Wednesday, October 31, 2007


Today’s CCH daily email Tax Newsletter reported that “Ways and Means Chairman Rangel Introduces AMT Patch Bill”.
According to the article, on October 30th Rangel introduced the Temporary Tax Relief Bill of 2007 (HR 3996), a bill that will be “marked up” by the committee on November 2 and is likely to move swiftly to the House floor for a vote.
The bill would provide one year of AMT relief for nonrefundable personal credits, and it would increase the AMT exemption amount to $66,250 for joint filers and $44,350 for individuals for 2007. The measure also includes the one-year extension of a host of expiring business and individual tax provisions known as the "extenders" and repeals the authority of the IRS to use private debt collectors (hurray!).


If it’s Wednesday it must be --- hey, wait a minute! Oi vey, I FUed - I posted the weekly Wednesday ASK THE TAX PRO entry yesterday (Tuesday)! Below is what I had intended to post yesterday. OOPS!

I have put off publishing this post as long as possible, in the hopes that Congress would act promptly to extend expiring tax breaks. But I can’t wait any longer.

As of this writing several popular tax breaks are scheduled to “expire” on December 31, 2007. These tax breaks may not be available in 2008. So 2007 may be your last chance to take advantage of them.

These popular tax breaks include:

* the deduction for PMI - private mortgage insurance - premiums (it is still a complete mystery to me why this should be deductible),
* the option to deduct state and local sales tax paid instead of state and local income tax paid,
* the “above-the-line” adjustment to income for qualified tuition and fees,
* the ability to transfer up to $100,000 tax-free from an IRA to a qualified charity,
* the “above-the-line” adjustment to income for elementary and secondary school “educator expenses”, and
* the residential energy tax credit.

You should take this into account when planning your year-end moves. For example -

* If you are planning to buy a new car, SUV, motorcycle, or other “big ticket” item in the near future you may want to do so before the end of the year to be able to deduct the sales tax.

* If you have not already claimed the maximum “lifetime” $500.00 energy tax credit you can purchase qualifying items, such as insulation, windows and doors, or heating and air-conditioning equipment, before year end. You can find out what type of energy-saving purchases will qualify for the credit at the Energy Star website.

* If your AGI does not permit you to claim a Hope of Lifetime Learning education tax credit, and you have not yet paid the maximum amount of qualified tuition and fees that can be deducted based on your income, be advised that you can deduct qualifying amounts paid in 2007 for an academic period that begins in the first three (3) months of 2008. FYI, this rule also applies for the tax credits.

The first five (5) items on the above list of expiring tax breaks are included in the “extender” portion of the recently introduced Tax Reduction and Reform Act of 2007. This means that these items could be available for tax year 2008. It is expected that the extender section will be extracted from the larger bill in the coming weeks for “expedited consideration” so action can be taken before Congress adjourns for the year in November. I will keep you informed on developments in this area here at TWTP.

to be continued……….


Tuesday, October 30, 2007


Elvis may have "left the building", but he is still the king! He earned an estimated $49 million in the past 12 months and has reclaimed the No. 1 spot on's list of Top-Earning Dead Celebrities.

The balance of the Top Ten are -

· John Lennon ($44 million)
· Charles M. Schulz ($35 million)
· George Harrison ($22 million)
· Albert Einstein ($18 million)
· Andy Warhol ($15 million)
· Theodor Geisel (Dr. Seuss) ($13 million)
· Tupac Shakur ($9 million)
· Marilyn Monroe ($7 million)
· Steve McQueen ($6 million)

Missing from the list is Broadway composer Richard Rodgers and colleagues, who I do believe had been in the top ten in the past. I am continually surprised to see Marilyn Monroe up there. And Albert Einstein at $18 Million?


Just a reminder to my New Jersey “readers” that October 31 is the deadline for filing the NJ Homestead Rebate and Senior Freeze (Property Tax Reimbursement) applications. You can apply for the Homestead Rebate online, but you must file a paper PTR-1 or PTR-2 to apply for the “Senior Freeze”. For more information you can go to the NJDOT website.


* I am on a new carnival today - the Festival of Frugality #98 - The Happy Halloween Edition at BEING FRUGAL, written by “a Christian wife and mother trying to get out of debt”.
Under the “Frugal Health and Personal Care” catgegory “Robert D Flach gives you some tips on sorting it all out in IT'S THAT TIME OF YEAR AGAIN! - PART IV".
I especially enjoyed the entry from David of MY TWO DOLLARS (I guess this is inflation on my 2 cents) on “Getting Organized Does Not Have To Cost A Lot Of Money”. I love shopping at the 99 cent stores!
* A new milestone - Site Meter informs me that I have surpassed 20,000 visits since signing up with the service last December. I am now up to 200+ visits per day during the week! And FYI, this is my 300th posting since returning to Blogger.


Q. I'm a television writer. Are my agent commissions considered "business-expense" deductions or is there any way I can deduct them on Schedule C (or any other way to take it off the AGI)? All my income was from W2s; the only schedule C income I had was a $75 royalty. Unfortunately, I've already hit AMT before I factor in my commissions, which is by far my biggest deduction.
Thanks so much
Angela - Los Angeles
A. It appears that you are “screwed”.

A commission paid to an agent would be a business expense. If you were treated as an “independent contractor” and your income was reported on a Form 1099-MISC then you would report the income on Schedule C and deduct the agent’s fee as a business expense on Schedule C. However, as you are considered to be an employee and receive a Form W-2 your business expenses as an employee are reported on Form 2106 (or Form 2106-EZ) and carried over as a miscellaneous deduction on Schedule A, subject to the 2% of AGI exclusion and not deductible in calculating the dreaded Alternative Minimum Tax (AMT). Your agent’s commissions would be along the lines of a job-seeking expense, or a legal fee to negotiate a salary agreement.

I expect that you would have other employee business expenses connected with researching the teleplays that you are writing, although perhaps these expenses are reimbursed by your employer under an “accountable” plan.

If you had both W-2 income and 1099 income for the same profession, as is common in the entertainment industry for actors, writers, etc. (I see it in my practice for police officers employed by a municipality who often receive a 1099-MISC for off-duty security work) and your business expenses applied to both sources of income you could allocate the expenses between Form 2106 and Schedule C either by applying direct expenses to the appropriate income or by using a “percentage of income” formula, or a combination of both.

Here is how the “percentage of income” formula would work. Let us say that you had total earnings of $100,000 for the year. $75,000 was reported on a Form W-2 and $25,000 was reported as “nonemployee compensation” on a Form 1099-MISC. You had a total of $10,000 in business expenses for the year. You would apply 75% or $7,500 ($75,000 W-2 income divided by $100,000 total income) to Form 2106 as employee business expenses and 25% or $2,500 ($25,000 1099 income divided by $100,000 total income) to Schedule C (or Schedule C-EZ).

In your specific situation that would not work. Your only other source of income is $75.00 in royalty income. In your case, as I assume the royalty is from something you have written, this $75.00 would be considered self-employment income to be reported on a Schedule C-EZ. It is not “royalty income” that is reported on Schedule E.

To add insult to injury, as you live in California, a highly taxed state, you are a victim of the dreaded AMT, which wipes out any tax benefit you would be able to receive from your employee business expenses.

As I said at the beginning of my answer, you are “screwed”. All you can do is hope that Congress does away with the dreaded AMT in 2008.

BTW, for what show(s) do you write? Perhaps I have seen and enjoyed your work!


Monday, October 29, 2007


I am now appearing in the “It's a Contest with Prizes! The Trick or Treat Edition of the Carnival of Personal Finance” at the Millionaire Mommy Next Door blog.

You can vote for my post – the first installment in my series on Year-End Tax Planning. The five post submissions receiving the highest vote counts will be awarded a prize. MM will tally the votes on Sunday evening, November 4th and announce the winners next Monday!

