Saturday, July 31, 2010

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

* New Jersey isn’t the only state to nickel and dime its residents with fees, as Aaron Crowe reports in his article “Unpopular Taxes and Fees Cropping Up Everywhere in the Nickel and Dime Economy” at WALLETPOP.

NJ is represented on Aaron’s list – “In Newark, N.J., city workers will soon have to start bringing their own toilet paper to work because the city isn't buying it anymore”.

* Kelly Phillips Erb, aka the taxgirl, also writes for WALLETPOP, where she provides an excellent review of “Tax Tips for Military Personnel”.

* Monica Lawver once again provides some common sense in her return to blogging at THE TAX CPA. BTW, her post “Dealing With the Gray” has nothing to do with the signs of approaching old age (I have actually been gray for several years now – and I am many years away from age 65).

Monica says -

I grow frustrated with the flawed logic that often appears: that all poor people are poor through no fault of their own, that all rich people are lazy and lucky. Some poor people earned their poverty through bad choices; some rich people really did earn their wealth.”

I agree that for the most part we do indeed “make our own bed”. I would use “many” rather than “some” in the above quote. Most of us are personally responsible for our own financial situation.

* Kay Bell gives us some good news in “Lawmakers Seek Repeal of New 1099 Forms” at DON’T MESS WITH TAXES.

Hey, look. There is a link to a TWTP post on the subject!

Of course if Congress actually read carefully the laws they were voting on in the first place, and thought about the possible resulting consequences and burdens of what they were voting on, they wouldn’t have to go back and fix FUs after the fact. But then that would suggest that Congress really cared about passing competent and effective legislation more than getting re-elected and grabbing whatever they can for their cronies and supporters.

* I was just notified via email that both THE WANDERING TAX PRO and the NEW JERSEY TAX PRACTICE BLOG are included in the list of “101 Top Tax Policy Blogs” at the MASTERS IN ACCOUNTING website.

* IRS employee Richard Panick answers a question I have been asked many times over the years (although usually in reverse – i.e. girlfriend) in his post “Can I Claim My Boyfriend as a Dependent?” at Oregon.com’s TAX Q+A blog.

*Over at Rick Telberg’s CPA TRENDLINES blog Elisabeth Whitlock, Jane Hamer, Susan Holberg, Marilyn Aman and Frank Pavlica identify “The 24 Personalities of Individual Tax Returns (and the Clients behind Them)”.

Rick explains – “One day at the offices of Frank J. Pavlica CPA in Inverness, Ill., it dawned on the folks that tax returns, like clients, have their own personalities. So far, they’ve identified at least 24.”

In my 39 tax seasons I have probably seen them all – some more than others!

BTW, Rick briefly highlighted my tax practice in a CPA TRENDLINES post back in January of 2007 titled “So, Who Said Tax Season Was Supposed To Be Easy?”.

* Paul Caron, the TAX PROF, quotes from an item by Americans for Tax Reform in “ATR: Obama's Broken Tax Pledge”.

The quote identifies how BO has already broken his “firm pledge” that “no family making less than $250,000 a year will see any form of tax increase” at least eight (8) times.

Were they surprised? Isn’t breaking campaign promises part of the job description of a politician?

* Wisconsin Tax attorney Rob Teuber goes back to Nina Olsen’s recent report to Congress and highlights an issue she has once again raised concerning the collection practices of the IRS in “The Taxpayer Advocate Says That the IRS is Undermining Tax Compliance” at his TAX LAW FORUM blog.

He quotes from the report (the highlight is mine) –

The IRS has failed to utilize the significant collection alternatives available to it to resolve taxpayer debts, thus, leading to increasing accounts receivable on the IRS books, while taxpayers face staggering accruals of penalties and interest that impact their future compliance.”

One of the “collection alternatives” that should be considered is a Federal Tax Amnesty program.

* MISSOURI TAX GUY Bruce addresses a special “industry” with “Tax for Truckers”. Some of his advice applies to all “industries” and some are specific to trucking.

Over the years I have done a few over-the-road truck drivers – although I certainly do not specialize in truckers. Bruce provides some good information. I do a great many police officers and fire fighters.

The post points out the fact that each individual “industry” or “profession” has deductions that are unique – and that one should seek out a tax professional who is experienced with his/her particular industry or profession.

* Although this has nothing to do with taxes – you can vote for your personal favorite among “The 25 Greatest Fictional Lawyers (Who Are Not Atticus Finch)” from film, television and literature at the ABA JOURNAL.

It appears that Vinny Gambino of MY COUSIN VINNY is the most popular on the lost – with 21% of those voting. LAW AND ORDER’s Jack McCoy is 2nd with 15%. My vote, Perry Mason, was surprisingly only the favorite of 6% of voters. PM was beaten out by Horace Rumpole with 8%.

The list misses some great fictional attorneys – hence the follow-up "Other Notable Characters That Did Not Fit Into Our Top 25”. Hey, where is Judd of JUDD FOR THE DEFENSE (played by former Donna Reed tv husband Carl Betz) or the jailhouse lawyer played by Ron Liebman in KAZ?

* I will end on some good non-tax news. THEMEDGURU.COM reports that “A rather bizarre study carried out by German researchers suggests that staring at women's breasts is good for men's health and increases their life expectancy”. I should live to be 100! Check out “Stare at Boobs for Longer Life: Study”.

TTFN

Friday, July 30, 2010

AN INTERESTING ANSWER

Back on July 15th my TWTP post discussed “An Interesting Question” raised by a reader that concerned the possible New York State income tax liability of a New Jersey resident.

I ended the post with a request –

And I would open the question to any of my tax pro readers who have experience with such a situation. You can let me know what you have to say either by submitting a comment or sending me an email at rdftaxpro@yahoo.com and I will include all responses in a future follow-up post.”

I received only one response.

Fellow tax pro and “twit” John Sheeley, an EA based in NYC, agrees with me about the wages being taxable to New York State and brings up another issue. As John points out below, the NJ consultant may also have to file corporate tax returns for and pay corporate income tax to New York City and New York State due to “nexus” (which is a real PITA).

Robert-

Long time no "speak". I won't ask how your season went; I know from "reading".

Your question posed in today's post is very interesting. I believe your statements are all true and correct, as usual. You don't mention a few other concerns:

(1) Having an employee in New York means the NJ corporation has nexus to New York. The only executions to this nexus are the protections provided under Public Law 86-272, which won't apply in this case.

(2) The corporation needs to qualify with the Secretary of State to transact business in NY (a one time fee of a few hundred dollars), file a NY corporate tax return, and pay NY corporation tax.

(3) If he would like sub-chapter "S" recognition in NY, he needs to file a CT-6. New York has a process for late-recognition of that status.

(4) The corporation also needs to file and pay New York City corporation tax, since he has nexus.

(5) Depending on what service he provides, he might need to collect sales tax. If he is repairing computers (which I doubt), he would be repairing tangible personal property, a service which is subject to sales tax in NY.

New York has a voluntary disclosure process whereby if the taxpayer comes forward and agrees to pay his back tax and interest, he can avoid penalties and possibly only be subject to a limited look back of three years. NY will also only impose the "regular" and opposed to "penalty" interest rates.

Love the blog, thanks for time you put in so the rest of us can enjoy it!

John Sheeley EA


I had thought about the possible NEXUS situation, but did not bring it up in my post because TWTP is basically concerned with individual income tax issues.

States like New York aggressively pursue potential corporate tax and “franchise fee” income resulting from NEXUS - more so, one would expect, in times of budget crisis.

TTFN

Thursday, July 29, 2010

WTF?

While I was in Austin a client sent me an email asking about the new “real estate sales tax” that he and the Mrs would have to pay if they sold their home. The email included the following, which he had received in a forwarded email -

REAL ESTATE SALES TAX –

Under the new health care bill - did you know that all real estate transactions will be subject to a 3.8% Sales Tax? The bulk of these new taxes don't kick in until 2013 (presumably after Obama’s re-election). You can thank Nancy, Harry and Barack and your local Democrat Congressman for this one. If you sell your $400,000 home, there will be a $15,200 tax. This bill is set to screw the retiring generation who often downsize their homes. Is this Hope & Change great or what? Does this stuff makes your November and 2012 votes more important?

