Monday, May 31, 2010

AS THE CONGRESS TURNS

How ridiculous!

If you are self-employed, either as a sole proprietor or a partner, all of your net income from self-employment is subject to the “self-employment” tax, which is the equivalent of the FICA (Social Security and Medicare) tax paid by employees. There is a maximum subject to the Social Security portion, but 100% is subject to the Medicare portion.

A self-employed taxpayer can incorporate his/her business and limit the FICA tax to the wages he/she pays himself/herself. Any additional profit that the shareholder gives to himself/herself is considered to be a dividend, and is subject to “double-taxation”.

Self-employed taxpayers can avoid some of the Social Security and Medicare tax on their net earnings and avoid the double-taxation of a regular “C” corporation by electing to be a “sub-chapter S” corporation. The FICA tax is still limited to wages paid, and the balance of the corporation’s income is passed through to be taxed as ordinary income only on the shareholder’s Form 1040. The “sub-S” corporation itself does not pay any federal, and generally state, income tax on the net profit of the business.

For years the sub-S corporation has been used to avoid paying FICA/self-employment tax. If the shareholder pays himself/herself too small a salary he/she faces the possibility of an audit in which the IRS would “reclassify” some or all of the pass-through “dividends” as wages subject to payroll taxes – but the risk was, for the most part, worth it.

In order to pay for the various provisions of the American Jobs and Closing Tax Loopholes Act of 2010 Congress chose to close this “loophole” provided by sub-chapter S corporation treatment. However, the cafones want to close the loophole for only certain sub-S shareholders.

If a loophole is considered “inappropriate” it is so for all who can take advantage of it. If Congress wants to do away with the exemption from FICA/self-employment tax for sub-S shareholders it should do so for all sub-S shareholders.

{As an unrelated aside, I also think that if a tax deduction is “appropriate” it is appropriate for all taxpayers, and should not be “phased-out” based on some arbitrary level of income.}

Limiting this loophole closing to only a certain “class” of shareholders makes no sense.

You should read the posts of Joe Kristan and Monica Lawver, which I included in this past Saturday’s BUZZ, for more detail.

This action clearly sends a message, as pointed out by TAX GIRL Kelly Phillips Erb, that “Congress Hates Small Businesses”.

To repeat – how ridiculous!

TTFN

Saturday, May 29, 2010

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

* My article “Find Tax Benefits from Your Junk” appeared this past week at MAINSTREET.COM.
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* Speaking of MAINSTREET.COM – want to know “Who Was the Richest President?”.
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* New Jersey senior and disabled homeowners should read my post “OOPS – They Did It Again” over at the NJ TAX PRACTICE BLOG.

* Shop till you drop! Kay Bell tells us about “Memorial Day State Sales Tax Holidays for Shoppers in Virginia, Texas and Louisiana” at DON’T MESS WITH TAXES.

* Kay also posts about a recent Tax Foundation study that finds “Southerners Pay Fewest Taxes”.

As Kay reminds us that “according to 2008 IRS data, a record 52 million filers (or 47 percent of the 143 million who filed a tax return for that year) had no tax liability”, and goes on to say that, according to the report, “Southern states have the highest percentages of nonpayers”.

* Approximately two hundred IRS Taxpayer Assistance Centers across the country will open on Saturday, June 5th, to provide help to individual taxpayers dealing with notices and payments, return preparation and a variety of other tax issues. Each office will be open from 9:00 a.m. until 2:00 p.m. local time.

Click here to find the locations in your state – and here for the locations in NJ.

* The Tax Foundation’s TAX POLICY BLOG reports on “Pork Barrel Tax Provisions in the Extenders Bill”.

* Joe Kristan (the ROTH AND COMPANY TAX UPDATE BLOG) in “Reputation and Skill” and Monica Lawver (THE TAX CPA) in “The Fuzzy Definitions” eloquently discuss the totally ridiculous idea of applying “self-employment tax to some -- but only some -- professional S corporations” that is part of the current “extenders bill”.

With the success of the Limited Liability Company entity, which provides liability protection while permitting the more flexible method of allocating income and expenses of a partnership, is the “sub-chapter S” corporation form really relevant any more?

* And, speaking of the “extenders bill”, Joe also tells us that “Extender Bill Extended to Next Month”. Joe tells us it “won't pass the house until after Memorial Day”.

* Howard Gleckman takes a scholarly look at the home mortgage deduction in “Should We Dump the Home Mortgage Interest Deduction?” at TAXVOX, the blog of the Tax Policy Center.

Perhaps the only reason most of my Schedule A filers are able to itemize is the mortgage interest deduction – and I would not necessarily want them to lose this deduction. However I might consider replacing the deduction with a non-refundable credit.

* Before I go – a thank you to Joe of CAFETAX for including me in his “Tax Around the Web” post and including TWTP as one of his favorite blogs. Check out Joe’s blog when you get a moment.

TTFN

Friday, May 28, 2010

DEAR GRADUATE

Since I guess you can say it is currently “graduation season” I thought I would post another rerun – advice that I would give to college graduates if I were the keynote speaker at a graduation:

WON’T YOU TAKE THIS ADVICE I HAND YOU LIKE A BROTHER –

A while back two of my fellow tax bloggers gave some good advice to those starting out in the accounting world. I would like to add a couple of cents.

My advice involves a song lyric and two advertising slogans –

* “You See You Can’t Please Everyone, So You Got to Please Yourself” (no jokes about pleasuring oneself now)

* “Only Sherwin Williams Can Cover the Earth”

* “Just Say No!”

1) Rick Nelson was spouting real wisdom when he sang “You see you can’t please everyone so you got to please yourself”. Do not choose your career, or run your life or business, because it is what you think your family, friends, clients, etc would want you to do. Follow your own dreams, and make your own decisions, and your own mistakes in the process, based on what you want.

2) When I first began my own practice, many, many, many years ago, I thought that I should offer, either personally or via relationships with consultants in other fields, all kinds of financial services to clients, not just 1040 preparation, so that their tax business could not be stolen away by their insurance agent or broker or another financial professional.

Then I remembered what a wise old Texan (my boss at the Summit YWCA) once told me – “Only Sherwin Williams can cover the earth”. You can’t be all things to all people. Don’t spread yourself too thin and try to offer the world to your clients.

Along the same lines, remember that the Tax Code is humongous and you can not be an expert in all Sections. Choose the area of tax practice that you enjoy most and are best at and limit your practice to that area.

3) Don’t be an Ado Annie. You must learn to just say “no” to clients. Regardless of how much you would sincerely like to help them with matters other than that in which you are educated and experienced, realize your limitations and learn to tell a client “I don’t do that”.

Over the years clients have brought me census forms and loan, financial aide, discount program, and rebate applications asking for help. I clearly state that I do 1040s and nothing else, because that is where my education and experience lies. I tell them that I know nothing more about these forms and applications then they do, and that I do not have time during the tax season to do anything that does not involve a 1040.

You should also learn to just say no to accepting a new client. If you feel you are already overworked during the tax season, or that the client shows a potential for agita and aggravation, learn how to say that you are not accepting any new clients.

And lastly learn how to say “no” to a client when they ask you to do something that is “shaky” or “shady” – such as to claim a deduction that you know, or strongly suspect, is not legitimate or appropriate or not to claim income that you know they received. It is better to lose the client than to gain the potential problems.

While I have written these three pieces of advice based on my many years of experience as a tax professional, they are valid regardless of your choice of trade or profession, and each one has many applications.

So good luck!

TTFN

Thursday, May 27, 2010

HERE IS SOMETHING TO THINK ABOUT - AGAIN

Just thought I would “rerun” a post that on an item of tax reform that needs to be thought about and discussed.

I welcome your comments on this issue. Please email them to me at rdftaxpro@yahoo.com (with WANDERING TAX PRO COMMENT in the subject line).


HERE IS SOMETHING TO THINK ABOUT -

I have a unique tax simplification proposal. I haven’t heard it discussed or proposed anywhere else. I submit it is something to think about.

What if we did away with the depreciation deduction for real estate?

According to the IRS, depreciation is “an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property”. The IRS discusses depreciation in detail in Publication 946 - How To Depreciate Property.

Let’s look at depreciation from the point of view of the Income Statement. Basically, if you purchase an asset (i.e. equipment, a vehicle, or real estate) that will last more than one year you spread the cost of the asset over its “useful life”. You purchase a new computer. You certainly do not purchase a new computer each year – you expect that it will continue to provide service for several years. So you divide the cost of the computer over a period of years to reflect this fact, and to properly report the “economic reality” of the purchase.

