Wednesday, June 27, 2007


The “buzz” is a bit early this week. More on why later.

* Trish McIntire of OUR TAXING TIMES reminds us to beware of telephone calls and emails supposedly from the IRS. The IRS will never initiate contact via email. Do not respond to unsolicited emails claiming to be from the IRS. If you receive a call from someone claiming to be an IRS agent or representative be wary - and never give them any bank or other account information! As Trish recommends, if you are told you are entitled to a refund tell them to mail it to you (the IRS has your address – so don’t give it to anyone over the phone).

* According to the Small Business Taxes and Management NEWS AND TIP OF THE DAY blog (June 25th entry) “it appears that work on alternative minimum tax reform legislation won't be taken up until after Congress returns from the August recess. The latest proposal would exempt taxpayers earning less than $250,000 from the AMT, while those earning more than $500,000 would see an increase in their AMT liability.” Let’s hope that Congress doesn’t leave us hanging until the last minute on an AMT fix, be it temporary of permanent, like they did with the tax extenders for 2006.

* The New Jersey Treasury Department has begun to mail out the 2006 NJ Homestead Property Tax Credit/Rebate application to non-senior and non-disabled homeowners. For more information check out the NJ UPDATE Page of my website.

What in the world was I thinking?

I am off to Williamsburg VA to attend the National Society of Tax Professionals Special Topic Workshop on “Meeting the Challenges of the 1040 Schedule C” – leaving in a couple of hours. You can’t imagine how thrilled I am to get out of New Jersey. I will be returning on the first of July.

How did I ever think I could finish all the GD extensions (for which I have all the necessary information “in hand”) before leaving? What a "cafone"!

When I return from VA I will be hopping on the GD extensions with the hope of having nothing but “red files” left when I arise on July 15th. I will try to squeeze in some time to post a trip narrative and a report on what I learn at the workshop.

“Talk” to you when I get back!


Tuesday, June 26, 2007


I wish someone would explain to me why the great unwashed masses are so fascinated by watching people with limited intelligence and no self-respect behave badly in airports, in the jungle or on a deserted island, in courtrooms, on the runway or at a photo shoot, in a boardroom sucking up to an over-exposed and self-absorbed millionaire, losing weight, in restaurant kitchens, in tattoo parlors, or supposedly looking for a mate.

Once upon a time television, while not always succeeding, at least attempted to entertain, enlighten and educate. That is apparently not the case any more.

Watching an aging Mafia princess fail miserably in her attempts to raise unintelligible sons is neither art nor entertainment.

Watching D, E and F list celebrity has-beens and never-weres, or brain-dead college drop-outs, living together is not entertaining, enlightening or educational.

The only thing worse than being Bobby Brown is watching Bobby Brown.

Family therapy, discussing your problems in private with a qualified professional who can offer constructive advice, is very helpful and therapeutic. However, a couple telling all on national tv while a self-important jury consultant puffs up his own ego by wagging his finger at them is not entertaining, enlightening or educational.

An aging former child star going through rehab on television is much more painful for those who watch it than it is for the actual patient himself.

Contestants drinking worm puree or eating bugs or, for the special Christmas episode, reindeer testicles is just plain sick.

Most of these programs are of the genre incorrectly referred to as “reality tv”. While the motto of the father of reality programs is “Outwit, Outplay and Outlast”, the real motto of the reality tv genre is “Embarrass, Humiliate and Abuse”.

These programs do much more damage than a brief “wardrobe malfunction” or a slip of the tongue at an awards show. What do they teach our youth – that greed is good, money is more important than self-respect or human dignity, and it is acceptable to publicly humiliate people.

Years ago the criteria for determining if a book or movie was pornography was the lack of any “socially redeeming value”. I dare anyone out there to show me any socially redeeming value in this excrement.

One of the programs in this category was a show called THE BIGGEST LOSER. Just who is the biggest loser when it comes to “reality tv”?

It goes without saying that those who participate as contestants on a reality program, and those who actually watch the garbage, are indeed losers, in every sense of the word. Also on the list of losers are the multitude of actors, writers, directors, and other creative personnel who are unemployed as a result of “reality tv”.

But the biggest losers are those of us who recognize the genre for the crap that it truly is, and therefore avoid it like the plague. For every hour of reality programming that pollutes the airwaves we are deprived of an hour of real television drama, comedy, documentary or news programming. By putting shows like BIG BROTHER on its prime time schedule, CBS has denied us what may have been the next ALL IN THE FAMILY, MASH, THE MARY TYLER MOORE SHOW, HILL STREET BLUES, THE COSBY SHOW, or 60 MINUTES.

The only winners in “realty tv” are the networks and the shows’ producers, who are laughing all the way to the bank!

Monday, June 25, 2007


According to the CCH Daily Tax Headlines online newsletter the New Jersey legislature has passed a state budget package that contains no new taxes or tax increases, but would do the following:

-- fund the maximum 20% property tax credit based in part on household income and double the amount of tenant rebates;

-- sunset the alternative minimum assessment (AMA) and the S corporation surcharge;

-- expand the state earned income tax credit (EITC) eligibility criteria to match the criteria under the federal EITC program and increase the state benefit amount for the EITC, on a phased-in basis over three years, up to 25% of the federal benefit by tax year 2009; and

-- exempt initiation fees, membership fees, and dues charged by nonprofit health and fitness, athletic, and sporting clubs or nonprofit shopping clubs, and certain parking services, from state sales and use tax.