Oh, you weren't aware this was in the Obamacare bill? Guess what, you aren't alone. There are more than a few members of Congress that aren't aware of it either (result of clandestine midnight voting for huge bills they’ve never read). AND, there are a few other surprises lurking
.”

A real estate sales tax? Poppycock!

Here is the real story –

Beginning in tax year 2013 there will be an additional 3.8% Medicare surtax on the lesser of –

(1) Net investment income, or

(2) Modified Adjusted Gross Income (MAGI) in excess of $250,000 on joint returns and $200,000 for single filers.

The surtax is on taxable income and not gross proceeds. If you sell your principal personal residence you can exclude up to $250,000 of the gain ($500,000 on a joint return) if you owned and lived in the residence for 24 months during the 5-year period prior to the sale. If 100% of the gain from the sale of a personal residence is excluded from tax under this rule then there is no taxable income on which to pay the 3.8%.

In the above example if the $400,000 home that is sold qualifies as the taxpayer’s principal residence for purposes of the exclusion the additional tax would be “0” if the taxpayer is married and filing a joint return – because of the $500,000 exclusion there is no taxable income. There would only be an additional tax if the taxpayer’s exclusion was limited to $250,000 and the basis of the home sold (original cost + capital improvements + closing costs on purchase and sale) was less than $150,000 and his/her modified AGI was more than $200,000 – but this would be no where near $15,200.

There would be a possible 3.8% surtax liability on any gain from the sale of any vacation, rental or investment real estate. But again the tax would only apply to the net taxable gain if MAGI exceeded $200,000 or $250,000 – and not the gross sale price.

The only truth in the above nonsense is the fact that the additional taxes do not kick in until 2013 – after the next Presidential election.

My client did the right thing. Upon receiving this totally false information from someone other than a competent tax professional he contacted me and was told the truth. As I am constantly writing and saying – NEVER ACCEPT TAX ADVICE FROM ANYONE OTHER THAN A PROFESSIONAL TAX PREPARER.

FYI – if you don’t believe me FactCheck.org addressed this issue back in April. Click here.

TTFN

Wednesday, July 28, 2010

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

THE BUZZ IS BACK!

* Kay Bell also attended the NATP conference in Austin, which is where she lives, although we did not manage to connect (my fault, I fear). Unlike me, she wrote new posts at DON’T MESS WITH TAXES during the week.

I plan to check out the Tax Foundation calculator she discusses in the post “Your 2011 Tax Burden”.

* Kay refers to NATP members in her post “Atypical Tips and Taxes”.

Over the years I have received “gifts” from clients that could probably be considered tips – as did my mentor Jim Gill. Jim received a convertible couch from one client, and a refrigerator from another – two items that came in handy in our office. My gifts have not been as substantial, although I have received original artwork from clients who are artists and the occasional restaurant and Amazon.com gift card.

* And Kay provides some guidance in answering the question “Are You Ready for a ROTH?” taken from one of the educational sessions offered at the NATP conference. I attended the same class that Kay mentions in her post – although not the same session as Kay (classes are offered at least twice at different times during the conference).

I am sincerely sorry Kay and I did not meet at the NATP conference (again – my fault, I fear). Maybe at a future conference.

* I don’t want to make this BUZZ all about Kay, but she had a lot of great posts over the past 10 days. She gave us the word on back-to-school sales tax holidays in “Sales tax holidays 2010”.

* The last of Kay - If you want to learn more about the Yellow Rose of Taxes check out the post “TAP Member Spotlight: Kay Bell–Journalist, Author, and Self-Proclaimed Tax Geek!!!” at JUST IN TIME WITH JUSTIN.

* Diane Kennedy and Megan Hughes have a series of posts on the LLC form of business organization over at DIANE KENNEDY’S US TAXAID blog. Last Friday’s entry was “5 Reasons Why Series LLCs Rock

* While I was away Kelly Phillips Erb celebrated the 5th Anniversary of her excellent TAXGIRL blog. Kelly discusses the milestone in “Me, Me, Me. It’s All About Me”.

Congratulations to KPE! TG is a great, and truly helpful and informative, blog. Keep up the good work!

* Kelly spreads the word that “Smaller Charities Get Important Extension”, with important information for small non-profit organizations. The IRS has a list of "Organizations At Risk of Automatic Revocation of Tax-Exempt Status".

* Bruce, the MISSOURI TAX GUY, who I had initially hoped to finally meet in Austin, filled the BUZZ void with his weekly Sunday “Reads from Last Week”. Lots of good posts mentioned here.

* Bruce also has a great post with “10 Things” that a new small business owner should do and 10 that he/she should not do.

He makes a very important point twice, once in each list –

Keep business and financial records separate, and don’t intermingle the two” and “Never put your personal and business assets together”.

And another very important Should Not –

Don’t touch money that’s been withheld for tax purposes like payroll or sales tax and use it for anything else — even if you’ve got an ‘emergency’.”

* Trish McIntire of OUR TAXING TIMES discusses this issue in more detail in her post “The Most Dangerous Money”.

* Jean Murray discusses the Small Business Jobs Tax Relief Act, which I mentioned in an earlier post at TWTP, in "Small Business May Finally Get a Tax Break”. She tells us “it passed the House and is currently in the Senate”.

As I had previously mentioned, the one provision of this bill that I really like is – “The bill allows business owners to deduct the cost of health insurance for themselves and their families from their self-employment tax”.

* TAX MAMA Eva Rosenberg hits the nail on the head with her response to a question from a reader in “Tax Advice from Friends”. She echoes my thoughts when she says -

But that’s one of my pet peeves, listening to well-meaning, but ignorant friends, instead of consulting a tax professional for tax advice.

Friends are terrific – to have fun with, and socialize with. But…it’s like asking some well-meaning buddy to fix a cavity in your tooth, rather than a dentist. Yeah, he heard some tips about how to do that. Don’t bother going to a dentist who spent years studying – or a tax professional who is constantly studying the new tax laws
.”

* FORBES.COM has a good article on “Five Rules For Inherited IRAs” by Deborah L. Jacobs.

* Elsewhere at FORBES.COM Eric Fox provides a good overview of the “Bush” tax cuts that will expire on December 31, 2010 if Congress doesn’t get off its arse and do something in “How Will The Expiring Bush Tax Cuts Affect You?”.

* Joe Kristan has returned from his well-deserved vacation – and asks the question “Is Extreme Remodeling a Charitable Contribution?” at the ROTH AND COMPANY TAX UPDATE BLOG.

* Ron Tueber’s “Friday's Tax Quote - July 23, 2010” was a great one –

Blessed are the young, for they shall inherit the national debt." - Herbert Hoover

* Before I go some non-tax BUZZ - Kudos to NJ Gov Chris Christie for speaking out against the steaming piece of excrement known as MTV’s “The Jersey Shore”. On a Sunday ABC news program the Republican governor said the so-called “reality” series is a "negative" for New Jersey because, as is basically the case with just about every so-called “reality” show, it doesn’t in any way, shape or form reflect reality!

Christie said it "takes a bunch of New Yorkers, drops them at the Jersey Shore and tries to make America feel like this is New Jersey."

I was shocked to learn while in Austin that the self-absorbed brain-dead arseholes (that describes anyone who appears on a reality tv show – doesn’t it) on The Jersey Shore make $30,000 per episode!

There was more good news this morning on the “reality tv” front. One of the idiots on the Desperate Housewives of New Jersey, another slice of dog waste, is bankrupt ($11 Million in debt) and according to a headline, “NJ 'Housewife' Teresa Auctions Off Contents of Foreclosed Mansion”.

Who watches this shit?

TTFN

Tuesday, July 27, 2010

THE NATP ANNUAL CONFERENCE IN AUSTIN - PART II

One of the problems with the NATP conference for one who has been in the business as long as I have, and who has attended as many previous conferences as I have, is basically - how many seminars on depreciation can you sit through? It is becoming more and more difficult to find sufficient class sessions to make attendance worth the ever-growing cost.

