – after the IRS had “gone to press” with the 2006 forms and instructions. Allison at QUEERCENTS explains where and how to report the extended tax breaks on your 2006 forms in
Tax Forms Missing Lines for Important Deductions”.

While I am sure you are smart enough to be able to prepare your own return, you don’t want to take any chances. You want to make sure your return is prepared correctly, so you will seek the help of a professional tax preparer. Kay Bell at DON'T MESS WITH TAXES provides some help with the task of "Picking A Tax Pro".

The main reason you need a tax pro is because the Tax Code is too damned confusing. One of the sources of confusion is the fact that many deductions and credits are phased out based on your AGI (Adjusted Gross Income) or MAGI (Modified Adjusted Gross Income) – and the phase-outs differ from item to item. JLP of ALLFINANCIALMATTERS provides a helpful table on some of the "Phase-Outs For Tax Benefits".

Here at the WANDERING TAX PRO (if I may be so bold as to include my blog in the Carnival) I review “What To Give Your Tax Preparer (Part One and Part Two)”.

Once the ball drops on One Times Square at midnight on December 31st and the New Year is rung in there is very little that can be done to cut your tax bill. Scott from SCOTT ON MONEY talks about something you can still do in 2007 to reduce your 2006 tax liability in “Tax Move You Can Still Use – 2006 IRA Deadline Is Not the End of the Year”.

And now for what residents of New Orleans know as lagniappe – a little something extra. These postings have nothing to do with our Carnival topic, but are tax-related items of interest nonetheless.

January is also the time to start thinking about your 2007 taxes. Joe Kristan of ROTH AND COMPANY TAX UPDATES makes the excellent point that "Procrastination is Expensive".

If you think taxes are high now you should see what the top rate was at the end of WWII! Jim at BLUEPRINT FOR FINANCIAL PROSPERITY takes “A Look At Historical Federal Tax Brackets”.

Before we go let’s have some commentary on “How Political Blackmail Enhances Tax Law Complexity” from Prof. James Edward Maule, author of MAULED AGAIN. Right on, JEM!

I have been told you should ‘always leaving them laughing’. I enjoy the many tax-related comic strips that Kerry M. Kerstetter posts on The TAX GURU. Let me end the Carnival with this one that I thought was especially humorous. I use it as my screen saver.

I hope you found this Tax Carnival helpful. Keep your eye out for the next one.


Sunday, January 21, 2007


Let’s take a break from taxes for a minute.

Here are some questions concerning two Broadway musicals from the 1960s based on popular subject-matter that did not exactly take Broadway by storm. The first five readers who can answer all five (5) questions will get a free copy of my special report DEDUCTING CONTRIBUTIONS. The next five will receive a free copy of SURFING USA.

Email your answers to me at Put TRIVIA CHALLENGE in the “Subject” line.

I will provide the answers at the end of the month, before going on my tax-season hiatus.

(1) A while back (I haven’t seen it around lately) a commercial on the “tube” had the Pillsbury Dough Boy dancing to the song “You’ve Got Possibilities”.

This song is from a Broadway musical produced and directed by Hal Prince with music by Charles Strouse and lyrics by Lee Adams, about a fictional American icon, that ran for 3½ months back in 1966. The cast included Jack Cassidy (father of David and Shaun) as a Winchell-esque gossip columnist. The song was sung in the show by an actress who would go on to become a popular tv waitress in the mid-70s to the mid-80s.

Name the show and the singer.

(2) In the early 1960s a Broadway music man turned a classic Christmas movie into a musical. Unfortunately the musical, which ran for 10 months at the Shubert Theatre, did not have anywhere near the success of the source material.

The show starred Janis Paige and Craig Stevens, and the cast included Fred Gwynne (tv’s Herman Munster), David Doyle (Bosley of “Charlie’s Angels”) and Broadway legend Michael Bennett in a minor role.

Name the author, the musical, and the source material.