This ends the policy of the past few years of last minute nickel and dime-ing of NJ individual and business (especially business) taxpayers to balance the budget.


Let’s say you are divorced with a college age child.

If you are not the custodial parent – and not entitled to claim the dependency exemption via Form 8332 – but you are required to pay the college expenses of your child as a condition of a divorce decree or agreement, part of the tuition you pay could go directly into the pocket of your ex-spouse.

If you cannot claim your child as a dependent on your tax return you cannot claim the HOPE or LIFETIME LEARNING education tax credit, or the above-the-line deduction for tuition and fees, for any qualifying college expenses you pay.

If your ex-spouse claims the child as the custodial parent he/she can also claim the appropriate educational credit or deduction, subject to the normal AGI limitations, and receive a “reimbursement” from Uncle Sam for monies that came out of your pocket. This could add up to $10,000 for 4 years of college (spread out over 5 calendar years) – more if graduate school is included.

Actually, in many cases the AGI of the non-custodial parent making the tuition payments is such that he/she would not be able to claim any credit or deduction even if it were available, while the custodial parent, with alimony as the only source of taxable income, is in a position to claim the maximum benefit.

The moral of the story is to make sure you take the potential education tax benefits into consideration when you are negotiating your settlement agreement.

That’s enough about divorce for a while. Any questions?


Sunday, June 24, 2007


Here is a unique idea -

If I told 10 friends to visit THE WANDERING TAX PRO -

And they each told ten friends to visit THE WANDERING TAX PRO -

And they each told ten friends to visit THE WANDERING TAX PRO, and it stopped there - that would mean 1000 new visitors to my blog!

But if it didn't stop - and each ten in turn told ten more - than eventually everyone in the US with internet access would have checked out THE WANDERING TAX PRO!

Let's give it a try!

If you find THE WANDERING TAX PRO interesting and helpful please email 10 friends and ask them to check out the blog. You may want to suggest a particular post that you found especially helpful. And then ask them to email 10 of their friends about THE WANDERING TAX PRO if they like what they find. And so on.



Saturday, June 23, 2007


* I look forward each week to the “Getting to Know You Tuesday” feature at Kelly Erb’s TAXGIRL blog. Each installment features a Q+A with a prominent tax blogger, many of whom are fellow members of This week we got to know Trish McIntire of OUR TAXING TIMES. I was interested to find that we share a love of the theatre – especially musicals. You will be able to get to know me, THE WANDERING TAX PRO, in early July

* Russ Fox of Clayton Financial and Tax of Irvine, CA reports on TAXABLE TALK of two cases in which the Tax Court said, “The AMT May be Unfair, But You Must Pay It”. The Court points out that "The unfortunate consequences of the AMT in various circumstances have been litigated since shortly after the adoption of the AMT. In many different contexts, literal application of the AMT has led to a perceived hardship, but challenges based on equity have been uniformly rejected...Congress enacted the AMT and we have no authority to disregard them."

* reports that Colleen M. Kelley, President of the National Treasury Employee's Union, has sent a letter to IRS Acting Commissioner Kevin Brown requesting the IRS to consider a mid-year increase in the standard mileage rate due to the high cost of gas. The IRS generally determines a new standard mileage rate in late fall, with that rate becoming effective January 1 of the following year. However there have been occasions in the past, like the summer of 2005, when the rate has been changed mid-year.


Friday, June 22, 2007


In the case of a divorced couple with a child, the parent that has physical custody automatically gets the dependency deduction, unless he/she “releases” the right to the deduction by providing the non-custodial parent with a signed IRS Form 8332. The dependency deduction can be released for one year at a time or for all future years.

What happens if the divorce decree clearly states that the non-custodial parent is entitled to the deduction, but the custodial parent refuses to sign the Form 8332?

The Tax Code requires that Form 8332 be signed by the custodial parent before the non-custodial parent can claim the dependency deduction. If the divorce decree unconditionally allows the non-custodial parent the deduction, an excerpt from the decree can be used in lieu of the IRS form is the wording meets exactly all the requirements of Form 8332 and it includes the dated signature of the custodial parent. However, most divorce decrees are written without the Tax Code in mind, and the majority of Tax Court cases have not accepted an excerpt from the decree.

In most cases, if the custodial parent refuses to sign the Form 8332 the non-custodial parent will have to go back to the state court and get it to order the custodial parent to sign the form.

When negotiating a divorce settlement that gives the dependency deduction to a non-custodial parent make sure to include specific terms that require the signing of Form 8332 and outline what will happen if the custodial parent refuses to do so (i.e. withholding of alimony payments).

More better – make sure that the decree is worded properly to meet all the requirements of Form 8332. According to IRS Publication 504 the divorce decree or agreement must state all three of the following:

1.The noncustodial parent can claim the child as a dependent without regard to any condition, such as payment of support.

2.The custodial parent will not claim the child as a dependent for the year.

3.The years for which the noncustodial parent, rather than the custodial parent, can claim the child as a dependent.

The noncustodial parent must attach all of the following pages of the decree or agreement to his or her return:

· The cover page (write the other parent's social security number on this page).

· The pages that include all of the information identified in items (1) through (3) above.

