Friday, June 28, 2013


Lots of BUZZ this installment!

* Check out “My Final Word on CPA vs EA or RTRP" at THE TAX PROFESSIONAL.  And let me know your opinion.  

Joe Kristan, a CPA, commented on my CPA vs EA vs RTRP post, as I expected he would, in his Tuesday “Tax Roundup” at the ROTH AND COMPANY TAX UPDATE BLOG.

Here is some of what Joe said (highlight is mine) -

·   Robert is correct, though, when he says ‘A CPA is not automatically a 1040 expert, but a specific CPA may be a 1040 expert’.

·   I do think that CPAs who do tax work tend to be very capable, but so are many non-CPA preparers.

·   You should choose your tax preparer not just because of initials; you should find out what kind of work the preparer does.  And check references.”

Peter J Reilly adds the following to the discussion in his FORBES.COM post “Enrolled Agents Deserve More Respect” (again, highlight is mine) –

He {me – rdf} does have a valid point.  To become an EA you have to show you know quite a bit about federal taxes.  To become a CPA you have to prove you know a bit about federal taxes but also quite a bit about a lot of other stuff.  If, for the rest of your career, you focus on the other stuff, your limited stock of tax knowledge will quickly wither away.”

* And a reminder - Did you know “The Energy Credit is Still Here For 2013”?  I explain at MAINSTREET.COM.

* The big tax news of the week was the Supreme Court decision that the Defense of Marriage Act (DOMA) was unconstitutional.

PARKER TAX PUBLISHING provides a good overview of the decision and what it means taxwise in “DOMA Struck Down - Opening the Floodgates for Amended Tax Returns.”

As PTP points out –

In the short term, practitioners have an opportunity to begin filing amended returns to obtain income tax refunds for any same-sex clients who were married under state law but precluded from filing a joint federal income tax return. Similarly, for individuals who were in a situation similar to Edith Windsor, refund claims can now be filed for estate taxes paid on property inherited from a same-sex partner to whom the individual was married under state law.”      
* At ACCOUNTING TODAY Mira Fine suggests that the “President’s Tax Proposals Seek to Reduce Deficit while Promoting Investment”.

Here are some of BO’s tax proposals -

The administration wants to raise taxes on the wealthy: by reducing itemized deductions to 28 percent for families in the top three income brackets; by imposing the Buffet Rule where millionaires pay no less than 30 percent of their income in taxes; and capping IRA account values that would provide a 62-year-old person with $205,000 in annual income.

In the estate planning area, the administration wants to, beginning in 2018, return the generation-skipping transfer and gift tax exemption rates to 2009 levels, with a top rate of 45 percent and an exclusion amount of $3.5 million (down from $5.2 million) and $1 million for gift taxes.”  

Bad ideas! 

And further proof that BO has no real interest in enacting true tax reform.  Unfortunately we must rely on the idiots in Congress.

* Along those lines, POLITICO gives us some good news – “Max Baucus and Orrin Hatch Tax Reform Plan: Wipe Slate Clean”.

We are told -

Committee Chairman Max Baucus (D-Mont.) and Utah Sen. Orrin Hatch, the panel’s top Republican, are preparing to release a tax reform framework on Thursday that essentially starts from a clean slate, according to more than a half-dozen lobbyists familiar with the discussion. That means eliminating virtually all existing deductions, credits and expenditures to dramatically lower corporate and individual tax rates.”

* Back to ACCOUNTING TODAY – where Michael Cohn reports “Trial Date Set for IRS Appeal of Tax Preparer Lawsuit” –

A federal appeals court in Washington, D.C., has scheduled oral arguments for September 24 to hear the Internal Revenue Service’s appeal of Loving v. IRS, the case in which a trio of independent tax preparers successfully sued the IRS to suspend its mandatory testing and continuing education requirements for tax preparers.”