If you deducted the full cost of the computer in the year of purchase this would distort the true cost of doing business. Since you generally purchase a new computer every five years, claiming a deduction of 1/5 of the cost each year “more better” represents your cost of operations.

Thus depreciation is used to “recover the cost or other basis of certain property”.

Another way to look at depreciation is from the Balance Sheet perspective. When you purchase an asset that asset has value to you. You trade the asset of cash for a computer. If you sold your business the value of the computer would be included in the value of the business. As an asset ages its value drops. A two-year old computer does not have the same value in the market as a comparable brand new computer. Depreciation is used to reflect the drop in value of the asset.

Thus depreciation is used to reflect the “wear and tear, deterioration, or obsolescence of the property.”

There are several ways to depreciate an asset. The simplest method is “Straight Line”. You deduct the cost of the asset evenly over its life. If you purchase a computer for $1000 and you expect it to last for five years you would deduct $200 per year. There are also “accelerated” methods which recognize that the value of an asset will be reduced disproportionately, with the reduction in value being greater in the earlier years. As you well know, when you buy a new car it drops in value the minute you drive it off the lot.

To simplify matters, the government provides guidelines for the “useful” life of different types of assets. The current depreciation system is called the “Modified Accelerated Cost Recovery System” (MACRS), which came about with the Tax Reform Act of 1986. MACRS is divided into two separate depreciation systems:

General Depreciation System (GDS) – this is “regular” MACRS and is used most often. It provides the shortest “recovery periods”. You can use the accelerated “150% Declining Balance” method or the Straight Line method over the GDS recovery period.

Alternative Depreciation System (ADS) – you can elect to deduct the cost of the asset over a longer life using the Straight Line method. In some instances, such as for “listed property” which is used less than 50% of the time for business, ADS must be used.

MACRS allows the cost of the asset, other than real estate or improvements thereto, to be deducted over 3, 5, 7 and 10 years. The most common recovery periods are 5-year, for cars, computers, copiers, typewriters and software, and 7-year, for furniture and fixtures.

For tax deduction purposes depreciation begins when the asset is “placed in service” and not necessarily when it was purchased. If I purchase and pay for a computer online in December of 2007, but the computer is not delivered to my office until the first week of January 2008, then depreciation begins in January and I can begin to deduct depreciation on the computer in tax year 2008.

Tax rules call for a “half-year convention”, which treats all assets whose cost recovery begins during the year as being placed in service on the midpoint of the year. It basically allows for 6 months of depreciation. Under certain circumstances assets can be depreciated using a “mid-quarter” convention, provided a greater first year depreciation for assets purchased early in the year.

Real estate is treated differently in the Tax Code. First of all the cost of land is never depreciated. So one must remove the value of the land from the purchase price of the property. The adjusted purchase price of Residential Real Estate, including residential rental property, is recovered over a “useful life” of 27.5 years. Non-residential Real Estate (i.e. commercial property), including the portion of a residence that is used as a home office, has a useful life of 39 years. The depreciation of real estate uses a “mid-month” convention.

If we look at economic reality, a building has a life of much more than 27.5 or 39 years. The building I lived in before moving to my current apartment was 100 year old and still going strong. And, for the most part, the value of real estate does not drop in value over the years. If properly maintained its value will generally increase. My parents purchased their first home for $13,000 and sold it many, many years later for $75,000 (and they were robbed).

For all intents and purposes, again for the most part, real estate does not “depreciate”. You do not replace a building every few years because it no longer provides the same service or function. And the value of real estate as a component of the value of a business does not drop as it ages. So why do we allow a tax deduction for the depreciation of real estate?

Where depreciation of real estate comes into play most often in the world of 1040s, at least in my 35 years of experience, is with the rental of a 2-family building. One floor of the building is used as the personal residence of the owner and the other is rented out. Depreciation is claimed as a deduction against rental income on Schedule E and, in most cases, either creates or increases a tax loss. It is possible for the rental activity to provide positive cash flow, but because of the depreciation deduction result in a deductible loss. The depreciation deduction can increase the return’s refund by up to $1,000 or more!

The problem arises when the taxpayer(s) sell the property.

With a two-family house as described above, if the required conditions are met one half of the gain on the sale, up to $250,000 or $500,000 depending on filing status, is eligible for exclusion under Section 121. The other half is taxable as a capital gain. Any depreciation “allowed or allowable” (see my post on “Ask The Tax Pro – Allowed or Allowable”) over the years must be “recaptured”, or added back, to the taxable gain from the rental half of the property.

If the total net gain on the sale of the property is $100,000, generally (but not necessarily if, for example, capital improvements were made directly to the rental half) $50,000 will be allocated to the personal residence and $50,000 to the rental activity. If the taxpayer claimed $25,000 in depreciation on Schedule E over the years, or was entitled to claim $25,000 in depreciation (the “allowable” portion of “allowed or allowable”), the taxable capital gain is $75,000.

While long-term capital gain is taxed at 5% or 15%, gain resulting from depreciation recapture can be taxed at up to a maximum of 25%. In the above example, if the taxpayer was in the 25% bracket before adding the capital gain, $50,000 is fully taxed at 15%, for $7,500 in tax, and the $25,000 depreciation recapture would be taxed at 25%, for $6,250 in tax, resulting in total federal tax of $13,750 (effective 18 1/3% tax) – plus the appropriate state income tax on $75,000.

The above is the tax reality. But here is what the taxpayer will probably be thinking:

· “I sold my personal residence and my gain was only $100,000 – so I do not have to pay any federal or state income taxes!” – or

· “Since it was a two family house I only have to pay tax on half the profit - $50,000!” – or, worst of all

· “Hey, I just bought a new house that cost more than what I sold the old one for, so there is no tax!”

What is “more bad” is if the sale, after claiming all closing costs from the purchase and sale and capital improvements made over the years but before factoring in the depreciation recapture, results in a net loss! If we assume $25,000 in depreciation recapture against a $5,000 loss (50%) that is $20,000 taxed at up to 25%, or $5,000 in federal tax, plus state tax on the $20,000. You have to answer your client when he screams, “but I lost money – why am I paying tax?”

It is possible that recaptured depreciation can add $12,000+ to the overall federal and state tax bill – which more often than not comes as a complete shock to the taxpayer. And of course I was not told about the sale, which happened in May, until I get the client’s “stuff” in March of the following year. And again of course, the taxpayer did not increase withholding or make any estimated tax payments to cover the gain.

You try to explain to the client that he/she/they was/were saving $500-$1,000 each year by deducting the depreciation in the past, and now they are just paying “Sam” back – but clients cannot always understand or accept this. That $500-$1,000 per year was spent a long time ago!

In the “good old days”, when ordinary income rates were higher and there was a 50% or 60% capital gain exclusion (I am dating myself again) instead of reduced capital gain rates, it was easier to show a client that he actually made money in the long run by claiming depreciation – but not so today when the possible 25% rate on depreciation recapture could be the same as the rate for ordinary income.

And you won’t avoid the problem simply by not deducting depreciation when it is “allowable” – back to the “allowed or allowable” rule.

So we can see that in the long run depreciating real estate on the 1040 only results in increased “agita” for both taxpayer and tax professional.

Doing away with this deduction would provide “Uncle Sam”, and corresponding state uncles or aunts, with additional tax money up front, instead of having to wait years or decades to finally collect it. And bottom line - doing away with the depreciation deduction would more correctly tax the actual economic activity.

Recent court cases and IRS regulations have more clearly defined the difference between a capital improvement that is depreciated and a repair that is currently deducted, moving away from the dollar amount as the criteria and towards the nature of the expense as the determining factor. This is a topic for another posting. Under my suggestion there would also be no depreciation of true capital improvements – they would simply be added to cost basis.

No longer “allowing” the depreciation of real estate would not only affect the tax on the sale of rental property, but also remove the need for a taxpayer to recapture depreciation claimed on a home office when the residence is sold.

As THE WANDERING TAX PRO deals with individual income tax issues I will not go into this suggestion from a corporate tax point of view, at least at this time. Perhaps I will discuss it in a future posting.

So, what do you think - should we do away with the depreciation deduction for real estate, at least on the 1040? I am especially interested in hearing the opinions of my fellow tax bloggers.

This post has been especially long, and I apologize if it was because of my being long-winded.

Wednesday, May 26, 2010

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

* A double helping of Joe Kristan (of the ROTH AND COMPANY TAX UPDATE BLOG) – two posts worth checking out: “Insert your 'Professional Courtesy' Joke Here” and “I Lied to the IRS, But I'm Being Honest With You!”.

