Tuesday, April 29, 2014


* Over at MARKETWATCH.COM Robert Klein (no, not that Robert Klein) reviews the 2013 tax season and tells us that the “Wealthy Paid 13% More Tax on Same Income”.

Robert’s piece clearly underscores the fact that (highlight is his) “it's no secret that high-income households have historically paid more than their fair share of income tax relative to their numbers” - even more so for 2013.

We should not punish entrepreneurship, ambition, and success.  And we should not disproportionately tax the “wealthy” merely because they can afford it.
* Steven J. Fromm of the PHILADELPHIA ESTATE AND TAX ATTOREY BLOG provides a primer on “Estate Planning: Now What? A Must Read For Everyone”.  Despite the arrogance of the title, it does appear to be a must read.

* Over at JD SUPRA BUSINESS ADVISOR Jessica Catlow contemplates “The Independent Contractor: To Be or Not to Be”.

The opening sentence of her piece is important to remember -

Just because an employer calls someone an independent contractor does not make him or her so.”

* You can check the status of your current year’s tax refund online at the IRS website.  Did you know you can also check on a refund requested on an amended return?

The IRS “Where’s My Amended Return?” tool allows you to check the status of Form 1040X Amended Tax Return for the current year and up to three prior years.

* And did you know that each week tax information publisher CCH provides a “Weekly Report from Washington, D.C” on the tax-related developments for the week from Congress, the White House, the Treasury Department, and the IRS?  It is part of the publisher’s week-day daily Tax Headlines email newsletter.

Click here to sign up for the Tax Headlines e-letter.

* The TAX WARRIOR CHRONICLES from Drucker & Scaccetti review the “Tax Aspects of Caring for An Elderly Individual”.


Monday, April 28, 2014


This past tax filing season I had to explain to one taxpayer in the 15% federal tax bracket why $8,000 in additional qualified dividends and long-term capital gains, which the IRS tells us is taxed at the rate of 0%, cost $1,097 in federal income tax (13.7%).   

And to another, in the 25% bracket, why $10,000 in additional rental income cost $4,625 in federal income tax (46.25%).

The reason lies in the way Social Security and Railroad Retirement benefits are taxed. 

This could also cause a taxpayer in the 15% bracket to pay $638 in federal income tax on $5,000 in tax-exempt municipal bond interest (12.75%).

If you are collecting Social Security or Railroad Retirement for every $1.00 of additional taxable income you could be paying tax on $1.50 to $1.85.  And for every $1.00 of tax-exempt municipal bond income you could be paying tax on 50 to 85 cents.

The amount of Social Security or Railroad Retirement benefits that are taxed by Uncle Sam depends on the amount of your other taxable and tax-exempt income.  The maximum amount of benefits that are taxed is 85%.  If your gross Social Security benefits, before deducting Medicare Part B and Part D premiums, is $18,000 the most you will be taxed on is $15.300. 

If, based on your other income, the maximum 85% of your benefits are already being taxed then every additional $1.00 in taxable income is taxed as $1.00, and every additional $1.00 in tax-exempt municipal income is totally tax free (unless you are a victim of the dreaded Alternative Minimum Tax and you have income from private activity bonds).  

It is important for Social Security and Railroad Retirement beneficiaries to know where they stand regarding the taxability of their benefits so that they can understand how much additional taxable and tax-exempt income will cost in terms of federal income tax.

And so that their tax preparer does not put them in shock at tax time if they did well in the market or had additional income from another source during the year.

So here is how Social Security and Railroad Retirement benefits are taxed –

Start 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. 

Here is another example of how this method of taxing benefits screws taxpayers. Let’s say you itemized in 2013 and claimed a deduction for the full amount of state income taxes withheld or paid in via estimated tax during the year.  When you prepared your state return you find you are getting a $300 refund.  When you prepare your 2014 Form 1040 you will report this $300 refund as taxable income Line 10. If you are receiving Social Security this could cost an additional $255 of your benefits to be taxed. 

If you are in the 15% bracket for both 2013 and 2014 this $300 provided a tax benefit of $45 on your 2013 return, but will cost you $83 in federal income taxes in 2014.  The solution is to claim the exact amount of your state tax liability as a deduction on Schedule A instead of the total amount paid, or to claim a deduction for state and local sales tax.      

