AS THE CONGRESS TURNS

Today’s CCH daily email Tax Newsletter reported that “Ways and Means Chairman Rangel Introduces AMT Patch Bill”.

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According to the article, on October 30th Rangel introduced the Temporary Tax Relief Bill of 2007 (HR 3996), a bill that will be “marked up” by the committee on November 2 and is likely to move swiftly to the House floor for a vote.

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The bill would provide one year of AMT relief for nonrefundable personal credits, and it would increase the AMT exemption amount to $66,250 for joint filers and $44,350 for individuals for 2007. The measure also includes the one-year extension of a host of expiring business and individual tax provisions known as the "extenders" and repeals the authority of the IRS to use private debt collectors (hurray!).

IT’S THAT TIME OF YEAR AGAIN! – PART V

HAPPY HALLOWEEN!

If it’s Wednesday it must be --- hey, wait a minute! Oi vey, I FUed - I posted the weekly Wednesday ASK THE TAX PRO entry yesterday (Tuesday)! Below is what I had intended to post yesterday. OOPS!

I have put off publishing this post as long as possible, in the hopes that Congress would act promptly to extend expiring tax breaks. But I can’t wait any longer.

As of this writing several popular tax breaks are scheduled to “expire” on December 31, 2007. These tax breaks may not be available in 2008. So 2007 may be your last chance to take advantage of them.

These popular tax breaks include:

* the deduction for PMI - private mortgage insurance - premiums (it is still a complete mystery to me why this should be deductible),
* the option to deduct state and local sales tax paid instead of state and local income tax paid,
* the “above-the-line” adjustment to income for qualified tuition and fees,
* the ability to transfer up to $100,000 tax-free from an IRA to a qualified charity,
* the “above-the-line” adjustment to income for elementary and secondary school “educator expenses”, and
* the residential energy tax credit.

You should take this into account when planning your year-end moves. For example -

* If you are planning to buy a new car, SUV, motorcycle, or other “big ticket” item in the near future you may want to do so before the end of the year to be able to deduct the sales tax.

* If you have not already claimed the maximum “lifetime” $500.00 energy tax credit you can purchase qualifying items, such as insulation, windows and doors, or heating and air-conditioning equipment, before year end. You can find out what type of energy-saving purchases will qualify for the credit at the Energy Star website.

* If your AGI does not permit you to claim a Hope of Lifetime Learning education tax credit, and you have not yet paid the maximum amount of qualified tuition and fees that can be deducted based on your income, be advised that you can deduct qualifying amounts paid in 2007 for an academic period that begins in the first three (3) months of 2008. FYI, this rule also applies for the tax credits.

The first five (5) items on the above list of expiring tax breaks are included in the “extender” portion of the recently introduced Tax Reduction and Reform Act of 2007. This means that these items could be available for tax year 2008. It is expected that the extender section will be extracted from the larger bill in the coming weeks for “expedited consideration” so action can be taken before Congress adjourns for the year in November. I will keep you informed on developments in this area here at TWTP.

to be continued……….

TTFN

I SEE RICH DEAD PEOPLE!

Elvis may have "left the building", but he is still the king! He earned an estimated $49 million in the past 12 months and has reclaimed the No. 1 spot on Forbes.com's list of Top-Earning Dead Celebrities.

The balance of the Top Ten are -

· John Lennon ($44 million)
· Charles M. Schulz ($35 million)
· George Harrison ($22 million)
· Albert Einstein ($18 million)
· Andy Warhol ($15 million)
· Theodor Geisel (Dr. Seuss) ($13 million)
· Tupac Shakur ($9 million)
· Marilyn Monroe ($7 million)
· Steve McQueen ($6 million)

Missing from the list is Broadway composer Richard Rodgers and colleagues, who I do believe had been in the top ten in the past. I am continually surprised to see Marilyn Monroe up there. And Albert Einstein at $18 Million?

LAST CHANCE!

Just a reminder to my New Jersey “readers” that October 31 is the deadline for filing the NJ Homestead Rebate and Senior Freeze (Property Tax Reimbursement) applications. You can apply for the Homestead Rebate online, but you must file a paper PTR-1 or PTR-2 to apply for the “Senior Freeze”. For more information you can go to the NJDOT website.

ALL ABOUT ME!

* I am on a new carnival today - the Festival of Frugality #98 - The Happy Halloween Edition at BEING FRUGAL, written by “a Christian wife and mother trying to get out of debt”.

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Under the “Frugal Health and Personal Care” catgegory “Robert D Flach gives you some tips on sorting it all out in IT'S THAT TIME OF YEAR AGAIN! - PART IV".

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I especially enjoyed the entry from David of MY TWO DOLLARS (I guess this is inflation on my 2 cents) on “Getting Organized Does Not Have To Cost A Lot Of Money”. I love shopping at the 99 cent stores!

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* A new milestone - Site Meter informs me that I have surpassed 20,000 visits since signing up with the service last December. I am now up to 200+ visits per day during the week! And FYI, this is my 300th posting since returning to Blogger.

ASK THE TAX PRO – EMPLOYEE BUSINESS EXPENSES

Q. I'm a television writer. Are my agent commissions considered "business-expense" deductions or is there any way I can deduct them on Schedule C (or any other way to take it off the AGI)? All my income was from W2s; the only schedule C income I had was a $75 royalty. Unfortunately, I've already hit AMT before I factor in my commissions, which is by far my biggest deduction.

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Thanks so much

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Angela - Los Angeles

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A. It appears that you are “screwed”.

A commission paid to an agent would be a business expense. If you were treated as an “independent contractor” and your income was reported on a Form 1099-MISC then you would report the income on Schedule C and deduct the agent’s fee as a business expense on Schedule C. However, as you are considered to be an employee and receive a Form W-2 your business expenses as an employee are reported on Form 2106 (or Form 2106-EZ) and carried over as a miscellaneous deduction on Schedule A, subject to the 2% of AGI exclusion and not deductible in calculating the dreaded Alternative Minimum Tax (AMT). Your agent’s commissions would be along the lines of a job-seeking expense, or a legal fee to negotiate a salary agreement.

I expect that you would have other employee business expenses connected with researching the teleplays that you are writing, although perhaps these expenses are reimbursed by your employer under an “accountable” plan.

If you had both W-2 income and 1099 income for the same profession, as is common in the entertainment industry for actors, writers, etc. (I see it in my practice for police officers employed by a municipality who often receive a 1099-MISC for off-duty security work) and your business expenses applied to both sources of income you could allocate the expenses between Form 2106 and Schedule C either by applying direct expenses to the appropriate income or by using a “percentage of income” formula, or a combination of both.