Joe was on a roll Monday- did you see my Monday post “I Tried”?

* ABOUT.COM: TAX PLANNING: US provides a list of states that will be running a Tax Amnesty program in 2010 -

"• Maine's tax amnesty program runs from September 1, 2010 through November 30, 2010
• Massachusetts has an amnesty program that is limited to businesses which begins April 1, 2010 and ends June 1, 2010
• New Mexico has approved an amnesty program, but the dates have not yet been released
• Nevada will conduct a tax amnesty program between the dates of July 1, 2010 and September 30, 2010
• Pennsylvania's tax amnesty program begins April 26, 2010 and ends June 18, 2010
• Philadelphia has a tax amnesty program that runs from May 3, 2010 to June 25, 2010
"

You can link to the website of each state’s Amnesty program at the ABOUT.COM post.

* No surprise here when Kay Bell reports that “Homebuyer Credit Sales, Related Audits Up, But Other IRS Audits Likely to be Lower” at DON’T MESS WITH TAXES.

Kay tells us -

The April 30 expiration of the first-time homebuyer credit prompted more people to buy houses last month.

And in connection with those purchases, we get another statistical bump that's also unsurprising. The IRS is auditing more tax returns that contain those homebuyer tax credit claims
.”

* The Small Business Taxes and Management website provides a good special report that explains “Documentation is More Than Invoice and Canceled Check”.

* BNA reports that “Extenders Vote Postponed Amid Concerns Over Cost, Carried Interest”.

* BNA also brings us an update on the testing process for the new program of licensing tax preparers in “IRS to Match Return Preparation With Testing Under Preparer Regime”.

While the IRS announced that it will offer two options for the test that preparers, except for some unknown reason (defying logic) CPAs and attorneys, must pass and has said that preparers can take whichever one they prefer – until now there has been no reference to limiting the scope of returns that one can prepare based on the test taken.

BNA reports (highlights are mine) – “The Internal Revenue Service will eventually check on whether the returns that tax preparers do fall into the category for which they have been tested, but not for now, David Williams, IRS Electronic Tax Administration director, told a gathering of accountants May 21.”

I am still somewhat perturbed that I have to take a test to show that I know what I am doing after 39 tax seasons without incident, considering that I take more than the now required continuing education CPEs in taxation each and every year, and even more considering that CPAs and attorneys are exempt from the test.

* Bill Perez tells us of a new IRS payroll form in “Form W-11 Released For Payroll Tax Exemption” at WILLIAM’S TAX PLANNING BLOG.

* You will notice that TWTP has a new “sponsor”. Click on the CPA ORANGE COUNTY, CA link in the upper left hand margin to go to ELLS, CPAs and Business Advisors.

The firm’s website also has a tax-related blog – ELLS BLOG.

I have not yet had the time to review in detail the tax provisions in the new healthcare “reform” bill. The ELLS BLOG discusses one aspect in its post “Tax Credit Helps Small Employers Provide Health Insurance Coverage”.

Do you want to help keep TWTP alive by becoming a “sponsor”? Click here to find out how.

TTFN

Tuesday, May 25, 2010

WRONG ANSWER!

During my “wanderings” on the web I came across a blog post that was providing answers to tax questions.

The question, submitted by a person who had recently begun doing some work as an “independent contractor”, was – “How much money do I have to make in order to be taxed?

The blog author provided the following answer –

Self-employed individuals are required to report any income earned over $400.00."

That answer is wrong!

As a self-employed individual you are taxed on your very first dollar of income! There is no minimum amount of self-employment income needed to be subject to the income tax. If your net income, after deducting all allowable legitimate business expenses, is $3.00 you must include this $3.00 in gross taxable income. If the net income is $398.00 you must add $398.00 to your gross income, same as you must do if the net income is $46,000.00.

The $400.00 figure refers to “self-employment tax” – the equivalent of FICA (Social Security and Medicare) Tax paid by those with net earnings from self-employment. If the net earnings from self-employment calculated on Schedule SE – which is 92.35% of the net profit reported on Schedule C or C-EZ (or passed through from a partnership on a K-1) – is less than $400.00 you do not have to pay any self-employment tax.

Let’s say Line 31 of your 2009 Schedule C, which is carried over to Line 12 on Page 1 of the Form 1040, is $430.00. Your net earnings from self-employment is $397.00 ($430.00 x .9235). Your Schedule C income is not subject to self-employment tax. If the Schedule C incomes is $500.00 your net earnings from self-employment is $462.00 ($500.00 x .9235). You will pay self-employment tax on the full $462.00.

The self-employment tax rate is 15.3%. Half of the self-employment tax calculated on Schedule SE is deducted “above the line” as an adjustment to income on Page 1 of Form 1040, reducing your Adjusted Gross Income.

I just wanted to set the record straight.

TTFN

Monday, May 24, 2010

I TRIED!

I just can’t seem to avoid distractions to take me away from getting the GD extensions done. The obvious solution is no more GD extensions - my goal for next tax season!

Over at the ROTH AND COMPANY TAX UPDATE BLOG Joe Kristan tells us that according to a “Former Tax Policy Chief: Tax System ‘Nearing Collapse’".

Joe quotes from a “sobering speech from Pamela F. Olson, a former Treasury assistant secretary for tax policy” on the mucking fess out federal income tax system has become.

Ms Olson joins Joe, myself, and other tax bloggers in our concerns regarding how the cafones in Washington have totally FU-ed the Tax Code. Her comments certainly bear repeating.

Congress decided to administer all manner of benefits through the tax code decades ago, but it has become particularly popular to do so in the last 15 years. Somewhere in the 1990s Republicans realized they could enact promised tax cuts with targeted provisions in the tax code, and Democrats realized they could enact promised spending programs with targeted provisions in the tax code.”

She hits the nail on the head with -

That is unfortunate, because the tax code is a poor delivery vehicle for tuition tax breaks that can't be delivered until long after the tuition check is written, for income support paid on the basis of last year's annual income, or for healthcare for those without employer-provided coverage. It is also a poor delivery mechanism because it fails to provide an incentive for many at the bottom of the income ladder who pay home mortgage interest but cannot deduct the interest, who set aside money in savings accounts but do not qualify for the savers credit, whose employers don't provide a retirement savings plan.”

Her bottom line –

In the tax world, instead of simplifying to increase productivity in compliance and administration, we keep adding complexity -- more rules, more limitations, more terms, more conditions, more qualifiers, more provisos, and more exceptions. The result is that our system gets slower and slower and more inefficient.”
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Right on, sister!

As I have said in an August 2009 post “There Has Got To Be A Better Way” (which also bears repeating) –

So why, then, could not the U.S. Department of Education automatically apply the American Opportunity Credit, or the HOPE or Lifetime Learning Credit, towards the price of tuition, with the possibility of any remaining available credit being applied at the college book store? Then the government would be assured that the money is actually spent on continuing education. If the student “drops out” the unused portion of the “government subsidy” would be returned to the Department of Education.

And why, then, could not the First Time Homebuyer Credit be applied to the purchase of a qualifying home at the actual closing? Then the government would be sure that a primary personal residence was actually being purchased by a “first-time” homebuyer. A “Statement of Qualification” could be added to the papers filed with the purchase on which the purchaser(s) would certify, under penalty of perjury, that he/she/they qualify for the $8,000 payment.

If there are credits to be provided to cover health insurance premium purchases in any upcoming Health Care Reform bill, why not have the U.S. Department of Health and Human Services credit the amount to the price of the actual premiums? Then the government would be sure that the money is actually spent on health care coverage.

Perhaps the amount of Retirement Savings Credit allowed could be actually deposited by the government into the individual’s IRA or other retirement savings account. Then the money would actually add to and help to grow retirement savings.

And in the case of the Earned Income Credit, why not just provide the qualifying individual or family with a supplemental welfare check, perhaps through the SSI system?

Doing things in this way would be beneficial in many ways.

(1) It would be easier for the government to verify that the recipient of the subsidy or hand-out actually qualified for the money, greatly reducing fraud. And tax preparers would no longer need to take on the added responsibility of having to verify if a person qualified for government funds.

(2) The qualifying individual(s) would get the money at the “point of purchase”, when it is really needed, and not have to go “out of pocket” up front and wait to be reimbursed when they file their tax return.

(3) We would be able to actually measure the true income tax burden of individuals. No longer would about half of the American population either pay absolutely no federal income tax or actually make a profit from filing a tax return. These people would still be receiving government hand-outs, but it would not be tied into the income tax system so they would actually be paying federal income tax.