· The signature page with the other parent's signature and the date of the agreement.

to be continued…


Thursday, June 21, 2007


It has been two months since the end of the tax filing season (April 17th this year). I am pleased to report that so far I have completed more than half of the GD extensions!

During the past two months I prepared the 1st Quarter 2007 payroll tax returns for my business clients and kept up-to-date on client notices and inquiries from “Sam” and “Jon” – as I receive a notice from a client I respond promptly. I have begun the process of sorting and filing the 2005 and 2006 returns by separating the two years – now I have to sort them alphabetically.

I had been completing “red files” as soon as the information was received, and for a while was doing one GD extension per day (except on Wednesdays when I am gone all day). However lately I have fallen behind – falling victim to "manana" disease.

During the tax-filing season I am up and at the desk by 5:30 am and stop only briefly for breakfast, lunch and dinner. I avoid all distractions – like cable tv – and do nothing but 1040s until about 8:00 pm.

Now that the season is over I sleep until around 8:00 am and have a more leisurely breakfast – often watching bowling reruns on ESPN Classic until 10:00 am. I next go online and visit several tax and financial blogs and websites and work on my blog postings – such that it is at least 11 am before I can get down to any “real” work. I stop for lunch between 12 noon and 1:00 pm, and often give in to temptation by watching a movie on one of the free stations I now get with Comcast Digital service. Before you know it – it is time for dinner. I rarely go back to GD extensions after dinner – it is either too late to start anything or I am satisfied if I was able to complete one return during the day. While I maintain pretty much the same schedule 7 days a week during the season, once it is over I spend Wednesdays counting a business client’s money and visiting my folks in Ocean Grove – so no 1040 work is accomplished.

It is difficult to explain to the “uninitiated” that once the heavy burden of the April deadline has passed almost all motivation to continue to do 1040s is gone.

What I need to do is, at least for the rest of the month of June, force myself to return to the rigid tax season schedule for at least 5 days per week. I began today (Thursday) by rising at 6:30 am and hopping right on amended returns that needed to be done ASAP – so I am off to a good start. I will continue on Friday by tackling some GD extensions – with the hopes of getting at least two completed each day. As the remaining GD extensions are all projects to some degree I think it is too much to aim for three.

This will probably mean that my postings to THE WANDERING TAX PRO will be reduced to maybe only three posts per week during this period.

Let me take this time to thank those clients among the GD extensions for whom I now have everything I need to finish their return for their patience and understanding. I really do hate GD extensions – and next season I will do what I must to reduce the number I have to file to a minimum, even if it means “thinning the herd”. One thing is for sure – I will absolutely, positively under no circumstances accept any new clients – so don’t ask me!

It is my goal to leave for my NSTP seminar on Schedule C in Williamsburg VA on June 28th with only “red files” remaining. Wish me luck!


Tuesday, June 19, 2007


When divvying up the marital assets during a divorce the spouses generally consider only the dollar market value of the items being divided. However, when attempting to determine an “equitable” division of marital property you should take into consideration the “after-tax” value of the assets.

You should value each asset based not on its fair market value but on how much cash you would have in your hands after paying federal, state and local income taxes if the asset was disposed of on the day after the divorce is finalized. Marital assets could include, among other things, cash, personal property, pension accounts, stocks and bonds, collectibles, a personal residence and a vacation or rental property. The disposition of each item may be treated differently for tax purposes.

· Cash, and cash-equivalents like a money market account, is worth what it is worth. Its cost basis and its fair market value are the same. There is no tax consequence on the disposition of cash.

· Personal property – furniture, a car, etc - generally decreases in value over time. As you cannot deduct the loss on the sale of personal property there is generally no tax consequence to the disposition of personal property. However, any gain on the sale of personal property is taxable (see below regarding appreciated assets).

· The tax treatment of pension distributions depends on the type of account and the source of the contributions to the account. Distributions from a 401(k) or 403(b) or 457 plan are generally fully taxable as ordinary income, as contributions are usually made “pre-tax”. Qualified distributions from a ROTH IRA are totally tax free. However an IRA funded by individual contributions may have a “tax basis” depending on whether the contributions to the account were deductible or non-deductible. An IRA account, or an employer pension account partially funded by “after-tax” contributions, that has a “tax basis” is slightly more valuable than one from which distributions will be fully taxable.

· Stocks and bonds are “capital assets” and are taxed upon disposition based on the holding period of the individual investment.

· Gain on the sale of collectibles (work of art, rug, antique, precious metal, gem, stamp, coin, or alcoholic beverage held more than 1 year) is taxed like stocks and bonds, or any other appreciated asset, although at possibly a higher tax rate.

· An individual can exclude from taxable income up to $250,000 of gain on the sale of a personal residence, as long as he/she owned and lived in the residence for 24 months during the 5-year period prior to its sale. So there may be no tax consequence on the disposition of a personal residence. On the other hand, a vacation or rental property is taxed as a “capital asset”, like stocks and bonds. In the case of a rental property, any depreciation claimed over the years must be “recaptured”.

The disposition of certain marital assets may be taxed differently on the state and local return than they are for federal tax purposes – so you should be sure to take the state and local tax consequences into consideration as well.

