Thursday, May 28, 2015

WHAT A DISRUPTIVE DEVELOPMENT THIS IS!


I recently initiated discussions, via THE TAX PROFESSIONAL, among tax preparers about how the excessive Earned Income Tax Credit due diligence requirements and the Obamacare health insurance coverage requirement have affected their practices and policies.  The bottom line appears to be that these developments turned out to be not as bad as expected, while still unnecessary inconveniences.

The one development of this millennium that has been the most disruptive to the tax filing season is not the EITC due diligence or Obamacare.  It is the consistent late arriving multiple corrected copies of brokerage Consolidated Form 1099 Tax Statements, which began with the inception of “qualified” dividends in 2004.

I just finished reviewing a corrected brokerage tax statement that was generated on March 31st.  It was actually the second corrected statement for this account – the first was generated on March 24th, and was received by the taxpayer two days after the completed 2014 Form 1040 had been mailed out to Uncles Sam and Chris.

It appears from my review that the client would owe the IRS an additional $22.00 based on the multiple up and down changes to the numbers on the statement.  My advice to the client – it is not worth spending the money, and my time, to prepare an amended return.  If the IRS questions the return based on the corrected statement in the future we will worry about it then.

Clients who would normally send me their “stuff” in early or mid-February – allowing for a much smoother work flow during the season - now must wait until mid-March because of the need to “wait and see” if corrected brokerage reports arrive.  This results in a very hectic and stressful “back-end” of the season and additional GD extensions.

Even if no corrected brokerage statements are ultimately issued client must wait until almost mid-March just in case corrections may be issued – hence the necessity for “wait and see”.

Why is there a need for these delayed corrected statements?  Brokerage firms have had a decade to develop and fine-tune their internal software so as to be able to promptly issue correct statements.  Does the fault lie with the brokerage houses, or with the individual mutual fund houses (most corrections involve mutual funds and similar investments) who report corrections to the brokerage houses late?

There is also a problem with late K-1s – but this can be easily avoided by simply not investing in limited partnerships (it is my firm belief that there are mutual funds that would provide the same return or benefits as any limited partnership investment).  But investors cannot avoid using brokers, nor should they avoid mutual funds

I invite any “higher-up” at any brokerage house to explain to me the reason why multiple late corrected copies are necessary.  You can respond in a comment to this post or email me at rdftaxpro@gmail.com with “Late Brokerage Statements” in the subject line.

Would things change if the IRS fined brokerage houses $50.00 per day per client for corrected statements issued after February 15th?

As always, I welcome comments and emails from fellow tax professionals on this issue.

TTFN

Wednesday, May 27, 2015

OOPS - THEY DID IT AGAIN!


The taxes imposed by the State of New Jersey are among the highest taxes in the country – sales tax, income tax, estate and inheritance tax, and especially property tax.  The only tax that does not rank in the top 5 is the state’s gas tax.  While not the major factor in my move to PA it was certainly a secondary one.

To provide some relief to NJ homeowners, especially seniors and the disabled, the state has two Property Tax Relief programs – the NJ Homestead Benefit and the Property Tax Reimbursement (aka Senior Freeze).

The Property Tax Reimbursement (PTR) program “reimburses eligible senior citizens and disabled persons for property tax or mobile home park site fee increases on their principal residence”.

A qualifying homeowner establishes a “base year” by having two consecutive years within a certain income threshold ($80,000, indexed for inflation beginning with tax year 2012).  Once the base year has been established each year that homeowner will receive a check from Trenton for the difference between the property taxes assed by their municipality and the base year tax amount.

For example, if a qualifying homeowner’s base year is 2011, and the property taxes assessed for 2011 were $5,000, if the property taxes assessed for 2014 are $7,000, and the homeowner’s income for 2014 is within the limitation, he/she will receive a check from Trenton for $2.000.

The income used to determine eligibility includes all income – both taxable and nontaxable.  It includes otherwise tax-exempt interest and the full amount of Social Security or Railroad Retirement benefits. 