(3) We could measure the true cost of education, housing, health, welfare, etc programs in the federal budget because the various subsidies would be properly allocated to the appropriate departments and not be reported as a part of net income collected via income tax.

(4) The Tax Code would be much less complicated, the cost to the public for preparing a tax return would be reduced, and the IRS would have much less to process and to audit
.”

TTFN

NO TIME FOR POSTINGS

Like Winsocki I must “buckle down”.
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This is the last week in May. If I will be moving on July 1st, as I am hoping, I will need most of June devoted to organizing and packing. So, since wishing won’t make them go away, I must spend this week plugging away on the GD extensions.

So I must take a hiatus from posts this week – with the exception of perhaps a Wednesday BUZZ or if there is breaking tax news that will not wait.
.
New Jersey taxpayers may want to check out today's post at my NJ TAX PRACTICE BLOG.

Thanks for your patience. “Talk” to you next week.

TTFN

Sunday, May 23, 2010

ANYTHING BUT TAXES - THE SPA!

During my entire career I have been preparing 1040s to the tune of “American Popular Standards”. I find that I cannot work properly without background music. It began with New York’s WRFM in the early 70s, which was playing constantly in my mentor’s office at Journal Square in Jersey City. It went on to include WNEW-AM and other NY based stations.

While Jonathan Schwartz broadcasts from the local NYC public radio station on week-ends, I know of no New York or New Jersey based station (which I can get on the radio here in Jersey City) that plays APS round-the-clock. There is WOBM 1160 AM – which plays APS from mid-morning to mid-afternoon – but it cannot be heard outside of Monmouth and Ocean counties. There are plenty of NY and NJ “oldies” stations, to which I listen on occasion, but none playing the music of Francis Albert and friends.

I have turned to the internet, listening to stations originating throughout the US. Unfortunately, as formats change and stations give-up live online streaming, I must often find new stations. To do so I turn to RadioLocator.com – which identifies by format and links to stations from all over the US.

My latest find is KFSD 1450 AM “The SPA” from Escondido CA – Southern California’s Contemporary Standards. The SPA blends the enduring standards of timeless artists with bold new interpretations from the younger vanguard. From Frank Sinatra, Dean Martin, Sammy Davis Jr., Barbra Streisand, Harry Belafonte, Ella Fitzgerald, Perry Como, Andy Williams, Petula Clark, and Nat King Cole, to Diana Krall, John Pizzarelli, Harry Connick Jr., Diane Schuur, Michael BublĂ©, Rod Stewart, Karrin Allyson, and Natalie Cole.

Why not check it out.

Let’s hope they continue to stream APS online for years to come.

TTFN

Saturday, May 22, 2010

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

* I was represented at MAINSTREET.COM this week with “Planning A Deductible Vacation – Part 2”.

* Joe tells us about the “Revised 941 for 2010 2nd Qtr” at his CAFETAX blog.

* Another Joe, Mr Kristan of the ROTH AND COMPANY TAX UPDATE BLOG, tells us that his earlier post, mentioned in this past Wednesday’s BUZZ installment, was premature in “Estate Tax Deal? Not So Fast”.

As Joe excellently puts it - “Well, Congress has been botching the estate tax for almost ten years now; why should they start getting anything right now?

* Joe makes up for his “prematurity” with the post “Oh, THAT $658,447”, which talks about a taxpayer who failed to report a huge capital gain because he had repurchased the stock which was sold for a gain and thought the “wash sale” rule applied.

Joe properly points out that – “There is no 'wash sale' rule for stock gains. While wash sale rules disallow stock losses if you buy the stock back within 30 days before or after the loss sale, you normally can't undo gains.”

And, perhaps more importantly, “Oh, and if you omit 98.6% of your gross income from your 1040, don't expect to pin the whole blame on your preparer.”

* Kelly Phillips Erb, the internet’s TAX GIRL, brings us some great news in “H&R Block Takes Hit, Announces Lay-Offs”.

Kelly reports – “Overall, H&R Block reported a decline in tax preparations at its tax offices. The number of returns prepared fell by 6.6% while tax preparation fees decreased 5.5%.”

What has caused this drop. Kelly says – “High unemployment rates and fewer numbers of taxpayers who owe have translated into more than just headaches for IRS: many tax preparers across the country saw a dip in 2010.”

I have personally not seen a dip in business this past filing season. While I have lost clients due to death, I doubt few, if any, of my clients decided to try preparing their own return this year. I have always said that my profession is inflation-proof. People will always need to, if not actually pay taxes (thanks to GWB and BO), at least tile tax returns. The Tax Code does not get any less complicated during times of economic downturn – probably the opposite.

I can only hope that Henry and Richard’s drop in income is the result of taxpayers realizing that these guys charge gourmet restaurant prices for fast food service (again apologies to fast food chains – I have found good service and true value at Burger King and McDonalds locations that does not exist at H+R Block).

* Some good advice from Michael Rozbruch at the TAX RESOLUTION UNIVERSITY blog – “Taxpayers Must Beware of Tax Relief Firms That Misrepresent Their Ability to Resolve IRS Problems”.

Remember – NOBODY can guarantee to resolve your tax debt for pennies on the dollar, and any firm that suggests this is possible is full of reality tv (we all know what word reality tv is a synonym for)!

* Jean Murray discusses taxes and bartering in “6 Things to Consider About Barter Transactions” at JEAN'S BUSINESS LAW / TAXES: U.S. BLOG.

As Jean says – “While barter is a legal way to do business, barter is considered taxable by the IRS. The IRS says: ‘Barter dollars or trade dollars are identical to real dollars for tax reporting’."

* Kelly, the TAX GIRL, also touches on the topic of barter in “Ask the taxgirl: Swaps and Payments”.

* Ben Harris suggests “An Alternative to the Alternative Minimum Tax” at TAXVOX, the blog of the Tax Policy Center.

Congress could improve the current system by creating a true "minimum tax": Adjusted-gross income (AGI) above a certain threshold—perhaps the $200,000 for single filers and $250,000 for married filers that President Obama favors—would be subject to a minimum tax rate. High-income taxpayers would lose the benefits of various deductions and credits if their average tax bill on AGI above the threshold fell below the minimum rate.”

If we must have a minimum tax this is certainly “more better” and less convoluted than the current dreaded AMT, which, as Ben points out, “isn’t a minimum tax at all; it’s simply a parallel tax”. But why have any kind of minimum tax, alternative or otherwise? Just fix the damned Tax Code!

I still say there should be a true “minimum” tax – every single American citizen who is over the age of 18 and not a full-time student should be required to pay a minimum tax of $100.00. This way there would be no more “non-taxpayers”.

TTFN

Friday, May 21, 2010

AS THE CONGRESS TURNS

I am taking a break from the IRA series to bring you up to date on the “extenders” bill.

Ways and Means Committee Chairman Sander Levin and Senate Finance Committee Chairman Max Baucus have introduced the American Jobs and Closing Tax Loopholes Act. Click here to download a 29-page summary of the Act.

According to the official press release, included in the legislation are provisions to –

• “Provide tax relief to businesses and State and local governments to help them invest and create jobs;
• Provide important tax cuts to put money back in the pockets of working families;
• Help restore the flow of credit to enable small businesses to expand and hire new workers by extending small business loan programs;
• Expand career training programs for Americans who are looking for work;
• Extend eligibility for unemployment insurance benefits, COBRA health care tax credits and other critical programs that families and communities depend on through December 31, 2010;
• Endure that seniors, military service members and Americans with disabilities continue to have access to doctors they know and trust; and
• Close tax loopholes for wealthy investment fund managers and foreign operations of multi-national companies
.”

Gee – it does everything but grow hair!

The bill will extend for one year - through December 31, 2010 only – the following popular tax benefits:

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

• the additional $500 or $1,000 standard deduction for real estate taxes paid,

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

• the “above the line” adjustment to income for educator expenses, and

• the ability to make a tax-free transfer of up to $100,000 directly from an IRA to a qualified charity.

You will note, as I have highlighted above, that these items are extended for 2010 only. As fellow tax blogger Kay Bell says – “We’ll have to do this all again in seven or so months”.

When will the idiots in Washington stop this nonsense? If a tax deduction is appropriate make it permanent. It can always be repealed in the future. This annual ritual of passing an extender bill is ridiculous.

The bill would be paid for by closing a multitude of foreign loopholes, making owners of S corporations engaged in a “professional service business” pay full FICA (Social Security and Medicare) tax on all net income (they will no longer be able to take a nominal salary and avoid payroll taxes by receiving the rest of the income as pass-through dividends), and preventing “investment fund managers from paying taxes at capital gains rate on investment management services income received as carried interest in an investment fund”.