Let us look at a simple example:

A divorcing couple with assets valued at $550,000 decides on an equal split. Their cash balance of $50,000 will be split evenly. The wife will take full title to their personal residence valued at $250,000, which they owned and lived in for the past 30 years, and the husband will receive an investment portfolio of appreciated stocks worth $250,000. All of the stocks in the portfolio had been held for more than one year and the cost basis is $150,000. There is no mortgage or equity borrowing on the personal residence.

If the wife sells the personal residence there will be no federal or state tax on the gain. However, if the husband liquidates the investment portfolio he will pay 15% federal and let’s say 5% state income tax on the $100,000 taxable gain, a total of $20,000. So the “after tax” value of the portfolio is only $230,000. For the split of assets to be truly equal the husband should get $35,000 of the cash and the wife only $15,000. Each spouse then walks away with $235,000 “after taxes”.

to be continued. . . . .


Monday, June 18, 2007


"It was about as even a divorce settlement as you could hope for. Each lawyer got $50,000." Cartoon in the Wall Street Journal

"I am a marvelous housekeeper. Every time I leave a man I keep his house." Zsa Zsa Gabor

With a divorce, like any other life event, it is very important to carefully consider the tax consequences.

Before discussing specific tax planning aspects of divorce let me first provide some basic information on the tax treatment of various divorce-related topics.

Some of the items listed below are extremely detailed in nature, and I could easily devote multiple postings to any one of them. For the purposes of this posting I only present a brief introduction. For more specific information on how any of these items may relate to your specific situation I suggest you contact a tax professional.

· Your filing status is determined by your marital status on the last day of the year. If you are legally divorced on December 31st you will file your return for that year as either Single or Head of Household. If the divorce is not finalized and you are still legally married on December 31st you generally must file as either Married Filing Joint or Married Filing Separate. If a dependent child is involved the custodial spouse may be able to file as Head of Household.

· Alimony is allowed as an “above-the-line” deduction by the person paying it and must be claimed as taxable income by the person receiving it. Child support is neither deductible nor taxable. Required payments to a third party on behalf of a spouse under the terms of a divorce or separation instrument can qualify as alimony. This include payments for a spouse's medical expenses, housing costs (rent, utilities, etc.), taxes, tuition, etc. The payments are treated as received by the spouse and then paid to the third party. Even though a required annual payment is described as “alimony” in the divorce decree, if the payment is reduced or stops on any event relating to a child (i.e. reaching a certain age, graduating from college, marrying, dying, earning a certain amount of income) that amout is considered to be child support and therefore not deductible.

· Generally the cost basis of an asset, and its “holding period”, does not change as a result of divorce. If, prior to divorcing, a couple owns a personal residence with a cost basis of $200,000, the cost basis for the spouse who receives title to the property as a result of the divorce remains $200,000 – regardless of the market value of the property at the time of the divorce.

· A divorced parent can claim unreimbursed medical expenses paid for his/her child as a medical deduction on Schedule A (subject to the 7½% of AGI exclusion) whether or not he/she is entitled to claim the child as a dependent. For purposes of the medical expense deduction the child is considered to be the dependent of both parents.

· An education credit can only be claimed by the parent that claims the student as a dependent. This is true even if the divorce decree requires the other parent to pay the child’s tuition directly to the college or university.

· Only the custodial parent can claim the Credit for Child and Dependent Care Expenses. This is true even if the non-custodial parent claims the child as a dependent.

· Only that portion of the legal fees for a divorce that directly relates to providing tax advice or to efforts to obtain taxable alimony are deductible as a miscellaneous deduction on Schedule A (subject to the 2% of AGI exclusion). Legal fees paid to avoid paying alimony are not deductible.

To be continued. . . . . . . .


Saturday, June 16, 2007


It was bound to happen someday. Last week a lawyer (other than Jim Maule, Kelly Erb or Jim Grisi) actually said something intelligent! I expect to see a pig in flight any day now.

In reaction to the media frenzy over Paris Hilton’s on-and-off incarceration, attorney Gerald Schwartzbach, who had represented Robert Blake, said:

“I am mystified at why (Hilton’s) case is getting so much attention. We’re at war; we’ve lost more than 3,000 soldiers. For people to be so fascinated with this, it is a sad commentary.”

Right on, Gerald!

Friday, June 15, 2007


Key Bell, the Yellow Rose of Taxes, reminds us at DON'T MESS WITH TAXES that it is “Estimated Tax Time Again”. The 2nd Quarter federal and state estimated tax payments are due today – June 15th.

As I strongly remind my clients each year in my “Here is your tax return” letter - it is very important that you make your federal and state estimated tax payments on time to avoid penalties.

I also tell clients for whom I have scheduled state estimated tax payments to make the 4th Quarter payment in December of the current year (i.e. 2007) instead of January 15th of the next year (2008), which is the actual due date – unless, of course, they expect to be paying the dreaded Alternative Minimum Tax (AMT).


Thursday, June 14, 2007


As the summer approaches it is an appropriate time to repeat this reminder-

If you and your spouse both work, or if you are a working single parent, the cost of sending your dependent child (under age 13) to a summer day camp is eligible for the Credit for Child and Dependent Care Expenses. Day camp expenses qualify even if even if the camp specializes in a particular activity, such as computers or soccer.

Only day camp expenses qualify for the credit – the cost of an overnight camp does not qualify.

If you have one qualifying child you can claim the credit on up to $3,000 in expenses. For two or more qualifying children the maximum is $6,000. The amount of expenses eligible for the credit it further limited to earned income of the parent – in the case of two working parents it is the lesser of the two incomes. If one spouse earned $50,000 for the year and the other $2,500, only $2,500 of expenses are eligible for the credit.