Like the NJ state income tax income is categorized by source.  Losses in one category can be applied against income from the same category, but cannot be applied against income from another category.  A $5,000 capital loss from the sale of one stock can offset a $2,000 capital gain from the sale of another stock.  But the $3,000 in excess losses cannot be applied against $25,000 of gross Social Security benefits.  The PTR application would show $25,000 in Social Security income and 0 in capital gains.

Ever since 2010, in order to balance the state budget in the eleventh – or actually twelfth - hour, the legislature has reduced the income threshold for the current year, or the second year of comparison, from $80,000 (or $80,000 indexed for inflation) to $70,000.  If the applicable income for the year is under the $80,000 amount but over $70,000 there would be no check issued – but the qualifying homeowner would be able to create or maintain a base year tax amount.

The PTR application forms (PTR-1 for first-time applicants and PTR-2 for previously approved homeowners) – with a blue cover – are mailed out in mid to late February, and the initial deadline for filing the application is June 1st (or the next appropriate business day).  However each and every year the current sitting Governor, as proof of his “compassion” for seniors and the disabled, announces at the end of May that the filing deadline has been extended.  It has been extended a second time in the past – ultimately until October 15tt.  This has been going on for years. 

And it has been done again for 2014 PTR applications.  The page for “Property Tax Relief Programs”, and subsequent pages for the “Property Tax Reimbursement (Senior Freeze) Program”, on the website of the NJ Division of Taxation all state in bold print –

Filing deadline for 2014 Senior Freeze (PTR) Applications extended to October 15, 2015.”

And an official press release has been issued – click here.

It is good news for NJ senior and disabled homeowners – and those NJ tax preparers who have been holding their breaths because of PTR applications still to be done.

The word is still out on whether the income threshold will once again be dropped to $70,000.  We will not know that until the end of June or beginning of July.

If the idiots in Trenton (members of Congress are not the only idiots) are going to extend the filing deadline for the PTR applications till October 15th each and every year why don’t they just make the initial deadline October 15 and not June 1?!?

Why – because doing so does not allow the Governor to gain points with seniors and the disabled by extending the deadline at the last minute!

The current press release says –

We are extending the filing deadline for the Senior Freeze Program to ensure that every senior and disabled resident of New Jersey who is eligible for the program has an opportunity to apply.”

I also believe that one of these years, when tax preparers and homeowners are so used to the deadline extension that they assume it will be automatic, the DFBs in Trenton (clean version is Damned Fool Bureaucrats) in Trenton will surprise everyone and not extend the deadline – screwing senior and the disable out of tens of thousands of dollars in property tax relief so that the legislature will have more money to waste on pork and entitlements.

Am I being too cynical?  What person who has grown up in NJ – especially those who have grown up, as I did, in Hudson County – is not cynical when it comes to the actions and motives of politicians?

TTFN

Tuesday, May 26, 2015

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’ – TUESDAY EDITION


* Tax pros – have you seen the new post at THE TAX PROFESSIONAL yet?  Why not?

I pose some questions that I would like tax pros to answer.

And please tell your fellow tax preparers about THE TAX PROFESSIONAL.

* Read about my recent trip to Lancaster PA in BOB’S BABBLINGS.    

* Around this time of the year clients begin to receive a Form 5498 for 2014.  They are emailed or postal mailed to me with questions about WTF they are for.

Bill Perez explains the situation in detail in the appropriately titled “Form 5498” at ABOUT.COM -

Form 5498 is an annual document issued by a financial institution to report information about individual retirement accounts and other tax-preferred savings accounts. Form 5498 is filed with the Internal Revenue Service and a copy is also sent to the person who owns the account. Essentially, Form 5498 provides independent confirmation to the IRS of the amounts you contributed to IRAs and other tax-preferred savings accounts.”

It is basically for information only, and the 2014 Form 1040 does not need to be changed, as any IRA contributions or withdrawals have already been reported.  I do not need to see them – although it couldn’t hurt to have them in the client file.