Here is how the “percentage of income” formula would work. Let us say that you had total earnings of $100,000 for the year. $75,000 was reported on a Form W-2 and $25,000 was reported as “nonemployee compensation” on a Form 1099-MISC. You had a total of $10,000 in business expenses for the year. You would apply 75% or $7,500 ($75,000 W-2 income divided by $100,000 total income) to Form 2106 as employee business expenses and 25% or $2,500 ($25,000 1099 income divided by $100,000 total income) to Schedule C (or Schedule C-EZ).

In your specific situation that would not work. Your only other source of income is $75.00 in royalty income. In your case, as I assume the royalty is from something you have written, this $75.00 would be considered self-employment income to be reported on a Schedule C-EZ. It is not “royalty income” that is reported on Schedule E.

To add insult to injury, as you live in California, a highly taxed state, you are a victim of the dreaded AMT, which wipes out any tax benefit you would be able to receive from your employee business expenses.

As I said at the beginning of my answer, you are “screwed”. All you can do is hope that Congress does away with the dreaded AMT in 2008.

BTW, for what show(s) do you write? Perhaps I have seen and enjoyed your work!

TTFN

NOW APPEARING!

I am now appearing in the “It's a Contest with Prizes! The Trick or Treat Edition of the Carnival of Personal Finance” at the Millionaire Mommy Next Door blog.

You can vote for my post – the first installment in my series on Year-End Tax Planning. The five post submissions receiving the highest vote counts will be awarded a prize. MM will tally the votes on Sunday evening, November 4th and announce the winners next Monday!

My posting is the last in the first category – “My Top 10 Personal Favorites”. So go to the carnival and vote for me!

IT’S THAT TIME OF YEAR AGAIN! – PART IV

This installment of my year-end tax planning series discusses employer-sponsored Flexible Benefit Plans, aka Flexible Spending Accounts.

For many employers the fall is time for “open enrollment” for various employee benefits, including dependent care and health care “flexible spending accounts” (FSA). If your employer offers an FSA you should consider participating – you can realize substantial tax savings from such a plan.

Participants in an employer-sponsored dependent care and health care FSA can set aside a specific dollar amount of their salary each year to pay for qualifying child-care or medical expenses during the year. The maximum amount that can be set aside for a dependent care plan is $5,000. There is no statutory maximum for a medical expense FSA, but most employers will limit employee contributions.

Monies set aside in a flexible spending account are considered “pre-tax” for both federal income tax and FICA (Social Security and Medicare) tax purposes. If your annual salary is $50,000 and you set aside, and spend, $5,000 in an FSA, the federal wages reported in Box 1 on your Form W-2, as well as the Social Security and Medicare wages, will be $45,000. If you are in the 25% bracket, this $5,000 will save you $1,633 in federal income and FICA taxes.

A pre-tax contribution to a dependent care FSA will generally provide a greater tax benefit than claiming the Child and Dependent Care Credit – especially for those in the 25% and higher brackets. The maximum credit allowed for such a taxpayer is $600 for one qualifying child or $1,200 for more than one qualifying child.

Medical expenses are deductible as an Itemized Deduction on Schedule A only to the extent that they exceed 7 1/2% of AGI. Medical expenses paid through a pre-tax health care FSA are fully deductible from gross income.

The savings does not end there. Employee contributions to an FSA will reduce Adjusted Gross Income and may therefore increase deductions and credits that are affected by AGI (such as medical and miscellaneous expenses on Schedule A). See my posting on “The Most Important Number on Your Tax Return”. Plus many states also treat FSA contributions as “pre-tax”, so you may save state income tax as well. Unfortunately, New Jersey does not treat contributions to either type of FSA as being “pre-tax”.

An FSA is a “use it or lose it” plan. If the amount of qualifying child-care or medical expenses paid by an employee-participant during the year is less than the amount that has been set aside in the plan the employee loses the excess. For example, if Mary Mom has set aside $5,000 of her salary in her employer’s dependent care FSA for 2007, but pays only $4,000 in qualifying child care expenses during the year, she loses $1,000 in wages! The $1,000 cannot be carried forward to the next plan year. So if you are a participant in a dependent care FSA and you currently have an unspent balance in your “account” make sure you spend that balance before year-end so you do not have to forfeit any of your salary.

There is an exception for a medical expense FSA. If the plan allows, participating employees have until March 15th of the next year to submit expenses to the plan. If the above example was for a medical FSA instead of a dependent care FSA Mary would have until March 15, 2008 to incur and submit up to $1,000.00 of medical expenses, which would be applied against the $5,000 set aside for 2007.

Only medical expenses that are deductible on Schedule A can be paid or reimbursed by a health care FSA, with the one exception of non-prescription “over-the-counter” medicine and drugs. They are not deductible on your tax return, but can be paid “pre-tax” through an FSA.

If (1) you are married, (2) both you and your spouse are eligible to participate in an employer-sponsored FSA, and (3) only one of you will earn wages that exceed the Social Security wage base ($102,000 for 2008), the spouse with the salary that is less than the Social Security wage base should claim as much of the couple’s combined FSA contribution as possible.

John Q Taxpayer will earn $110,000 in 2008 and wife Jane Q will earn $40,000. Both are eligible to participate in an FSA. They decide to set aside $5,000 for medical expenses for tax year 2008.

If Jane has the entire $5,000 taken from her salary, the couple will save an additional $310 in total taxes ($5,000 x 6.2% Social Security portion of FICA tax). Because John’s salary, even after the deducting the possible $5,000 FSA contribution, exceeds the $102,000 Social Security wage base, he will not realize any Social Security tax savings by contributing to his employer’s medical FSA.

to be continued ……….

TTFN

[ PS – This has nothing to do with year-end tax planning, but I just thought you might be interested in reading a reply I got from the NJ Division of Taxation a month after writing to the Acting Director to ask why NJDOT does not pay interest to taxpayers whose money it has held on to erroneously for almost a year. It appears in today’s posting to my NJ TAX PRACTICE BLOG. RDF ]

HAVE YOU HEARD THE ONE ABOUT...

Has anyone sent you this joke yet?

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"A little boy wanted $100.00 very badly and prayed for weeks, but nothing happened. He decided to write God a letter requesting the $100.00.

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When the postal authorities received the letter to ‘God, USA’ they decided to send it to the President.