The absolute worst case scenario is that the IRS wins the appeal.  Given the lateness in the year the IRS would need to set the deadline for RTRP candidates to take and pass the competency test at December 31, 2014 – so I would not have to take the test in order to prepare 2013 tax returns in 2014.  And I would have more than a year to continue to lobby for grandfathering.

But I do believe that the IRS will NOT win its appeal – and the mandatory RTRP program will remain dead.

And, considering the ongoing examples of IRS mismanagement, Congress, despite being composed of idiots, is not going to give the IRS the authority to force licensure.

* Speaking of ongoing examples of IRS mismanagement, here is the latest from Robert W Wood of FORBES.COM – “IRS Using Tax Dollars For Porn, Wine, $100 Lunches?”.

* Two good items of interest from JK LASSER. 

First – the answer to the question “I sold some municipal bonds at a loss. Can I deduct the loss?

The second has good bottom line advice for the graduate –

If 2013 is the first year for which you will have to file a tax return (next April 2014), acquaint yourself now with general income tax rules. This will help you better understand employee fringe benefits as well as your annual tax filing obligations.”

Hey – one way to acquaint yourself with general tax rules is to become a regular visitor to THE WANDERING TAX PRO!

* Miranda Marquit also provides advice to graduates in “College Grads: Avoid these 401(k) Mistakes at Your First Job” at BARGAINEERING.  

* Oi vey! More news on IRS FUs at FORBES.COM.  Kelly Phillips Erb, the internet’s TAXGIRL, tells us “Millions Of Tax Dollars Improperly Refunded To Unauthorized Workers As IRS Insists It's Getting Better”.

* Check out these “Strange & Unusual Taxes throughout History from Around the World” shared by EFILE.COM.

* And last, but certainly not least, this week Bruce McFarland’s weekly Tuesday “McTax Hangout” YouTube “tv show” dealt with “Travel Expenses”.

Part One -

North West? 

What total idiots!

If the father was a Mr. Kong would the talentless and self-absorbed Kim K have named her child Donkey?

I feel sorry for the child.

Part Two –

I ended my post on the Death of DOMA with the following statement –

I do believe that television shows like WILL AND GRACE, and MODERN FAMILY {add ELLEN and GLEE} are partially responsible for the widespread acceptance of same-sex marriage and for this decision being possible.  Television can change the world!

The power of tv to influence society is why “reality tv excrement is dangerous!


Thursday, June 27, 2013


I was watching Ellen DeGeneres’s talk show while having a late breakfast at the County CafĂ© in Beach Lake yesterday morning when the program was interrupted to report on the Supreme Court decision on the Defense of Marriage Act (DOMA).  An odd coincidence, don’t you think?

As fellow tax-blogger Jason Dinesen, EA, who had blogged extensively on same-sex tax issues, reported at DINESEN TAX TIMES – “DOMA Ruled Unconstitutional”.

TAXGIRL Kelly Phillips Erb explains in her announcement of the decision (“Supreme Court Rules DOMA Unconstitutional – And It Was a Tax Case”) –

“. . . it wasn’t so much about the individual rights of folks to marry but the rights of states to write their own laws defining marriage”.

The decision did not say that same-sex marriages should be legal, or that same-sex couples have a legal right to marry.  It says that the federal government has no right to deny benefits to same-sex individuals who have married, and reside, in a state that has legalized same-sex marriage. 

What is unclear is what happens if a couple that was legally married in a state that has legalized same-sex marriage moves to a state that has not.

As with anything else, I first look at the decision from a federal tax point of view.  How will it affect my 1040 clients? 

When it comes to the federal Estate Tax the decision is a true victory that will benefit same-sex couples.  It allows same-sex couples who are legally married and reside in states that permit same-sex marriage to be able to take advantage of the Estate Tax unlimited “marital deduction”.

Kelly’s post refers to an estate tax example that was cited in the decision - 

Edith Windsor, a resident of New York, married Thea Spyer, her partner of 40 years, and that marriage was recognized by the state of New York. However, Spyder’s estate was required to pay more than $363,000 in federal estate taxes at her death because the federal government did not recognize same sex marriages.”