If we are going to tax Social Security and Railroad Retirement benefits how should they be taxed?  I have suggested we tax these benefits the same as any other retirement benefit with after-tax employee contributions. Use the “simplified method” to allocate a portion of each monthly benefit payment to the total employee Social Security withholdings, or for a self-employed taxpayer the Social Security share of self-employment tax, as a “return of contribution”. So a portion of each monthly payment would be tax free.


Friday, April 25, 2014


Sorry for lack of posts this week.  I have been working on the GD extensions!

* Professor Annette Nellen tells us “TaxDay - April 15, 2014 - It Can Be Easier” at 21st CENTURY TAXATION.

Indeed it can, and the Professor has some suggestions.

Her bottom line is the simpler the better – a concept with which I wholeheartedly agree.  I especially like, and agree with 100%, what she initially says about education incentives in the Tax Code –

“. . . today there are multiple, duplicative, complex provisions offering various tax savings for higher education costs. I think that for the most part, this should all be taken care of outside of the tax law because there is already a system in place, such as for Pell Grants.”

I would go further.  Forget “for the most part”.  There should be no tuition credits or deductions on the 1040.

As Annette suggests, it can be easier.  But, considering the idiots we have elected to Congress, I doubt it will actually really be easier any time soon.
* Jim Blankenship talks about “The One-Rollover-Per-Year Rule: Revised” at GETTING YOUR FINANCIAL DUCKS IN A ROW.

It is important to note, as Jim reminds us (highlights are mine) -

Bear in mind that trustee-to-trustee transfers (direct rollovers) are not subject to the one-rollover-per-year rule, since these transfers are not considered to be ‘rollovers’ by the IRS.”

* USA TODAY reports that “IRS Workers Who Didn't Pay Taxes Got Bonuses”.

The scandals just continue.  And these guys want to regulate my profession?  The IRS needs to take care of its own house before it looks to license me.

* Neal Frankle, CFP explains “Loans to Family Members – How to Do It Right” at WEALTH PILGRIM.

His best advice – and good advice – “Don’t loan money to friends and family if at all possible.”  

But if you must –

I don’t care how much you trust this person. I don’t care if you are loaning money to your brother-in-law who saved your life by donating his lung to you — get it in writing. And while you’re at it, have all the spouses sign as witnesses to the agreement. This is crucial. You don’t want anybody to misunderstand. This is a loan and must be repaid.”  

If you get it in writing you may be able to claim a non-business bad debt deduction on Schedule D when the family member or friend defaults if you can prove it is truly uncollectible.

* Was your federal refund check less than you expected?  Kay Bell suggests one reason in “Got Debts? They Could Eat Into Your Tax Refund” at DON’T MESS WITH TAXES.

Kay says –

The U.S. Treasury, which is boss to the Internal Revenue Service, is able to nab part or all of your refund to pay some outstanding federal or state debts you have.”

Some of these debts may be erroneous, but, as Kay points out, you must go to the agency or organization claiming the debt to try to get the money back.


Tuesday, April 22, 2014


BUZZ, BUZZ.  The BUZZ is back!

* Donald Rumsfield, Secretary of Defense from 1975 to 1977 under Gerald Ford and again from 2001 to 2006 under Dubya, agrees that the US Tax Code is a mucking fess.  He shares his frustration with the complexity of the Code in a letter to the IRS.  Click here to read the letter.
* Fellow tax-blogger Joe Kristan of THE ROTH AND COMPANY TAX UPDATE BLOG is interviewed by a local Iowa news station on a unique state tax credit.  Click here to see Joe on tv.

* Kay Bell of DON’T MESS WITH TAXES, the yellow rose of taxes, talks about the 2013 Form 1040s filed by BO and the Vice President at her BANKRATE.COM tax blog.

To see BO’s 2013 tax return click here.  And click here for the Bidens’ return.

* CCH has published a “2014 Post Filing Season Update” Tax Briefing.  Click here to download the report.

* MARKETWATCH.COM “Tax Guy” Bill Bischoff lists some resolutions to make that will help make 2014 less taxing in “5 Tax Mistakes You Should Never Make Again”.