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The President was so amused that he instructed his secretary to send the little boy a $5.00 bill. He thought this would appear to be a lot of money to a little boy.

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The little boy was delighted with the $5.00 bill and sat down to write a thank-you note to God, which read -

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Dear God: Thank you very much for sending the money. However, I noticed that for some reason you sent it through Washington, DC, and those assholes deducted $95.00 in taxes!”

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There was a time in our history when this could have been true – as the top federal income tax bracket was 91%!

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TTFN

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

* Jeremy Vohwinkle of About.com: Financial Planning gives some good advice in his post “Getting Your Financial House in Order”. As he states, “One of the easiest things you can do to help keep your financial house in order is to get organized.” This is especially so true when it come to your taxes. More on this in early January in my Year-Beginning Tax Planning series.

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* Investment Advisor John Kaighn, a fellow NJ-based blogger, provides a good primer on “Coverdell Education Savings Accounts” in his blog THE KAIGHN REPORT.

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* This past week I posted about the “809” telephone scam. Kay Bell writes about a new IRS-related telephone scam in “Telephone Tax Scammers are Back” at DON’T MESS WITH TAXES.

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* Check out TAX GIRL KPE’s tax haiku, and those in the comments section, at her posting “With a Side of Sushi?".

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* Several sources, including NATP’s TAXPRO WEEKLY email newsletter, report that the IRS has eliminated Form 1120-A, U.S. Corporation Short-Form Income Tax Return, for tax years beginning after 2006. Apparently Form 1120-A filers have been steadily decreasing in number every year. Damn – I liked the 1120-A, and used it for all but one of my remaining “C” corporations. Oh well, more work for me.

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* Friday’s CCH daily email Tax Newsletter reports on the reaction to the Tax Reduction and Reform Act of 2007 in “Rangel Tax Relief Legislation Gets Cool Reception from GOP”. According to the article Republican lawmakers predict the bill would never make it to the White House.

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* There has been a lot of buzz in the various media to the Tax Reduction and Reform Act of 2007, Chuck Rangel’s supposed “mother of all tax reforms”, introduced on Thursday. The CCH article is just one of many. As usual, Paul Caron provides an excellent compilation of resources and articles on the topic at his TAX PROF blog. Add to this Joe Kristan’s appropriately-titled posting “Third Cousin, Once Removed, of Tax Reforms” at the ROTH AND COMPANY TAX UPDATE BLOG. See my “This Ain’t No Mother” posting that outlines the Act.

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Here are some more of my thoughts on TRARA 2007:

· The permanent repeal of the AMT is good. However, the way the bill pays for this only adds complication to the Tax Code. Forget about a “replacement tax” or “surtax”. And don’t make the various phase-outs and exclusions any more confusing than they already are. If you want to raise the top tax rate just do it. Increase the tax rates from 28% to 30%, from 33% to 35%, and from 35% to 39%, or something like that, and be done with it.

· Unless you are going to substantially increase the Standard Deduction amounts while at the same time simplifying the Tax Code by adjusting or doing away with certain itemized deductions, don’t bother with minimal increases of $425, $625 and $850.

· Forget about increasing the Earned Income Credit for individuals without kids. Chances are good that these taxpayers are already not paying any federal income tax. Same with the refundable Child Tax Credit. There is no need to encourage more tax fraud by increasing refundable credits.

· Whatever is done, make sure that the mandatory cost basis reporting requirement stays!

TTFN

THIS AIN'T NO MOTHER

I have had a chance to more closely review at least the Summary of H.R. 3970 – the Tax Reduction and Reform Act of 2007.

To be honest I was a bit disappointed. With all the hype about being “the mother of all tax reforms” and “the most significant change to the Internal Revenue Code since the Tax Reform Act of 1986” I was expecting a lot more. Outside of the permanent repeal of the dreaded Alternative Minimum Tax it really does nothing to significantly change the Tax Code for 1040 filers.

For individual taxpayers here is what it does:

(1) It permanently raises the Standard Deduction amount by $425.00 for Single and Married Filing Separate, $625.00 for Head of Household, and $850.00 for Married Filing Joint and, I assume, Qualifying Widow(er), and annually adjusts these additional amounts for inflation. Big whoop! An additional $850.00 for a couple in the 15% tax bracket is only $128.00 - $213.00 for a couple in the 25% bracket. Hey, it’s still better in your pocket than in the government’s!

(2) It expands the number of low-income persons without children who would qualify for the Earned Income Credit by increasing the credit % and the phase-out % used in calculating the EIC tables for individuals (I can’t really call them taxpayers as most of them do not pay any federal income taxes) with no qualifying children.

(3) It allows for a refundable Child Tax Credit of 15% of the amount by which a taxpayer’s earned income exceeds $8,500. Currently the threshold amount will be $12,050 for 2008, and this amount is indexed annually for inflation. The Act fixes the threshold at $8,500 permanently, without annual inflation adjustments. Regular visitors to TWTP know that I am strongly opposed to refundable credits.

(4) I am extremely happy to report that it establishes “mandatory cost basis reporting by brokers for transactions involving publicly traded securities”. The securities covered under this requirement include stock, debt, commodities, derivatives, and any other investments specified by the Secretary of the Treasury which are “acquired in the account or transferred to the account managed by the broker”. This mandatory cost basis reporting will apply to stock purchased after January 1, 2009, and all other investment products purchased after January 1, 2011. I expect/hope that this will eventually mean that the 1099B received by a taxpayer from his brokerage firm will include not only the gross proceeds but also the date of purchase and cost basis for each sale (if the original purchase took place after 1/1/09 or 1/1/11, as applicable).

The Act also provides a one (1) year extension for the following popular individual tax breaks, as well as many other more obscure business-related ones, that are scheduled to expire on December 31, 2007 – allowing them to apply for 2008 tax returns:

* the deduction for PMI - private mortgage insurance - premiums (it is still a complete mystery to me why this should be deductible),

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

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

* the ability to transfer up to $100,000 tax-free from an IRA to a qualified charity,

* the “above-the-line” adjustment to income for elementary and secondary school “educator expenses”,

* the election to include exempt combat pay in earned income for purposes of calculating the Earned Income Credit, and

* the ability of active duty reservists to make penalty-free withdrawals from retirement accounts.

According to the Ways and Means Committee press release, the above extenders, plus the AMT fix for 2007 discussed below, “will be extracted from the larger bill in the coming weeks for expedited consideration” so action can be taken before Congress adjourns for the year in November.