* Billionaire Warren Buffett makes an excellent statement, but is wrong when it comes to the solution to the problem.  According to a post by Dan Bigman at FORBES.COM - “Warren Buffett: Stop Blaming The Rich for Income Inequality. If You Really Want To Help, Do This” -

The world’s third-richest man weighed in on the national debate over rising levels of income disparity in the United States yesterday, saying that while the gaps between the country’s haves and have nots are definitely increasing, it is not the fault of those at the top. Nor will it be solved by traditional methods, like improving education or hiking the minimum wage. His solution: Increase access to the Earned Income Tax Credit.”

Buffett is correct when he says (highlight is mine) –

No conspiracy lies behind this depressing fact: The poor are most definitely not poor because the rich are rich.  Nor are the rich undeserving {some rich are undeserving – the name Kardashian comes to mind - rdf}. Most of them have contributed brilliant innovations or managerial expertise to America’s well-being. We all live far better because of Henry Ford, Steve Jobs, Sam Walton and the like.”

But Buffet is wrong when he says the solution is to increase access to the Earned Income Tax Credit.  The current access to the refundable EITC, and other refundable tax credits, results in a large percentage of erroneous and fraudulent claims, and billions of wasted tax dollars – about $25 Billion according to a recent TIGTA report.  While federal welfare, which is what the EITC is, may be appropriate, it should not be distributed via the US Tax Code.

Personally I firmly believe that, for the most part, we are ultimately responsible for our own financial condition.  I am not a millionaire today because of the choices I made over the past 40+ years.  I am not complaining – I am happy with most of my life choices.

The problems of income inequality will not be resolved quickly.  But I do believe that improved education is a part of the answer.

* Trish McIntire discusses issues involved with “Graduation and Taxes” at OUR TAXING TIMES.

I had offered graduates some advice in past posts “Dear Graduate” and “Advice for a New Graduate Starting Out in His/Her first Full-Time Job”.

* And, in honor of Memorial Day, Trish also discusses “Taxes and The Military”, providing an overview of the “special tax treatments available to the military; active duty, reserve or retired”.

* In “From the Archives: New Preparer Requirements on Earned Income Credit = Higher Fees forClients” Enrolled Agent Jason Dinesen looks back at his predictions for how the then new excessive due diligence rules would affect his practice –

What I’ve found in my practice is, the EIC documentation requirements have indeed resulted in higher fees for returns claiming the EIC, but I didn’t raise fees as much as I had thought I would.

I also have found that the paperwork burden is not nearly as bad as I had thought it would be. I don’t deal with a lot of EIC claims, but for those that I have dealt with, getting the needed paperwork and filling out the Form 8867 isn’t that onerous.”

I file only a small handful of EIC claims each year for long-time continuing clients (as you probably know I do not accept any new clients).  I have not required any additional paperwork to support the claims – I am well aware of the clients’ situation based on years of preparing their returns.  The only affect the new requirements have had on me is to waste time filling out the Form 8867 – really nothing more than an inconvenience. 

However I still feel that this additional due diligence is uncalled for – and still would like to see a lobbying organization for all tax professionals that would fight thrusting this type of additional work on preparers.

TTFN

Friday, May 22, 2015

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


* Tax pros – have you seen the new post at THE TAX PROFESSIONAL yet?  Why not?

And please tell your fellow tax preparers about THE TAX PROFESSIONAL.

* Learn the answer to last week’s Trivia Challenge at BOB’S BABBLINGS.    

* Jason Dinesen continues his lesson with “Why Make Estimated Tax Payments, Part 2” at DINESEN TAX TIMES.

Another reason – if you don’t your Uncle Sam could hit you with a penalty!

* Jean Murray does good work in exposing “5 Myths about Limited Liability Companies (LLCs)” at ABOUT.COM.

* I realize it is a bit early – but Kay Bell issues a “Tax Calendar Alert: 2015 Returns are Due Monday, 4-18-2016”.

And “Maine, Massachusetts taxpayers get even more time thanks to Patriots Day”.

So it looks like I will get an extra day of work during next year’s tax filing season.  Hey – that could be three less GDEs!

* ACCOUNTING TODAY reports “Paul Ryan Tells CPAs about Tax Reform Priorities”.

The best comment on tax reform in the item, however, comes from “Sen. Heidi Heitkamp, D-N.D., ranking member of the Senate Banking Subcommittee on National Security and International Finance, also addressed the issue of tax reform in a separate speech Tuesday at the AICPA Spring Council meeting” –

Either do it, or stop saying you’re going to do it.”