I especially like his 5th - “Resolve to consult your tax pro before major transactions.”

Bill forgets two of the most important resolutions –

·  Resolve to become more informed on taxes, and

·   Resolve to keep better tax records.

* Is your state income tax too high?  MOTLEY FOOL identifies “These States Have No Income Tax”.  There are 7.  And 2 with “no income tax on wages but do tax interest and dividends”.  The item takes a look at each of these 9 states.

* ACCOUNTING TODAY tells us “IRS Audit Rate Hits New Low”.

The Internal Revenue Service is anticipating the chances of a tax return being audited to be the lowest in years.

The IRS audited less than 1 percent of individual tax returns in 2013, the lowest rate since 2005, and the number of individual returns that will be audited this year will decline even further, IRS commissioner John Koskinen told the Associated Press.”

The reason?  Why the idiots in Congress, of course.

Thanks to successive rounds of budget cuts at the hands of Congress, the IRS has been forced to cut back on its audits.”

The item “compare the combined federal, state and local income tax bill on a gross household income of $100,000 in” Queens NY, Topeka KS, and Seattle WA.

The Seattle family pays the least amount of overall income taxes, and the Topeka family pays the most federal income tax.  This is because (1) Seattle has no state income tax, and (2) Kansas has substantially less local real estate taxes than the other two locations, and a Kansas homeowner pays much less in mortgage interest, due to the price of homes, than homeowners in Queens and Seattle, which reduces the Topeka family’s Schedule A deductions

This example shows how the deductions for real estate taxes and mortgage interest can help to “geographically” equalize tax burdens.

Tax Freedom Day is the day when the nation as a whole has earned enough money to pay its total tax bill for year.”

Why 3 days more?

Tax Freedom Day is three days later than last year due mainly to the country’s continued slow economic recovery, which is expected to boost tax revenue especially from the corporate, payroll, and individual income tax.”

What about the individual states? 

The total tax burden borne by residents of different states varies considerably due to differing state tax policies and because of the progressivity of the federal tax system.”

It is no surprise that NJ residents need to work until May 9th to cover its their excessive tax burden.  That is longer than any other state.  Connecticut has the same Tax Freedom day.  NY’s TFD is May 4th.  My new home state of PA celebrated on April 21st.  I certainly did better by moving (in a lot of ways).


Monday, April 21, 2014


43 down – 7 to go!

The 2014 tax filing season (for filing 2013 returns) once again got off to a late start – also once again caused by the actions of the idiots in Congress.  This time the delay was a result of the October 1 – 16, 2013 government shutdown.  The IRS needed “time to program and test tax processing systems following the 16-day federal government closure”.  The Service announced it “would start accepting and processing 2013 individual tax returns no earlier than Jan. 28 and no later than Feb. 4”.

And, once again, the delay did not affect me one bit.  For the past 40+ years the tax filing season has always started for me on February 1st.  And, as you should know by now, I prepare all my federal returns manually, so delays in processing electronically-filed returns don’t mean anything to me.

There was not much new that affected the 2013 Form 1040.  Most of the few new wrinkles concerned taxpayers who are considered to be “wealthy”.  These included the higher capital gains and top tax rate, the return of PEP and PEASE (at much higher levels), and the new Obamacare surtaxes – the additional .009 Medicare surcharge and the 3.8% tax on net investment income.

The bulk of my clients can be classified as “average middle class taxpayers”.  However I did have 6 clients who were hit by one or more of the new punishments for ambition, success, and entrepreneurship.  While the cost was not what I would consider substantial – it did add over $2,000 to the tax bill of some of these clients.

A change on the Form 8949 was truly welcomed.  Some investors were able to enter “covered” sales directly on Schedule D and bypass reporting the details of specific transactions on Form 8949. 

According to the Schedule D instructions –

You can report on line 1a (for short-term transactions) or line 8a (for long-term transactions) the aggregate totals from any transactions (except sales of collectibles) for which:

·  You received a Form 1099-B (or substitute statement) that shows basis was reported to the IRS and does not show a nondeductible wash sale loss in box 5, and

·  You do not need to make any adjustments to the basis or type of gain or loss (short term or long term) reported on Form 1099-B (or substitute statement) or to your gain or loss.”