But what about the federal income tax?  As a result of the decision same-sex couples, again who are legally married and reside in states that permit same-sex marriage, will be able to, as Jason points out in his post, “prepare their federal and state tax returns as a married couple, using married person tax law, same as any other married couple”.

This will very likely generate income for the US Treasury.  Jason explains -

Will all same-sex couples pay less in income taxes because of this ruling? NO, not necessarily. In my practice, 2/3 of my clients who are in same-sex marriages will actually PAY MORE in income taxes by filing as a married couple rather than as two single people.”

Why?  Because of the “marriage penalty”.  While there will be some same-sex couples who will now be able to take advantage of the “marriage benefit” on their 1040s, I do believe that more often than not a same-sex couple consists of two working “spouses” – more so than “traditional” married couples – and the couple will now end up paying much more in federal income tax than when they filed as two single individuals.

In my own practice I do not expect this decision to really have any effect.  Most of my clients are from New Jersey.  While NJ has provided for “domestic partnerships” and “civil unions”, it has not gone “all the way” and legalized actual same-sex “marriages” - and I expect the decision applies only to what is identified under state law as “marriage”.  I do have some New York clients, but none are, or will become, same-sex couples married under NY state law – and I do not accept any new 1040 clients.

Russ Fox has some advice for same-sex couples who have extended their 2012 returns and will now be able to file as married at his blog TAXABLE TALK.  He posts “DOMA Done – But Don’t File That Joint Return Just Yet”, explaining -

I suspect it will be two months (maybe more) before the IRS is ready to accept such returns.”

Although, to be honest, I am not sure why – unless the IRS computers can identify the sex of files from the Social Security numbers and will not accept same-sex married returns.

To download the decision click here.

As an aside – I do believe that television shows like WILL AND GRACE and MODERN FAMILY are partially responsible for the widespread acceptance of same-sex marriage and for this decision being possible.  Television can change the world!


Tuesday, June 25, 2013


* THE TAX PROFESSIONAL, my other tax blog, is back!  I suggest that all tax professionals who are reading this, as well as regular taxpayers, check out my new post "Continuation of a Discussion on the Currently Dead IRS RTRP”.

And return to THE TAX PROFESSIONAL on Wednesday (tomorrow) for “My Final Word on CPA vs EA or RTRP“.
* Did you know “The Energy Credit is Still Here For 2013”?  I explain at MAINSTREET.COM.

* As the “tweet” promoting Steve Repak’s piece “Top 3 Tips for Getting Personal Finance Advice on Social Media” at EQUIFAX.COM correctly states – “Just because someone has a social media account claiming to be a financial expert, doesn’t mean they are.” 

The same can be said for someone with a blog.

Trish McIntire provides a good review of income tax issues involving Social Security benefits at ANSWERS.COM, most of which I have previously discussed here at TWTP.

Jack proves to be a good nail head hitter when he says -

The tax code is a mess and littered with a bunch of garbage and ineffective narrow provisions. It is an unwieldy product of an entrenched political system. I do not know how anyone can defend it.

The fundamental role of a tax system should be to raise sufficient revenue to fund the legitimate and democratically agreed upon government functions. Unfortunately, that is not the case for our system. It is about picking winners and losers, rewarding friends and trying to punish enemies. It has become a philosophic opportunity to shape government, society and direct individual conduct. The country can do better.”

Right on, brother!

* TAX MAMA Eva Rosenberg asks “Do You Qualify for the Adoption Tax Credit?” – and proceeds to explain the credit in detail at EQUIFAX.

To be honest, in my 40+ years “in the business” I have never claimed this credit on a 1040.


Monday, June 24, 2013


Any tax preparer – regardless of training, experience, or “initials” – can make a mistake.  I know I have made mistakes on 1040s I have prepared over the years.