The idiots in Congress have been talking about tax reform for quite a while now – but have actually not done a fekking thing (they have actually not done a fekking thing about much of anything). 

As Heitkamp goes on to explain in the item, continually talking about tax reform and doing nothing is worse than just doing nothing.

To echo Heidi in perhaps more appropriate terms –

Hey, idiots in Congress, shit or get off the pot!

* Speaking of the idiots in Congress and their incompetence, back to Kay Bell, who asks “Will Congress OK Highway Money Before it Hits the Road?

She begins her post by making an appropriate addition to a famous quote -

The only certainties in life, to paraphrase a Founding Father, are death, taxes and the last-minute way Congress does, or doesn't do, its job.”

Kay very properly chastises the idiots –

Why can't these people get their acts together on something as critical to everyone, regardless of political affiliation, as our highways and other infrastructure? Roads are deteriorating, bridges are crumbling, jobs would be filled to fix them if financing were provide, but no, Representatives and Senators are idling.”

And she suggests –

Remember Congress' lack of direction as you take a driving trip this upcoming three-day weekend and have to maneuver around potholes and bump across generally crappy roads.”

TTFN

Wednesday, May 20, 2015

DEDUCTING MORTGAGE INTEREST


In my opinion the area of the Tax Code where proper documentation and strict adherence to the law is perhaps the most overlooked (or actually ignored) is the deduction for mortgage interest – both on Schedule A and Form 6251 (Alternative Minimum Tax-Individuals).

As a reminder – there are three (3) kinds of mortgage debt –

1) Grandfathered debt – debt acquired on or before October 13, 1987, that was secured by a main residence or a qualified second home.  It does matter what the proceeds of the loan were used for, as long as the debt was secured by the property.

2) Acquisition debt - debt acquired after October 13, 1987, that was used to buy, build, or substantially improve a main residence or a qualified second home. A “substantial improvement” is one that adds value to the home, prolongs the home’s useful life, or adapts the home to new uses.

3) Home equity debt – debt acquired after October 13, 1987, that is secured by a main residence or a qualified second home that is not used to buy, build, or substantially improve the property.  There is no restriction or limitation on what the money can be used for; you can use it to buy a car, to pay for college, or to pay down credit card balances. 

Interest on home equity debt is not deductible in calculating the dreaded Alternative Minimum Tax (AMT)

Taxpayers are required to keep separate track of acquisition debt and home equity debt, to make sure that the deduction on Schedule A does not include interest on debt principal that exceed the statutory maximums ($1 Million for acquisition debt and $100,000 for home equity debt – no limit on grandfathered debt), and to determine what interest deduction to add back on Form 6251 when calculating Alternative Minimum Taxable Income.

I firmly believe that 99.5% of taxpayers do not do this.  I do not know of any taxpayer who does. 

And I expect that the majority of tax preparers do not do this for their taxpayer clients.

Most taxpayers, and a large percentage of tax preparers, merely take the amount of “Mortgage interest received from payer(s)/borrower(s)” reported in Box 1 of the Form 1098 Mortgage Interest Statements and enter it on Line 10 of Schedule A. 

And similarly, most taxpayers, and a large percentage of tax preparers, do not include any adjustment to the Schedule A mortgage interest deduction on Line 4 of Form 6251.

It is sometimes easy to identify the difference between acquisition debt and home-equity debt if the taxpayer has one acquisition mortgage and a separate home equity loan and/or line of credit.  But home equity debt often arises from multiple refinancings and consolidations over an extended period of years.

To be fair to my fellow tax preparers, many do not adjust the Schedule A or Form 6251 deduction for home equity interest because their clients have not kept track of the separate types of debt and therefore do not provide separate principal or interest numbers.

The responsibility for keeping separate track of the two types of mortgage debt (actually three if you consider “grandfathered” mortgage debt) truly lies with the taxpayer client and not the tax preparer.