My posting is the last in the first category – “My Top 10 Personal Favorites”. So go to the carnival and vote for me!


This installment of my year-end tax planning series discusses employer-sponsored Flexible Benefit Plans, aka Flexible Spending Accounts.

For many employers the fall is time for “open enrollment” for various employee benefits, including dependent care and health care “flexible spending accounts” (FSA). If your employer offers an FSA you should consider participating – you can realize substantial tax savings from such a plan.

Participants in an employer-sponsored dependent care and health care FSA can set aside a specific dollar amount of their salary each year to pay for qualifying child-care or medical expenses during the year. The maximum amount that can be set aside for a dependent care plan is $5,000. There is no statutory maximum for a medical expense FSA, but most employers will limit employee contributions.

Monies set aside in a flexible spending account are considered “pre-tax” for both federal income tax and FICA (Social Security and Medicare) tax purposes. If your annual salary is $50,000 and you set aside, and spend, $5,000 in an FSA, the federal wages reported in Box 1 on your Form W-2, as well as the Social Security and Medicare wages, will be $45,000. If you are in the 25% bracket, this $5,000 will save you $1,633 in federal income and FICA taxes.

A pre-tax contribution to a dependent care FSA will generally provide a greater tax benefit than claiming the Child and Dependent Care Credit – especially for those in the 25% and higher brackets. The maximum credit allowed for such a taxpayer is $600 for one qualifying child or $1,200 for more than one qualifying child.

Medical expenses are deductible as an Itemized Deduction on Schedule A only to the extent that they exceed 7 1/2% of AGI. Medical expenses paid through a pre-tax health care FSA are fully deductible from gross income.

The savings does not end there. Employee contributions to an FSA will reduce Adjusted Gross Income and may therefore increase deductions and credits that are affected by AGI (such as medical and miscellaneous expenses on Schedule A). See my posting on “The Most Important Number on Your Tax Return”. Plus many states also treat FSA contributions as “pre-tax”, so you may save state income tax as well. Unfortunately, New Jersey does not treat contributions to either type of FSA as being “pre-tax”.

An FSA is a “use it or lose it” plan. If the amount of qualifying child-care or medical expenses paid by an employee-participant during the year is less than the amount that has been set aside in the plan the employee loses the excess. For example, if Mary Mom has set aside $5,000 of her salary in her employer’s dependent care FSA for 2007, but pays only $4,000 in qualifying child care expenses during the year, she loses $1,000 in wages! The $1,000 cannot be carried forward to the next plan year. So if you are a participant in a dependent care FSA and you currently have an unspent balance in your “account” make sure you spend that balance before year-end so you do not have to forfeit any of your salary.

There is an exception for a medical expense FSA. If the plan allows, participating employees have until March 15th of the next year to submit expenses to the plan. If the above example was for a medical FSA instead of a dependent care FSA Mary would have until March 15, 2008 to incur and submit up to $1,000.00 of medical expenses, which would be applied against the $5,000 set aside for 2007.

Only medical expenses that are deductible on Schedule A can be paid or reimbursed by a health care FSA, with the one exception of non-prescription “over-the-counter” medicine and drugs. They are not deductible on your tax return, but can be paid “pre-tax” through an FSA.

If (1) you are married, (2) both you and your spouse are eligible to participate in an employer-sponsored FSA, and (3) only one of you will earn wages that exceed the Social Security wage base ($102,000 for 2008), the spouse with the salary that is less than the Social Security wage base should claim as much of the couple’s combined FSA contribution as possible.

John Q Taxpayer will earn $110,000 in 2008 and wife Jane Q will earn $40,000. Both are eligible to participate in an FSA. They decide to set aside $5,000 for medical expenses for tax year 2008.

If Jane has the entire $5,000 taken from her salary, the couple will save an additional $310 in total taxes ($5,000 x 6.2% Social Security portion of FICA tax). Because John’s salary, even after the deducting the possible $5,000 FSA contribution, exceeds the $102,000 Social Security wage base, he will not realize any Social Security tax savings by contributing to his employer’s medical FSA.

to be continued ……….


[ PS – This has nothing to do with year-end tax planning, but I just thought you might be interested in reading a reply I got from the NJ Division of Taxation a month after writing to the Acting Director to ask why NJDOT does not pay interest to taxpayers whose money it has held on to erroneously for almost a year. It appears in today’s posting to my NJ TAX PRACTICE BLOG. RDF ]

Sunday, October 28, 2007


Has anyone sent you this joke yet?
"A little boy wanted $100.00 very badly and prayed for weeks, but nothing happened. He decided to write God a letter requesting the $100.00.
When the postal authorities received the letter to ‘God, USA’ they decided to send it to the President.
The President was so amused that he instructed his secretary to send the little boy a $5.00 bill. He thought this would appear to be a lot of money to a little boy.
The little boy was delighted with the $5.00 bill and sat down to write a thank-you note to God, which read -
Dear God: Thank you very much for sending the money. However, I noticed that for some reason you sent it through Washington, DC, and those assholes deducted $95.00 in taxes!”
There was a time in our history when this could have been true – as the top federal income tax bracket was 91%!

Saturday, October 27, 2007


* Jeremy Vohwinkle of Financial Planning gives some good advice in his post “Getting Your Financial House in Order”. As he states, “One of the easiest things you can do to help keep your financial house in order is to get organized.” This is especially so true when it come to your taxes. More on this in early January in my Year-Beginning Tax Planning series.
* Investment Advisor John Kaighn, a fellow NJ-based blogger, provides a good primer on “
Coverdell Education Savings Accounts” in his blog THE KAIGHN REPORT.
* This past week I posted about the “809” telephone scam. Kay Bell writes about a new IRS-related telephone scam in “Telephone Tax Scammers are Back” at DON’T MESS WITH TAXES.
* Check out TAX GIRL KPE’s tax haiku, and those in the comments section, at her posting “With a Side of Sushi?".
* Several sources, including NATP’s TAXPRO WEEKLY email newsletter, report that the IRS has eliminated Form 1120-A, U.S. Corporation Short-Form Income Tax Return, for tax years beginning after 2006. Apparently Form 1120-A filers have been steadily decreasing in number every year. Damn – I liked the 1120-A, and used it for all but one of my remaining “C” corporations. Oh well, more work for me.
* Friday’s CCH daily email Tax Newsletter reports on the reaction to the Tax Reduction and Reform Act of 2007 in “
Rangel Tax Relief Legislation Gets Cool Reception from GOP”. According to the article Republican lawmakers predict the bill would never make it to the White House.
* There has been a lot of buzz in the various media to the Tax Reduction and Reform Act of 2007, Chuck Rangel’s supposed “mother of all tax reforms”, introduced on Thursday. The CCH article is just one of many. As usual, Paul Caron provides an excellent compilation of resources and articles on the topic at his TAX PROF blog. Add to this Joe Kristan’s appropriately-titled posting “Third Cousin, Once Removed, of Tax Reforms” at the ROTH AND COMPANY TAX UPDATE BLOG. See my “This Ain’t No Mother” posting that outlines the Act.
Here are some more of my thoughts on TRARA 2007:

· The permanent repeal of the AMT is good. However, the way the bill pays for this only adds complication to the Tax Code. Forget about a “replacement tax” or “surtax”. And don’t make the various phase-outs and exclusions any more confusing than they already are. If you want to raise the top tax rate just do it. Increase the tax rates from 28% to 30%, from 33% to 35%, and from 35% to 39%, or something like that, and be done with it.

· Unless you are going to substantially increase the Standard Deduction amounts while at the same time simplifying the Tax Code by adjusting or doing away with certain itemized deductions, don’t bother with minimal increases of $425, $625 and $850.

· Forget about increasing the Earned Income Credit for individuals without kids. Chances are good that these taxpayers are already not paying any federal income tax. Same with the refundable Child Tax Credit. There is no need to encourage more tax fraud by increasing refundable credits.