The mistake can be mathematic or involve the proper application of tax law or regulation.

A tax preparer can unintentionally omit reporting or entering income or deductions from an information return or a client worksheet. 

A tax preparer can unknowingly understate or overstate taxable income or legitimate deductions.  A tax return is prepared based on information supplied by the taxpayer, and this information can be, purposefully or not, faulty.

Over the years I have found that tax preparers who use tax preparation software – which I expect is now about 95% of all tax pros (I am truly one of the last of the dinosaurs) – tend to become lazy when it comes to checking software-generated tax returns.

There is nothing to guarantee that a tax return generated using a tax preparation software package, whether or not the “preparer” is a tax pro or the taxpayer himself/herself, is correct, mathematically or otherwise.  All software-generated tax returns should be double and triple checked. 

Using a tax preparation software package is no substitute for knowledge of tax law.  This applies to paid preparers as well as individual taxpayers.  I sometimes wonder how many alleged tax professionals, especially those employed by the “fast food” tax preparation chains, are really nothing more than data entry clerks. 

And, of course, a tax preparer - regardless of “initials” or having to sit through 2 hours of ethics preaching annually - can purposefully file a fraudulent return, with or without the knowledge and consent of the taxpayer.  Holding a professional credential or attending annual ethics CPE is no guarantee that a tax preparer is honest or ethical.

Before signing and filing any tax returns prepared by a tax pro review the return carefully.  If the return was software-generated ask the preparer if he/she has checked and verified the math on the returns.  If there is anything on your returns that you do not fully understand have your preparer explain it to your satisfaction.

Just because you do not understand something on your return does not mean that anything is wrong.  Do not automatically assume that your preparer has made an error.  Whatever you do, do not call or email your preparer and say “you made a mistake on my return”.  Simply tell him/her that you have a question about something on the return.   

It is important to remember that you, the taxpayer, are ultimately responsible for everything that is on your tax return.


Friday, June 21, 2013


* I tell you “What the IRS Should Do About the RTRP” at ACCOUNTING TODAY.

BTW – In response to the editorial Dan Alban of the Institute for Justice “tweeted” me – “Another good article. Your two-tier certification proposal & renaming of the EA designation might rescue it from obscurity.”

And Tracey Shannon Levey of Parker Tax Publishing “tweeted” – “Yes I do agree with you. Your solution addresses so many issues that all three designations would find satisfying & less costly.”

Do you agree with me?
Unfortunately the discussion in the comments section has devolved into garbage and nonsense.  I must accept partial responsibility, as I went off on a tangent in some of my responses.

* Claire Berlin lists the “Seven Specific Requirements for a Payment to be Deemed Alimony” at the NSA (National Society of Accountants) BLOG.

* Over at MARKETWATCH.COM the internet’s TAX MAMA Eva Rosenberg wants to know “Are You Smarter Than a Tax Pro?”. 

We are certain that you are smarter than the members of Congress!

Eva provides a tax quiz to help you “Find out whether or not you should be doing your own taxes”.

* Tim Maurer, a personal finance blogger for FORBES.COM, lists “7 Reasons I Dumped Facebook”.

Nobody offended me.  I didn’t have a bad experience.  While I’m not thrilled about the idea of Big Brother watching my every move, I’m not particularly paranoid about social media sharing.”  Tim has other reasons.  

My opinion – there is no good reason to join Facebook in the first place.

* Michael Cohn brings us “IRS at Nite: The Lost Episodes” at TAXPRO TODAY.

The IRS has promised not to produce any more embarrassing staff-produced videos like the “Star Trek” parody or the one of employees line dancing at a conference.  Michael “thought it would be fun to speculate about some of the videos that the IRS never got the chance to produce”.

Wednesday, June 19, 2013


Your assignment for the day is to read my editorial "What the IRS Should Do About the RTRP" at ACCOUNTING TODAY and comment on it - either here or there.