To pay for the above the Act would tax “carried interest” as ordinary income, instead of as a long-term capital gain, closing a tax break that has been causing a lot of buzz lately, and close some other obscure loopholes.

The Act also makes various changes to corporate taxation, most notably reducing the top corporate income tax rate from 35% to 30.5%, repealing the “domestic production activities” (Section 199) deduction, and making the increased Section 179 expensing limits, scheduled to “sunset” in 2011, permanent.

The centerpiece of the Tax Reduction and Reform Act of 2007 is the permanent repeal of the dreaded Alternative Minimum Tax on individuals effective with tax year 2008.

Prior to AMT repeal, the increased exemption amounts, adjusted for inflation, are reinstated for 2007, as is the ability to reduce AMT by certain non-refundable personal credits – the expected one-year AMT “fix”.

While the actual tax is finally put to death, the benefit of its repeal is “limited” for certain “upper-income” taxpayers.

(1) A “replacement tax” of 4% is imposed on income in excess of an amount set by the Treasury Department that is “determined by selecting an income level above which 90% of all married taxpayers would otherwise be subject to tax under AMT, but in no event less than $200,000”. While not mentioned in the 10-page summary, I do believe the minimum threshold for single taxpayers will be $150,000. This surtax increases to 4.6% on income in excess of $250,000 for singles and $500,000 for couples.

(2) The “read my lips” taxes, the phase-out of itemized deductions and personal exemptions, are adjusted for Single taxpayers with an AGI in excess of $250,000 and married taxpayers with an AGI in excess of $500,000.

(3) The 2% of AGI exclusion on miscellaneous itemized deductions is increased to 5% for the portion that a taxpayer’s AGI exceeds the “amount set by the Treasury Department” discussed above.

So all the hype boils down to basically three positive items for 1040 filers – the death of the AMT, the temporary extension of expired tax breaks, and the mandatory reporting of investment cost basis.

Don’t forget that this is just a bill that has been introduced in the House. There will lots and lots of debate and compromises before a final Tax Reduction and Reform Act of 2008 is signed into law by the President – and that final bill will most likely look a lot different than the one I have outlined above.

Let us hope that at least the one-year extenders, including the 2007 AMT fix, are passed promptly.

BTW, you can read the complete text of the Act by clicking here.

TTFN

MORE THIS JUST IN

It’s me again – with some breaking news.

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I just finished a post in which I said there was no word on the extenders bill and then I read an article in today’s CCH daily email Tax Newsletter under the title “Rangel to Introduce Major Tax Reform Legislation”. The Accountants World daily email headline newsletter also includes an article on the subject.

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According to the CCH article, House Ways and Means Chairman Charles B. Rangel “plans to unveil sweeping tax reform legislation on October 25 [today!], setting the stage for the passage in 2008 of what he hopes will be the most significant change to the Internal Revenue Code since the Tax Reform Act of 1986.” This is Rangel’s promised "mother of all tax reforms".

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Chuck promises this bill will "provide benefits to more than 90 million American families while also helping ensure that our companies remain competitive internationally."

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The Tax Reduction and Reform Bill of 2007 would-

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· Permanently eliminate the AMT beginning in 2008 (hurray!!!!).
· Expand the earned income tax credit, the standard deduction and the child tax credit.
· Lower the corporate tax rate to 30.5 percent.

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The cost of the bill would be offset by a 4% “surtax” on supposed “upper income” taxpayers who have adjusted gross income of $150,000 for single taxpayers, and $200,000 for married taxpayers. The bill would also repeal the Code Sec. 199 manufacturing deduction and the last-in, first-out (LIFO) accounting method for valuing inventory.

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CCH reports that “the bill may include legislation to provide a one-year patch for the AMT for 2007, as well as a one-year extension of the business tax breaks known as extenders that expire in 2007, according to the informal summary. Those provisions would be offset by provisions that affect carried interest, offshore hedge funds, securities firms and S corporations. Although the summary lists this as part of the reform bill, Rangel has said that he plans to introduce a separate, one-year AMT patch bill that would pass the House before adjournment in November”.

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I will keep you up-to-date as more information becomes available.

THIS JUST IN - A TELEPHONE SCAM ALERT

I received the following forwarded email this week-

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“We actually received a call last week from the 809 area code. The woman said "Hey, this is Karen. Sorry I missed you--get back to us quickly. I have something important to tell you." Then she repeated a phone number beginning with 809. We didn't respond.

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Then this week, we received the following e- mail:

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DON'T DIAL AREA CODE 809, 284 AND 876 - THIS IS VERY IMPORTANT INFORMATION PROVIDED TO US BY AT&T. DON'T DIAL AREA CODE 809.

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This one is being distributed all over the US. This is pretty scary, especially given the way they try to get you to call.

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Be sure you read this and pass it on.

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They get you to call by telling you that it is information about a family member who has been ill or to tell you someone has been arrested, died, or to let you know you have won a wonderful prize, etc.

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In each case, you are told to call the 809 number right away. Since there are so many new area codes these days, people unknowingly return these calls.

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If you call from the US, you will apparently be charged $2425 per-minute. Or, you'll get a long recorded message. The point is, they will try to keep you on the phone as long as possible to increase the charges. Unfortunately, when you get your phone bill, you'll often be charged more than $24,100.00.

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WHY IT WORKS: The 809 area code is located in the British Virgin Islands (The Bahamas). The charges afterwards can become a real nightmare. That's because you did actually make the call. If you complain, both your local phone company and your long distance carrier will not want to get involved and will most likely tell you that they are simply providing the billing for the foreign company. You'll end up dealing with a foreign company that argues they have done nothing wrong.”

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I checked out the Scam Alert Page at FraudBureau.com and here is what it said:

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“The 809 scam refers to an innocent recipient receiving a phone, faxed, email or pager message that asks the recipient to telephone the sender of the message immediately using an 809 area code. The reasons that one is required to call back are quite varied and have included:

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· notification of winning a prize
· a requirement to call to avoid litigation over an outstanding account (which the innocent victim has nothing to do with)
· a message to call to receive information about a relative who is ill, has died or has been arrested

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Once the innocent victim calls the 809 area code number, the victim ends up contacting a person who tries to keep the victim on line or the victim is met with a long recorded message or even a clever recording that responds to the caller's voice. In all cases the scam attempts to keep the victim on the line as long as possible. The reason for this is that some of the numbers in the 809 area code are pay-per-call numbers codes like those in the 900 area code in the US. The result is a large long distance bill. The cost per minute has been recorded as high as $25 per minute.