Saturday, January 20, 2007


When preparing your tax return you are often given choices on how to treat a certain situation or item. For example:

· Married Filing Joint or Married Filing Separate.
· Claiming a personal exemption for a dependent student or allowing the student to claim an education tax credit on his/her own return.
· Claiming an “above-the-line” adjustment to income for tuition and fees, an itemized deduction as an “employee business expense” if applicable, or a HOPE or LIFETIME LEARNING education tax credit.
· Depreciating a new business asset or claiming a Section 179 deduction.
· Itemizing your deductions or claiming the standard deduction.
· Deducting state and local income tax paid or state and local sales tax paid.
· Deducting state and local sales tax paid from the Optional Sales Tax Tables or claiming the total actual sales tax paid for the year.
· Claiming the standard credit amount or a credit for the actual telephone excise tax paid.

If you find yourself faced with choices you should review each option and do separate tax calculations to see which one will result in the lowest tax.

You should also consider how the federal option will affect your resident and non-resident state and local tax returns. Choosing an option may save you $50.00 in federal income taxes but cost you $100.00 in state income taxes.

In New Jersey it is often “more better” for married couples to file separately. However, you usually must use the same filing status on your NJ-1040 as you do on your federal return. Do separate federal and state calculations for Joint and Separate filing and determine the overall tax savings or additional tax cost.

Your goal is to choose the options that will allow you to pay the absolute least amount of combined overall federal, state and local income taxes.

Any questions?


Friday, January 19, 2007


* Just a reminder – I will be guest-hosting the next TAX CARNIVAL this coming Monday.

Those of you who are so inclined have until the end of the day on Saturday to submit your postings to be considered for inclusion in the Carnival.

* It seems that Trump got himself a star on the Hollywood Walk of Fame (who did he have to pay for that?). David Letterman and Conan O’Brien had some dead on comments on this “event”

“Donald Trump got a star on the Hollywood Walk of Fame. It’s now official – Hollywood has run out of stars.” D LETTERMAN

“In California Donald Trump got a star on the Hollywood Walk of Fame this week. At the ceremony Donald became so choked up that he forgot to say that Rosie is fat.” C O’BRIEN

* According to a report by Washington DC’s WTOP Radio, “Federal Workers Owe Billions in Unpaid Taxes

The federal government is trying to recover $2,799,950,165 from 450,000 of its own active and retired employees who failed to voluntarily comply with federal income tax requirements and did not file income tax returns for 2005, according to documents obtained by WTOP through the Freedom of Information Act. The documents show that every federal agency has employees who failed to comply with federal tax laws.

WTOP has developed an
Excel Spreadsheet to break-down the non-filers by federal departments and agencies.

* The tongue-in-cheek tax blog Taxalicious has created a website to honor “Tax Giving Day”.

“To the delight of Tax preparers and bureaucrats alike Tax Giving Day is right around the corner. Our celebration to mark the tax filing deadline of April 15th, families will celebrate the return of Lord Stew Taxalot hopeful they will be one of the lucky recipients of this year’s surprise tax refund


A week after my father’s claim application mailing had arrived I received a similar package for the claim of my uncle’s estate. This one involved much more work, and it ended up being almost six months until the check was finally received by my father.

Because my uncle was deceased I had to provide different kinds of documentation. As my father had thrown out all the estate paperwork I had to purchase a new death certificate from the state (total cost $25.00 for the certificate and $20.45 for “shipping and handling”). I also had to get a currently dated certified Surrogate’s Certificate from the county, which cost $15.95.

When all the required documentation was finally in hand I submitted the paperwork, including a notarized Declaration/Agreement form signed by my father as Executor. A few weeks later the Declaration/Agreement form was returned by Trenton. Because my uncle’s will had named two “co-Executors”, my father and his bank, the claim had to also be signed by a representative of the bank.

As with most banks in the area, the original bank had been purchased by another institution (fortunately there was only one turn-over – other banks in the area have changed names several times). So I could not simply go back to the Trust Office we had originally dealt with 16 years ago. The biggest delay and amount of aggravation in the processing of the claim for my uncle’s property came in dealing with the bank.