Tuesday, June 18, 2013


* A “blast from the past” (February of 2010) from Jim Blankenship of GETTING YOUR FINANCIAL DUCKS IN A ROW, brought to my attention via a “tweet”, explains A Little-Known Social Security Spousal Benefit Option”.

* TAXGIRL Kelly Phillips Erb reminds us “FBAR Deadline Creeping Up Taxpayers: No Extensions Available”.

That’s FBAR (Foreign Bank and Financial Accounts), not FUBAR (the current US Tax Code).

* Kay Bell celebrated Father’s Day with “Tax Breaks for Dads on this Father's Day” at DON’T MESS WITH TAXES.

* At BARGAINEERING Miranda Marquit wonders “Could a 529 Plan Mess Up Your Child’s Financial Aid?”.

Miranda’s bottom line is that, while “a 529 is one of the best ways to save money for college” parents should “be aware of how ownership of the account affects aid, and assign ownership in the most advantageous manner”.

* TAXPRO TODAY tells us about a “Bill Would Let EAs Promote Themselves Everywhere” –

Sen. Rob Portman, R-Ohio, and Rep. Charles Boustany, R-La., have introduced legislation aimed at allowing Enrolled Agents to present themselves as such and tout their credential wherever they practice.”

I was truly surprised to learn that there are states that “prohibit Enrolled Agents from using their credential when representing taxpayers or advertising for potential clients”.  I very seriously suspect that these prohibitions were the result of local CPA societies attempting to handicap legitimate competition.

The AICPA, and the state societies, believe that CPAs “own” the brand of “tax expert”, and, unfortunately, many uninformed taxpayers, and uninformed journalists, also do.  But the truth is that the Enrolled Agent, or EA, is the true proven tax expert.  To repeat a popular statement of mine – just because a person has the initials CPA after his/her name does not mean that he/she knows his/her arse from a hole in the ground when it comes to 1040 preparation.   

This bill would clarify that Enrolled Agents may use and display their credential when advertising their services and representing their clients.”

Now if only EAs would get a better name and be able to dispel the unfortunate widely-held misconception that they are employees, representatives, or “agents” of the IRS.

And if we could only create a voluntary designation to give “unenrolled” tax professionals, like myself, the respect that they (we) deserve.

* TAX MAMA (is there a Tax Papa?) Eva Rosenberg talks about “Maximizing Extra Mortgage Payments and Tax Deductions” at EQUIFAX.COM.  

Eva’s “The benefit of making extra or increased mortgage payments” discussion is similar to advice I have been giving to clients and readers for years.


Friday, June 14, 2013


* CPA ADVISOR reports “IRS Income Tax Tables for 2014 Tax Season”.  The information discussed in this post actually applies to tax year 2013 – for 2013 returns to be filed in 2014.

* “Tax Pros: Do You Know What You're Worth?  The NSA BLOG reports on the findings of its 2012-2013 “Income and Fees of Accountants and Tax Preparers in Public Practice” survey.  

The survey indicated that the average cost of a Form 1040 with Schedule A and a state return is $246.  The average cost for a non-itemized return is $143.

As you would expect, prices vary based on region.  The average cost for a Form 1040 with Schedule A and a state return for the “Middle Atlantic” region – New Jersey, New York, and Pennsylvania – is $258. 

I hope my clients read this – and realize how lucky they are!

* The marriage penalty is alive and well.  So we learn from “Wedding-Bell Blues” at the WALL STREET JOURNAL.

The article points out -

For example, if the hypothetical spouses cited above each earn $75,000, rather than one partner earning $150,000, they could incur nearly $4,000 more in tax compared with what they would owe as single filers with the same income, deductions and children.”
* Just a reminder – the 2nd quarter 2013 estimated tax payment is due on June 17th (Monday).

* “Refund, or No Refund?”, that is the question.  Over at 5 CENT NICKEL new staff writer William Cowie gives us his answer.