Obviously the best solution to this issue is to have boxes on the Form 1098 for “acquisition debt” principal and interest and “home equity debt” principal and interest, and require banks and other mortgage providers to properly report these amounts thereon.  But this would require a lot more information gathering and paperwork on the part of mortgage providers, and I doubt if the banking lobby would allow a law requiring this additional reporting to pass.

I have created a “Mortgage Interest Guide” as part of my Dollar Store of Tax Guides.  In this guide I explain the various types of mortgage debt and the deduction limitations, and go into detail on how refinancing an acquisition debt mortgage can result in home equity debt. 

I also include in this guide two worksheets – one for Acquisition Debt Activity and one for Home Equity Debt activity – and provide a detailed example of how to use the debt activity worksheets.  These worksheets will allow homeowners to keep a detailed record of the two types of mortgage debt – so that they will be able to properly complete their tax returns, or to provide the necessary information to their professional tax preparers.

As one would expect, the cost of this Mortgage Interest Guide, sent as a pdf email attachment, is only $1.00!

Send your check or money order for $1.00, payable to TAXES AND ACCOUNTING, INC, to –

MORTGAGE INTEREST GUIDE
TAXES AND ACCOUNTING INC
POST OFFICE BOX A
HAWLEY PA 18428

You may also want to check out the other Tax Guide in my Dollar Store (click here).

TTFN

Tuesday, May 19, 2015

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’ – TUESDAY EDITION


* Tax pros – check out the new post at THE TAX PROFESSIONAL.  I share some TAXPRO BUZZ and talk about the period for providing comments to the IRS on proposed regulations.  

FYI – I submitted comments to the IRS on the issue discussed at TTP – and yesterday I received the following email from the IRS –

Thank you for your comments. We appreciate the time and effort you put into preparing these comments.”

Please tell your fellow tax preparers about THE TAX PROFESSIONAL.

* Learn the answer to last week’s Trivia Challenge at BOB’S BABBLINGS.    

* Like the 7 stages of grief, Linda Coussement of ADDICTED2SUCCESS believes there are “6 Common Stages You Will Go Through When Becoming an Entrepreneur”.

I have always felt there were 3 stages of a tax filing season –

Stage 1 – Bring on the 1040s and keep them coming! There is plenty of time.

Stage 2 – Oh my God!  There are so many 1040s to do and so little time.  I will never get them all done.  What am I going to do?

Stage 3 – F**k it!  If they get done they get done.  If not, too bad.

For the last couple of tax filing seasons I find I go directly from Stage 1 to Stage 3.

* JD SUPRA BUSINESS ADVISOR lists “Ten Reasons To Review Your Estate Plan Today”.

* The TAX FOUNDATION provides us with a map showing “Which States Relied the Most on Federal Aid in 2013?”.

NJ is near the bottom of the list at #41, despite the large amount sent to Washington by its residents.  I do better now as a PA resident – PA is #29.  North Dakota is #50.  The top two states are Mississippi (#1) and Louisiana (#2).

* Kelly Phillips Erb, FORBES.COM’s TaxGirl, exclaims “I'm Going Back To The Movies!”.

Back by popular demand, this summer, Taxgirl is going back to the movies! That’s right, with Memorial Day blockbusters waiting in the wings, I’m reviving my ‘Taxgirl Goes To The Movies’ feature.”

What is it all about?

From time to time, beginning after Memorial Day, I’ll choose a movie to review. It may be a popular flick or it might be one that’s already been packaged for DVD or available on Netflix.

I’ll post my review – but it won’t be your run of the mill film review. Instead, I’ll focus on the tax considerations – and consequences – of the plot of the film as well as how the decisions made by the characters would play out in real life.”

What can you do?

I encourage my readers to nominate movies for review – especially those movies that have an interesting tax twist – just leave a note in the comments below or on Facebook. If I choose a movie that you’ve suggested, there may be (at my discretion) a fun thank you prize in it for you.”

I look forward to KPE’s reviews.

* Just one more report detailing the error rate of EITC claims – and one more reason why the EITC, and refundable credits in general, do not belong in the US Tax Code.

TAXPRO TODAY reports on the latest TIGTA report in “Improper EITC Payments Totaled $17.7 Billion in FY2014”.