To make an already long story short, after I was initially sent on a wild goose chase by the bank, and my subsequent request that someone from the bank co-sign the claim form was totally ignored, I sent a letter of complaint to the President of the bank, which got a prompt response and a signed and notarized claim form. I submitted this to Trenton and just last week my father received a check for more than $2,300, also the result of the liquidation of shares of MetLife, corresponding dividends, and interest.

So that is how I (or my father) made over $4,500 by watching GOOD MORNING AMERICA (or some other morning news program)!

According to the
National Association of Unclaimed Property Administrators there is more than $24 billion in unclaimed assets nationwide, waiting for someone to claim them. However, NAUPA reports that only 1.3 million people filed claims to recover $1.2 billion last year, which represents just 5% of the money being held by the states.

Some common types of unclaimed property include savings or checking accounts, stocks, uncashed dividend, payroll and refund checks, traveler’s checks, trust distributions, unredeemed money orders and gift certificates, insurance payments or refunds and life insurance policies, annuities, certificates of deposit, utility company deposits, customer overpayments, mineral royalty payments and the contents of safe deposit boxes.

Each state has an unclaimed property law that calls for customer-abandoned assets, generally after there's been no account activity for a year, to be turned over to state officials. You should go to your state’s website and do a search. Who knows – you, too could end up with over $4,500!

As an aside, one of the morals of my story is never name a lawyer, bank, brokerage or other institution as the “co-Executor” of an estate. If you want your brother to be the Executor, make him the sole Executor. If you want a lawyer or bank Trust Department to be the Executor, make him or it the sole Executor.

And another aside – each of the two claims were assigned to a different state employee. My emails to these two state workers always received a prompt and helpful response, and their responses during the processes indicated a real interest in my situation.


Thursday, January 18, 2007


Yesterday the Senate Finance Committee approved the Small Business and Work Opportunity Bill of 2007, a package of tax incentives for small business that will be offered as an amendment when the full Senate takes up minimum wage legislation.

Highlights of the Bill include:

· Extend the higher Sec. 179 expensing limits ($100,000, indexed for inflation) for one year (through 2010).
· Extend for three months (through March 31, 2008) the 15-year recovery period for qualified restaurant property.
· Provide a 15-year recovery period for qualified retail improvement property placed in service before March 31, 2008. Generally, qualifying property includes improvements to an interior portion of a building open to the public if the improvement is placed in service more than three years after the building was placed in service.
· Eligibility to use the cash method under the gross receipts exception is expanded to taxpayers with receipts under $10 million.
· The work opportunity tax credit would be extended for five years and expanded to included qualified veterans and expands the definition of qualified first-year wages from $6,000 to $12,000 for individuals with a service-connected disability. The bill would also expand the definition of certain groups.
· Provide a certification program for professional employer organizations.
· Make several changes to the rules for S corporations including the expansion of qualifying beneficiaries of an electing small business trust and eliminate gains from sales or exchanges of stock or securities as an item of passive investment income.

The bill also includes an $806 million revenue raiser that would cap at $1 million the amount of executive compensation that can be deferred annually.

The Bill faces an uphill battle in the House, where Ways and Means Committee Chairman Charles B. Rangel of New York said that he has no plans to consider merging small business tax relief with an increase in the minimum wage. Senate Finance Committee Chairman Max Baucus has stated that a minimum wage bill could not pass in the Senate without the small business provisions.

The White House supports legislation that combines an increase in the federal minimum wage with small business tax relief. The administration opposes, in its current form, the stand-alone minimum wage bill, HR 2, which is scheduled for a House floor vote on January 18.

[Thanks, and a tip of the hat to the Small Business and Management website for highlights of the bill – RDF]


I think it was GOOD MORNING AMERICA, although I could not swear to it in a court of law. It could have been TODAY. And I did not actually make the money – it belongs to my father. But I got it for him!

Here’s the story:

One morning last June, during a segment on “found money”, I learned about the “unclaimed property” fund maintained by each of the 50 states.