It seems that classes on Depreciation and Passive Activities are on the list every year – as well they should be for new preparers. There are sessions on ethics – and until I am forced to do so I am not going to waste my time on these. I have no desire to represent taxpayers before the IRS, other than to assist existing clients with audits of returns I have prepared (which is why I have not become an Enrolled Agent) – so sessions on representation are of no value to me. I no longer accept corporate or partnership clients – so sessions on issues related to these returns do not interest me.

Each year the conference evaluation asks what topics participants would like to see presented in the future. I answer this question each year, often in detail, but my suggestions have rarely, if ever, been offered. I continually ask NATP to either go north or schedule the conference in the fall – but, as I said Sunday, they always seem to book in the hottest place they can find at the height of summer.

I always attend the “Current Developments” session at conference – but to be honest this topic is covered in more depth, and more completely, in the annual year-end “update” seminar offered locally by NATP each year. This seminar has always been for me, and now with the new CPE requirements even more so, a must attend. And, also to be honest, with the internet, and especially with my blog-inspired wanderings and research, I am constantly learning of “current developments” throughout the year as they happen. As long as I am being honest – this year’s Current Developments offering was somewhat disappointing.

I do not participate in the “social” activities of the conference – so that aspect of attendance is not an issue.

Is the annual NATP conference done well? Certainly yes! Do I learn anything new at conference? Yes – I do at just about any CPE seminar or workshop I attend, although admittedly not a lot. But do I learn anything that I will actually use in my practice to benefit my clients and/or increase my income - enough to justify the cost of attending conference? That is the real question.
.
I will admit that I do find myself often making notes at CPE offerings of specific questions or items to discuss with specific clients, or to review in more detail in relation to a specific client, when I return home. But it seems that I do this more at locally attended offerings than at conference.

And another factor that applies to me specifically is one that can be described by quoting one of the instructors of the Current Developments session. He and his co-instructor were discussing the new wrinkles to the Form 941 that resulted from the HIRE Act. He ended the topic by asking, “Now how many tax preparers will decide to stop preparing payroll tax returns?”

I truly do believe that one can teach an old dog new tricks. But I have also come to a point in my practice where I do not necessarily want to learn new tricks. Of course some new tricks must be learned because they affect a large number of my existing 1040 clients. But since I am no longer accepting new clients, I can simply say when faced with a more specialized new trick, “I just won’t accept any clients, or do any returns for taxpayers, who have that situation”.

In the future I will be more careful in evaluating whether I attend the NATP conference, as I have been the past few years. My decision will certainly be affected by the classes being offered, by any special scheduled speakers, by the state of the tax profession, and by the location. While attending the conference creates a tax-deductible vacation – the value only exists if the location is either new to me and of interest, or one to which I want to return.

I will return to San Francisco, Boston, Chicago, or Washington DC as often as I can – but would not go back to Minneapolis or Corpus Christi or Orlando or Atlanta or Austin unless the content truly made it financially worthwhile.

The last word - I do highly recommend attending the NATP annual conference to those who are new to the profession, and those who want to expand and grow their practice.

TTFN

Monday, July 26, 2010

THE NATP ANNUAL CONFERENCE IN AUSTIN - PART 1

I’m back!

First let me apologize for my pre-scheduling of posts FU. It seems that the first truly was last. The last entry was posted first (Monday, July 19) and the first entry in the series was posted last (Friday, July 23rd)! I did not have access to the internet on my trip – so I did not spot the FU until Saturday morning. My bad!

Now – on with the National Association of Tax Professionals annual conference in Austin, Texas. As I mentioned yesterday, this was the 18th annual conference I have attended in my 23 years as a member of NATP. The last conference I attended was 2006 in Boston.

The draw, and highlight, of this conference was the double-bill of top-level IRS speakers – Karen Hawkins, the new Director of the Office of Professional Responsibility and keeper of Circular 230, who gave the keynote address at the opening session on Monday morning, and David Williams, Director of IRS Electronic Tax Administration and Refundable Credits and the IRS person who is creating and overseeing the new tax return preparer registration regime, who spoke on the new regime and the e-file mandate in a general session on Tuesday afternoon.

In discussing return preparer registration Karen, an attorney, affirmed the fact that the CPA exam and the bar exam are not tests of 1040 preparation knowledge – and stated her belief that “lawyers and CPAs should be tested”. However, she gave as the excuse for why this is not being done some federal regulation that forbids the government or the Treasury Department (I forget which) from issuing regulations that affect the ability of CPAs or attorneys to “practice”.

While I am not familiar with the specific regulation, this appears to me to be a poor excuse. Requiring CPAs and attorneys to be tested and take specific annual CPE does not affect their ability to certify the audits of financial statements or represent clients before the various bars. There is nothing in the new regime that changes the ability of EAs, CPAs or attorneys to “practice” before the Internal Revenue Service – i.e. represent clients in collection and Tax Court matters. Formerly unenrolled preparers who must now register will not be able to represent clients before the IRS in these matters.

The new regulation regime simply wants to assure that all individuals who wish to prepare federal income tax returns for a fee verify their competence via an initial test and remain current by taking required CPE credits in federal taxation topics. CPAs and attorneys who wish to prepare federal income tax returns for a fee should be subject to the same requirements as the previously unenrolled. Only Enrolled Agents have already proven competency and currency and should be exempt.

Both were excellent speakers. David was exceptional – and one wondered what he is doing working for the IRS. David did not address in detail the reasons CPAs and attorneys are exempt from proving competency and remaining current, and he was not asked any questions on this topic during the brief Q+A following his presentation.

The following items of interest regarding the new regulations were mentioned in the presentations –

* A tax preparer’s PTIN must be renewed, and a fee paid, every year – and not every three years as originally proposed by the IRS. There was some bureaucratic reason for this. The actual fee, which it had been determined by the IRS, could not be announced at the time of the presentations because there was still some government individual or group that had to provide its “blessing” on the amount before it could be made public. We have since learned from IR-2010-86, issued July 22, 2010, that the IRS will charge “a fee of $50, payable to the IRS, to cover technology costs, as well as compliance and outreach efforts associated with the new PTIN program. The proposed regulations would also provide for an additional fee (expected to be substantially lower than $50) to be charged by the third-party vendor chosen to operate the new online system.”

* Since all those who register for or renew a PTIN, including EAs, CPAs and attorneys, will be required to pay this fee, the enrollment/renewal fee for Enrolled Agents is expected to be reduced.

* Once the regulation regime is fully phased-in the IRS will consider charging taxpayers who pay individuals without a valid PTIN to prepare their federal income tax return a penalty. This would not happen for at least 3 years.

* The IRS may consider sending taxpayers who file computer-generated “self-prepared” returns a letter asking them to verify, under penalty of perjury, that the return was indeed “self-prepared” and not done by an unregistered paid preparer who did not sign the return.

* Registered tax preparers who will be taking the competency test will be fingerprinted as part of the “background check” that will be required. Because Electronic Return Originators (EROs) apparently have already provided fingerprints and undergone a background check they may be exempt from this requirement.

* Individuals who prepare only federal payroll tax returns, and are not involved in the preparation of federal income tax returns, may be exempt from the 1040 competency exam, although they will have to register and obtain a PTIN. As an update - according to the recent NATP TAXPRO WEEKLY e-letter – “Initially, the IRS indicated that paid preparers who prepare only payroll returns would be required to take the 1040 nonwage business competency exam. The FAQs have been revised to state that at this time, testing will only apply to those preparers who prepare at least one 1040 series return.”

* The annual requirement for 15 hours of CPE in specific tax topics (which includes the ridiculous 2-hr ethics waste of time) will be effective for all applicable registrants for the one year period beginning January 1, 2011, and not the date of registration if earlier. The TAXPRO WEEKLY also brings an update on this item – “The effective date for the continuing education requirement has yet to be officially determined but IRS sources say it could be another year before the requirement becomes effective”.

* David mentioned that the current priority is getting in place the procedures for initial registration by September of this year. Once this is done work will begin on the procedures for the competency testing and other related issues.