If one spouse works and the other is disabled or a full-time student the non-working spouse is “deemed” to earn $250 per month is there is one child or $500 per month is there is more than one. This applies to only one spouse per month. If both spouses are full-time students during the same month, only one is “deemed” to earn the $250 or $500.

In most cases if you are married you file a joint return to claim the credit.

The credit is allowed for a dependent child who is under age 13. You can claim the credit on expenses incurred up to the child’s 13th birthday. If your son turns 13 in November you can still claim the credit on day camp expenses incurred during the summer.

The expenses must be incurred to allow you to work or actively look for work. According to IRS Publication 503 (Child and Dependent Care Expenses) “If you work or actively look for work during only part of the period covered by the expenses, then you must figure your expenses for each day. For example, if you work all year and pay care expenses of $250 a month ($3,000 for the year), all the expenses are work related. However, if you work or look for work for only 2 months and 15 days during the year and pay expenses of $250 a month, your work-related expenses are limited to $625 (2.5 months × $250).”

So if you are a teacher and do not work during the summer it would seem that you would not be able to claim a credit for summer day camp expenses.

Be sure to get the federal Employer Identification Number of the Day Camp if it is a “for-profit” business. You must report this number on the Form 2441 - the IRS will disallow the credit if you do not include an ID number. However, again according to Pub 503, “You do not have to show the taxpayer identification number if the care provider is one of certain tax-exempt organizations (such as a church or school). In this case, enter “Tax-Exempt” in the space where the tax form calls for the number.”

Day camp expenses also qualify for reimbursement under an employer-sponsored “pre-tax” Dependent Care Benefit “flexible spending account” (FSA). Generally the tax credit is 20%. If you are in the 25% or 28% bracket you will get a greater tax benefit by running your child care expenses through an FSA than if you claim the credit.

Any questions?


Tuesday, June 12, 2007


** It appears from my latest Site Meter report that last week I reached the milestone of 10,000 visits to THE WANDERING TAX PRO since I moved back to on December 1, 2006. Congratulations to me!

** According to Kiplinger the IRS will me conducting more audits in an attempt to narrow the “tax gap” which is estimated to exceed $300 Billion per year. The audits will be “smarter” – as the IRS will target specific areas where it is felt noncompliance is high.

Audit targets will include-

· Sole proprietors, who often underreport income and inflate write-offs.
· S corporations and partnerships, especially S company owners who take dividends instead of salaries.
· Gamblers who may underreport their winnings or who subtract losses from winnings instead of reporting them as miscellaneous itemized deductions.
· Taxpayers who itemize medical costs, charitable contributions and job-related expenses on Schedule A.
· Earned income tax credits taken by individuals who don't qualify.
· Investors who don't report capital gains properly.

** The lead headline in the ENTERTAINMENT NEWS section of my homepage portal yesterday read “
Hilton Says She'll No Longer `Act Dumb' ”. Who ever said she was “acting”? Those who saw the remake of HOUSE OF WAX tell me she can’t!

** Tax law requires a taxpayer to notify the IRS of a change of address. To do so you use Form 8822. There are many tax issues that make it in your best interest to make sure the IRS has your current address.

** I am not by any means a prude, but I was very disappointed that a musical where teen-agers hop around the stage screaming obscene lyrics about abortion, homosexuality, autoerotism, sadomasochism and incest (please do not bring up HAIR – from what I have seen there is absolutely no comparison) was the big winner Sunday night, practically shutting out a smart and witty traditional feel-good musical. I must admit that I did not see "Rude Awakening" - and the number presented on the Tony show certainly did nothing to make me want to. I was, however, pleased at David Hyde-Pierce’s much-deserved win.

** Now that school is out and your kids will soon be starting summer jobs I would like to remind you of my post on “Dependents and Income Tax Withholding”.


Monday, June 11, 2007


Ever since ENRON the ethics and regulation of the accounting industry has come under scrutiny. In many states CPAs are now required to take continuing education classes in ethics each year. This scrutiny has carried itself over to the tax preparation industry, where Enrolled Agents (EAs) are also now required to take ethics CEUs.

While, as the National Association of Tax Professionals (of which I am a 20+ year member) points out in a recent press release, the concept of regulating or licensing tax professionals has been proposed for more than 25 years, the idea has gained recent momentum through legislation introduced in the past two Congressional sessions. The legislation has called for registration and testing of all tax preparers.

Last year a Government Accountability Office (GAO) study brought more attention to this topic. The study resulted in a report to Congress titled “Paid Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors”. The GAO sent undercover agents with two different tax scenarios to a total of 19 offices of 5 “fast-food” commercial tax chains in a metropolitan area. In only 2 instances was the correct refund calculated, but all 19 returns contained errors, many of them serious. In several instances the errors caused the “taxpayers” to pay more federal income tax than necessary.

Senate Bill 1219: The Taxpayer Protection and Assistance Act of 2007 is currently being reviewed by the Senate Finance Committee. The bill would, among other things, authorize the Secretary of the Treasury to regulate, test and require continuing education of paid income tax preparers. To be more specific the bill “will require people who make a living preparing tax returns to pass a minimum competency exam”.