William’s answer is contrary to the popular opinion of financial advisors.  And, while I understand the reasoning of the popular opinion, I do support William’s choice. 

Adding to William’s reasoning – going for the refund is a form of forced savings.  I know full well that if some of my clients received an extra $100 in their paychecks each month, or each week, they would spend it – and not necessarily wisely.

* NJ homeowners - here is the latest word on the 2012 NJ Homestead Benefit program, from the NJDOT website –

Applications for the 2012 homestead benefit are expected to be mailed in the fall of 2013.”

So the program is still alive. 

As for the 2011 NJ Homestead Benefit –

. . eligible homeowners will receive their 2011 homestead benefit as a credit applied to property tax bills in August 2013.”

* We all like to get free stuff – especially free stuff that is actual worth something.  Kristine McKinley of BEACON FINANCIAL ADVISORS is offering a “FREE Report: 10 Strategies to Maximize Your Social Security Income”.


Tuesday, June 11, 2013


* MISSOURI TAXGUY Bruce McFarland explains “Employee vs. Contractor… How to Tell”.
* A @Tax Policy Center tweet explained “A hit man can deduct his cost of doing business. So can a prostitute. But firms that sell medical marijuana cannot.”  Howard Gleckman pleads “Let Legal Marijuana Dispensaries Deduct Their Business Expenses” at TAXVOX, the Tax Policy Center’s blog.

* Find out what charities you should NOT donate to.  The CENTER FOR INVESTIGATIVE REPORTING discusses the “Dirty Secrets of the Worst Charities”.

* Tom Herman of the WALL STREET JOURNAL deals with a question I have often heard asked over the years in “Working Seniors Must Still Pay Tax”.

Q: I am 72, retired and went back to work. At what point do I not have Social Security tax deducted from my pay? 

Actually I have more often heard it in a different way.  A worker age 72 or older demands that payroll (sometime me) stop withholding Social Security tax from their wages – he/she is age 72 and no longer has to pay Social Security tax.

From the day you are born till the day you die you must pay Social Security (and Medicare) tax on all taxable wages.  It doesn’t matter if you are 2 years old or 97 years old.  There are no age limitations on the requirement for FICA withholding.

The confusion comes from the old rules that at age 72 you could have unlimited earned income and not have to pay back Social Security benefits.

* A “tweet” from @PARKER TAX UPDATES led me to Parker’s discussion of a court case where “Lack of Signed Release Costs Noncustodial Parent Dependency Exemption and Child Tax Credit”.

It is very, very important that if you are a non-custodial parent you MUST attach a signed Form 8332 if you want to be sure to claim your child as a dependent.  In the past attaching a copy of the divorce agreement may have been sufficient – but do not rely on this anymore.

If your spouse refuses to sign the Form 8332, as required under the divorce agreement, you may want to withhold alimony to the extent of lost tax benefits or go back to court.  But discuss the problem with your divorce attorney first.

Or when drafting the divorce agreement spell out specific “penalties” if the custodial spouse will not sigh the 8332. 

It is very important that you get your, or a, tax pro involved in the process of drafting your divorce agreement.    

As I said last year in “Wandering Tax Pro On The Tax Aspects Of Divorce” at FORBES.COM –

. . while you would certainly want Arnie Becker as your divorce attorney, you should have the divorce agreement reviewed and approved by Stuart Markowitz  before signing it.”

I expect that this cultural reference dates me.

* Speaking of FORBES.COM, Peter J Reilly covers “Whole Life Insurance Tax Disasters” there.

* Did you know “ provides a special section dedicated to truckers and their taxes”?  I found out via a “tweet”.

Click here.


Every year on the Saturday before the TONY Awards show I attend a matinee performance of a musical comedy in New York City with friends.  More often than not the musical is a revival (the original production of which I have probably seen over my 50+ years of going to Broadway).  And every year the production we have seen on Saturday afternoon wins at least one major TONY Award on Sunday night.