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The 809 number is not the only area code in Caribbean anymore and accordingly the scam can be used with other such numbers. See our article entitled 809 Scam: E-mail Regenerating an Old Scam for more details.

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If you receive a message with an 809 area code or with any other area code that you do not recognize, then simply don’t respond.”

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Just as with email, do not return a call to someone you do not know, or to an area code with which you are not familiar. If the message is legitimate and it is really important they will call again.

AS THE CONGRESS TURNS

Republican Wally Herger of California and Democrat Ron Kind of Wisconsin, both members of the House Ways and Means Committee, have introduced the Equity for Our Nation’s Self-Employed Act (H.R. 3660) that would allow self-employed taxpayers to deduct their health insurance as a business expense on Schedule C.

Under current law, self-employed taxpayers can deduct qualified health insurance premiums as an “above-the-line” adjustment to income. In doing so they reduce their federal income tax – either the “regular” income tax or the dreaded Alternative Minimum Tax (AMT). By being able to deduct the premiums as a business expense on Schedule C they would also be able to reduce their self-employment tax – the sole proprietor’s equivalent of FICA (Social Security and Medicare) tax.

If this law is passed, an individual reporting net earnings from self-employment in excess of $12,000 who pays $12,000 for health insurance premiums for himself and his family would be able to reduce their self-employment tax by up to $1,696.

While the actual self-employment tax rate is 15.3%, the tax is applied to 92.35% of net earnings from self-employment – so the effective self-employment tax rate is actually 14.13%.

A one-man corporation can pay the sole shareholder a salary, subject to FICA tax, and also provide health insurance coverage to the shareholder/employee income tax-free and FICA tax-free. H.R. 3660 would put sole-proprietorships, and one-man LLCs opting to be taxed as a sole proprietorship, on equal footing with one-man corporations.

Sounds only fair to me!

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While we are on the subject of Congress, both Acting IRS Commissioner Linda Stiff and Treasury Secretary Henry M Paulson have reached out to Congress concerning the problems that the IRS will face without immediate legislation to provide an AMT “fix” for 2007. But no word yet from the House Ways and Means Committee on the extenders bill promised for this week.

SOME COMMENTS ON COMMENTS

I welcome “appropriate” comments from my readers.

If you agree with me, or “more better” if you disagree with me, please tell me, and explain your reasons why.

If you discover a “FU” in a posting, or you think I made a mistake, please let me know.

If you do not completely understand, or have a question about, something discussed in a posting, please ask for clarification.

If you were in a similar situation to one I talked about, please share it.

If you have additional information on a topic or question discussed, please send it to me.

However, do not use a comment solely as a blatant advertisement for your product, website or political organization by submitting a press release prepared by your PR office.

You are welcome to briefly mention your product, website or political organization if it truly applies to a particular posting. If your website can provide additional, or more detailed, information on a topic discussed in a posting by all means tell me about it (I will personally check out the site before printing the comment) – but don’t send a blatant advertisement.

This posting sort of echoes the “comments on comments” in Trish McIntyre’s post “TANSTAAFL or It's My Blog, part III” at OUR TAXING TIMES. I wonder if we are both responding to the same comment. I also like the new (to me) acronym – check out her post to see what it means.

IN THE COURTS

The November 2007 issue of TAX HOTLINE just arrived. It reports on two Tax Court cases of interest – one disturbing and one helpful.

* The disturbing one (William Edward Colombell et ux, TC Summary Opinion 2006-184) concerns the definition of an “active participant” in an employer pension plan. The deductibility of a contribution to a traditional IRA is phased-out based on AGI if you are an active participant in a qualified employer-sponsored retirement plan.

In this case the wife was a part-time ER nurse. Her employer had a plan that provided benefits to employees who worked more than 1000 hours per year. For the year in question, the wife worked only 511 hours, and was therefore ineligible for any benefits. She made and deducted a contribution to a traditional IRA. Her W-2 for the year included an “x” in the box that indicated active participation in an employer plan, and the IRS disallowed the IRA deduction based on the joint return AGI.

In her defense the taxpayer claimed that she was not a “participant”, let alone active, in the plan as the word was defined in the dictionary. She said she could not be an active participant in a plan in which she did not participate.

The court ruled for the IRS, stating that, “Even if she never met the dictionary’s definition of what it would mean to be an ‘active participant’, the regulations make it clear that she was an active participant.” The regulations to which the court referred state that a person is an “active participant” in an employer plan “simply by not being excluded from the plan.” It is implied that nothing excluded her from the plan, as she would have received benefits if she had worked more than 1000 hours.

If you ask me, the fact that she did not work more than 1000 hours specifically excluded her from the plan. For my money this ruling clearly does not reflect the intent of the law. I do believe that Congress intended to encourage taxpayers who could not receive pension coverage from an employer plan to save for retirement by allowing a tax deduction for the contribution.

Of course nothing prohibited Mrs. Colombell from contributing to an IRA. She was just not allowed a tax deduction.

* The second one (Michael J Rozzano Jr, TC Memo 2007-177) concerns the issue of business vs hobby.

The taxpayers, who loved horses, purchased a farm and used it to run a horse-boarding business. The business showed a loss, ranging from $36,000 to $94,000, for eight straight years. The IRS disallowed the losses claiming that there was no “profit motive”.

The court ruled for the taxpayers. It noted that they boarded horses at the going commercial rates, hired employees to take care of the horses, kept complete business records, and had a credible business plan, and the husband, who had a full-time W-2 job, worked on the farm himself on a regular basis (every week-end) – all indications of a profit motive. The business passed the “duck test” – if it quacks like a business and waddles like a business then it must be a business.

This decision upheld the fact that you can have consistent net losses and still be considered a legitimate business for tax purposes as long as you dot all the i’s and cross all the t’s.

TTFN

ASK THE TAX PRO – NEW JERSEY AND HEALTH SAVINGS ACCOUNTS

If it’s Wednesday it must be Ask The Tax Pro! How about another New Jersey state question this week.

Q. NJ recognizes the older Archer MSAs (NJSA54A:3-4, and it's covered in the NJ-1040 instructions) but not the newer Health Savings Account, although a bill is pending to do that, Assembly Bill 724. So there is no NJGIT deduction for HSA contributions.

For federal tax purposes, taxpayers are told not to include the HSA payments in their deductible medical expenses, as the amounts have already been deducted. A lot of taxpayers are like me, do their federal returns first and then copy over the base numbers to the NJ return without doing a lot of thinking.