On the NJ Division of Taxation website I found a link to “Unclaimed Property” in the “index” which eventually took me to an “Unclaimed Property Search”. I did a search for my last name and found results for Robert Flach (it turned out to be my father and not me) and Theodore Flach (my father’s brother, who had gone to his final audit in January of 1991).

I submitted two Unclaimed Property Claim Inquiry Forms, one for my father and one for my uncle. The instructions requested that the following information be included with the inquiry form -

· clear copy of a driver’s license or other legal photo identification (i.e. a Passport),
· proof of Social Security number,
· documentation of any name change (if different from the listing on the search results page), and
· proof of the original owner’s address as listed on the search results page.

Documents that could be used to prove the address or name relationship include –

· auto registration
· marriage certificate
· utility statement
· bank statement
· court documents
· medical card
· insurance policy
· birth certificate
· divorce decree
· canceled check
· income tax return
· expired driver’s license, or
· W-2 form

My father did not have a photo id – both his driver’s license and passport had expired and were not renewed, and the expired documents had been disposed of. I did include a copy of his Social Security card, Vehicle Registration card, the 2003 Form SSA-1099-SM (the annual statement indicating his Social Security benefits for the year), and a brokerage account statement from a year when he lived at the address on the results page (he had since moved).

In the case of my uncle, my father, who was a co-Executor with a bank and the sole beneficiary of the will, had thrown away all the paperwork related to the estate, as it had been settled fifteen years ago. I had in my files a copy of an original Surrogate Court form that indicated my father was an Executor, a copy of the will, and a copy of the obituary, which I included with the inquiry form.

Within a month I received a response to the inquiry for Robert Flach that included an Unclaimed Property Declaration/Release and Indemnification Agreement and a listing of the “unclaimed property”, which consisted of shares of stock of Met Life, a result of the insurance company’s “demutualization”, and resulting dividends. The cover letter requested that I submit a completed, signed and notarized Declaration/Agreement, a copy of a driver’s license or other federal or state-issued identification card and verification of the Social Security number.

The only applicable identification my father had was his Medicare card. The cover letter had indicated the name and email address of the person in Trenton who was assigned to the claim, so I emailed to explain that my father had no photo id form and asked if the Medicare card would be acceptable. A prompt return email said that it would.

The claim application package for my father was sent and in about 4 weeks a check arrived for close to $2,200! The shares of MetLife stock had been liquidated by the state and he got the cash plus the unclaimed dividends and some interest.

Tomorrow the rest of the story.


Wednesday, January 17, 2007


The IRS has issued Notice 2007-11 to provide additional guidance on the telephone excise tax refund.

· The standard credit amount available to individuals ($30.00 - $60.00 depending on the number of exemptions on the return) is per tax return and not per phone. If you have more than one phone line you still only get one standard amount.

If a taxpayer claiming only one exemption has one telephone line into his/her residence the standard credit amount is $30. If the same individual also has a second line in the residence for the computer the standard credit amount is still $30. If that individual also has an office with two additional lines (one regular and one for the fax) the standard credit amount is still $30.

The same logic also applies if an individual had a landline and a cell phone – the standard credit amount for a Single taxpayer with no dependents is $30.00.

· A dependent with a separate phone can request a refund. However, a dependent must claim his/her credit based on actual costs only. A standard credit amount is not allowed for a taxpayer who has no exemptions (a dependent is not permitted to claim himself/herself on the federal tax return).

In such a situation, the taxpayer who is claiming the dependent cannot count that dependent as an exemption when determining the standard credit amount. If a taxpayer’s return shows a total of 4 exemptions, 2 personal exemptions (husband and wife) and 2 dependency exemptions, and one of the dependents is claiming his/her own credit, the taxpayer is only allowed the standard credit based on 3 exemptions. The standard credit amount would be $50.00.

· The estate of a deceased individual can claim the credit for actual costs only on a Form 1041, even if the estate filed a final 1040 in a prior year. However, if the estate account has already been closed, or if there never was a separate bank account for the estate, Dave Mellem of Ashwaubenon Tax Professionals in Green Bay, WI, former director of the NATP Research Department, suggests “before spending the energy and time into filing this Form 1041, it may be wise to see if a financial institution will cash the refund check”.