This past Saturday we saw PIPPIN.  I had seen the original with Ben Vereen, John Rubinstein, and Irene Ryan (Granny from “The Beverly Hillbillies” tv show) 40 years ago.  And, true to form, PIPPIN won the TONY for Best Revival of a Musical as well as Best Director of a Musical and Best Leading and Featured Actress in a Musical – all well deserved.

I was surprised that RODGERS AND HAMMERSTREIN’s CINDERELLA was included in the musical revival category.  The current production is the first time it appeared on Broadway.  It was originally written as a television special – first with Julie Andrews and years later “revived” on tv with Leslie Ann Warren. 


Monday, June 10, 2013


I am often asked to explain how Social Security, and Railroad Retirement, benefits are taxed.

Back when unemployment benefits first became subject to federal income tax I remember my mentor and I saying that next they will tax Social Security benefits.  And we were right.

1984 was the first year that Social Security and Railroad Retirement benefits were taxed.  Originally the maximum amount subject to tax was 50% of your total gross benefit.  The Deficit Reduction Act of 1993 increased the maximum to 85%.

The amount of your benefits that is subject to federal income tax depends on the amount of your other income – both taxable and tax-exempt.

The calculation of taxable benefits starts with one-half (50%) of your gross Social Security or Railroad benefits (from Box 5 of Form SSA-1099 or RRB-1099) – combined if filing a joint return.

To this number you add all other taxable income (Form 1040 Lines 7, 8a, 9a, 10-14, 15b, 16b, 17-19, 21).

Next you add the amount of tax-exempt interest reported on Box 8b of Form 1040.  While municipal bond interest is exempt from federal income taxation, it is included in the calculation of taxable SS or RR benefits – so in reality up to 85% of tax-exempt municipal interest could be subject to federal income tax.

From the total of these three amounts you subtract the total “adjustments to income” from Form 1040 line 23 – 32 plus any write-in adjustments included in Line 36.  Deductions for student loan interest, tuition and fees, and domestic production activities, the adjustments reported on Form 1040 lines 33, 34, and 35, are not allowed in calculating taxable benefits.

If this amount (50% of benefits + other taxable income + tax-exempt interest – most adjustments to income) is more than $25,000 (but not more than $34,000) if you file as Single, Head of Household, or Qualifying Widow(er) or $32,000 (but not more than $44,000) if you are Married Filing Joint than you will pay federal income tax on up to 50% of your total gross benefits.

If the amount is more than $34,000 if Single, Head of Household, or Qualifying Widow(er) or $44,000 is Married Filing Joint you will pay federal income tax on up to 85% of your total gross benefits.

If you are filing as Married Filing Separately and you lived with your spouse at any time during the year you will pay tax on 85% of your Social Security or Railroad Retirement benefits.  If you file separately and you and your spouse lived apart for the entire year you calculate the taxable benefit as if you are a Single individual.

Click here to download the IRS Social Security Benefits Worksheet.  Although this worksheet is for the 2011 Form 1040 it also applies for 2012 and 2013.

You can see that, because of the way Social Security and Railroad Retirement benefits are taxed, it is possible that for every $1.00 in additional taxable income you receive from other sources you will be taxed on $1.50 or $1.85!  So it is important that benefit recipients who are not already paying tax on the maximum 85% of benefits plan carefully to reduce their Adjusted Gross Income (or in this case a Modified AGI).  This is just another example of why AGI is the most important number on your tax return. 

We are told that long-term capital gains and qualified dividends are taxed at the rate of 0% if you are in the 10%-15% brackets.  But this income increases your MAGI for purposes of calculating taxable Social Security or Railroad Retirement benefits.  So if you have $1,000 in qualified dividends, which you expect to be totally tax free due to the 0% bracket, you could end up paying tax on as much as $850 at your "normal" ordinary income rate!