Before I go any further I must point out the following two items –

(1) The illegal and unethical practices of ENRON and others were perpetrated by CPAs – members of a very highly regulated industry. Registration and regulation of tax preparers will by no means put an end to unethical and illegal activity.

(2) The tax preparers in the GAO study were all employees of fast food chains such as Henry and Richard and Jackson Hewitt, and not independent tax professionals such as myself. It is certainly no surprise, at least to me, that H+R Block and Jackson Hewitt tax preparers are incompetent.

As for regulating the industry, I fully support the concept of registering tax preparers. The mechanism is already pretty much in place in the form of the PTIN (Preparer Tax Identification Number) system – which assigns tax preparers a special federal id number so they do not have to put their Social Security number on tax returns they prepare, as had previously been required.

Currently anyone can put out a shingle as a “tax preparer” – there are no unified legal requirements. And I have seen the shingle hung in many strange places over the years.

One morning, not too long ago, while walking on Central Avenue here in Jersey City I saw a sign in the window of a barber shop that basically said “tax returns prepared here”. You could apparently get a haircut and a manicure and have your 1040 prepared all in one sitting! Many years ago, before I had my own office, I had considered renting a desk in an insurance or real estate office – it never occurred to me to rent a chair at a barbershop.

Early in my career, when I was working with my mentor Jim Gill at Journal Square (where the “Jersey Bounce” started), I came across a near-vacant room in the corner of the old bus station with large storefront windows. Inside the room was a person sitting on a folding chair at a card table with an adding machine – there was no other furniture or fixtures in the room. A hand-printed cardboard sign in the window advertised “Tax Returns Prepared Here”. What was sad was that I once actually saw a person in the room getting his return prepared.

I also strongly support the requirement that all tax preparers take a minimum number of continuing education credits each year to be able to continue to prepare returns. I attend on average about 40 hours of federal and state tax update classes each year.

What I am very much against is making all tax preparers take an initial “competency” examination in order to be able to continue to prepare taxes. Any legislation that regulates the tax preparation industry must contain a “grandfather” clause.

(1) I have been preparing tax returns for 35 years without incident. I have no intention at this point in my career to have to take a test to prove that I know what I am doing.

(2) There are more than a million “unenrolled” (non-CPA and non-EA) tax preparers like myself currently in practice. It would be literally impossible, and prohibitively expense, for the IRS to properly administer a test to every single unrolled preparer, and they freely admit this. The IRS has a hard enough time with the annual Enrolled Agent exam for a few thousand applicants.

I would make the following recommendation – Every current tax preparer that has been in “the business” for at least five full years (60 months) and who has taken a minimum of 60 hours of continuing education in taxation during the past two years (24 months) would be exempt from taking the examination. These “grandfathered” preparers would be subject to the same annual continuing education requirements as those who had to take the competency exam to maintain their status.

I also agree with the suggestion of the NATP that the legislation “follow the realities of the tax preparation industry, recognizing that more than 90 percent of all tax return preparers complete only individual returns” and require continuing education in keeping with the nature of the individual’s practice.

So what do you think?


Sunday, June 10, 2007


Last night (Saturday) I saw the new musical CURTAINS at the Al Hirshfield (formerly Martin Beck) Theatre on 4th Street in NYC.

CURTAINS is the last collaboration of the team of John Kander and Freb Ebb that began with FLORA THE RED MENACE (the Broadway debut of Lisa Minnelli) in 1965 and included such classics as CABARET and CHICAGO. The book is by Peter Stone, the only writer to ever win the Tony, Oscar and Emmy. Stone wrote the screenplay for CHARADE, FATHER GOOSE and THE TAKING OF PELHAM 1-2-3 and the book for 1776, SUGAR and THE WILL ROGERS FOLLIES. Freb Ebb and Peter Stone both passed away before CURTAINS was finished and Rupert Holmes (THE MYSTERY OF EDWARD DROOD, ACCOMPLICE) was called in to finish the lyrics and book.

CURTAINS is a backstage murder mystery that begins with the death of the off-key leading lady of Broadway-bound musical THE ROBBIN’ HOOD during curtain calls for opening night of try-outs in Boston in 1959. The murder is investigated by stage-struck homicide detective Frank Cioffi, played by FRASER’s David Hyde-Pierce (who told us in SPAMALOT that “You Won't Succeed on Broadway” unless you have Jews). Several more deaths occur during the course of the investigation. By the final curtain Cioffi manages to solve the murders and fix the show.

Two thumbs way up from me! The show is witty, smart and funny. A good original “old-fashioned” musical. Go see it!

The excellent cast also which also includes Debra Monk and Ernie Sabella as the producers, Karen Ziemba as one of the writers who becomes the new leading lady, Hyde-Pierce’s FRASER colleague Edward Hibbert as the director, and Jill Pace as a supporting actress who captures the heart of the detective. It was directed by Scott Ellis.

CURTAINS has been nominated for eight (8) Tonys - Best Musical, Best Book of a Musical, Best Original Score, Best Performance by a Leading Actor in a Musical (David Hyde Pierce), Best Performance by a Leading Actress in a Musical (Debra Monk), Best Performance by a Featured Actress in a Musical (Karen Ziemba), and Best Direction of a Musical.