· You will not get a credit on a purchased phone card. The credit for the tax on the phone cards belongs to the store that sold the card and not to the individual who purchased the card and used it for making phone calls.

The actual Notice is 18-pages long. If you wish, email me at with “IRS Telephone Tax Refund Notice” in the “Subject” line and I will send you a copy of the notice as a “pdf” email attachment.


Tuesday, January 16, 2007


From the “I couldn’t have said it better myself” file:

Check out today’s posting at the Small Business Taxes and Management website’s NEWS AND TIP OF THE DAY on “Documenting Travel Expenses” –

“What do you have to document to insure the IRS allows a deduction for travel expenses?

· Amount--The cost of each separate expense for travel, lodging, and meals. Incidental expenses may be totaled in reasonable categories such as taxis, daily meals for traveler, etc.
· Time--Dates you left and return for each trip and number of days spent on business.
· Place or Description--Destination or area of your travel (name of city, town, or other designation).
· Purpose--Business purpose for the expense or the business benefit gained or expected to be gained.

The above documentation should be kept in a diary, account book, log, etc. You can use either a hard copy or an electronic substitute such as a PDA {I use a pocket date book – RDF}. In addition, you must have documentary evidence such as receipts, credit card statements, etc. for any expense for lodging while traveling away from home and for any other expense that is $75 or more. If you're combining business and personal activities on the trip, you be particularly careful in documenting the business portion. For more information, get IRS Publication 463."


On several occasions over the years I have had 1040 clients, each a partner in a business organized as a partnership, or an LLC electing to be taxed as a partnership, include in the “stuff” they gave me at tax time both a Form W-2 and a Form K-1 from the partnership.

The first thing I told them was that this was incorrect. According to Internal Revenue Service Revenue Ruling 69-184 you cannot be both a partner in and an employee of the same partnership. A partner cannot receive a salary from the partnership, and therefore should not be given a W-2.

This is apparently a common error. FYI, in every instance a CPA or CPA firm handled the accounting, payroll filing and reporting for the partnership or LLC.

In each of the occasions, the partner was actively involved in the daily operation of the business on a full-time basis (i.e. a Registered Physical Therapist providing physical therapy to patients, the manager of a fast-food franchise), and received a weekly “paycheck” from the business.

An employee receives “wages”, from which federal and state income tax, FICA (Social Security and Medicare) tax, and, depending on where you work, state unemployment and/or disability insurance is withheld. Wages are also subject to FUTA (federal unemployment) tax.

A partner can receive “guaranteed payments”. Guaranteed payments from a partnership are not subject to income tax, FICA or state unemployment and/or disability insurance withholding. If the guaranteed payments represent “net earnings from self-employment”, the partner will pay self-employment tax on Schedule SE as part of his annual Form 1040 filing. Guaranteed payments are not subject to federal unemployment tax. A partner receiving guaranteed payments should be making quarterly federal and state estimated tax payments.

If you are a partner who received guaranteed payments in 2006 and you receive a 2006 Form W-2 from the partnership you should go to the partnership’s accounting firm, tell them that they FU-ed, and show them this posting.

Any questions?


Monday, January 15, 2007


* My posting on “The ROTH 401(k) Dilemma" is one of the 70+ posts included in the 83rd Carnival of Personal Finance today at the YOUNG AND BROKE financial blog.

* Today’s posting to the ROTH AND COMPANY TAX UPDATES tax blog has some interesting comments on the dreaded Alternative Minimum Tax (AMT):

“But to me, it's really the dishonesty. The AMT has provided cover for deceptive tax policy ever since it was enacted. It works like this: a politician promises a tax benefit. The tax benefit is written so that it doesn't work for AMT.

When the technicians compute the revenue effect of the tax break, they take into account that it won't work for AMT. This makes the tax break much less costly than it would be otherwise.

The politician gets to brag about a brave new loophole, and the taxpayers think he's a great guy, or gal. Then they complain about how that darn AMT got them. It's the ultimate bait-and-switch of tax policy."