* With the newly created need for continuing education in taxation this is a business that we should seriously consider getting involved in. Continuing education providers will need to be “approved” by the Internal Revenue Service.

* The IRS will very likely offer an “opt out” choice for taxpayers who do not want their tax preparer to submit their 1040, or 1040A, electronically, therefore relieving the preparer of the e-filing requirement. And the Service may consider offering special “waivers” from the requirement for tax preparers with situations like mine. That is good news indeed!

Here are some items of interest that I either learned or was reminded of in the various classes I attended –

* The fact that IRAs were made available to all taxpayers, regardless of level of income or employer plan coverage, was what saved the economy from double-digit interest rates back in the early 1980s.

* One should not rollover a 401(k) or other employer plan to an IRA after converting a traditional IRA to a ROTH in the same year. If you convert in 2010 wait until 2011 to do the rollover. This is because the total amount in all IRA accounts at December 31st is used in the calculation to determine the taxable amount of the conversion (I attended the same class – although a different session – on ROTH conversions as Kay Bell – which she discussed in her post “Are You Ready for a ROTH?”).

* There are 1000 types of IRS notices – and over 200 Million notices are sent out by the IRS each year.

* Nothing is ever “off the record” at an IRS office audit.

to be continued . . . .

TTFN

Sunday, July 25, 2010

IT'S TOO DARN HOT!


Cole Porter may have been thinking about Austin, Texas when writing the 2nd Act opener to KISS ME KATE. The title certainly applies!

I left the oppressive heat of New Jersey for the oppressive heat of Texas. Even at 7:30 in the evening, on the four block walk back to the Hilton from dinner at the Driskoll Hotel, it was brutal.

The purpose of my trip to Austin was to attend the annual conference of the National Association of Tax Professionals. This was the 18th conference I have attended during my 23 years as a member.

For years I have been begging NATP to either go north for conference (Portland, Oregon or Maine, or Seattle, Washington) or schedule it in the fall. They almost always seem to book the hottest place they can find at the height of the summer. Next year the conference is in St Louis, MO – but the temperature there on Saturday was 96 degrees!

The flight from Newark was a little under 4 hours, and the clock was put back one hour upon arrival. The Super Shuttle, which I booked round-trip, brought me to the Austin Hilton on Sunday evening.

The Hilton was excellently located. It is across the street from the uniquely designed Convention Center and its Metro Rail (apparently disliked by locals) and bus stops, and one block from the 6th Street Entertainment District (“from jazz, blues, and country to rock, hip-hop, beat, progressive, metal, punk and derivations of these, there's something to whet everyone's musical pallete”) – which is one reason for Austin being called “Live Music Capital of the World”.

The hotel, Austin’s biggest, has only one, expectedly expensive, restaurant choice for dinner, Finn and Porter (where I dined Monday evening) - although sandwiches, pasties and ice cream are available at relatively reasonable prices in the lobby’s JAVA JIVE, which is open all day.

Finn and Porter is a steak, seafood and sushi restaurant. None of these items interest me, especially sushi, so luckily my choices were limited to the least expensive items on the menu – chicken or pasta. The steak entrees were priced at $40.00 and up. I chose the half chicken, which was very good and actually filling, preceded by equally good Lobster Bisque and followed by an assortment of sorbet.

The stinger that arrived at my table (I told the waitress how it was made) was a dirty green color – and was promptly returned. The bar did not have White Crème de Menthe, so the bartender tried green. Trust me – it doesn’t work.

The hotel’s more casual Liberty Tavern is open for breakfast and lunch and, judging by the breakfast menu, is also expensive. The $15.00 breakfast buffet (actually $16.24 with tax) was barely adequate.

There are two excellent, although also pricey, restaurants very close to the Hilton. Carmelo’s Ristorante Italiano is directly across the street from the hotel, on the site of what was once the town’s rail station. Chez Nous, an authentically French eatery, is half a block away. Both were excellent, although the real find was Chez Nous. On my last night in town I dined at the 1886 Café and Bakery in the lobby of historic Driskoll Hotel on 6th Street, a more moderately priced choice.

The Hilton lobby was surprisingly empty. No gift shop or Tour Desk – or even a rack with tour information. There was only a UPS store, instead of a “Business Center”, and a clothes boutique tucked in a corner, which never seemed to be open (not that I planned to shop). I also found it inconvenient that, while there was an ice dispenser, there were no vending machines on any of the room floors. One had to trek down to the lobby to Java Jive and pay $2.50 for a soda.
.
I did learn while waiting for the elevator one day that the Austin Hilton is "pet friendly". For $50.00 per night extra you can share a room with your dog!
.
I located the Austin Visitor Center on 6th Street and booked the Austin Duck Adventure – “an amphibious {1 hour 15 minute – rdf} tour of Austin’s downtown and beautiful Lake Austin inside one of our Unsinkable, US coast guard inspected, Hydra Terra vehicles”. I had previously been on Duck tours of Branson MO, Washington DC, and Boston.

The Visitor Center was also the starting point for “Austin in 90 Minutes” — “a narrated Austin sightseeing tour that familiarizes you with over 30 of Austin's major historical, cultural, significant points of interest in just 90 minutes” – and had information on several walking tours. I did not take the 90 minute tour, and I certainly was not going to do any walking in 96+ degree heat!

The Center also had a discount table for area entertainment. I considered getting a ticket for ESTHER’S FOLLIES, a live show of “original topical satire, mystifying magic, & musical parody” with performances on Thursday thru Saturday at 8:00 and 10:00 PM on 6th Street, but the only offerings on the board were for Friday evening.

I had checked into the theatre scene before leaving home and found only a touring production of THE DROWSY CHAPERONE at the Zach Theatre (I was not interested) and an Agatha Christie mystery that was too far away from the hotel. JERSEY BOYS is coming to BASS HALL in August – too late for me (I have not seen the Broadway production yet).

Austin, Texas is not a location I would have chose to visit if it had not been for the NATP conference. I am glad I came, but, unlike neighboring San Antonio (where I had attended a National Society of Tax Professionals convention several years ago) I do not plan to return to Austin. As I said upfront – it’s too darn hot!

TTFN

Friday, July 23, 2010

TILL DIVORCE DO US PART - PART I

While I am away at the NATIONAL ASSOCIATION OF TAX PROFESSIONALS national conference in Austin, TX I am re-running my series on Divorce from the summer of 2007. Nothing much has changed in this area - but if anything has and I have not mentioned it I am sure someone will let me know.
.
"It was about as even a divorce settlement as you could hope for. Each lawyer got $50,000." Cartoon in the Wall Street Journal

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

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

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

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

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

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

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

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

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

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

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

To be continued. . . . . . . .

TTFN

Thursday, July 22, 2010

TILL DIVORCE DO US PART - PART IV

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

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

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

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

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

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

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

Wednesday, July 21, 2010

TILL DIVORCE DO US PART - PART III

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

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

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

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

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

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

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

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

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

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

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

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

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

{Update - Under final regulations issued by the IRS a copy of a court order or divorce or separation decree or agreement that includes the same language as the Form 8332 will no longer be acceptable as an alternative to Form 8332. Only the actual Form 8332 or a similar document containing the same information that is specifically written for the sole purpose of serving as a written declaration in lieu of the Form 8332 will be acceptable}

to be continued…

TTFN

Tuesday, July 20, 2010

TILL DIVORCE DO US PART - PART II

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

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

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

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

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

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

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

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

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

Let us look at a simple example:

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

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

to be continued. . . . .

TTFN

Monday, July 19, 2010

PAY THE SALES TAX AND AVOID THE DIVORCE LAWYER

Let me end the topic of Divorce with this rerun that provides some good advice for cheating husbands.
.
In my reprint of a September 2001 post on the benefits of a national sales tax I mentioned that – “States like New Jersey have had much more success raising revenue from sales tax audits than from audits of income tax returns.”