This new procedure was a godsend – as I did not have to waste as much valuable time “cutting and pasting” dozens of pages of 1099 detail as supplements to multiple 8949s.  Unfortunately even as little as $1.00 in wash sale adjustments could void its use.  The IRS should allow this procedure to be used if the only adjustment to cost basis is a wash sale adjustment that has been reported to the IRS.

And brokerage houses should be allowed the option of reporting the cost basis of “non-covered” sales to the IRS on Form 1099B if the investment was purchased by the same firm that is reporting the sale, expanding the use of this great new procedure.

Generally I did find that overall 1099-B reporting by brokerage houses continued to be more consistent and easier to follow.

I have also found that, for me, the new due-diligence requirements for claiming the Earned Income Credit are merely a pain in the arse time waster (having to fill out another form) and not really increased work.  This is because I do not accept any new 1040 clients.  I only did 2 or 3 2013 returns that claimed the EIC, and they were for long-time clients whose situation I was familiar with.  I did not ask any additional questions or look at any documents.  I expect in a year or so I will no longer have any EIC returns.

On the state tax front, I continued to submit NJ-1040s via the online NJWebFile system whenever possible, unless the client specifically told me not to so do.  The print-out has slightly improved – it does not waste as much paper as in the past.  But the cafones in Trenton have still not properly updated the software to account for excess FLI (family Leave Insurance) withholding or include the new NJ-BUS procedures.  I was often forced to prepare manual NJ returns not because I wanted to, or because the client wanted me to, but because of the excessive limitations and restrictions of the system.

Like last year, there were no “technical difficulties” involving my computer or printer, my car, or the weather to contend with this tax season.  And I developed a system to reduce my time spent at the Post Office.

I did not find any special “themes” to this tax season.  In the past there have been years where it seemed every third client won something in the lottery, or refinanced the mortgage, or had something else in common.

Unfortunately I ended the season with 44 GD extensions.  A handful were requested by clients who either had not yet gotten their “stuff” together and to me or who were waiting for K-1s (which also could be appropriately preceded by the initials GD).  And I am sure there are some more filed directly by clients.  There were less than 40 that were required due to workload and time constraints. 

On the plus side this year I was much better in practicing the FIFO (first-in, first-out) system of return preparation that I preached.  All returns received in my hands in the month of February were dealt with.  No returns got lost between the cracks or in the shuffle.  All time constraint GDEs were received during the last three weeks of March.

My January client letter clearly stated that all returns not physically in my hands by March 22nd would be automatically extended, and that I could not guarantee that returns received after March 15th would be able to be completed in time for an April 15th filing.  The great majority of GDEs fell into these two date-related categories.  Only literally a handful were received before March 16th.

I did discover a problem with the Post Office.  Packages sent to me via regular first class mail occasionally took as long as two weeks to get from NJ to me here in the “boonies”.  I sent back all completed returns via Priority Mail, and charged clients for the cost, originally because of the free tracking component.  In next year’s January client letter I will instruct all clients to use Priority Mail to send me their “stuff”, to receive actual priority in delivery and for the free tracking.

I have thought about why there are so many mid-March mailings resulting in GDEs, and I do believe the main reason is because of the lateness of brokerage firms in sending out the Year-End Tax Reporting Statement.  The IRS now does not require delivery until mid-February, and many send out at least one corrected copy as late as mid-March.  Many clients, who a dozen years ago would send me their stuff in early or mid-February must now wait until March out of necessity.

This problem first began with the creation of the category of “qualified dividends”, which are taxed at a lower rate, back in, I believe, 2004.  This is because, as is their custom, the idiots in Congress had to complicate the requirements for dividends to be “qualified”.

Whatever the reason, 40 GDEs, or even 20 GDE, are too many.  Next season I truly need to find ways to aggressively “thin the herd” and to reduce the time I must spend away from my desk.

Of course the tax season ended for me not on April 15th but on April 14th.  Fellow tax-blogger Peter Reilly from Forbes.com explains why (click here).

So there it is.  That was the tax season that was.  Any questions?


Tuesday, April 15, 2014