· Whatever is done, make sure that the mandatory cost basis reporting requirement stays!


Friday, October 26, 2007


I have had a chance to more closely review at least the Summary of H.R. 3970 – the Tax Reduction and Reform Act of 2007.

To be honest I was a bit disappointed. With all the hype about being “the mother of all tax reforms” and “the most significant change to the Internal Revenue Code since the Tax Reform Act of 1986” I was expecting a lot more. Outside of the permanent repeal of the dreaded Alternative Minimum Tax it really does nothing to significantly change the Tax Code for 1040 filers.

For individual taxpayers here is what it does:

(1) It permanently raises the Standard Deduction amount by $425.00 for Single and Married Filing Separate, $625.00 for Head of Household, and $850.00 for Married Filing Joint and, I assume, Qualifying Widow(er), and annually adjusts these additional amounts for inflation. Big whoop! An additional $850.00 for a couple in the 15% tax bracket is only $128.00 - $213.00 for a couple in the 25% bracket. Hey, it’s still better in your pocket than in the government’s!

(2) It expands the number of low-income persons without children who would qualify for the Earned Income Credit by increasing the credit % and the phase-out % used in calculating the EIC tables for individuals (I can’t really call them taxpayers as most of them do not pay any federal income taxes) with no qualifying children.

(3) It allows for a refundable Child Tax Credit of 15% of the amount by which a taxpayer’s earned income exceeds $8,500. Currently the threshold amount will be $12,050 for 2008, and this amount is indexed annually for inflation. The Act fixes the threshold at $8,500 permanently, without annual inflation adjustments. Regular visitors to TWTP know that I am strongly opposed to refundable credits.

(4) I am extremely happy to report that it establishes “mandatory cost basis reporting by brokers for transactions involving publicly traded securities”. The securities covered under this requirement include stock, debt, commodities, derivatives, and any other investments specified by the Secretary of the Treasury which are “acquired in the account or transferred to the account managed by the broker”. This mandatory cost basis reporting will apply to stock purchased after January 1, 2009, and all other investment products purchased after January 1, 2011. I expect/hope that this will eventually mean that the 1099B received by a taxpayer from his brokerage firm will include not only the gross proceeds but also the date of purchase and cost basis for each sale (if the original purchase took place after 1/1/09 or 1/1/11, as applicable).

The Act also provides a one (1) year extension for the following popular individual tax breaks, as well as many other more obscure business-related ones, that are scheduled to expire on December 31, 2007 – allowing them to apply for 2008 tax returns:

* the deduction for PMI - private mortgage insurance - premiums (it is still a complete mystery to me why this should be deductible),

* the option to deduct state and local sales tax paid instead of state and local income tax paid,

* the “above-the-line” adjustment to income for qualified tuition and fees,

* the ability to transfer up to $100,000 tax-free from an IRA to a qualified charity,

* the “above-the-line” adjustment to income for elementary and secondary school “educator expenses”,

* the election to include exempt combat pay in earned income for purposes of calculating the Earned Income Credit, and

* the ability of active duty reservists to make penalty-free withdrawals from retirement accounts.

According to the Ways and Means Committee press release, the above extenders, plus the AMT fix for 2007 discussed below, “will be extracted from the larger bill in the coming weeks for expedited consideration” so action can be taken before Congress adjourns for the year in November.

To pay for the above the Act would tax “carried interest” as ordinary income, instead of as a long-term capital gain, closing a tax break that has been causing a lot of buzz lately, and close some other obscure loopholes.

The Act also makes various changes to corporate taxation, most notably reducing the top corporate income tax rate from 35% to 30.5%, repealing the “domestic production activities” (Section 199) deduction, and making the increased Section 179 expensing limits, scheduled to “sunset” in 2011, permanent.

The centerpiece of the Tax Reduction and Reform Act of 2007 is the permanent repeal of the dreaded Alternative Minimum Tax on individuals effective with tax year 2008.

Prior to AMT repeal, the increased exemption amounts, adjusted for inflation, are reinstated for 2007, as is the ability to reduce AMT by certain non-refundable personal credits – the expected one-year AMT “fix”.

While the actual tax is finally put to death, the benefit of its repeal is “limited” for certain “upper-income” taxpayers.

(1) A “replacement tax” of 4% is imposed on income in excess of an amount set by the Treasury Department that is “determined by selecting an income level above which 90% of all married taxpayers would otherwise be subject to tax under AMT, but in no event less than $200,000”. While not mentioned in the 10-page summary, I do believe the minimum threshold for single taxpayers will be $150,000. This surtax increases to 4.6% on income in excess of $250,000 for singles and $500,000 for couples.

(2) The “read my lips” taxes, the phase-out of itemized deductions and personal exemptions, are adjusted for Single taxpayers with an AGI in excess of $250,000 and married taxpayers with an AGI in excess of $500,000.

(3) The 2% of AGI exclusion on miscellaneous itemized deductions is increased to 5% for the portion that a taxpayer’s AGI exceeds the “amount set by the Treasury Department” discussed above.

So all the hype boils down to basically three positive items for 1040 filers – the death of the AMT, the temporary extension of expired tax breaks, and the mandatory reporting of investment cost basis.

Don’t forget that this is just a bill that has been introduced in the House. There will lots and lots of debate and compromises before a final Tax Reduction and Reform Act of 2008 is signed into law by the President – and that final bill will most likely look a lot different than the one I have outlined above.

Let us hope that at least the one-year extenders, including the 2007 AMT fix, are passed promptly.

BTW, you can read the complete text of the Act by clicking


Thursday, October 25, 2007


It’s me again – with some breaking news.
I just finished a post in which I said there was no word on the extenders bill and then I read an article in today’s CCH daily email Tax Newsletter under the title
Rangel to Introduce Major Tax Reform Legislation”. The Accountants World daily email headline newsletter also includes an article on the subject.
According to the CCH article, House Ways and Means Chairman Charles B. Rangel “plans to unveil sweeping tax reform legislation on October 25 [today!], setting the stage for the passage in 2008 of what he hopes will be the most significant change to the Internal Revenue Code since the Tax Reform Act of 1986.” This is Rangel’s promised "mother of all tax reforms".
Chuck promises this bill will "provide benefits to more than 90 million American families while also helping ensure that our companies remain competitive internationally."
The Tax Reduction and Reform Bill of 2007 would-
· Permanently eliminate the AMT beginning in 2008 (hurray!!!!).
· Expand the earned income tax credit, the standard deduction and the child tax credit.
· Lower the corporate tax rate to 30.5 percent.
The cost of the bill would be offset by a 4% “surtax” on supposed “upper income” taxpayers who have adjusted gross income of $150,000 for single taxpayers, and $200,000 for married taxpayers. The bill would also repeal the Code Sec. 199 manufacturing deduction and the last-in, first-out (LIFO) accounting method for valuing inventory.
CCH reports that “the bill may include legislation to provide a one-year patch for the AMT for 2007, as well as a one-year extension of the business tax breaks known as extenders that expire in 2007, according to the informal summary. Those provisions would be offset by provisions that affect carried interest, offshore hedge funds, securities firms and S corporations. Although the summary lists this as part of the reform bill, Rangel has said that he plans to introduce a separate, one-year AMT patch bill that would pass the House before adjournment in November”.
I will keep you up-to-date as more information becomes available.