A while back then Director of the NJ Division of Taxation Robert Thompson – who left office after being charged with “making discretionary decisions while under undisclosed conflicts of interest caused by their receipt of meals, entertainment, golf outings and other gifts” from OSI, the outside collection agency hired by the NJDOT to collect outstanding NJ taxes – told the NJ chapter of the National Association of Tax Professionals about NJ’s special sales tax audit initiative.

The program would target NJ businesses where pretty much 100% of gross receipts are subject to sales tax – like pizza parlors, liquor stores and taverns. NJDOT would get purchase information from vendors who supplied the business selected for audit with “cost of goods sold” items (i.e. wholesale pizza dough and liquor purchases), get a price list or menu from the business being audited, verify inventory numbers, and, using industry standards for spoilage and theft, “back into” what the business should have reported in gross sales subject to sales tax. If this was more than what was actually reported on quarterly sales tax reports the business would receive a bill.

It was not the goal of the program to put the pizza parlors, liquor stores or taverns being audited out of business. The sole purpose was to collect more tax. No criminal or other action was brought against the business by the State and the bill was not overloaded with penalties.

This program was very successful.

Bob Thompson told of the audit of one pizza parlor, which happened to be located around the corner from the NJDOT headquarters in Trenton. The Division asked the parlor to submit a menu, which was reviewed by the auditors. One auditor then visited the parlor and asked the owner, “How come if the menu you sent us says you charge $2.00 for a slice of pizza, when I come in here for lunch you charge me $2.75?” Apparently the owner was not too bright!

My favorite story concerns the state's attempt to collect “use tax” on out of state purchases.

A sales tax is a “consumption” tax assessed and paid at the “point of purchase”. The State of NJ current charges a 7% sales tax on the purchase of qualifying items made within the state. You go to a local McDonalds in Jersey City and buy a Big Mac and you pay NJ state sales tax on the purchase. The sale takes place in NJ and you “take possession” of the Big Mac in NJ – so it is subject to NJ sales tax.

If a New Jersey resident purchases a taxable item in New York and will walk out of the store with that item in hand he/she will pay New York state sales tax on the item, even though the item will ultimately be used in New Jersey, and will not owe any tax to NJ.

But if a NJ resident purchases an item from a New York vendor and has the item shipped to a New Jersey address he/she does not pay New York state sales tax at the point of purchase. That person then must pay a use tax on the purchase to the State of New Jersey.

NJ use tax is paid by any individual who “stores, uses, or consumes” within the borders of the state of New Jersey tangible personal property subject to NJ sales tax that was purchased from an out-of-state seller and no local sales tax was paid at the “point of purchase” to the out-of-state seller. Got that?

So if you order a bracelet from a New York jeweler and have it shipped to your New Jersey address you would not pay sales tax to New York, but you would be liable for New Jersey use tax on the purchase.

Individuals pay any NJ use tax liability as part of the filing of the NJ-1040 state income tax return. Most state tax returns will have a line where the taxpayer can enter an amount for use tax due. Many of these states, NJ included, require that if a resident is not declaring a use tax liability he/she must enter “0” on the appropriate line – so that the taxpayer is “going on record” that he/she does not owe any use tax.

And that is what the story is about.

The NJ Division of Taxation got a hold of the records of a jewelry store located in New York (possibly as a result of a NYS audit of the store – I don’t remember the actual details) and made a list of all purchases where the items were shipped to a New Jersey address and no NY state sales tax was paid. The Division then sent a bill for the appropriate amount of use tax to the registered NJ residences of all those on the list.

One of these bills arrived at the home of a married doctor and was opened by the wife. After she reviewed the bill she immediately called the NJ Division of Taxation.

“I have just received a bill for use tax from the Division of Taxation and I think you have made an error,” she said.

“What is the error,” the DOT employee asked.

“My husband only gave me one diamond bracelet!”

So the moral of the story – if you are going to give your wife and your mistress the same expensive gift don’t buy both at the same time, and be sure to pay state sales tax on the gift for your mistress!

TTFN
.
I WILL BE BACK FROM TEXAS TONIGHT - NEXT WEEK I WILL REPORT ON MY TRIP AND WHAT I LEARNED AT CONFERENCE.

Saturday, July 17, 2010

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

* Megan Hughes gives us the word on a popular tax scam in “Your Business Can’t Buy Your House” at DIANE KENNEDY’S US TAX AID blog.

And the post explains why if you could put your home in the name of your business you certainly wouldn’t want to.

* I announced that there is a “New Director for NJ Division of Taxation” at my NJ TAX PRACTICE BLOG.

* I also announced that the NJDOT has begun to mail out Property Tax Reimbursement checks in the NJ TAX PRACTICE BLOG post “The Check Is In The Mail!”.

* The Tax Foundation’s TAX POLICY BLOG tells us that “Seniors Earn Lion's Share of Dividend Income According to New IRS Data”.

Overall, taxpayers over age 55 account for 71 percent of all dividend income earned. The lion's share of dividend income - 48 percent - is earned by those over 65, and dividend income accounts for 6 percent of all the income earned by these taxpayers.”

The post points out that this information – “sheds light on how seniors will be impacted if the current 15 percent tax rate on dividend income is allowed to expire at the end of 2010 and dividends revert to being taxed at the personal income tax rate, which could go as high as 39.6 percent”.

* Perhaps in response to the above referenced IRS data, according to BNA SOFTWARE, “Baucus Sees Need to Prevent Dividends From Being Taxed at Ordinary Rates”.

Senate Finance Committee Chairman Max Baucus (D-Mont.) said July 13 that he intends to seek middle ground with other lawmakers in the coming months in an attempt to keep dividends tax rates from returning to the ordinary income tax rate at the end of the year.”

* A “tweet” led me to this article from KIPLINGER.COM – “Six Tax Breaks for Small Business” – which discusses tax relief for small business that Congress is considering.

"Self-employeds would also get help, in the form of a long awaited easing. They would be allowed to deduct their medical coverage on Schedule C, lowering their SECA tax. Right now, they can deduct it only against income tax. But this would be a one-year break -- for 2010 only .”

One of the methods to pay for the bill gets a definite “thumbs down” –

The 1099 filing rules would be applied to landlords. Starting in 2011, they’d have to issue a 1099 if they paid a service provider $600 or more a year.”

Another income generator is certainly worth considering –

And balances in 401(k)s could be rolled directly into the plan’s Roth 401(k). Ditto for 403(b)s and 457 plans. As when an IRA is converted to a Roth, the income from a 2010 conversion could be deferred, with half of it taxed in 2011, the rest in 2012.”

* TAX GIRL Kelly Phillips Erb reports on a bi-partisan estate tax proposal in her post “Federal Estate Tax Gets Some Interest”.

This proposal sounds pretty good to me. I especially like the part where “Basis for assets would be ‘stepped up’ at death, just as it was before 2010.” For me this is the only reason to keep some kind of estate tax in place. Carry-over basis would be disastrous for all involved.

And I do agree with Kelly that it is good someone in Congress is trying to do something about the estate tax. As she says – “I mean, it’s better than the ‘let’s do nothing and keep them guessing’ plan that we’ve gotten used to…

* The CCH daily tax headline e-letter indicates “Same-Sex Married Couples Allowed to File Joint Returns”.

According to a US. District Court decision in N. Gill v. Office of Personnel Management, DC Mass., 2010-2 USTC –

Same-sex married couples were allowed to file joint federal income tax returns and have access to other federal benefits available to married couples.”

Same-sex couples who have been legally married under state law have not been able to file joint federal income tax returns because section 3 of the Defense Of Marriage Act “defines, for federal law purposes, a marriage as a legal union between one man and one woman, and a spouse as a person of the opposite sex who is a husband or wife”. However, the court found –

Section 3 of the Defense of Marriage Act (DOMA) violates the equal protection principles of the Fifth Amendment's due process clause.”

I am surprised that there has not been more discussion of this court decision around the tax “blogoshpere”.

So now same-sex couples have the same right to pay the “marriage tax penalty” as “traditional” married couples.

* A subsequent CCH e-letter advised that “Senate Tax Panel Discusses Future of 2001 and 2003 Tax Cuts”.