I have learned that the NJ deduction of medical expenses in excess of 2% of taxable income (under NJSA 54A:3-3) is a lot better than the federal threshold of 7.5% of AGI. Shouldn't NJ taxpayers be advised to add HSA contributions to the deductible medical expenses for NJ purposes?

I thought you would know if my analysis is right, whether practitioners are already giving this advice, and if accurate and not already out there how to promulgate it.

Philip

A. Your analysis is not quite right.

As you mention, you can deduct medical expenses on your NJ-1040 to the extent that the total exceeds 2% of your NJ Gross Income. This is indeed “more better” than the federal 7½% of AGI exclusion. You may deduct medical expenses on your NJ-1040 even it you do not itemize and claim medical deductions on your federal Form 1040.

Two items are deductible in full as a medical expense on the NJ-1040. They are not subject to the 2% of NJ Gross Income exclusion. They are the Self-Employed Health Insurance Deduction and contributions to an Archer Medical Savings Account (MSA).

New Jersey follows the federal rules for contributions to an Archer Medical Savings Account – created by the Health Insurance Portability and Accountability Act of 1996. If you fill out federal Form 8853 for 2007 you can deduct the qualified Archer MSA contribution reported on this form on your NJ-1040, without regard to the 2% of NJ Gross Income exclusion. You must include a copy of your federal Form 8853 with the filing of your 2007 NJ-1040.

Here is how deducting medical expenses on the NJ return works. First you add up your total allowable medical expenses, without any qualified self-employed health insurance premiums or MSA contributions. From this total you subtract 2% of your NJ Gross Income (line 28 of your NJ-1040). If the result is less than “0” you would use “0”. Now you add your self-employed health insurance premiums and Archer MSA contributions (the same amounts as allowed as “above-the-line” adjustments to income on your federal Form 1040). The total is the amount you can claim as a medical deduction on your NJ-1040. There is a worksheet for doing this calculation in the NJ-1040 instruction package.

As you state, qualified contributions to a Health Savings Account (HSA), while deductible as an adjustment to income on the federal Form 1040, are not deductible on the NJ-1040. The HSA was created by the Medicare bill signed into law by President Bush in 2003. You can not add your HSA contributions to the allowable NJ medical expenses subject to the 2% exclusion.

The medical expenses deductible on your NJ-1040 subject to the 2% exclusion would be the same as the total medical expenses deductible on the federal Schedule A before deducting the 7½% of AGI exclusion (Line 1 of the federal Schedule A). So carrying over this base number from your federal return to your NJ-1040 is not a problem. To repeat what I said above, you would not add your HSA contributions to this amount for the NJ return.

Here is where HSA activity comes into play on the NJ-1040:

On the federal return, as qualified contributions to both the MSA and HSA are deductible up front, you must reduce your medical expenses by any reimbursements you receive from an Archer Medical Savings Account or a Health Savings Account, as well as reimbursements from your insurance provider or from your employer under a medical reimbursement or pre-tax flexible benefit plan.

But because HSA contributions are not deductible on the NJ state return, you do not have to reduce the medical expenses claimed on the NJ-1040 by any reimbursements or payments from a Health Savings Account.

If your medical expenses for the year total $10,000 and you received a reimbursement of $2,000 from a Health Savings Account, only $8,000 can be used to determine your federal Schedule A deduction. But the full $10,000 can be deducted on your NJ-1040, minus, of course, the 2% of NJ Gross Income exclusion.

FYI, just as HSA contributions are not deductible on the NJ-1040, New Jersey does not treat employee contributions to a Section 125 employer-sponsored medical Flexible Spending Account (FSA) as “pre-tax”. If your gross wages for the year are $100,000 and you contribute $5,000 to your medical FSA, your federal taxable wages are $95,000, but your NJ state taxable wages are $100,000. Therefore, you also do not have to reduce your NJ medical expenses by reimbursements received during the year from your medical FSA.

As for what other tax professionals are advising their clients regarding HSAs - I haven’t a clue. I only know what I advise my clients.

I have just “promulgated” the appropriate advice concerning the NJ tax treatment of HSA activity here in this posting to THE WANDERING TAX PRO! And, if I may be permitted a plug – NJ taxpayers can learn more about deducting medical expenses on their NJ-1040 by ordering my special report “DEDUCTING MEDICAL EXPENSES ON YOUR 2007 NEW JERSEY STATE INCOME TAX RETURN”. Order by October 31st and it is yours for only $1.00!

I hope my answer has cleared up this issue for you. Please let me know if you need any further clarification.

TTFN

A VERY BAD IDEA

TAXPROF Paul Caron’s TAX NEWS ROUND-UP takes us to an Associated Press article from CBS News on presidential hopeful Barack Obama's tax proposals.

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One proposal is “to direct the IRS to send pre-filled tax forms to 40 million workers who take the standard deduction and have a bank account. They would simply have to sign and return it, which Obama estimates would save more than $2 billion in tax preparation fees and 200 million hours of work.”

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"There's no reason you should have to pay H&R Block to spend hours and hours. You should just get a form," Obama said. "It should take you about five minutes. That should save you a lot of time and aggravation."

While I agree with BO that there is no reason you should have to pay H&R Block (in any situation), I certainly do not agree with his plan to send “pre-prepared” short forms to taxpayers. The idea is ridiculous!

Taxpayers should be allowed to determine if they will claim the standard deduction – and not be told, or even suggested, by the IRS that this is what they should do. Individual situations change from year-to-year – how does the IRS know that a taxpayer is better off filing a short-form simply from his W-2 and Form 1099-INT information. Taxpayers should also be allowed to consult a competent tax professional to determine if the standard deduction or a short-form will result in the least tax liability.

Let’s face it. There are a lot of taxpayers who would save mucho dinero by itemizing or taking advantage of various other tax adjustments or credits – but who would simply sign a short-form and pay a lot more tax then they would or should have to if the IRS sent them a pre-prepared return and requested a signature.

And looking at the issue from the government side – who is to say that the only income a taxpayer has to report is included on the W-2 and Form 1099-INT information that the IRS has in its computer matching program. Besides, pre-printing and mailing out such forms would be a waste of the government’s money.

Actually I agree with the basic thought behind this totally unacceptable idea – that the current Tax Code is too complicated and needs to be simplified.