Conspicuously missing from the Act is any mention of the annual AMT patch!

TTFN

Thursday, May 20, 2010

JUST ABOUT EVERYTHING YOU ALWAYS WANTED TO KNOW ABOUT AN IRA – BUT DIDN’T WANT TO PAY SOMEONE TO TELL YOU: PART III – THE TRADITIONAL IRA

Any individual under age 70½ who has earned income can open and contribute to a traditional Individual Retirement Account, regardless of the amount of Adjusted Gross Income.

Contributions to a “traditional” IRA are either deductible or non-deductible. How much can be deducted depends on the taxpayer’s situation.

Deductible contributions are made with “pre-tax” dollars. If all of your contributions to all of your IRA accounts over the years were fully deductible, then all IRA distributions are fully taxable. Amounts that were “rolled-over” to an IRA from a pre-tax employer plan like a 401(k) are treated as deductible contributions.

If you are an active participant in an employer-sponsored pension plan, such as a 401(k), a 403(b) or a SEP, the amount of your traditional IRA contribution that is deductible is phased-out based on your “modified” Adjusted Gross Income (MAGI). “Modified” AGI in this case begins with “regular” AGI and adds back the-

• foreign income and housing exclusions
• savings bond interest exclusion for higher education costs
• adoption assistance benefits exclusion
• deduction for student loan interest
• deduction for qualified tuition and fees
• deduction for domestic production activities

For tax year 2010 the phase-out range is MAGI reaches $50,000 - $60,000 if filing as Single or Head of Household, or $80,000 - $100,000 if married and filing a joint return.

Non-deductible contributions are made with “after-tax” dollars. You have already paid income tax on these contributions. Accumulated non-deductible contributions make up your “basis” in the IRA. If some of your IRA contributions over the years were non-deductible, then a portion of any IRA distribution is a tax-free return of your after-tax contributions. The tax-free portion is determined by a special formula and is calculated on IRS Form 8606.

A taxpayer whose situation would permit a fully deductible maximum IRA can elect to have all or part of the contribution treated as “non-deductible”. It is possible that available tax deductions and credits would reduce a taxpayer’s tax liability to “0” or below – so there would be no, or only partial, tax benefit from deducting the IRA contribution.

Many taxpayers have more then one IRA account, and each individual account may have a different mix of deductible and non-deductible contributions. However, when you calculate the tax-free portion of a traditional IRA distribution all monies in all traditional IRA accounts are lumped together.

Individuals who take money out of an IRA before reaching age 59½ will generally be subject to a 10% “premature withdrawal” penalty. There are several exceptions under which you can avoid the 10% penalty – more on these exceptions in a future entry in the series.

You must begin to take annual minimum distributions from your traditional IRA once you reach age 70½. When you turn 70½ you can no longer make contributions to a traditional IRA, even if you continue to work and have earned income. Upon your death your beneficiaries will be taxed on withdrawals from an inherited traditional IRA.
.
TTFN

Wednesday, May 19, 2010

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

TAX GIRL Kelly Phillips Erb sets a bride-to-be straight on the rules for determining filing status in “Ask the taxgirl: Filing Single When You’re Married”.

I can’t imagine where this college student heard some of the stuff she mentions in the course of submitting her question to Kelly. BTW – I assume that the questioner is not an English major.

* An interesting report from the US Census Bureau – “Census Bureau Reports Nearly Half of U.S. Residents Live in Households Receiving Government Benefits”.

According to the report –

In the third quarter of 2008, approximately 45 percent of U.S. residents lived in households in which at least one individual received government benefits, according to data released today by the U.S. Census Bureau.”

Unfortunately I am not among the blessed 45%. What am I doing wrong?

* I had previously reported that April 9th was Tax Freedom Day (OOPS- did I forget to post on Tax Freedom Day 2010?). Now Kay Bell tells us that this past Monday was “Tax Freedom Day Sequel: Deficit Day” at DON’T MESS WITH TAXES. This year’s “D-Day” was “the second latest deficit-inclusive Tax Freedom Day since World War II”.

Kay’s post provides an interesting statistic – “This creates a per-household deficit of $13,158”.

This item seems to be an excellent “companion” to the previous one on the extent of Americans “on the tit”.

FYI, New Jersey’s Tax Freedom Day was April 25th. NJ was #2 (no jokes now) on the list – only 2 days before Connecticut.

* It seems that someone actually reads these tax blogs – in addition to other tax bloggers.

The blog posts of absolutely fabulous Joe Kristan (ROTH AND COMPANY TAX UPDATE BLOG) and Kelly Phillips Erb (TAX GIRL) are quoted by Bill Toland in the Pittsburgh Post-Gazette article “Some Find Pennsylvania's Tax Amnesty Ads Too Scary”.

For more info on PA’s Tax Amnesty Program click here.

* Speaking of Joe Kristan, he reports that “the Senate Finance Committee may be nearing an estate tax agreement” in “Estate Tax: 35% Rate, $5 Million Exemption?” at the ROTH AND COMPANY TAX UPDATE BLOG.

* The IRS HITMAN provides some good “More Hard Truths on Tax Debt”.

TTFN

Tuesday, May 18, 2010

FROM THE MAILBAG

* Here is a comment from a fellow blogger on my WHERE THE FAKAWI post -

I wish you all the luck. I felt extremely luck as far as GDE’s in that I only have two this year to deal with. One I expect around mid-June, the other (a fruit-loop that owns a roofing company) I expect around the first of October.

I am expanding my services and have been out of touch with everyone. I have spent my time learning new software and re-learning all the new rules as pertaining to same. I am trying to get back into the groove with everyone but doing so softly. Still learning new stuff.

I like the new car.

Bruce – the Missouri Tax Guy

.
Thanks!

I would be in heaven if I only had 2 GDEs to deal with – and none workload related!

I see that “fruit-loops” are not limited to the NY-NJ metropolitan area.

I look forward to your returning to the “groove” – and to your return to posting at THE MISSOURI TAX GUY.

* I tell my clients that if they receive any correspondence from “Sam” of any other “uncle” they should send it to me immediately. Don’t call or email first – just put it in the mail.

{As an aside many clients waste lots of valuable time trying to call me to tell me they got a notice instead of just automatically mailing it to me. If they ever did get me on the phone the first thing I would say would be, “mail it to me”.}

I recently received a copy of a CP12 notice that the IRS sent to clients (a married couple). This notice indicates that the taxpayers will receive a refund of $3,226.00. It tells them – “We are writing to you because there is an error on your 2009 Federal Income Tax Return.”

The notice goes on to say – “We changed the refund amount on Line 73a or the amount you owe on Line 75 of your Form 1040 because the amount entered on your tax return was computed incorrectly.”

FYI – Line 73a of the original Form 1040 that I prepared for the clients indicates a refund of $3,226.00. This is the exact same amount of refund the notice said they were getting.

The back of the notice includes an analysis showing “Line Item on Your Return”, “Your Figures” (the amounts reported on the originally filed return) and “IRS Figures”. The “Your Figures” and the “IRS Figures” were exactly the same.

Why the cafones at the IRS sent this notice to my clients is totally beyond me. I do suspect that it had something to do with BO’s “Making Work Pay” credit – further confusion on the part of the IRS.

The couple are both over age 65 and both collected Social Security for the entire year. The husband continues to work and earned more than enough to qualify for the full $800.00 MWP credit. However, because they each received a $250.00 ERP (economic “recovery” payment) the amount of credit claimed on Schedule M was $300.00. This is correct.

Another example of your tax dollars at work!

TTFN

JUST ABOUT EVERYTHING YOU ALWAYS WANTED TO KNOW ABOUT AN IRA – BUT DIDN’T WANT TO PAY SOMEONE TO TELL YOU: PART II - HISTORY OF THE IRA

An Individual Retirement Account for taxpayers not covered by an employer pension plan was first introduced in 1974 as part of the Employee Retirement Income Security Act (ERISA). You could contribute and deduct up to $1,500.

The 1981 Economic Recovery Tax Act raised the maximum annual contribution to $2,000 and allowed participants to contribute $250 on behalf of a nonworking spouse. It also gave all taxpayers under the age of 70½ the ability to contribute to an IRA even if they were covered under a qualified plan.

I seem to recall that the universal availability of an IRA deduction was credited as one of the factors that pulled us out of the recession of the late 70s and early 80s (remember “Whip Inflation Now”?) – when interest rates were in the double-digits.