A panel of economic experts testified before the Senate Finance Committee on July 14 on the pros and cons of extending the tax cuts enacted in 2001 and 2003.”

Check out the item to see what they had to say.

* No BUZZ would be complete without a visit to DON’T MESS WITH TAXES. Speaking of the SFC hearing, Kay Bell comments on what these “economic experts” had to say in her post “Tax Cuts or Total Tax Reform?”.

My vote goes to total tax reform!

* Tonya Moreno gives us “Tax-Free Shopping in 2010: A List of Sales Tax Holidays This Year” over at ABOUT.COM: TAX PLANNING: US.

I don’t see New Jersey, New York, or Pennsylvania on the list, and the Texas sales tax holiday is too late to do me any good.

* WEBCPA provides the word that “IRS Undeliverable Mail Costs Millions”.

According to the article a May report by the Treasury Inspector for Tax Administration “found that the IRS sends out approximately 200 million notices and letters each year to individual and business taxpayers and their representatives at a cost of $141 million. In 2009, approximately 19.3 million of those mailings were returned to the IRS at an estimated cost of $57.9 million.”

And, as I have said often in the past, based on my 39 tax seasons of experience more than half (I am being conservative) of IRS notices are incorrect to begin with.

* There has much talk about “sin taxes” around the tax blogosphere lately as a result of the new tanning tax. REUTERS tells us that “U.S. Pockets $20.6 Billion in Sin Taxes”.

* Professor Annette Nellen looks at “Hope vs. Opportunity: Higher Education Tax Incentives” and compares both credits to “reality” in her article at the AICPA TAX INSIDER. She also looks at tax credits for college tuition in terms of recognized principles of good tax policy.

She ends a brief post about her article at her 21st CENTURY TAXATION blog with the following opinion –

I'd like to see these incentives pulled from the tax law where they really don't work well. The funds aren't available when tuition is due, they provide benefits to many people who really don't need them while others struggle to get to and stay in college, the federal government already has various programs for helping students pay for college, and they complicate the tax law.”

She then asks, “What do you think?” – and I echo the question.

I am off to Austin TX tomorrow afternoon, returning on Friday. “Talk” to you when I get back!

TTYWIGB

Friday, July 16, 2010

ON THE ROAD AGAIN

I will be leaving the heat of New Jersey for the heat (but apparently less humidity) of Austin, Texas on Sunday (July 18th) – to attend the annual conference of the National Association of Tax Professionals. This will be my first conference, and my first flight, in a couple of years. I return Friday (July 23rd) late afternoon.

While I am gone I will be re-running my 4-part series on Divorce from 3 years ago, with a special 5th rerun that is sought of divorce-related, here at TWTP.

There will be no BUZZ on Wednesday or Saturday. The next BUZZ entry will be Wednesday, July 28.

When I return I will post about the trip itself (this will be my first visit to Austin, though I have previously been to San Antonio, Corpus Christi, and Houston in Texas) and let you know what I learned at the conference.

I will not have, as hoped, finished all of the GD extensions in the “to be done” box (as usual my “eyes were bigger than my stomach” so to speak) before boarding the plane – and I expect those remaining will still be in the box when I return.

FYI – there will be a BUZZ installment tomorrow (Saturday).

TTFN

Thursday, July 15, 2010

AN INTERESTING QUESTION

I received an interesting question by way of a comment to my post ASK THE TAX PRO – STATE TAXES FOR A NJ RESIDENT WORKING IN NYC from October of 2007.

It is a specific tax question – which I do not answer here at TWTP. But it does bring up an interesting issue.

I need your help. I'm a consultant. I have a NJ Corporation. My corporation subcontracts services through another NJ corporation. I do work physically in NYC but I have been withholding only NJ state income taxes from my wages. I am not filing a NY state tax return, only a NJ state tax return. My company is not registered to do business in NY since it does all its business with NJ companies.

When I started this position in 2005 my accountant at the time advised me that I did not have to pay NY state tax but should continue paying NJ state tax. My current accountant seems to agree but I now have concerns.

Can you please shed some light on this for me? And if I was supposed to be filing NY state returns, can I just amend my NJ returns and try to recover some of the credit from them? What can NY State do to collect the funds from me?

Anon


This is, as I said, an interesting, but apparently not a unique, situation that happens mostly with computer consulting.

As I understand the situation presented NYC Company A needs a consultant to work on-site in its NYC location. It contracts with NJ Company B to provide this service. NJ Company B in turn contracts with NJ Consultant C, whose business is organized as a corporation, to do the work. I assume Company A pays Company B, and Company B pays Consultant C.

NYC Company A wants to avoid the expense of hiring the appropriate employee directly and paying all applicable payroll and benefit costs. NJ Consultant C wants to use employee benefits and other related expenses within the corporate structure to reduce the amount of income subject to FICA and income taxes. NYC Company A pays less total out of pocket then if it hired an actual employee – and NJ Consultant C gets to keep more money in pocket than if he/she was an employee of the company. So both parties come out ahead. Why NJ Company B is involved is a curiosity- other then as a way to put A and C together or in an attempt to “shield” Consultant C from liability for NY state income taxes.

Off the top of my head I would say that because all the work is done physically in New York State the wages are probably subject to New York State income tax.

The instructions for NY Form IT-203 (nonresident individual income tax return) indicate that you are subject to NY state income tax if “you have income from a New York source”. It goes on to say that New York source income includes income from “services performed in New York State”.

But it is a topic that requires further research – time-consuming research I am not willing to do on my dime. As I said above, I do not provide specific tax advice on individualized tax situations free of charge. As I am not accepting any new clients, I am not looking to earn a fee here.

I can tell you that if you are subject to NY state income tax you only have to pay on wages earned while physically in the State of New York. If you spend 4 days a week in NY at the client’s office and 1 day in NJ at your “home office” (if you qualify) doing paperwork or such you would only pay tax on the wages for the 4 days physically in NY. And if you attend a convention or conference, or any other work-related meeting or activity, that takes place outside of New York State you would not pay NY state tax on the wages allocated to these days.

And if you are subject to NY state income tax you can claim a credit on your NJ-1040 for the taxes paid to NY State. You would be able to amend your state returns to claim this credit for all “open” tax years (at this point 2007, 2008 and 2009).

If your current accountant says you do not have to pay NY state income tax I suggest you pay another tax professional for a documented “second opinion”. Your accountant may be correct, but you are right to be concerned.

And I would open the question to any of my tax pro readers who have experience with such a situation. You can let me know what you have to say either by submitting a comment or sending me an email at rdftaxpro@yahoo.com and I will include all responses in a future follow-up post.

TTFN

Wednesday, July 14, 2010

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

A pretty skimpy BUZZ this time around – it being summer and all.

* The fabulous Stacie Clifford Kitts speaks for all serious bloggers with her post “Flabbergasted Reputable Tax Service Company Acting Like an A-Hole” at STACIE’S MORE TAX TIPS.

Hello, the comment section of a blog post IS NOT FREE ADVERTISING SPACE FOR YOU OR YOUR BUSINESS. If you want to capitalize on my time investment and my readership, contact me and I will be happy to discuss the fee for advertising on my site.”

Amen, sister!
.
I also find I often get comments that are looking for free specific tax advice - when the commentor should be paying his/her tax pro for the answer. Do doctors who write medical blogs get frequent requests for free medical diagnosis?

* Kay Bell reports that “IRS Opens Toll-Free Oil Spill Hotline” at DON’T MESS WITH TAXES.

If you have tax issues related to the Deepwater Horizon oil spill, you now can call the IRS directly for answers at 866-562-5227.”

Kay tells us that – “the IRS is working out details for its previously announced special oil spill assistance day on July 17.

On that Saturday, IRS employees will be available in seven Gulf Coast cities -- Mobile, Ala.; Panama City and Pensacola, Fla.; New Orleans, Houma and Baton Rouge, La.; and Gulfport, Miss. -- to work with taxpayers and tax preparers to resolve tax issues related to the oil spill
.”

* Bruce, the MISSOURI TAX GUY, provides a Sunday treat with his weekly “Reads From Last Week” chock-a-block of goodies.