Here is a tax tip.  If you itemized in 2012 and claimed as a deduction the full amount of state income taxes withheld or paid in via estimated tax during 2012, and report income on Line 10 of your 2013 Form 1040, your net taxable income for 2013 could be increased by from 50% to 85% of this state income tax refund. 

But if you deducted only the actual amount of state income tax liability (from your 2012 state income tax return) on your 2012 Schedule A, then you did not receive a “tax benefit” from the amount of your refund, and nothing needs to be entered on Line 10 of your 2013 Form 1040.  The refund will not increase your taxable benefits. 

By doing this your 2012 federal refund is slightly reduced, but the reduction in federal income tax liability on your 2013 return is more than the reduction in the 2011 refund – so you are net “in pocket” for the two years.

If 2013 is the first year you will be collecting Social Security or Railroad Retirement (either disability or normal retirement) benefits you should visit your tax professional before the end of the year to do some calculations.

Any questions?

An afterthought - there is another way that tax-exempt municipal bond interest can end up biting you in the arse.  The amount of exempt interest reported on Form 1040, or Form 1040A, Line 8b is added to your AGI to determine if you will be charged a higher Medicare Part B premium.


Friday, June 7, 2013


* Oops, they did it again! 

Governor Chris Christie is expanding access to the property tax relief available to

New Jersey residents by extending the filing deadline for the 2012 Senior Freeze (Property Tax Reimbursement Program) to September 16, 2013.”

We are talking about NJ’s PTR-1 and PTR-2 forms.

Each year the PTR packages (with a blue cover) are sent out to NJ senior and disabled homeowners stating that the filing deadline is June 1st (or the first business day thereafter – it was June 3rd this year).  And each and every year the cafones in Trenton extend the deadline.  Initially they had more than one extension eventually until October, but lately they have just made the one extension. 

Why don’t the fools just make October 1st – or October 15th or October 31st - the filing deadline from the beginning?  I guess because by doing that they can’t look like they are being good guys and showing sympathy and concern for seniors and the disabled by extending the deadline to make sure no qualified applicant misses out.

I have no idea why the new deadline is September 16th and not October 1st or 15th or 31st. 

And there is no word on the 2012 NJ Homestead Benefit.  Usually the application packages have gone out by now. 

* Jamaal A Solomon announces “IRS vs. Tea Party: Let the Court Battles Begin” at TAX FACTOR.

As Jamaal points out – “You knew this was going to happen……

With all the problems the IRS has to deal with I expect that their campaign to license all tax return preparers is pretty much dead – and the Loving v IRS decision will stand.

And at this point I don’t see Congress passing legislation to give the IRS the authority to license all tax preparers.

The only question is if the IRS will keep the RTRP program as a volunteer designation – perhaps as part of a 2-tiered designation that includes the current Enrolled Agent program (as I have suggested).

* If you want to keep up-to-date on the ongoing IRS scandal(s) you should visit Paul Caron’s TAX PROF blog daily.  He is up to “The IRS Scandal – Day 29”.

* Just in case you have been following the story – Jason Dinesen’s saga continues with “Taxpayer Identity Theft — Part 15”.   

* A reminder that all IRS offices will be closed next Friday, June 14th, due to sequester (via the idiots in Congress).  All filing and payment deadlines unchanged.  Click here for the IRS release.

* “Non-passive? Prove it!” So says Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG.

The Obamacare Net Investment Income Tax will make owners of “passive” businesses pay 3.8% additional tax on income from their businesses, as long as their income is high enough for the tax to apply in the first place.

Taxpayers with only profitable businesses haven’t had to worry about whether they were “passive” before.  It only mattered if you had losses.  Now it matters a great deal, and a case this week out of Tax Court helps illustrate some of the challenges these taxpayers will face.”

Joe’s bottom line –

If you want to prove that you are non-passive, and it’s not obvious otherwise (e.g., a full-time job), you should keep a daily calendar of your time spent.”