The Tax Reform Act of 1986 introduced the phase-out of the deduction based on “modified” Adjusted Gross Income for workers who were covered by an employment-based retirement plan themselves or who had a covered spouse.

The Taxpayer Relief Act of 1997, signed into the law on August 5, 1997, created the ROTH IRA, named for Senator William Roth of Delaware. It was first available for tax years starting in 1998.

The $2000 maximum contribution was in place through tax year 2001. It was raised to $3000 from 2002 to 2004, to $4000 from 2004 to 2007, and to the current $5000 from 2008 to 2010.

Beginning in 2002 individuals over 50 could make an additional "Catch-Up” contribution – originally $500 and currently $1,000.

Next Up – The Traditional IRA . . .

TTFN

Monday, May 17, 2010

JUST ABOUT EVERYTHING YOU ALWAYS WANTED TO KNOW ABOUT AN IRA – BUT DIDN’T WANT TO PAY SOMEONE TO TELL YOU: PART I - THE BASICS

As I mentioned in an earlier BUZZ installment, a recent report by the Treasury Inspector General for Tax Administration (TIGTA) titled "A Service-wide Strategy Is Needed to Address Growing Noncompliance With Individual Retirement Account Contribution and Distribution Requirements" (2010-40-043) indicates that there is widespread noncompliance regarding Individual Retirement Accounts (IRA).

According to the report -

TIGTA found that 295,141 individuals made more than $1.5 billion in excess contributions to their IRAs in 2006 and 2007, resulting in an estimated loss of $94 million in excise tax and $17 million in income tax. In addition, TIGTA found that 255,498 individuals did not take the required minimum distributions totaling $348 million during that time, resulting in an estimated tax revenue loss of $174 million.”

As with other areas of noncompliance many of the errors result from confusion and misunderstanding of the rules rather than intentional fraud. What follows is the beginning of a week-long series of posts explaining the various IRA rules.
.
An Individual Retirement Account is an account that lets you save money for retirement. The earnings on an IRA accrue tax-free at least until you take money out of the account, and possibly forever. Your contribution to an IRA may be tax deductible, and your withdrawals from an IRA may be partially or totally tax free.
.
There are two types of Individual Retirement Account – the “traditional” IRA and the ROTH IRA. While anyone can have a “traditional” IRA the ability to open, or convert an existing traditional IRA to, a ROTH, and the amount of contribution allowed, is based on one’s “modified” Adjusted Gross Income (MAGI).
.
You must have “earned income” – salary and wages reported on a Form W-2 or “net earnings from self-employment” – in order to contribute to an IRA.

For IRA purposes net earnings from self-employment is the bottom line on Schedule C – or Form K-1 if from a partnership – less the above-the-line deductions for contributions to a retirement plan, like a SEP or Keogh, and one-half of self-employment taxes. If you have more than one source of self-employment income you would net the combined income and losses. If your self-employed activities result in a net loss this does not reduce your other earned income. With a W-2 of $4,000 and net Sch C losses of $500 you could contribute $4,000 to an IRA.
.
For 2010 the maximum IRA contribution is the lesser of $5,000 or earned income, with an additional $1,000 contribution allowed for taxpayers who will be age 50 or older at the end of the year. If a person only has $4,000 in earned income the maximum IRA contribution is $4,000.
.
The maximum contribution applies to both the ROTH and traditional IRA combined. You can have a ROTH IRA and a traditional IRA – but the combined total contributions to both are subject to the $5,000, $6,000 or earned income annual limitation.
.
A non-working spouse can open and contribute to an IRA as long as the other spouse has earned income. The combined contributions of working and non-working spouses are limited to the working spouse’s earned income.

If the working spouse earns only $9,000 for the year the maximum contribution that can be made to the IRA accounts of both spouses is $9,000, allocated as the couple sees fit. Each can contribute $4,500 to their separate accounts, the working spouse can contribute $5,000 and the non-working spouse $4,000, or the working spouse can contribute $4,000 and the non-working spouse $5,000. If the working spouse is age 50 or older he/she can contribute $6,000 and the non-working spouse $3,000.

A contribution to an individual’s IRA cannot be made once the individual has passed away. Jack makes a contribution to his IRA for 2010 in January of 2010. He goes to his final audit in March. This contribution is OK, provided he had sufficient earned income prior to passing. However, Jack’s Executor cannot make a contribution to Jack’s IRA for 2010, based on eligible earned income prior to death, in June.
.
You will be charged a 6% penalty if you contribute more than the maximum amount allowed to an IRA. To avoid the penalty you must withdraw the excess amount, plus any earnings on this amount, by the statutory due date, including extensions, of the return for the year the excess contributions were made. If you make an excess contribution for 2009 in 2010 you can re-allocate the excess amount to your 2010 contribution.

You cannot borrow money from your IRA, like you can from a 401(k), sell property or investments to your IRA, use your IRA as security for a loan, or use IRA monies to purchase an item for personal use.

Tomorrow – History of the IRA . . . . .

TTFN

Sunday, May 16, 2010

ANYTHING BUT TAXES - LAW AND ORDER BITES DUST

It has been a while since I wrote an “Anything But Taxes” post. Here goes -

I just heard that “Law and Order” has been cancelled.

A fellow tax professional twit has told me that “Law and Order” will tie “Gunsmoke” for the longest-running television show – with 20 seasons each. He tells me that in terms of number of episodes “Gunsmoke” beats L and O – with about 200 more over the 20-year period. But from 1955-1961 “Gunsmoke” was a 30-minute show, expanding to an hour in Sept, 1961 – so when it comes to hours of episodes the race is closer.

Creator Dick Wolfe explained how the concept of the original “Law and Order” – first half “law” (police capturing the “perp”) and second half “order” (the trial) - came to be in a tv interview a while back.

Successful broadcast television shows can make lots of money in “syndication”, often more than the original production. Some shows have been known to operate at a loss on the initial broadcast episodes (they cost more to make than the network pays for airing) just to be able to create a sufficient syndication “inventory”. As one online explanation of the process put it – “If you can get a television show in syndication, you can live off that money for the rest of your life.”

Some 20+ years ago it was easier, and probably more profitable, to syndicate a half-hour series than it was an hour-long program. But the networks were looking for hour-long drama series. The “Law and Order” format – basically a half hour of police and a half hour of lawyers - was essentially created so it could be run as two-part half-hour episodes in syndication.

Dick and company had toyed with several such two-part shows, with names like Night and Day.

As it turns out DW did not have to worry about creating half-hour segments for syndication. I expect that the L+O franchise is the most syndicated in history, and that every hour of every day an episode of L+O or one of its spin-offs is running somewhere in the world.

Actually the idea of half police procedural and half courtroom drama was not new to television. “Arrest and Trial” was a 90-minute series that aired one season on ABC, airing Sundays from 8:30-10:00 pm during the 1963-64 season.

According to Wikipedia –

Each week's program was actually two 45-minute segments. The first segment followed Sgt. Nick Anderson (Ben Gazzara) of the LAPD as he tracked down and apprehended a criminal. The person Anderson arrested was defended in the second half of the show by criminal attorney John Egan (Chuck Connors).”

You will note that it differed from L+O in that it took place in LA and the trial portion was presented from the defense point of view and not the prosecution.

Episodes of A+T are available on DVD. I watched several earlier this year via my Netflix subscription.

Coincidently, Dick Wolfe used the title “Arrest and Trial” for a short-lived 30-minute syndicated “docudrama” hosted by Brian Dennehy in 2000. The show followed individual criminal cases (commission, police investigation, and actual trial) via a combination of reenactments and real trial footage.

As a bit of side trivia - "Arrest and Trial" became the first American import to be broadcast on the UK's BBC2. And along the same lines - apparently there is also a "Law & Order: UK" hands across the water spin-off - the first US drama television series to be adapted for British television.

TTFN

Saturday, May 15, 2010

WHERE THE FAKAWI?


It has been one full month till the official end of the tax filing season – although the filing deadline was extended from April 15 to May 11th for residents of some New Jersey Counties.

I realize that it sounds strange, and is not logical, but after April 15th I, and I would expect other tax pros in similar situations, experience something that is not unlike “postpartum depression”.

After doing almost nothing but 1040s (and 1040As) for 12+ hours a day, 7 days a week for some 10 weeks it is truly difficult to get motivated to continue to deal with 1040s once the pressure of the April 15th deadline has come and gone. I cannot bring myself to do more than 1, or on occasion 2, GD extensions a day.

I have been told by a fellow tax professional – an EA practicing in NYC – that, “It's a law of physics that if you complete more than 3 tax returns any day after April 15, the universe collapses upon itself”. I certainly do not want to be the cause of the end of days.