I found “How 16 Great Companies Picked Their Unique Names” from WISE BREAD and “How to Choose a 529 Plan And Save Now For Future College Costs – Prepaid vs. College Tax Savings Plan” from SAVING TO INVEST especially interesting.

* The title of this article from CNN MONEY, which appeared as part of the ACCOUNTANTSWORLD.COM daily headline news, caught my eye – “IRS Starts Mopping Up Congress's Tax-Reporting Mess”.

Author Neil deMause talks in detail about the new 1099 reporting “mess”.

* OOPS! I forgot to tell you about my item “Unclaimed Property: Can You Cash In?” that appeared at MAINSTREET.COM last week.

TTFN

Tuesday, July 13, 2010

IT' AIN'T NECESSARILY SO!

As I was driving down to Neptune to do my laundry this morning a deceptive commercial for storm windows played on the radio.

The ad basically said if you run into the sponsor’s store and buy storm windows before the end of the year the government will give you $1,500.

As Ira Gershwin wrote, It Ain't Necessarily So!

Yes, you can claim an energy tax credit of $1,500 for qualified purchases on your 2010 Form 1040. And yes, this includes storm windows.

However the credit is actually 30% of the total of your qualified purchases, up to a maximum of $1,500. So if you run down and buy $1,000 worth of storm windows the most you will get from Uncle Sam is $300. You must spend $5,000 in order to get the full $1,500.

And not all storm windows qualify. The windows must meet certain U factor and SHGC requirements (don't ask me what this means). The manufacturer will know if “his” windows qualify and will be able to provide purchasers with a Manufacturer’s Certification if they do.

Be aware that installation costs for windows, as well as doors, insulation, and roof, are not eligible for the credit.

The $1,500 maximum applies to the two year period of the credit – tax years 2009 and 2010. So if you purchased a qualifying item in 2009 and have already claimed the full $1,500 you will get absolutely no tax credit for qualifying storm windows purchased in 2010. If you claimed a $1,000 energy credit on your 2009 Form 1040 the most you can get for 2010 is $500.

And you must have a net tax liability of at least $1,500 to get a tax benefit of $1,500 for qualifying energy credits. The credit is neither refundable (thank God) nor able to be carried forward.

Before you run down anywhere to buy anything that you think will provide you with an energy credit check your 2009 Form 1040 to see what, if anything, has already been claimed. Then I suggest you go to the “Federal Tax Credits for Consumer Energy Efficiency” page at www.energystar.gov.

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. Prior to making the a purchase, check out the specific requirements at the Energy Star web page and make sure what you are buying does qualify.

And if you do buy be sure to get the Manufacturer’s Certification.

This misleading ad is similar to one that tells you to donate your car to a specific charity and get a big tax deduction. Again – it ain’t necessarily so. For one thing, in order to claim a deduction for donating your car to charity you must be able to itemize. And, again, you must have an actual tax liability that can be reduced by an additional itemized deduction.

I have said and written many times, here and elsewhere, that the best tax advice I can give you is - DON’T ACCEPT TAX ADVICE FROM ANYONE OTHER THAN A PROFESSIONAL TAX PREPARER. Don’t listen to a broker, a banker, an insurance salesman, or your Uncle Charlie! Or a radio ad!

TTFN

Saturday, July 10, 2010

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

* Kay Bell winds up her DON’T MESS WITH TAXES series of Mid-Year Tax Moves with “Midyear Tax Tip #10: Get Organized”, telling us – “The road to tax hell is paved with unorganized filers”.

Once again – if you want to get organized click here.

* Another double-dose of the Yellow Rose of Taxes – Kay also tells us that “Hawaii Finally Issuing 2009 Tax Refunds ”.

Kay suggests –

Meanwhile if it looks like you'll be getting a refund from Hawaii (or any state tax office or the IRS, for that matter) when you file your 2010 taxes, you might want to adjust your withholding now.

That way you'll get your tax money throughout this year and won't have to wait on any refund check in case Hawaii (or your state) has budget issues that again necessitate holding onto taxpayer refunds
.”

* Bruce, the MISSOURI TAX GUY, provides an basic overview for taxpayers who must file state tax returns in “Two or More States”.

* BNA Software tells us that “IRS Flooded With Comments, Concerns on New Payment Reporting Rules”.

The IRS recently, in Notice 2010-51, called for comments on the new 1099 reporting rules. According to BNA – “scores of taxpayers and certified public accountants have called for the repeal of a law change that, beginning in 2012, will require businesses to report a wider range of payments to contractors, vendors, and others, usually on Form 1099”.

As I mentioned in Thursday’s post (NEW REPORT FROM THE NATIONAL TAXPAYER ADVOCATE), National Taxpayer Advocate Nina Olsen also had concerns about the added burden of the new reporting requirements, saying that the burdens “may turn out to be disproportionate as compared with any resulting improvement in tax compliance.”

* The Tax Foundation’s TAX POLICY BLOG reports on the appointment of Harvard Professor Dr. Donald M. Berwick to run Medicare and Medicaid, calling him “Obama's New Secretary of Redistribution”.

The post provides a disturbing quote from a speech Berwick made in England -

"Any healthcare funding plan that is just, equitable, civilized, and humane must, must redistribute wealth from the richer among us to the poorer and the less fortunate. Excellent healthcare is by definition redistributional."

The purpose of the Tax Code is not to redistribute wealth – it is to raise money to pay for the government!

* Oi vey. AUCTIONBYTES.COM warns us that “USPS Publishes Proposed Rate Increases for 2011

The increases, which would take effect on January 2, 2011, include -

· “First-Class Mail stamp would increase two cents to 46 cents and would add less than 13 cents a month to the average American household's budget.

· Each additional ounce would cost 18 cents.

· Postcard stamp would increase to 30 cents.

· The first ounce of a large envelope (flat) would cost 92 cents
.”

* Decades ago I worked for one of the then “Big Eight” international accounting firms in the Small Business Services Department as a “para-professional”. At the time it appeared to me that one essential criterion for employment with the firm was the ability to play either golf or tennis. I had never played either. The only reason I was hired, I guess, was because I knew my tax law and accounting, having been self-taught via prior on-the-job experience in both areas.

It seems that proficiency in golf is still an important part of the CPA workload. Or so I surmise from this post “Lessons from 1,000 Rounds: Tips On Playing Golf with Clients” by Carter Wilcoxson, which I found via a “tweet”.

* Expectant father Joe Arsenault answers the question “So Why Are Babies Called a Tax Deduction
” at CAFETAX.

TTFN

Thursday, July 8, 2010

NEW REPORT FROM THE NATIONAL TAXPAYER ADVOCATE

National Taxpayer Advocate Nina E. Olson released a report to Congress yesterday that identifies the priority issues the Taxpayer Advocate Service will address during the coming fiscal year. The report expresses concern about the adequacy of IRS taxpayer service, particularly as the IRS begins to implement health care reform, about new information reporting burdens facing small businesses and others, and about certain IRS collection practices.

Here are some pertinent quotes from the IRS press release on the TAX report (any highlight is mine):

Taxpayer Services-

* “Spending for IRS taxpayer service programs has been declining in recent years. At the same time, more taxpayers have been contacting the IRS for assistance as the IRS has been tasked with administering an increasing number of social benefit programs, including Economic Stimulus Payments, Making Work Pay credits, and First-Time Homebuyer credits. The report says that as a result of the imbalance between taxpayer demand and IRS resources, the IRS has fallen short of providing adequate taxpayer service in important areas.”

* “There appears to be an implicit assumption built into existing budget procedures and projections that raising tax compliance requires ramping up enforcement and that taxpayer service is less important – perhaps even unimportant – for compliance. We think this implicit assumption is wrong.

The report states that many noncompliant taxpayers are baffled by complex rules and states that additional taxpayer service, particularly outreach and education, could improve tax compliance
.”