I received the following forwarded email this week-
We actually received a call last week from the 809 area code. The woman said "Hey, this is Karen. Sorry I missed you--get back to us quickly. I have something important to tell you." Then she repeated a phone number beginning with 809. We didn't respond.
Then this week, we received the following e- mail:
This one is being distributed all over the US. This is pretty scary, especially given the way they try to get you to call.
Be sure you read this and pass it on.
They get you to call by telling you that it is information about a family member who has been ill or to tell you someone has been arrested, died, or to let you know you have won a wonderful prize, etc.
In each case, you are told to call the 809 number right away. Since there are so many new area codes these days, people unknowingly return these calls.
If you call from the US, you will apparently be charged $2425 per-minute. Or, you'll get a long recorded message. The point is, they will try to keep you on the phone as long as possible to increase the charges. Unfortunately, when you get your phone bill, you'll often be charged more than $24,100.00.
WHY IT WORKS: The 809 area code is located in the British Virgin Islands (The Bahamas). The charges afterwards can become a real nightmare. That's because you did actually make the call. If you complain, both your local phone company and your long distance carrier will not want to get involved and will most likely tell you that they are simply providing the billing for the foreign company. You'll end up dealing with a foreign company that argues they have done nothing wrong.
I checked out the
Scam Alert Page at and here is what it said:
The 809 scam refers to an innocent recipient receiving a phone, faxed, email or pager message that asks the recipient to telephone the sender of the message immediately using an 809 area code. The reasons that one is required to call back are quite varied and have included:
· notification of winning a prize
· a requirement to call to avoid litigation over an outstanding account (which the innocent victim has nothing to do with)
· a message to call to receive information about a relative who is ill, has died or has been arrested
Once the innocent victim calls the 809 area code number, the victim ends up contacting a person who tries to keep the victim on line or the victim is met with a long recorded message or even a clever recording that responds to the caller's voice. In all cases the scam attempts to keep the victim on the line as long as possible. The reason for this is that some of the numbers in the 809 area code are pay-per-call numbers codes like those in the 900 area code in the US. The result is a large long distance bill. The cost per minute has been recorded as high as $25 per minute.
The 809 number is not the only area code in Caribbean anymore and accordingly the scam can be used with other such numbers. See our article entitled
809 Scam: E-mail Regenerating an Old Scam for more details.
If you receive a message with an 809 area code or with any other area code that you do not recognize, then simply don’t respond
Just as with email, do not return a call to someone you do not know, or to an area code with which you are not familiar. If the message is legitimate and it is really important they will call again.


Republican Wally Herger of California and Democrat Ron Kind of Wisconsin, both members of the House Ways and Means Committee, have introduced the Equity for Our Nation’s Self-Employed Act (H.R. 3660) that would allow self-employed taxpayers to deduct their health insurance as a business expense on Schedule C.

Under current law, self-employed taxpayers can deduct qualified health insurance premiums as an “above-the-line” adjustment to income. In doing so they reduce their federal income tax – either the “regular” income tax or the dreaded Alternative Minimum Tax (AMT). By being able to deduct the premiums as a business expense on Schedule C they would also be able to reduce their self-employment tax – the sole proprietor’s equivalent of FICA (Social Security and Medicare) tax.

If this law is passed, an individual reporting net earnings from self-employment in excess of $12,000 who pays $12,000 for health insurance premiums for himself and his family would be able to reduce their self-employment tax by up to $1,696.

While the actual self-employment tax rate is 15.3%, the tax is applied to 92.35% of net earnings from self-employment – so the effective self-employment tax rate is actually 14.13%.

A one-man corporation can pay the sole shareholder a salary, subject to FICA tax, and also provide health insurance coverage to the shareholder/employee income tax-free and FICA tax-free. H.R. 3660 would put sole-proprietorships, and one-man LLCs opting to be taxed as a sole proprietorship, on equal footing with one-man corporations.

Sounds only fair to me!
While we are on the subject of Congress, both Acting IRS Commissioner Linda Stiff and Treasury Secretary Henry M Paulson have reached out to Congress concerning the problems that the IRS will face without immediate legislation to provide an AMT “fix” for 2007. But no word yet from the House Ways and Means Committee on the extenders bill promised for this week.


I welcome “appropriate” comments from my readers.

If you agree with me, or “more better” if you disagree with me, please tell me, and explain your reasons why.

If you discover a “FU” in a posting, or you think I made a mistake, please let me know.

If you do not completely understand, or have a question about, something discussed in a posting, please ask for clarification.

If you were in a similar situation to one I talked about, please share it.

If you have additional information on a topic or question discussed, please send it to me.

However, do not use a comment solely as a blatant advertisement for your product, website or political organization by submitting a press release prepared by your PR office.

You are welcome to briefly mention your product, website or political organization if it truly applies to a particular posting. If your website can provide additional, or more detailed, information on a topic discussed in a posting by all means tell me about it (I will personally check out the site before printing the comment) – but don’t send a blatant advertisement.

This posting sort of echoes the “comments on comments” in Trish McIntyre’s post “TANSTAAFL or It's My Blog, part III” at OUR TAXING TIMES. I wonder if we are both responding to the same comment. I also like the new (to me) acronym – check out her post to see what it means.


The November 2007 issue of TAX HOTLINE just arrived. It reports on two Tax Court cases of interest – one disturbing and one helpful.

* The disturbing one (William Edward Colombell et ux, TC Summary Opinion 2006-184) concerns the definition of an “active participant” in an employer pension plan. The deductibility of a contribution to a traditional IRA is phased-out based on AGI if you are an active participant in a qualified employer-sponsored retirement plan.

In this case the wife was a part-time ER nurse. Her employer had a plan that provided benefits to employees who worked more than 1000 hours per year. For the year in question, the wife worked only 511 hours, and was therefore ineligible for any benefits. She made and deducted a contribution to a traditional IRA. Her W-2 for the year included an “x” in the box that indicated active participation in an employer plan, and the IRS disallowed the IRA deduction based on the joint return AGI.

In her defense the taxpayer claimed that she was not a “participant”, let alone active, in the plan as the word was defined in the dictionary. She said she could not be an active participant in a plan in which she did not participate.

The court ruled for the IRS, stating that, “Even if she never met the dictionary’s definition of what it would mean to be an ‘active participant’, the regulations make it clear that she was an active participant.” The regulations to which the court referred state that a person is an “active participant” in an employer plan “simply by not being excluded from the plan.” It is implied that nothing excluded her from the plan, as she would have received benefits if she had worked more than 1000 hours.

If you ask me, the fact that she did not work more than 1000 hours specifically excluded her from the plan. For my money this ruling clearly does not reflect the intent of the law. I do believe that Congress intended to encourage taxpayers who could not receive pension coverage from an employer plan to save for retirement by allowing a tax deduction for the contribution.

Of course nothing prohibited Mrs. Colombell from contributing to an IRA. She was just not allowed a tax deduction.

* The second one (Michael J Rozzano Jr, TC Memo 2007-177) concerns the issue of business vs hobby.

The taxpayers, who loved horses, purchased a farm and used it to run a horse-boarding business. The business showed a loss, ranging from $36,000 to $94,000, for eight straight years. The IRS disallowed the losses claiming that there was no “profit motive”.

The court ruled for the taxpayers. It noted that they boarded horses at the going commercial rates, hired employees to take care of the horses, kept complete business records, and had a credible business plan, and the husband, who had a full-time W-2 job, worked on the farm himself on a regular basis (every week-end) – all indications of a profit motive. The business passed the “duck test” – if it quacks like a business and waddles like a business then it must be a business.

This decision upheld the fact that you can have consistent net losses and still be considered a legitimate business for tax purposes as long as you dot all the i’s and cross all the t’s.


Wednesday, October 24, 2007


If it’s Wednesday it must be Ask The Tax Pro! How about another New Jersey state question this week.

Q. NJ recognizes the older Archer MSAs (NJSA54A:3-4, and it's covered in the NJ-1040 instructions) but not the newer Health Savings Account, although a bill is pending to do that, Assembly Bill 724. So there is no NJGIT deduction for HSA contributions.

For federal tax purposes, taxpayers are told not to include the HSA payments in their deductible medical expenses, as the amounts have already been deducted. A lot of taxpayers are like me, do their federal returns first and then copy over the base numbers to the NJ return without doing a lot of thinking.