If the Tax Code itself were substantially simplified, with a flat tax and a system under which all taxpayers would file a simpler “short-form” (like the half-page return suggested by the President’s Advisory Panel) than it might be ok for the IRS to send out pre-printed returns. But certainly not under our current tax system.

So what do you think?

IT’S THAT TIME OF YEAR AGAIN – PART III

In this installment of my series on Year End Tax Planning I will discuss a change in the tax law for 2008 that may affect your 2007 year-end investment moves, and a way you can create a deductible capital loss from an investment you are not ready to sell.

* Under the Jobs and Growth Tax Relief Reconciliation Act of 2003 the 5% capital gains tax rate on qualified dividends, capital gain distributions and long-term capital gains for taxpayers in the 15% and 10% tax brackets is reduced to 0% for tax year 2008 only. Taxpayers in at least the 15% tax bracket for tax year 2008 will pay absolutely no federal income tax on qualified dividends and capital gain distributions received in 2008, and on long-term capital gains from trades that occur in 2008.

I believe that this also includes the portion of the alternative tax calculation for qualified dividends and long-term capital gains that falls within the 5% category if such income would have been taxed partially at the 5% rate and partially at the 15% rate.

Keep this in mind when planning your 2007 year-end sales - and postpone selling investments that will produce a long-term capital gain until 2008 if all or part of the gain will be taxed at 0% and you do not have a substantial 2007 capital loss carryover to 2008.

If you have a $10,000 capital loss carryover from 2007 to 2008 and $6,000 in net capital gains for 2008, the $10,000 carryover will wipe out the $6,000 in gains and produce the maximum $3,000 net capital loss deduction for 2008. You will get no tax benefit from the 0% tax rate on long term capital gains for 2008.

If your capital gains will all be fully taxed at 15% in 2008, you may want to consider “gifting” an appreciated security that you plan to sell for a gain to a family member (i.e. an elderly parent) who will be in the 15% bracket and have that person sell the stock in 2008. This is a good way to provide support to your parents without being “out of pocket”.

You generally give your parents $20,000 each year to help toward their support, but are not able to claim them as dependents because of the gross income test. They are in the low end of the 15% tax bracket. You plan to sell an investment in 2008 that will generate $20,000 in gross proceeds and a $10,000 long-term capital gain. You gift the investment to your parents, and, as is the rule, your basis and holding period carry over to them.

If you sold the stock and gave your parents the cash you would have to pay $1,500.00 in federal (15%) and probably at least $500.00 in state income taxes. By gifting the stock to your parents in 2008, who then sell it to generate the needed support, you save the $2,000.00+ in income tax. The capital gains tax to your parents on the $10,000.00 will be “0”. As many states provide some kind of retirement income exclusion to the elderly your parents would probably not pay any state income tax either.

* If you have in your portfolio an investment (stock or mutual fund shares) that has gone down in value, but you have high hopes that it will go back up in the future and do not want to unload it yet, you can turn this paper loss into an actual deductible loss and still hold on to the security.

Sell the investment, wait 31 days, and buy back a matching amount of the same investment. Or you can first buy a second lot of the investment, wait 31 days, and then sell the original investment, specifically instructing your broker to sell the original lot.

In either case it is of vital importance that you wait the full 31 days before completing the transaction. Under the “wash sale” rules, the IRS will disallow any loss on the sale of an investment when the same or substantially identical securities and acquired within 30 days before or after the sale.

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The wash sale rules do not apply in the case of securities sold at a gain. You may want to use this strategy to generate gains to wipe out an excess net capital loss for the year. You do not have to wait the 31 days discussed above. You can sell the stock for a gain on Tuesday and buy it back on Wednesday.

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Above I talked about having a $10,000 capital loss carryover from 2007 to 2008. If your 2008 income, without counting qualified dividends, capital gain distributions and long-term capital gains, will put you in the 15% bracket, you can use wash sales to generate $10,000 in capital gains - thus freeing up any net long-term capital gains in 2008 to be at least partially taxed at the 0% bracket.

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As an aside, New Jersey does not allow the carryover of excess capital losses. So if you have a net federal capital loss carryover from 2007 to 2008 of $10,000 this loss will be lost forever when it comes to NJ state income taxes, resulting in perhaps $552.00 in lost tax savings. See my post on "Capital Gains and New Jersey State Income Tax". A wash sale to wipe out your excess losses will save NJ state taxes in the future.

When it comes to year-end moves involving investments it is vital to consider the financial aspects of possible sale transactions. Putting off the sale of a stock that will generate a long-term gain until 2008 could result in a smaller profit due to a reduced share price. You should consult both your tax professional and your broker before making taking any action.

to be continued ……….

TTFN

HAPPY 21st BIRTHDAY!

Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG reminds us that today is the 21st “birthday” of the Tax Reform Act of 1986.

TRA 86 was the largest revision of the Tax Code since 1954. It was also known as the “Tax Professionals Full Employment Act of 1986”.

While increasing the need for taxpayers to seek the help of professionals at tax time, the Act did away with much of the magic that we tax preparers could perform by phasing out Income Averaging and Ten-Year Averaging, as well as other tax deductions and breaks (including the itemized deduction for “personal” interest). It also introduced the “Kiddie Tax” and the 2% of AGI exclusion of miscellaneous itemized deductions.

A major component of TRA 86 was the introduction of the “passive activity” rules to close many of the loopholes that allowed tax shelters to thrive. As such, the Act should have also done away with the dreaded Alternative Minimum Tax (AMT), whose original purpose was to keep high-income taxpayers from taking excessive advantage of tax shelters to altogether avoid paying federal income taxes. Instead the Act helped to create the monster that the AMT has become today.

An item in the Tax Foundation’s TAX POLICY BLOG from last year points out that in the 20 years since TRA 86, “much of what passed in 1986 to limit special tax loopholes has already crept back into the system courtesy of politicians quick to give in to whatever lobby fills their pockets”.

MY TWO CENTS WORTH ON THE PRESIDENTIAL CANDIDATES’ TAX PROPOSALS

I have had a chance to review the 2008 Presidential Candidates' Tax Proposal Matrix developed by the Tax Policy Center. Here is my “2 cents” on the proposals.

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Tax credits seem to be a popular topic – consolidating and expanding existing ones and creating a new one for health care. The candidates want to make many of these credits “refundable” – if the total amount of the credit exceeds the total tax liability on the return the excess would be refunded as a gift to the taxpayer – similar to the current refundable Earned Income Credit and Child Tax Credit.