As of this writing there are 20 GDEs in the “to be done” box and 7 that have been “red-filed” (need more – or any – information to begin or continue). From this count I have made a good dent in the GDEs – for which I am very pleased – but there are still too many left.

I am too distracted by apartment and car shopping (mission accomplished on that item on Friday!), getting ready to make my move to Monmouth County, hopefully on July 1, and possible “wanderings” and theatre outings.

And I want to get back to regular 6-day a-week blogging and to writing items for MainStreet.com.

Looking to the future I no longer want more than at most 10 workload-related or late-receipt GD extensions in the box on April 15th. I would be the proverbial pig in you-know-what if there were no workload-related GD extensions. I long for the “good old days” when it was really over on April 15th.

I don’t mind a handful of GDE for clients who are not yet ready to file – and who will get me their “stuff” in the summer. A small number of returns, prepared at a leisurely pace with no pressure, would be ok during the off season.

To reach this goal I must strictly enforce “read my lips – no new clients”, reduce distractions and non-productive activities during the filing season, thin the herd, or refuse to accept new work not in my hands by the third week of March – or more likely a combination of the four.

Today and tomorrow (Saturday and Sunday) I will be devoting to GDEs – and I will tempt the laws of physics by trying to get as many done as possible.

I will be working on the NJ Property Tax Reimbursement applications (PTR-1 and PTR-2) early next week. The initial filing deadline is June 1st. In the past this deadline has consistently been eventually extended to October – but considering the State’s financial situation I do not feel safe assuming the same will be done this year. Once those are in the mail I will return to the GDEs – at 1 or 2 a day – with the hopes of getting all those that can be completed done and in the mail by month’s end.

Wish me luck!

TTFN

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

* Have you seen my latest tax tips at MainStreet.com – “Open A ROTH IRA for Your Child” and “Plan a Deductible Summer Vacation”?

* It seems that many of my tax columns from MainStreet.com also showed up at Consumerist.com – where I am referred to as “Tax Cat’s Smarter Cousin”.

* Over at the CAFETAX blog Joseph Arsenault talks about the penalty for early withdrawal from annuity and retirement distributions issued before the age of 59 1/2 “Myth Busted 10% Penalty”.

His bottom line is the best advice that anyone can give regarding not just retirement distributions but any tax issue –

Of course never make any assumptions before taking retirement distributions. Always consult with a professional about your unique situation.”

* COMPLETE PAYROLL INC reports that “President’s Budget Proposal Calls for Quarterly W-2 Reporting”.

Everything old is new again! I seem to recall that when I first began doing payroll back in the mid-1970s we had to list the name and earnings for each employee on the quarterly Form 941, with the total needing to reconcile to gross wages for the quarter reported on the form.

* The IRS tells us that “Kentucky Severe Storm and Flooding Victims Have Until June 30 to File Their Tax Returns” – similar to the recent relief for certain NJ residents that gave me some extra time to timely file federal and state returns.

* Roni Deutch reports on what to do if “you attended jury duty last year {or this year – rdf} and had an employer who continued to pay your salary but required you to forfeit fees that the court would have paid you for serving on the jury” in her post “Tax Deduction of the Week: Jury Pay Paid to an Employer” at her TAX HELP BLOG.

* Kay Bell discusses something else Congress is thinking about taxing in “Tax Proposed on Carry-on Bag Fees” at DON’T MESS WITH TAXES. The post also provides some insight as to why the airlines are charging for individual items like carry-ons, food, blankets and pillows instead of just raising the price of the ticket.

* Happy 3rd Birthday to the 21st CENTURY TAXATION blog. Here’s to many more!

TTFN

Friday, May 14, 2010

LEARNING FROM YOUR 1040 - PART TWO

Back in January or February when you were getting your tax “stuff” together to prepare your 2009 Form 1040, or to give to your tax professional, did you find that your recordkeeping was less than adequate, and that you had to make estimates of many of your potentially deductible expenses?

If you answered “yes” to this question you should resolve to be more efficient and effective in documenting your deductions for 2010.

You MUST keep good, contemporaneous records of all of your income and deductions in the manner prescribed by the IRS and the Tax Code. This is even more important with certain deductions that require special recordkeeping or additional information, such as business meals and entertainment, business use of "listed property" such as automobiles, cell phones and computers, gambling losses, and charitable donations.

Keep records during the year as if you are going to be audited by the IRS. In the rare case your return is selected for review you will be ready. If you are not audited you will at least be assured that you did not miss any deductions or credits to which you were entitled.

Even if you use a tax professional the more information you provide him/her at tax time the more accurate your return will be, and the easier it will be to properly prepare. And your preparation fee should be reduced.

I have developed a package of advice, information and forms, schedules and worksheets to help make sure that you pay the absolute least amount of federal and state income tax for 2001 - “Documenting 2010 Deductions”.

Click on the above link to learn more about this package.

TTFN

Thursday, May 13, 2010

FROM THE MAILBAG

I received the following email from a reader:

Sort of a comment ---

When are any of the tax pros going to start complaining about the lack of the passage of the expected increase in the ALTERNATIVE MINIMUM TAX EXEMPTION AMOUNT FOR 2010.

The year is almost half over and millions will be hit by it. Contacting senators and Congressional reps does NOTHING!!!!

Unless the tax pros start highlighting the fact that nothing has been done, nothing will get done!!!!!!!!!!!!

This is serious money to middle class taxpayers in high tax states such as NY, NJ and CA.

Thanks!!!!!!!!!

Sincerely,

Virginia Fogarty


As a tax pro and tax blogger I have been complaining about the existence of the dreaded Alternative Minimum Tax for years now – but it is still with us.

While I certainly believe that the primary goal/motivation of any politician is getting re-elected and not properly administering the government, and that his/her loyalty to “the Party” certainly trumps any loyalty to constituents – I do not believe that contacting senators and representatives does nothing. It was a deluge of letters to Congress that caused the creation of the damned minimum tax in the first place.

Taxpayers should indeed continue to write to their representatives in Washington demanding for relief from the dreaded AMT.

It is not the specific responsibility of a tax professional to call to task the Congress any more than it is the responsibility of every citizen. Countless posts about abolishing the dreaded AMT by a multitude of blogging tax professionals have certainly not produced the intended result.

Congress is aware of the problem with the dreaded AMT. But their response, as one would expect, has been the lazy one of putting off real action by regularly passing a one or two year patch.

I do expect the cafones in Washington to pass another at least one-year patch for 2010, along with continuing the ridiculous policy of annual extensions of the popular “extender” tax benefits.

Fellow tax blogger Kay Bell has just written about the extenders in the post “Ways To Pay for Tax Extenders Grows” at DON’T MESS WITH TAXES.

Kay tells us –

One thing Senators and Representatives they can agree on, though, is that they want the extenders done by the end of May.

“The official combined bill is now called the Promoting American Jobs and Closing Tax Loopholes Act and Ways and Means Committee Chair Sander M. Levin (D-Mich.) is aiming for a House vote on it next week
.”

While her post does not say that the annual dreaded AMT patch is a part of the bill, and I did not find anything substantial on the contents of the bill in an online search, if it is not I do expect that Congress will pass the patch at sometime in the year. Hey, it is still early in the year. In the past the cafones have waited until the last minute to pass extenders.

Instead of passing the annual fixes they should take the time to fix the Tax Code itself.

To explain what Virginia is talking about – as of this writing the dreaded Alternative Minimum Tax exemptions for 2010 are:

• $33,750 for single and head of household filers,
• $45,000 for married people filing jointly and for qualifying widows or widowers, and
• $22,500 for married people filing separately.

The 2009 exemptions were:

• $46,700 for single and head of household filers,
• $70,950 for married people filing jointly and for qualifying widows or widowers, and
• $35,475 for married people filing separately.

At the current lower exemptions millions more taxpayer will become victims of this ridiculous tax – which is neither an alternative nor minimum. Someone said it should more appropriately be called the Mandatory Maximum Tax.

So, as a tax professional, a taxpayer, and a citizen I do call upon Congress to promptly deal with the dreaded Alternative Minimum Tax. I hope you will join me.

TTFN

Wednesday, May 12, 2010

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

* The Treasury Inspector General for Tax Administration (TIGTA) has discovered widespread noncompliance regarding Individual Retirement Accounts (IRA).