I have learned that the NJ deduction of medical expenses in excess of 2% of taxable income (under NJSA 54A:3-3) is a lot better than the federal threshold of 7.5% of AGI. Shouldn't NJ taxpayers be advised to add HSA contributions to the deductible medical expenses for NJ purposes?

I thought you would know if my analysis is right, whether practitioners are already giving this advice, and if accurate and not already out there how to promulgate it.


A. Your analysis is not quite right.

As you mention, you can deduct medical expenses on your NJ-1040 to the extent that the total exceeds 2% of your NJ Gross Income. This is indeed “more better” than the federal 7½% of AGI exclusion. You may deduct medical expenses on your NJ-1040 even it you do not itemize and claim medical deductions on your federal Form 1040.

Two items are deductible in full as a medical expense on the NJ-1040. They are not subject to the 2% of NJ Gross Income exclusion. They are the Self-Employed Health Insurance Deduction and contributions to an Archer Medical Savings Account (MSA).

New Jersey follows the federal rules for contributions to an Archer Medical Savings Account – created by the Health Insurance Portability and Accountability Act of 1996. If you fill out federal Form 8853 for 2007 you can deduct the qualified Archer MSA contribution reported on this form on your NJ-1040, without regard to the 2% of NJ Gross Income exclusion. You must include a copy of your federal Form 8853 with the filing of your 2007 NJ-1040.

Here is how deducting medical expenses on the NJ return works. First you add up your total allowable medical expenses, without any qualified self-employed health insurance premiums or MSA contributions. From this total you subtract 2% of your NJ Gross Income (line 28 of your NJ-1040). If the result is less than “0” you would use “0”. Now you add your self-employed health insurance premiums and Archer MSA contributions (the same amounts as allowed as “above-the-line” adjustments to income on your federal Form 1040). The total is the amount you can claim as a medical deduction on your NJ-1040. There is a worksheet for doing this calculation in the NJ-1040 instruction package.

As you state, qualified contributions to a Health Savings Account (HSA), while deductible as an adjustment to income on the federal Form 1040, are not deductible on the NJ-1040. The HSA was created by the Medicare bill signed into law by President Bush in 2003. You can not add your HSA contributions to the allowable NJ medical expenses subject to the 2% exclusion.

The medical expenses deductible on your NJ-1040 subject to the 2% exclusion would be the same as the total medical expenses deductible on the federal Schedule A before deducting the 7½% of AGI exclusion (Line 1 of the federal Schedule A). So carrying over this base number from your federal return to your NJ-1040 is not a problem. To repeat what I said above, you would not add your HSA contributions to this amount for the NJ return.

Here is where HSA activity comes into play on the NJ-1040:

On the federal return, as qualified contributions to both the MSA and HSA are deductible up front, you must reduce your medical expenses by any reimbursements you receive from an Archer Medical Savings Account or a Health Savings Account, as well as reimbursements from your insurance provider or from your employer under a medical reimbursement or pre-tax flexible benefit plan.

But because HSA contributions are not deductible on the NJ state return, you do not have to reduce the medical expenses claimed on the NJ-1040 by any reimbursements or payments from a Health Savings Account.

If your medical expenses for the year total $10,000 and you received a reimbursement of $2,000 from a Health Savings Account, only $8,000 can be used to determine your federal Schedule A deduction. But the full $10,000 can be deducted on your NJ-1040, minus, of course, the 2% of NJ Gross Income exclusion.

FYI, just as HSA contributions are not deductible on the NJ-1040, New Jersey does not treat employee contributions to a Section 125 employer-sponsored medical Flexible Spending Account (FSA) as “pre-tax”. If your gross wages for the year are $100,000 and you contribute $5,000 to your medical FSA, your federal taxable wages are $95,000, but your NJ state taxable wages are $100,000. Therefore, you also do not have to reduce your NJ medical expenses by reimbursements received during the year from your medical FSA.

As for what other tax professionals are advising their clients regarding HSAs - I haven’t a clue. I only know what I advise my clients.

I have just “promulgated” the appropriate advice concerning the NJ tax treatment of HSA activity here in this posting to THE WANDERING TAX PRO! And, if I may be permitted a plug – NJ taxpayers can learn more about deducting medical expenses on their NJ-1040 by ordering my special report “DEDUCTING MEDICAL EXPENSES ON YOUR 2007 NEW JERSEY STATE INCOME TAX RETURN”. Order by October 31st and it is yours for only $1.00!

I hope my answer has cleared up this issue for you. Please let me know if you need any further clarification.


Tuesday, October 23, 2007


TAXPROF Paul Caron’s TAX NEWS ROUND-UP takes us to an Associated Press article from CBS News on presidential hopeful Barack Obama's tax proposals.
One proposal is “to direct the IRS to send pre-filled tax forms to 40 million workers who take the standard deduction and have a bank account. They would simply have to sign and return it, which Obama estimates would save more than $2 billion in tax preparation fees and 200 million hours of work.”
"There's no reason you should have to pay H&R Block to spend hours and hours. You should just get a form," Obama said. "It should take you about five minutes. That should save you a lot of time and aggravation."

While I agree with BO that there is no reason you should have to pay H&R Block (in any situation), I certainly do not agree with his plan to send “pre-prepared” short forms to taxpayers. The idea is ridiculous!

Taxpayers should be allowed to determine if they will claim the standard deduction – and not be told, or even suggested, by the IRS that this is what they should do. Individual situations change from year-to-year – how does the IRS know that a taxpayer is better off filing a short-form simply from his W-2 and Form 1099-INT information. Taxpayers should also be allowed to consult a competent tax professional to determine if the standard deduction or a short-form will result in the least tax liability.

Let’s face it. There are a lot of taxpayers who would save mucho dinero by itemizing or taking advantage of various other tax adjustments or credits – but who would simply sign a short-form and pay a lot more tax then they would or should have to if the IRS sent them a pre-prepared return and requested a signature.

And looking at the issue from the government side – who is to say that the only income a taxpayer has to report is included on the W-2 and Form 1099-INT information that the IRS has in its computer matching program. Besides, pre-printing and mailing out such forms would be a waste of the government’s money.

Actually I agree with the basic thought behind this totally unacceptable idea – that the current Tax Code is too complicated and needs to be simplified.

If the Tax Code itself were substantially simplified, with a flat tax and a system under which all taxpayers would file a simpler “short-form” (like the half-page return suggested by the President’s Advisory Panel) than it might be ok for the IRS to send out pre-printed returns. But certainly not under our current tax system.

So what do you think?


In this installment of my series on Year End Tax Planning I will discuss a change in the tax law for 2008 that may affect your 2007 year-end investment moves, and a way you can create a deductible capital loss from an investment you are not ready to sell.

* Under the Jobs and Growth Tax Relief Reconciliation Act of 2003 the 5% capital gains tax rate on qualified dividends, capital gain distributions and long-term capital gains for taxpayers in the 15% and 10% tax brackets is reduced to 0% for tax year 2008 only. Taxpayers in at least the 15% tax bracket for tax year 2008 will pay absolutely no federal income tax on qualified dividends and capital gain distributions received in 2008, and on long-term capital gains from trades that occur in 2008.

I believe that this also includes the portion of the alternative tax calculation for qualified dividends and long-term capital gains that falls within the 5% category if such income would have been taxed partially at the 5% rate and partially at the 15% rate.

Keep this in mind when planning your 2007 year-end sales - and postpone selling investments that will produce a long-term capital gain until 2008 if all or part of the gain will be taxed at 0% and you do not have a substantial 2007 capital loss carryover to 2008.

If you have a $10,000 capital loss carryover from 2007 to 2008 and $6,000 in net capital gains for 2008, the $10,000 carryover will wipe out the $6,000 in gains and produce the maximum $3,000 net capital loss deduction for 2008. You will get no tax benefit from the 0% tax rate on long term capital gains for 2008.