Saturday, June 9, 2007


A busy day planned for today – my normal bi-weekly payroll and accounts payable session with my largest business client this morning and dinner at JOE ALLEN’s and a ticket to the Tony-nominated musical CURTAINS tonight. I will post a review of the show here next week.

In the meantime – here are some interesting “bits and pieces”:

* Did you know that the federal government has a LUST Fund? No – it’s not what you are thinking (although I am sure that many Congressional offices have that kind of fund under a different title). And it is not the name of the Bill Clinton Impeachment Defense Fund. A bill signed late last year – H.R. 6131 – modified the Internal Revenue Code to allow expenditures from the Leaking Underground Storage Tank Fund for specified additional purposes. I think there was an episode of the CBS action series NUMBERS on “LUSTs”?

* When Congress recently made pretty much all dependent “children” subject to the “Kiddie Tax” (effective in 2008) it closed the “loophole” that allowed parents the ability to gift appreciated investments to children, who would pay lower capital gain taxes on the gain from the sale of the investments. By closing this “loophole” the government expects to collect as much as $1.5 Billion in extra tax revenues over the next 10 years.

* Bill Perez of’s Tax Planning blog reports on a “New E-mail Scam Targeting Taxpayers”.

* Bill’s colleague Mark Minassian of’s Business Law and Taxes blog explains “Why the Social Security Administration Loves Illegal Immigrants”. It makes sense!


Friday, June 8, 2007


It appears that the Internal Revenue Service plans to launch a new National Research Program (NRP) “reporting compliance study” for individual taxpayers. The last study was, I believe, two years ago. The purpose of the NRP study is to assist in developing “updated and more accurate audit selection tools and support efforts to reduce the nation’s tax gap”. The study will examine about 13,000 randomly selected tax year 2006 individual returns.

The NRP is a kinder, gentler version of the old TCMP (Taxpayer Compliance Measurement Program) audits that examined every single entry on a tax return in detail (i.e. if you filed as married you had to produce a copy of your marriage certificate).

The initial group of taxpayers whose returns are selected for audit under this new NRP study will start receiving official letters from "Sam" in October. The majority of individuals will have specific lines of their returns confirmed through in-person audits with an IRS examiner. Some of the individuals whose returns are selected will not be contacted if the IRS can obtain matching and third-party data that confirms the accuracy of their return.

The last time around only one of my approximately 400 clients was chosen for an NRP audit. The choice could not have been more fortuitous – they selected one of, if not the, most organized of the 400. This client is one of two who have their entire financial life recorded on the computer – and detailed back-up for each computer entry. We didn’t even go to the audit - I made copies of all supportive documentation for the items included in the review and sent a big box to the IRS. The result was “no change”.


Thursday, June 7, 2007



The IRS has issued an Information Release (IR-2007-110) with some good advice.

To quote Acting Commissioner Kevin Brown, “With forecasts calling for an active Atlantic hurricane season, the IRS encourages taxpayers to protect tax and financial documents that can be hard to replace. A little planning can help safeguard valuable information in case a hurricane or other disaster strikes.”

The Release goes on to suggest – “Another way a taxpayer can prepare for disaster is to photograph or videotape the contents of his or her home, especially items of greater value. The IRS has a disaster loss workbook, Publication 584, which can help taxpayers compile a room-by-room list of belongings. This can help an individual prove the market value of items for insurance and casualty loss claims. Photos should be stored with a friend or family member who lives outside the area.”

Good advice indeed!


My April 30th posting celebrated Tax Freedom Day in the US. According to the Adam Smith Institute Tax Freedom Day in the United Kingdom was June 1st.

Tax Freedom Day marks the point in the tax year when the average taxpayer should have earned enough to pay for his taxes. Tax Freedom Day in the UK is calculated by taking the net national income and calculating how much of that is taken away in taxes. Not just income taxes, but also the VAT (Value Added Tax), inheritance tax, stamp duty, car and fuel taxes, excise taxes, alcohol and cigarette taxes, company and employment taxes, etc.

So American taxpayers – it could be worse!


Bills have been introduced in the Senate (S. 1416) and the House (H.R. 1813) to make the deduction for Private Mortgage Insurance (PMI), currently available for 2007 only, permanent.

The Mortgage Insurance Companies of America reports that the cost of PMI for a typical 30-year loan on a mid-priced home of about $224,500 ranges from $50 to $100 per month. The group estimates the tax savings for homeowners who claim the deduction in 2007 will be between $300 and $350.

Currently the deduction is available only for PMI paid on insurance contracts purchased in 2007. The deduction is phased out as your AGI goes from $100,000 to $110,000 ($50,000 to $55,000 for Married Filing Separate).

This is an odd deduction. PMI is basically life insurance, which has never before been deductible in any form on the 1040 (other than as an employee benefit on Schedule C). The industry must have a very good lobby.


Wednesday, June 6, 2007


This question came in response to my posting on Amending Your Return.

Q. If you want to file an amended return for 2004 and are not as tax savvy as the Wandering Tax Pro is there any software that can help with this daunting task? I seem to be overwhelmed trying to amend our Schedule C and all of the accompanying forms (i.e. 8829, 4562) with instructions that can be over 50 pages long. Please help!?!

A. I do not know of any software that will prepare a 1040X, although I am sure that there is such a program somewhere out there.

I am not the person to ask regarding tax software. I do not use software to prepare tax returns - I prepare about 400 sets of returns each year by hand.