* “Second, with respect to the IRS’s ability to deliver social programs, the report expresses concern that the IRS currently is neither structured nor funded to do the job effectively. ‘I have no doubt the IRS is capable of administering social programs, including health care,’ Ms. Olson said. ‘But Congress must provide sufficient funding and the IRS itself must recognize that the skills and training required to administer social benefit programs are very different from the skills and training that employees of an enforcement agency typically possess. While some enforcement measures are required to prevent inappropriate claims, the overriding objective of agencies that administer social benefit programs is to help as many eligible persons qualify for the benefits as possible. That requires outreach and working one-on-one with potentially eligible individuals. If the IRS continues to ramp up enforcement while reducing taxpayer service programs, I would be concerned about its ability to administer the new health care credits and penalty taxes in a fair and compassionate way.’

Ms. Olson suggests that the IRS mission statement be revised to explicitly acknowledge the agency’s dual role as part tax collector and part benefits administrator. Such a revision would require the IRS to develop a strategic plan that gives sufficient attention to both roles and would underscore that the IRS requires sufficient funding to perform both functions effectively
.”

I do not believe the IRS should have any role as a benefits administrator. The IRS should not be administering social programs, including health care, whether they are capable of doing so or not. I have said time and again that providing social benefits should not be done through the Tax Code.

New Business and Tax-Exempt Organization Reporting Requirements -

TAS has not yet reached any conclusions regarding the benefits and burdens of the requirement, but the report expresses concern that the burdens ‘may turn out to be disproportionate as compared with any resulting improvement in tax compliance.’ During FY 2011, TAS will study the impact of the new reporting requirement more closely and, depending on what its study finds, may propose administrative or legislative recommendations to modify the provision or suggest that Congress consider less burdensome tax gap proposals, including a TAS proposal to require reporting of non-interest bearing bank accounts, to replace it.”

To download the National Taxpayer Advocate’s FY 2011 Objectives Report to Congress click here.

TTFN

Wednesday, July 7, 2010

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

* Mary O’Keefe continues the discussion on tax software and electronic filing in her posts “I Am Not a ‘Tax Artisan" (BTW – when I referred to Mary as an artisan I was referring to her as a teacher and not a tax preparer) and “Do US Presidents E-file Their Tax Returns?” at BED BUFFALOES IN YOUR TAX CODE.

In the first post Mary wisely points out (the highlight is mine) –

Thanks to our legislators, who have continued a trend of exponentially increasing tax complexity and who insist on tinkering with tax laws right up to the last minute before the filing season begins, tax software is extremely complex and intricate. Tax software is a useful tool, but I consider it vitally important to check the results carefully before filing.”

She also points out that many so-called tax pros rely too much on tax software without understanding the return that is generated –

Even knowledgeable and highly trained tax professionals can fall into this trap. For example, tax attorney Steve Rosenthal described his inability to explain his own teenage children's tax returns to them or even to understand what was going on in his own tax return {prepared using TurboTax – rdf}.”

As I pointed out in my comment on her post – “A tax preparer who relies 100% on software and does not understand the numbers or theory on the resulting return is not a tax preparer at all - but simply nothing more than a data entry clerk.”

And the answer to the question “Do US Presidents e-file their tax returns?” is “apparently not”.

For the past few decades, Presidents and Vice Presidents have routinely made their tax returns public while in office. The Tax History Project has archived their returns, which you can see here.
.
All the presidential tax returns currently available in that archive appear to be conventional paperfiles, not efiles. . . . recent presidential returns appear to have been prepared using tax software, but they were apparently signed and mailed rather than filed electronically
.”

FYI – “the only efiler evident in the archives is Sarah Palin”.

* While, at least if prepared by me, a handwritten 1040 can be a work of art, I do agree with Trish McIntire of OUR TAXING TIMES that handwritten 1099s and W-2Gs can be problematic, as she explains in her post “A Gambling Suggestion”.

I also agree with her suggestion –

I'm proposing that the casinos take one step out of their process and put the winner's info into a computer at the time of the win and use that info to generate a neat printed W-2G or 1099MISC. Make this the file the IRS gets. It may take up a minute or two more of the gambler's time but it will save the rest of us time and aggravation down the road.”

I have also seen my share of handwritten W-2s in my time. I do believe that all information returns, W-2s, W-2Gs, 1099s, etc, should be typed if not computer generated. I type all the W-2s for my clients.

* I like the Friday's Tax Quote - July 2, 2010 from Rob Teuber’s TAX LAW FORUM blog.

It is actually more of a tax definition than a tax quote-

Capital punishment: The Income Tax." - Jeff Hayes

* Don’t forget to check out MISSOURI TAX GUY Bruce’s regular Sunday “Reads From Last Week”. As usual Bruce “wanders” through more personal finance blogs than I do and always finds some gems.

For example, Kevin of NO DEBT PLAN adds to the “Classic Debate: Should You Pay Off Your Mortgage or Invest That Extra Money?” – and will continue the discussion in a subsequent post. I have always led toward the paying off your mortgage side of the question, after doing the math of course.

* Did you work for two or more employers in the great State of New Jersey in 2009? If you did chances are you bent over for NJ’s corrupt elected officials – something NJ residents are used to doing. Check out my post at the NJ TAX PRACTICE blog titled “NJ Screws Taxpayers Again (What Else is New?)!

* Kay Bell talks about some of the ideas floating around Congress for oil spill relief in “Gulf Coast Oil Spill Tax Relief Measure” over at DON’T MESS WITH TAXES.

* And don’t forget to check out Kay’s “Tax Carnival #72: Independence Day” (although it was actually published on July 5th).

Here are a few entries you should check out -

“Start Now: Get Organized for Tax Filing in 2010” from Back Taxes Help (for a great way to get organized click here).

“Inherited IRA Rules” from The Oblivious Investor.

“What Fools These "CongressCritters" Be!” from The Wandering Tax Pro (hey – that’s me!).

* Before we leave Kay – she also offers an FYI post on “What World Leaders Are Paid”.
.
* A “tweet” led me to “Tax Deductions for Writers: Guest Post by Pamela S. Thibodeaux” at AUTHORCULTURE (“inspiring, enlightening, and uniting writers and readers”).

* Another “tweet” took me to an item from BUSINESSWEEK.COM that indicates “Wash. Income Tax Initiative Steps Closer to Ballot”.

The State of Washington currently has no state income tax, as I know because I have been doing the 1040 for a Washington resident, formerly from NJ, for many years now. But, according to the item, “A campaign to impose an income tax on the state's wealthiest residents is likely headed to the November ballot, as supporters {including Bill Gates’ father – rdf} submitted boxes of petitions Thursday morning”.

Author Rachel La Corte tells us –

The income tax would have two brackets. The first is 5 percent of any income above $200,000, or $400,000 for couples. The second bracket is 9 percent on the income above $500,000 for individuals or $1 million for couples.

The initiative also would cut the state property tax by 20 percent and increase the business-and-occupation tax credit to $4,800
.”

* William Perez proves that brevity is the soul of wit when telling us that “New Mexico to Offer Tax Amnesty” at WILLIAM’S TAX PLANNING BLOG. It “will run from June 7, 2010, to September 30, 2010”.

* Having celebrated 1 Million hits (on the ROTH AND COMPANY TAX UPDATE blog that is) Joe Kristan is taking a well deserved vacation. While he is wandering the blog will post “Summer Reruns” of items Joe has posted on other websites.

Enjoy your time off, Joe!

In “50-State Tax Increase Ranking” TAX PROF Paul Caron quotes from a U.S. News & World Report item titled “10 States Where Taxes Are Rising the Most” by Rick Newman.

Newman “used NASBO data to compile the total tax hikes in each state since 2009, including proposed tax increases for 2011. Then I divided each aggregate figure by the state's population, based on Census Bureau data, and ranked the states according to the amount of new taxes per person.”

#1 on the list is New York State, which raised its state taxes by $419 per person.

* Before I go – I got a letter in today’s mail from “Internal Revenue Service, Commissioner’s Correspondence and Customer Support” in response to my Dear Commissioner Shulman. The letter, from a lackey, acknowledged receipt of my letter to DS, saying they “have assigned your inquiry to an IRS business unit for review”. I was told I “should receive a response from the assigned staff within 45 days from the date of this letter”.

TTFN