If your capital gains will all be fully taxed at 15% in 2008, you may want to consider “gifting” an appreciated security that you plan to sell for a gain to a family member (i.e. an elderly parent) who will be in the 15% bracket and have that person sell the stock in 2008. This is a good way to provide support to your parents without being “out of pocket”.

You generally give your parents $20,000 each year to help toward their support, but are not able to claim them as dependents because of the gross income test. They are in the low end of the 15% tax bracket. You plan to sell an investment in 2008 that will generate $20,000 in gross proceeds and a $10,000 long-term capital gain. You gift the investment to your parents, and, as is the rule, your basis and holding period carry over to them.

If you sold the stock and gave your parents the cash you would have to pay $1,500.00 in federal (15%) and probably at least $500.00 in state income taxes. By gifting the stock to your parents in 2008, who then sell it to generate the needed support, you save the $2,000.00+ in income tax. The capital gains tax to your parents on the $10,000.00 will be “0”. As many states provide some kind of retirement income exclusion to the elderly your parents would probably not pay any state income tax either.

* If you have in your portfolio an investment (stock or mutual fund shares) that has gone down in value, but you have high hopes that it will go back up in the future and do not want to unload it yet, you can turn this paper loss into an actual deductible loss and still hold on to the security.

Sell the investment, wait 31 days, and buy back a matching amount of the same investment. Or you can first buy a second lot of the investment, wait 31 days, and then sell the original investment, specifically instructing your broker to sell the original lot.

In either case it is of vital importance that you wait the full 31 days before completing the transaction. Under the “wash sale” rules, the IRS will disallow any loss on the sale of an investment when the same or substantially identical securities and acquired within 30 days before or after the sale.
The wash sale rules do not apply in the case of securities sold at a gain. You may want to use this strategy to generate gains to wipe out an excess net capital loss for the year. You do not have to wait the 31 days discussed above. You can sell the stock for a gain on Tuesday and buy it back on Wednesday.
Above I talked about having a $10,000 capital loss carryover from 2007 to 2008. If your 2008 income, without counting qualified dividends, capital gain distributions and long-term capital gains, will put you in the 15% bracket, you can use wash sales to generate $10,000 in capital gains - thus freeing up any net long-term capital gains in 2008 to be at least partially taxed at the 0% bracket.
As an aside, New Jersey does not allow the carryover of excess capital losses. So if you have a net federal capital loss carryover from 2007 to 2008 of $10,000 this loss will be lost forever when it comes to NJ state income taxes, resulting in perhaps $552.00 in lost tax savings. See my post on "Capital Gains and New Jersey State Income Tax". A wash sale to wipe out your excess losses will save NJ state taxes in the future.

When it comes to year-end moves involving investments it is vital to consider the financial aspects of possible sale transactions. Putting off the sale of a stock that will generate a long-term gain until 2008 could result in a smaller profit due to a reduced share price. You should consult both your tax professional and your broker before making taking any action.

to be continued ……….


Monday, October 22, 2007


Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG reminds us that today is the 21st “birthday” of the Tax Reform Act of 1986.

TRA 86 was the largest revision of the Tax Code since 1954. It was also known as the “Tax Professionals Full Employment Act of 1986”.

While increasing the need for taxpayers to seek the help of professionals at tax time, the Act did away with much of the magic that we tax preparers could perform by phasing out Income Averaging and Ten-Year Averaging, as well as other tax deductions and breaks (including the itemized deduction for “personal” interest). It also introduced the “Kiddie Tax” and the 2% of AGI exclusion of miscellaneous itemized deductions.

A major component of TRA 86 was the introduction of the “passive activity” rules to close many of the loopholes that allowed tax shelters to thrive. As such, the Act should have also done away with the dreaded Alternative Minimum Tax (AMT), whose original purpose was to keep high-income taxpayers from taking excessive advantage of tax shelters to altogether avoid paying federal income taxes. Instead the Act helped to create the monster that the AMT has become today.

An item in the Tax Foundation’s TAX POLICY BLOG from last year points out that in the 20 years since TRA 86, “much of what passed in 1986 to limit special tax loopholes has already crept back into the system courtesy of politicians quick to give in to whatever lobby fills their pockets”.


I have had a chance to review the 2008 Presidential Candidates' Tax Proposal Matrix developed by the Tax Policy Center. Here is my “2 cents” on the proposals.
Tax credits seem to be a popular topic – consolidating and expanding existing ones and creating a new one for health care. The candidates want to make many of these credits “refundable” – if the total amount of the credit exceeds the total tax liability on the return the excess would be refunded as a gift to the taxpayer – similar to the current refundable Earned Income Credit and Child Tax Credit.
I am all for targeted tax credits to encourage positive activity such as saving for retirement, continuing education, child care, and purchasing health care. I especially like Joe Biden’s plan to consolidate the education tax credits and deduction for tuition and fees into a single credit. Any consolidation or simplification of tax benefits is a good thing. But I am against “refundable” credits of any kind. As we have seen with the EIC, this encourages rampant tax fraud.
There is no doubt that taxpayers in many income levels need help paying for health insurance, especially here in New Jersey. For my money I would rather be provided with a source of cheap, government subsidized health insurance for small business owners and low to middle-income taxpayers rather than a tax credit.
There is not much in the matrix on changes to the taxation of investment income. I am very much opposed to John Edwards’ and Barrack Obama’s plans to increase the top tax rate on long-term capital gains. I strongly believe that lower tax rates on capital gains increase tax revenue in the long run.
I like Mitt Romney’s proposal to reduce the tax rate on interest, capital gains and dividends to 0% for taxpayers with AGI under $200,000. I am all for encouraging savings and investment. This may, however, may be a bit too much. Perhaps, instead, a variation on John Edwards’ recommendation to exempt the first $250.00 in interest, dividends and capital gains from income tax, similar in a way to the old “dividend exclusion” of my early days in the business (everything old is new again).
According to the matrix, the candidates are pretty silent on the topic of the dreaded Alternative Minimum Tax, other than one plan to index the exemption amounts for inflation and another to make George W’s increased exemption amounts permanent. It is very clear, at least to me, that, like Frankenstein in the old Hammer film, the Alternative Minimum Tax must be destroyed!
In general, the tax proposals of the candidates add to, instead of taking away from, the current complication of the Tax Code. Sam Brownback (no Brownback Mountain jokes now) supported a “flat tax”, but he has dropped out of the race, and only Mike Huckabee supports the “Fair Tax” national retail sales tax.
A few of the candidates favor repealing the federal estate tax. While no fan of the tax, as I have said here many times before, my only concern with its total repeal is the issue of “stepped-up basis” for inherited property. I would prefer to substantially increase the exemption amount – to $5 Million or more – as already proposed and attempted by the Democrats.
Duncan Hunter (I will admit I never heard of him before – he is a Republican Congressman from California) “supports a ‘major’ tax reform to simplify the tax system”. One of the few things that George W did correct during his tenure (although I also support the bulk of his tax cuts) was to create the President's Advisory Panel on Federal Tax Reform to “advise on options to reform the tax code to make it simpler, fairer, and more pro-growth to benefit all Americans”. Unfortunately, nothing ever came from this effort, as George W apparently lost interest.
My tax plan, if I were running for President, would be to reinstate the tax reform panel, make it totally non-political, and take its findings seriously. As I have said before, as a tax professional I am not against a flatter, more simple tax system. While complication is always good for business, I feel, and have so stated here in the past, that I would not lose business or income if the Tax Code was vastly simplified.
So what do you think about the candidates’ tax proposals?
BTW, the
Center for Tax Justice also has a page on Presidential candidates’ tax proposals.

Sunday, October 21, 2007


As promised, I have just added a new WHAT'S NEW FOR 2008 Page to my website with all the recently announced federal tax changes for 2008. I will update this page as more information becomes available.
This Page includes the 2008 Tax Rate Schedules.
Check it out!