In any case, you should not rely on software to make up for your lack of “tax savvy”. As I have said many times in the past, no tax preparation software is a substitute for knowledge of the tax code. As with any software program the rule is "garbage in - garbage out". If you don't know how to enter the information, or what information to enter, you will not get the best, or even the correct, answer.

And no tax preparation software is a substitute for the services of a trained tax professional. If you are overwhelmed trying to prepare an amended return you should consult a tax pro (although not me – I am not accepting any new clients). You can find one in your area at


Tuesday, June 5, 2007


Did you know -

* The federal income tax code is currently over 61,000 pages long. The total number of pages has more than doubled since 1986. Over 16,000 pages have been added since George W became president.

* The Earned Income Credit (EIC) is the largest single federal welfare program on the books! Approaching $40 Billion per year, it is almost 3 times the amount of federal payments for Aid to Families with Dependent Children.

* More than half of all identified tax fraud involves the Earned Income Tax Credit.

* New Mexico gets $2 in federal spending for every tax dollar that is paid by its residents -- the best "return on investment" of the 50 states. As usual, New Jersey is on the bottom of the list – we receive only 55 cents for every tax dollar.

* In 2006 82% of all federal individual income taxes were paid by those with incomes over $100,000. 53.7% was by individuals with incomes over $200,000 and 28.3% were paid by taxpayers with incomes of between $100,000 and $200,000.

You do now!


Monday, June 4, 2007


Kay Bell has posted “Tax Carnival #19: The Lazy, Hazy, Crazy Days of Summer Taxes” over at DON’T MESS WITH TAXES.

The Carnival ends with my posting on “Amending Your Return”.


One of the revenue raisers of the recently enacted U.S. Troop Readiness, Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007 is the increase of the age threshold for the “Kiddie Tax”.

The Tax Increase Prevention and Reconciliation Act of 2005 had previously increased the age from “under age 14” to “under age 18” beginning with tax year 2006. Now the age has been increased to “under age 19”, or to “under age 24” for full-time students – so it basically applies to all your dependent “children”.

The new increase in the age is effective for “tax years beginning after May 25, 2007”. For calendar year taxpayers, as most of us are, the new age is effective for the 2008 federal income tax return.

This means that 2007 is the last year that parents can sell investments that have been “gifted” to a college student dependent, or have been purchased in an account set up in the name of the dependent, and get the benefit of the lower 5% capital gain tax rate.

The cost basis of an investment that has been “gifted” and sold at a gain is the same as the donor’s cost basis. The “holding period” of a gifted investment for the “donee”, which determines capital gain tax treatment, begins when the investment was first purchased by the “donor”.

Let’s say the parents of a current college student purchased a stock for $10,000 in 2003. In 2006 they transfer title to the stock to their son as a gift. In 2007 the stock is sold by the son, age 19, for $15,000 to pay for his college tuition. The son would report a long-term capital gain of $5,000 on his 2007 Form 1040 and pay $250 (5%) in federal income tax on the gain.

If the parents had retained title of the stock and sold it for a $5,000 gain in 2007 to pay for their son’s tuition they would most likely pay $750 (15%) in federal income tax on the gain – or $500 more.

If the sale of the gifted stock took place in 2008 instead of 2007, depending on the extent of the son’s other “unearned” income, part, if not all, of the $5,000 gain would be taxed at the parents’ tax rate.

The change in the Kiddie Tax is especially bad news for parents who were hoping to take advantage of the 0% capital gains tax rate that replaces the 5% rate in 2008. CCH reports in its Tax Briefing on the Small Business and Work Opportunity Act portion of the war funding bill that earlier this year many Congresspersons had been calling for preventing dependents under age 24 from being able to take advantage of the 0% capital gains tax rate – and now they have their wish.

The Kiddie Tax was created by the Tax Reform Act of 1986 to keep parents from sheltering income by putting accounts in their children’s names. FYI, you can read about the history of the federal income tax on the TAX HISTORY Page of my website.

I must point out that the Kiddie Tax only applies to “unearned” – or investment – income, such as interest, dividends and capital gains. It does not apply to “earned” income – such as W-2 wages and net earnings from self-employment.

Any questions?


Saturday, June 2, 2007


Here is this week’s “round-up” -

* ROTH AND COMPANY TAX UPDATES reports that Iowa has approved a Tax Amnesty program for later this year.

* Christine of FINANCIAL TIPS FOR WAHMS reports on a new online tool called the
FAFSA4caster to help families predict whether they'll qualify for federal financial aid.

* My weekly email newsletter from the National Association of Tax Professionals reports that purchasers of qualified Ford Motor Company vehicles may continue to claim the full alternative motor vehicle credit through September 2007. The make, model and credit amount of the certified vehicles sold are:

· 2008 Ford Escape 2WD Hybrid - $3,000
· 2005, 2006, and 2007 Ford Escape 2WD - $2,600
· 2008 Ford Escape 4WD Hybrid - $2,200
· 2005, 2006, and 2007 Ford Escape 4WD - $1,950
· 2008 Mercury Mariner 4WD Hybrid - $2,200
· 2006 and 2007 Mercury Mariner 4WD - $1,950
· 2008 Mercury Mariner 2WD Hybrid - $3,000

FYI, I have posted a brief analysis of the provisions of the war funding bill that affect 1040 filers on the FEDERAL TAX UPDATE Page of my website.