In the report released today [A Service-wide Strategy Is Needed to Address Growing Noncompliance With Individual Retirement Account Contribution and Distribution Requirements (2010-40-043)], TIGTA found that 295,141 individuals made more than $1.5 billion in excess contributions to their IRAs in 2006 and 2007, resulting in an estimated loss of $94 million in excise tax and $17 million in income tax. In addition, TIGTA found that 255,498 individuals did not take the required minimum distributions totaling $348 million during that time, resulting in an estimated tax revenue loss of $174 million.”

I have been working on what will be a week-long post series on just about everything you need to know about IRAs, which should be up next week.

*Dennis Cauchon, writing in USA Today, tells us that “Tax Bills in 2009 at Lowest Level Since 1950”!

According to the item – “Amid complaints about high taxes and calls for a smaller government, Americans paid their lowest level of taxes last year since Harry Truman's presidency, a USA TODAY analysis of federal data found”.

Cauchon also tells us – “Taxes paid have fallen much faster than income in this recession. Personal income fell 2% last year. Taxes paid {excluding Social Security tax – rdf} dropped 23%.”

One of the main reasons (highlight is mine) – “Presidents Clinton and Bush pushed through a series of tax changes — credits, lower rates, higher exemptions — that slashed income taxes for poor and middle-class families. A drop in income now can trigger big tax breaks and sharply lower rates, sometimes falling to zero.”

And refundable credits, an open call for tax fraud, can often cause “non-taxpayers” to actually “make a profit” by filing a tax return.

* TAX GIRL Kelly Phillips Erb takes the words out of my mouth with the excellent advice in her answer to the question posed in her post “Ask the Taxgirl: Filing Late Tax Returns”.

* Trish McIntire talks about the difference between “may” and “can” when it comes to taxes in her post “Can or May? Casualty Losses” at OUR TAXING TIMES.

She correctly points out -“There are a lot of IRS Code sections where the taxpayer gets a surprise. They have the government's permission to make a specific deduction (may) but once the rules are applied to the issue, they can't deduct much or anything.” Her post provides one example – casualty losses.

There are many examples where an item “may be deducted but it can't always help you on your taxes”. May I deduct the contribution of a used car to charity? Yes you may. But can I? To begin with - only if you itemize.

* Yesterday’s (May 11) second news item at the Small Business Taxes and Management uses a Tax Court example to make an excellent point - “Recordkeeping can spell the difference between securing a deduction and losing it”.

* Monday’s AccountantsWorld.com daily headline news email took me to an update from BNA on the Registered Preparer designation titled “IRS Says No Registered Preparer Designation Without Competency Test”.

According to the update –

+ Registered tax professionals “will not be given their registration papers with IRS until they have passed a test to determine their competency”. IRS Electronic Tax Administration Director David Williams stated, “People who come in [early] will have three years before they have to take the competency exam,” he said. “Once you pass the test, we propose to call you an IRS registered tax preparer. We will give folks a certificate that says that.”

+ “IRS is working now on setting the user fee.”

+ Williams said the competency exam “is expected to be available in May 2011”.

+ “It will be several years before a database is up and running that will allow taxpayers to check to see what tests their preparer has passed.”

TTFN

Monday, May 10, 2010

CLAIMING THE RESIDENTIAL ENERGY CREDIT

Quite a few clients included with their tax “stuff” this past season bills for the purchase and installation of storm windows and doors, a new roof, and new furnaces, boilers and air conditioners - expecting to receive the 30% Residential Energy Credit. However only a couple actually provided me with a Manufacturer’s Certification that verifies the item’s eligibility for the credit.

In my client letter I specifically stated – “If you purchased energy-efficient windows or exterior doors, insulation, a central air conditioner, a water heater, a natural gas, propane or oil furnace or boiler, or a pigmented metal roof in 2009 be sure to give me the receipt and the ‘manufacturer’s certification’”.

In almost all the cases where the eligibility of the item was in question – which was all cases where I was not provided a manufacturer’s certification – I went to the “Federal Tax Credits for Consumer Energy Efficiency” page at www.energystar.gov before claiming a credit.

This is a great resource. It provides the very specific requirements for eligibility of each individual item – i.e. Heating, Ventilating, Air Conditioning (HVAC), Insulation, Roofs (Metal and Asphalt), Water Heaters, Windows and Doors, etc. – as well as links to lists of specific manufacturers and products that qualify.

In several instances the client, while not providing a manufacturer’s certification, did send or give me a descriptive brochure on the item purchased, which listed the product’s specifications, and I was able to determine eligibility by matching the product specifications to the requirements listed on the website. Where I just received a copy of a bill I emailed the client with the specific requirements and asked them to verify that the item they purchased matched the requirements.

This credit is still available for 2010. If you are purchasing an item that qualifies for the credit be sure to get a manufacturer’s certification – and be sure to include it with the “stuff” you give your tax professional next year!

If you do not receive a certification, or, more better, prior to making the actual purchase, check out the specific requirements at the Energy Star web page and make sure what you are buying does qualify. When sending me, or your tax professional, your 2010 “stuff” include a note or print-out that indicates that the specifications of your purchase meets the IRS requirements.

FYI – installation costs are included in the amount eligible for the credit for:

• HVAC systems
• Biomass Stoves
• Water Heaters (including solar)
• Solar Panels
• Geothermal Heat Pumps
• Wind Energy Systems
• Fuel Cells

Installations costs for windows, doors, insulation, and roofs are not eligible for the credit.

TTFN

Saturday, May 8, 2010

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

* Elizabeth P. Rosen provides an excellent post titled “Buying vs. Renting: Tax Benefits” at the US TAX CENTER blog.

She begins the post with the following –

If you’re considering buying a home, ask yourself these questions first:

1. Are you financially prepared?
2. Can you commit to living in one place for at least 5 years?
3. Is it the right time to buy?
4. Are you psychologically prepared?


If more Americans had asked themselves these questions, or reviewed Elizabeth’s “bad reasons to buy a house” at the end of the post, before buying a home our economy would not be in the mucking fess that it is today!

* I do not agree that one should “never say never” – and have posted about some tax-related “nevers” in the past.

The IRS HITMAN gives us his “Top 3 Thing You Should NEVER Do With Your Taxes”. I agree with all of them.

* The specific example discussed in the third item of a recent “A Little This-A . . .” post at my NJ TAX PRACTICE BLOG underscores important advice for taxpayers who receive a balance due notice from the NJ Division of Taxation, or, for that matter, the IRS or any other state tax authority –

If you receive any kind of notice from the NJ Division of Taxation it is more likely than not that it is erroneous. Do not be scared or intimidated by the notice and automatically pay the balance requested. Check it out. Send a copy of the notice to your tax professional immediately.”

This falls under my list of tax “nevers” –

3. NEVER assume that a notice you receive from the Internal Revenue Service or a state tax authority is correct. More often than not it is wrong. To repeat, when you get a letter or notice from “Sam” or any of your other “Uncles” give it to your tax professional immediately.”

* CNNMONEY.COM reports on “Health Care Law's Massive, Hidden Tax Change”.

Section 9006 of the health care bill -- just a few lines buried in the 2,409-page document -- mandates that beginning in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services in a tax year.”

We have never been required to issue 1099s to corporations in the past – and also never had to issue 1099s for purchases of goods. This creates a lot of additional work for small businesses.

* First there was “Cash for Clunkers” (the clunkers referred to were automobiles and not members of Congress). Now CNNMONEY.COM reports that “House Approves $6 Billion 'Cash for Caulkers'”.

But this is not law yet – “The Senate is expected to take up the legislation this summer and determine how to pay for the program, which is likely to be controversial.”

* Did you see my item on “Teens, Summer Jobs, and Taxes” at MAINSTREET.COM?

* While I truly believe that fellow tax blogger Joe Kristan of THE ROTH AND COMPANY TAX UPDATE BLOG is sincere in his objection to the new tax preparer regulation regime, I continue to be skeptical about the AICPA’s official opposition, as discussed in Joe’s post “Pushing Back at the IRS Preparer Regulation Plan”.

Joe tells us that the AICPA feels “regulation beyond assigning preparer ID numbers is not needed”.

The real reason that the AICPA is against creating a certified or licensed tax professional “credential” is that CPAs will then no longer “own” tax preparation – as they have told one of their own they feel they currently do. That is to say CPAs will no longer be erroneously thought by the public to be tax experts by virtue of their initials – and taxpayers will go to previously unenrolled but newly licensed tax preparers instead of CPAs for tax preparation.

The newly licensed preparers will have demonstrated via testing and required CPE in taxation that they are true tax experts, while possession of the CPA “credential” has absolutely nothing to do with one’s knowledge of or experience with federal individual income taxes.

TTFN