Here is a WHAT’S THE BUZZ Extra – some buzz that didn’t make it into yesterday’s posting:
* Gina of GINA’S TAX ARTICLES brings up a topic I haven’t heard discussed in many years in “Income from Barter”. As she points out, if you trade your professional services for compensation other than cash you must report the “value” of what you have received as part of your self-employment income. For example if I prepared a 1040 for a dentist and instead of giving me a check he gave me a free check-up we would both have to include in our taxable incomes for the year the value of the services provided. Of course, I could deduct the value of the dental check-up as a medical expense and he could claim the value of the tax return preparation as a miscellaneous deduction.
* Joe Kristan of the ROTH AND COMPANY TAX UPDATES BLOG recounts a horror story from a truly last-minute filer in “The Case for Electronic Filing, Illustrated” – with a Post Office manager “going postal”. While I have never been to the Post Office late on August 15th or October 15th, my experiences making an 11:30 pm run to the Main Post Office in Jersey City on April 15th in the “good old days” (now truly a thing of the past) have always been pleasant. There were extra personnel in the lobby to guide late-filers to special boxes set up for specific mailing addresses (i.e. one for 1040 refunds and one for 1040 balances dues and similarly ones for each of the three New Jersey addresses – balance due, no balance due and rebate only – and Harrisburg, New York for IT-203s). There were no long lines. The NYC main PO makes an event out of April 15th filing each year – with free snacks and various forms of entertainment.
FYI, I discuss my old April 15th experiences in a “comment” on Trish McIntyre’s posting “Oct. 15th is the new April 15th” at her OUR TAXING TIMES blog. What I forgot to include in my comment was that in those “good old days” there was no August 15th or October 15th for us. We never filed extensions. The tax season was truly over at midnight on April 15th! I wish it could be true again.
In his post Joe uses the story to encourage alternative methods for getting your return to the IRS, such as e-filing and authorized private delivery services. My response to this horror story is different – don’t wait until literally the last minute to get your 1040 in the mail! While I agree that it was, as Joe puts it, “a disgraceful performance by the Postal Service”, if the taxpayer in the tale was inconvenienced it was certainly his own fault.
BTW, Joe – hope you are felling better!
* The current AARP email newsletter introduced me to the Angels Gate animal hospice in Fort Salonga, NY. Angel’s Gate is a place where animals that have no place to go because of their special needs are cared for, wanted and loved. It takes in animals relinquished by their human companions or by other shelters because of medical reasons. In 2000 Angel's Gate became a wildlife rehabilitation center as well. This is certainly a charity that deserves our support. You can send a tax-deductible contribution or you can support the organization via its “Shopping Mall”, where every purchase returns a generous percentage to the charity.


Saturday, October 20, 2007


* Hey, I got an email from the “other side” yesterday. It was supposedly from actor Peter Ustinov, who died in 2004. The subject line did not make any sense, but I expect the email was promoting something pornographic. I deleted it unopened.

* What to OJ Simpson, Dionne Warwick and comedian Sinbad all have in common (no, not the obvious). According to an article in the WebCPA weekly email newsletter all three owe more than $1 Million in back taxes (plus penalty and interest) to the California Franchise Tax Board!

* MY MONEY BLOG asks the question ‘If you had to choose between contributing $4,000 to a Roth IRA or keeping/putting it towards your Emergency Fund, which should you choose?’ in the post “
Roth IRA Contribution vs. Emergency Fund Savings”. His answer – “I used to be in the Emergency Fund First camp, but now I think I’ve changed my mind.” I agree with MMB. One reason is, as the author puts it, “the annual $4,000 Roth IRA contribution limit is a ‘use it or lose it’ proposition. You can’t put nothing in this year, and then $8,000 the next. Once April 15th rolls around, you’ve missed out on potential tax advantages that may extend several decades (even to your heirs).”

If you do need money for an emergency, with a ROTH IRA you can always withdraw your actual contributions tax-free and penalty-free. There is no income tax or 10% premature withdrawal penalty until your total withdrawals exceed your total contributions.

* Jeremy Vohwinkle of ABOUT.COM: FINANCIAL PLANNING offers some good advice to college grads starting their first “real” job in his post “Make the Most of Your Paycheck from Your First Job”. Under the category “Begin Saving for Retirement” he suggests that you consider opening an IRA if your employer does not offer a 401(k). I would highly recommend that new employees contribute the maximum (or as much as they can afford) to a ROTH IRA in addition to participating in a 401(k) while their income is such that they qualify and their expenses are still relatively low. A few years of ROTH contributions now will grow to a sizeable tax-free amount at retirement 40+ years down the road.

* A report issued by the Treasury Inspector General for Tax Administration last month states that millions of taxpayers overlooked important tax breaks and made other costly mistakes on their 2006 returns. The report estimates that over 2 million individuals who were eligible to deduct state and local sales taxes didn't, 50% more than last year. This is possibly because, as Congress waited until literally the last minute to extend this deduction, this deduction was not indicated on Schedule A or included in the printed instructions for Schedule A. Many taxpayers also failed to claim the one-time telephone excise tax refund. As of September the IRS has only paid out half of the $8 Million it has anticipated. The report also concluded that the 2007 tax-filing season "generally" was successful, and also said "most" returns were "timely and accurately" processed by the IRS.

I would expect that most of the taxpayers who missed out on tax breaks on their 2006 return prepared their own returns, maybe via software, instead of using a competent tax professional. Or if they did use a paid preparer it was probably one employed by Henry and Richard or one of the other fast food chains.
* The NATP’s TAXPRO WEEKLY email newsletter reports that “The IRS has certified the 2008 Honda Civic Hybrid CVT as eligible for the alternative motor vehicle credit. The credit amount for the vehicle is $2,100."
* This past week I reported on the Social Security COLA increases for 2008, including the new Social Security wage base of $102,000. The SSA website has a page that lists the annual changes in the taxable wage base since Social Security began in 1937. FYI, the wage base for 1937 through 1950 was $3,000. When I started doing 1040s, in 1972, the wage base had tripled to $9,000. Since then the wage base has increased by 1033 1/3%! A tip of the hat to Kay Bell of DON’T MESS WITH TAXES for bringing this page to my attention.
* The TAXALICIOUS blog brings us the “Willie Nelson Tax Commercial”. Willie is now doing commercials for Henry and Richard, exploiting his famous tax problems of a few years back. One can only imagine how much “more worse” his tax problems would have been if H+R Block had prepared his returns!
* I apologize for wasting space here on TWTP on such an idiot – but I can’t help myself. Perennial tonsorially-challenged arsehole Donald Trump just can’t let go. He once again made a fool of himself putting down celebrities – including his obsession Rosie O’Donnell - in a recent interview on Larry King to promote his latest useless book. He said Rosie ate like a pig at his wedding, Joy Behar has no talent (what does Trump know of talent – he has none himself) and Angelina Jolie is no great beauty (what – did she turn him down?). If you can’t say anything nice about a person then don’t say anything. The only person Trump can say anything nice about is himself!

* Once again let’s leave with a joke – this time on “Verifying Donations” from the self-proclaimed TAX GURU’s website.

Friday, October 19, 2007


The IRS has announced the annual inflation-adjusted amounts for personal exemptions, the standard deduction, maximum pension plan contributions, and other tax items for 2008.