The report also talks about another refundable credit – the Additional Child Tax Credit, aka ATCT (highlight is mine) –

“. . . the ACTC improper payment rate is similar to that of the EITC. TIGTA estimates that the ACTC improper payment rate for fiscal year 2013 is between 25.2 percent and 30.5 percent, with potential ACTC improper payments totaling between $5.9 billion and $7.1 billion.

TTFN

Wednesday, May 13, 2015

NO INCOME IS TAXED ALONE


Fellow tax blogger Trish McIntire, of OUR TAXING TIMES, recently gave us an excellent post titled “No Income is Taxed Alone”.

Trish was talking about withholding – and the problem that arises when there are multiple sources of income or couples who both work.

As Trish points out in her post –

Withholding is based on that particular income source; paycheck, IRA distribution or other income.”

If a spouse fills out a Form W-4 with her employer claiming “Married – 1” the withholding will be based on the often false assumption that the wages from which the tax is being withheld is the only source of taxable income. 

If the other spouse does not work, and the couple does not have substantial other income, the withholding should be sufficient to cover the tax cost of the wage income.

But what happens if the other spouse also works, and makes more money, and/or one or both of the spouses is collecting Social Security or Railroad Retirement, and/or is self-employed, and/or the couple has a substantial capital gain or substantial interest and dividend income?  Then the “Married – 1” withholding on the wages will be nowhere near enough to cover the tax cost of that particular source of income, and the couple could end up with a huge balance due to Uncle Sam and their resident state.

But if the couple also has substantial itemized deductions – state income and real estate taxes, mortgage interest, charitable contributions, etc – the balance due will be less.

You must take all sources of income, and all deductions, into consideration when deciding what to claim on a federal and state W-4 (while the federal W-2 usually also covers state income tax withholding - you can often file a separate federal W-2 and state W-4).

As a general rule I advise my two-income couples to have the spouse with the smaller wage income claim “Married, but withheld at the higher Single rate – 0”.

Just what is the tax cost of a particular source of income?  You might think it is your marginal tax rate.  If you are in the 25% tax bracket you would expect that $10,000 of additional income would cost $2,500 in federal income tax.  Or $1,500 if the income is qualified dividends or long-term capital gains. 

But this is very often not necessarily the case.  Why?  Because additional taxable income will increase your Adjusted Gross Income (AGI), and many tax deductions and credits are reduced or totally eliminated based on one’s Adjusted Gross Income or a “Modified” Adjusted Gross Income (MAGI).

Here are just some of the tax items that are affected by AGI or MAGI –
 
·      losses from rental real estate activities,
·      traditional IRA contributions,
·      the ability to contribute to a ROTH IRA
·      student loan interest,
·      qualified tuition and fees,
·      medical and dental expenses,
·      casualty and theft losses,
·      miscellaneous deductions,
·      the Credit for Child and Dependent Care Expenses,
·      the American Opportunity and Lifetime Learning credits,
·      the Retirement Savings Contributions Credit, and
·      the Child Tax Credit

And additional taxable income could increase the amount of Social Security or Railroad Retirement benefits that are taxed.  An additional $1,000 could increase your taxable income by as much as $1,850!

And additional taxable income will increase Alternative Minimum Taxable Income, which could in turn reduce the exemption allowed under the dreaded AMT.  $1,000 in additional income could add $1,250 to income subject to the dreaded AMT.

Even though we are told that the maximum tax on qualified dividends and long-term capital gains is 0%, 15%, or 20%, under both the regular tax and the dreaded AMT, the actual tax cost of additional qualified dividends and long-term capital gains, under both the regular tax and the dreaded AMT, could be much more than 0%, 15%, or 20%. 

We certainly know that investment income could be subject to the 3.8% Net Investment Income Tax (NIIT).  SInce qualified dividends and long-term capital gain are included in investment income, additional qualified dividends and long-term capital gains could be taxed at 18.8% or 23.8%.

So not only is no income taxed alone, but no income is taxed separately, or in a vacuum. 

This is just more proof of the complexity of the US Tax Code.  And of the need for careful year-round tax planning with the help of a tax professional.

TTFN