The deduction for each Personal Exemption for 2008 is $3,500.
The Standard Deduction amounts for 2008 are:
· $ 5,450 for Single
· $10,900 for Married Filing Joint and Qualifying Widow(er)
· $ 8,000 for Head of Household
· $ 5,450 for Married Filing Separate
The additional Standard Deduction amounts for age 65 or older and/or blind for 2008 are:
· $1,350 for Single and Head of Household – up from $1,300 for 2007
· $1,050 for Married (Joint and Separate) and Qualifying Widow(er) – same as 2007
The 2008 Standard Deduction for a dependent is the greater of $900 or the sum of $300 and the dependent's earned income, not to exceed $5,450 (plus $1,350 if age 65 or blind) – up from $850 for 2007.
The 2008 annual contribution limits for retirement plans are:

· $15,500 (plus an additional $5,000 if age 50 or older at the end of 2008) for 401(k) and 403(b) plans – same as 2007
· $15,500 (plus an additional $5,000 if age 50 or older at the end of 2008) for 457 Plans (Deferred Compensation for state and local government employees) – same as 2007
· $10,500 (plus an additional $2,500 if age 50 or older at the end of 2008) for SIMPLE plans – same as 2007
· $46,000 for Defined Contribution KEOGH plans – up from $45,000 for 2007
· $46,000 for Self-Employed SEP plans (allowable contribution equal to 25% of net earnings of up to $230,000, which translates to 20% multiplied by the total of "net earnings from self-employment" from Schedule C, Schedule C-EZ or Form K-1 less the deduction for 50% of self-employment tax) – up from $45,000 for 2007
· $5,000 (plus an additional $1,000 if age 50 or older at the end of 2008) for traditional and ROTH Individual Retirement Accounts (IRA) – up from $4,000 for 2007
The compensation limit for participation in a SEP is $500.00 – same as 2007.
The maximum Hope credit, available for the first two years of post-secondary education, is $1,800, up from $1,650 in 2007.
I will be adding a WHAT’S NEW FOR 2008 Page to my website with the above information, the 2008 tax rate schedules and additional 2008 changes by the end of October.


The traditional year-end tax planning moves of deferring income and accelerating deductions outlined in Part I apply only if you pay the “regular” federal income tax. However, they may backfire if you fall victim to the dreaded Alternative Minimum Tax (AMT).

It is important to, when preparing your preliminary 2007 Form 1040, determine if you will be an AMT victim.

Part I discussed accelerating medical and miscellaneous deductions, and making a 4th Quarter state estimated tax payment in December instead of January. However, when calculating the dreaded AMT medical expenses are only deductible to the extent they exceed 10% (not 7½%) of AGI, and taxes and miscellaneous investment and job-related expenses are not deductible at all.

If you consistently pay AMT year after year it really doesn’t matter when you pay your taxes, investment expenses or job-related expenses. They will never be deductible (as long as the AMT exists in its current form).

However, if you usually pay the “regular” tax and, due to some special circumstances, you discover you will pay AMT for 2007 you should postpone paying additional taxes, investment and job-related miscellaneous expenses, and possibly medical expenses, until 2008 – hopefully a year when you will not be subject to AMT.

The AMT tax rate is a flat 26% or 28%. If under “regular” tax you are in the 28% bracket for 2007, and you also expect to be in this bracket for 2008, and you will be paying AMT for 2007 (but not necessarily for 2008) at the 26% flat rate it may pay to actually accelerate income to be claimed in 2007. The additional income will be taxed at 28% in 2008, but only at 26% in 2007.

Plus, if you will not be paying AMT in 2008, the increased income could affect the “read my lips taxes” (personal exemption and itemized deduction phase-outs) if claimed in 2008. These “taxes” are not a consideration in calculating AMT.

At this point it is a bit difficult to determine if you will be an AMT victim for 2007. As of this writing, Congress has still not enacted an AMT fix to extend the increased exemption amounts. So the 2007 AMT exemptions are currently $33,750 for Single and Head of Household filers, $45,000 for Married Filing Joint and Qualified Widow(er)s, and $22,500 for Married Filing Separate.
However, everyone, myself included, expects that Congress will act before year-end (Congressman Rangel of the House Ways and Means Committee has promised to have a bill that includes a 1-year AMT fix on the House floor by next week - see my post on "As The Congress Turns") and make the exemption amounts at least $42,500, $62,550 and $31,275 again for 2007. I will let you know when this happens, and what the exemption amounts will be, here at TWTP.
There also exists the possibility that the AMT will either be totally eliminated or drastically revised in 2008. House Ways and Means Committee Chairman Charles Rangel has proposed killing the Alternative Minimum Tax. However, to be safe, you should plan your 2007 year-end tax moves with the assumption that the AMT will continue in its current form for at least 2008.

To be continued……………


Thursday, October 18, 2007


Today's CCH daily email Tax Newsletter reports that "Rangel Says AMT/Extenders Bill Now; Broader Tax Reform Legislation in 2008”.

According to the article, Senate Finance Committee Chairman Charles Rangel told reporters yesterday “to expect the introduction of two separate tax bills during the week of October 22”. One bill would extend a group of popular business and individual tax breaks, among them the “big three” – the above-the-line adjustment to income for educator expenses and tuition and fees and the option to deduct state and local sales tax instead of state and local income tax. This bill would also include another one-year AMT fix. Rangel expects this bill will reach the House floor before the mid-November adjournment.
The second bill is Rangel’s "mother of all reform" bills that would totally eliminate the AMT (hurray!) and cut taxes for about 90 million Americans, lower corporate tax rates and close many business tax loopholes. Rangel expects to see this bill on the House floor sometime in 2008.
I expect the “extenders” bill will easily pass both House and Senate – but the “mother of all reform” will be another story.


The Social Security Administration has announced that the monthly Social Security and Supplemental Security Income (SSI) benefits will increase by 2.3 percent in 2008. This is the smallest increase in Social Security benefits in four (4) years. This increase will begin with the checks that Social Security beneficiaries receive in January 2008. Increased payments to SSI beneficiaries will begin on December 31.
The average monthly Social Security check will increase from $1,055.00 to $1,079.00. For a married couple who both receive benefit checks the average total will increase from $1,722.00 to $1,761.00.
Social Security and SSI benefits increase automatically each year based on the rise in the Bureau of Labor Statistics' Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), from the third quarter of the prior year to the corresponding period of the current year.
The earnings base for Social Security withholding on wages and the Social Security portion of Self-Employment Tax for 2008 is $102,000, up from $97,500 for 2007. So the maximum amount of Social Security tax to be withheld from wages for 2007 is $6,324 and the maximum Social Security portion of self-employment tax is $12,648.
The standard Medicare Part B monthly premium will be $96.40 in 2008, an increase of $2.90, or 3.1 percent, from the $93.50 Part B premium for 2007. The 2008 amount is the smallest percentage increase in the Part B premium since 2001 and is $2.10 less than the increase in the premium for 2007. Thankfully the increase in Medicare premiums will not wipe out the increase in benefits.
The income-based Medicare Part B monthly premiums for 2008 are:
Premiums - - - - Income of:
$ 96.40 - - - $82,000 or less
$122.20 - - - $82,001-$102,000
$160.90 - - - $102,001-$153,000
$199.70 - - - $153,001-$205,000
$238.40 - - - Above $205,000
Premiums - - - - Income of:
$ 96.40 - - - $164,000 or less
$122.20 - - - $164,001-$204,000
$160.90 - - - $204,001-$306,000
$199.70 - - - $306,001-$410,000
$238.40 - - - Above $410,000
Premiums - - - - Income of:
$ 96.40 - - - $82,000 or less
$199.70 - - - $82,001-$123,000
$239.40 - - - Above $123,000
The income base used to determine these premiums is one’s Adjusted Gross Income (AGI) plus any tax-exempt municipal bond interest income (reported on Line 8b of the Form 1040).
The earnings limitations for 2008 are:
1) Under Full Retirement Age - $13,560.00 per year or $1,130.00 per month ($1.00 in benefits lost for every $2.00 in earnings above the limit).
2) The Year You Reach Full Retirement Age - $36,120.00 per year or $3,010.00 per month (applies only to earnings for months prior to reaching full retirement age - no limit on earnings beginning the month you reach full retirement age; $1.00 in benefits lost for every $3.00 in earnings above the limit).
There is no limit on earnings beginning the month an individual reaches full retirement age.