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I am all for targeted tax credits to encourage positive activity such as saving for retirement, continuing education, child care, and purchasing health care. I especially like Joe Biden’s plan to consolidate the education tax credits and deduction for tuition and fees into a single credit. Any consolidation or simplification of tax benefits is a good thing. But I am against “refundable” credits of any kind. As we have seen with the EIC, this encourages rampant tax fraud.

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There is no doubt that taxpayers in many income levels need help paying for health insurance, especially here in New Jersey. For my money I would rather be provided with a source of cheap, government subsidized health insurance for small business owners and low to middle-income taxpayers rather than a tax credit.

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There is not much in the matrix on changes to the taxation of investment income. I am very much opposed to John Edwards’ and Barrack Obama’s plans to increase the top tax rate on long-term capital gains. I strongly believe that lower tax rates on capital gains increase tax revenue in the long run.

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I like Mitt Romney’s proposal to reduce the tax rate on interest, capital gains and dividends to 0% for taxpayers with AGI under $200,000. I am all for encouraging savings and investment. This may, however, may be a bit too much. Perhaps, instead, a variation on John Edwards’ recommendation to exempt the first $250.00 in interest, dividends and capital gains from income tax, similar in a way to the old “dividend exclusion” of my early days in the business (everything old is new again).

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According to the matrix, the candidates are pretty silent on the topic of the dreaded Alternative Minimum Tax, other than one plan to index the exemption amounts for inflation and another to make George W’s increased exemption amounts permanent. It is very clear, at least to me, that, like Frankenstein in the old Hammer film, the Alternative Minimum Tax must be destroyed!

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In general, the tax proposals of the candidates add to, instead of taking away from, the current complication of the Tax Code. Sam Brownback (no Brownback Mountain jokes now) supported a “flat tax”, but he has dropped out of the race, and only Mike Huckabee supports the “Fair Tax” national retail sales tax.

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A few of the candidates favor repealing the federal estate tax. While no fan of the tax, as I have said here many times before, my only concern with its total repeal is the issue of “stepped-up basis” for inherited property. I would prefer to substantially increase the exemption amount – to $5 Million or more – as already proposed and attempted by the Democrats.

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Duncan Hunter (I will admit I never heard of him before – he is a Republican Congressman from California) “supports a ‘major’ tax reform to simplify the tax system”. One of the few things that George W did correct during his tenure (although I also support the bulk of his tax cuts) was to create the President's Advisory Panel on Federal Tax Reform to “advise on options to reform the tax code to make it simpler, fairer, and more pro-growth to benefit all Americans”. Unfortunately, nothing ever came from this effort, as George W apparently lost interest.

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My tax plan, if I were running for President, would be to reinstate the tax reform panel, make it totally non-political, and take its findings seriously. As I have said before, as a tax professional I am not against a flatter, more simple tax system. While complication is always good for business, I feel, and have so stated here in the past, that I would not lose business or income if the Tax Code was vastly simplified.

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So what do you think about the candidates’ tax proposals?

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BTW, the Center for Tax Justice also has a page on Presidential candidates’ tax proposals.

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TTFN

WEBSITE UPDATE

As promised, I have just added a new WHAT'S NEW FOR 2008 Page to my website with all the recently announced federal tax changes for 2008. I will update this page as more information becomes available.

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This Page includes the 2008 Tax Rate Schedules.

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Check it out!

WHAT’S THE BUZZ – TELL ME WHAT’S A HAPPENNIN’ AGAIN

Here is a WHAT’S THE BUZZ Extra – some buzz that didn’t make it into yesterday’s posting:

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* Gina of GINA’S TAX ARTICLES brings up a topic I haven’t heard discussed in many years in “Income from Barter”. As she points out, if you trade your professional services for compensation other than cash you must report the “value” of what you have received as part of your self-employment income. For example if I prepared a 1040 for a dentist and instead of giving me a check he gave me a free check-up we would both have to include in our taxable incomes for the year the value of the services provided. Of course, I could deduct the value of the dental check-up as a medical expense and he could claim the value of the tax return preparation as a miscellaneous deduction.

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* Joe Kristan of the ROTH AND COMPANY TAX UPDATES BLOG recounts a horror story from a truly last-minute filer in “The Case for Electronic Filing, Illustrated” – with a Post Office manager “going postal”. While I have never been to the Post Office late on August 15th or October 15th, my experiences making an 11:30 pm run to the Main Post Office in Jersey City on April 15th in the “good old days” (now truly a thing of the past) have always been pleasant. There were extra personnel in the lobby to guide late-filers to special boxes set up for specific mailing addresses (i.e. one for 1040 refunds and one for 1040 balances dues and similarly ones for each of the three New Jersey addresses – balance due, no balance due and rebate only – and Harrisburg, New York for IT-203s). There were no long lines. The NYC main PO makes an event out of April 15th filing each year – with free snacks and various forms of entertainment.

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FYI, I discuss my old April 15th experiences in a “comment” on Trish McIntyre’s posting “Oct. 15th is the new April 15th” at her OUR TAXING TIMES blog. What I forgot to include in my comment was that in those “good old days” there was no August 15th or October 15th for us. We never filed extensions. The tax season was truly over at midnight on April 15th! I wish it could be true again.

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In his post Joe uses the story to encourage alternative methods for getting your return to the IRS, such as e-filing and authorized private delivery services. My response to this horror story is different – don’t wait until literally the last minute to get your 1040 in the mail! While I agree that it was, as Joe puts it, “a disgraceful performance by the Postal Service”, if the taxpayer in the tale was inconvenienced it was certainly his own fault.

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BTW, Joe – hope you are felling better!

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* The current AARP email newsletter introduced me to the Angels Gate animal hospice in Fort Salonga, NY. Angel’s Gate is a place where animals that have no place to go because of their special needs are cared for, wanted and loved. It takes in animals relinquished by their human companions or by other shelters because of medical reasons. In 2000 Angel's Gate became a wildlife rehabilitation center as well. This is certainly a charity that deserves our support. You can send a tax-deductible contribution or you can support the organization via its “Shopping Mall”, where every purchase returns a generous percentage to the charity.

TTFN

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

* Hey, I got an email from the “other side” yesterday. It was supposedly from actor Peter Ustinov, who died in 2004. The subject line did not make any sense, but I expect the email was promoting something pornographic. I deleted it unopened.

* What to OJ Simpson, Dionne Warwick and comedian Sinbad all have in common (no, not the obvious). According to an article in the WebCPA weekly email newsletter all three owe more than $1 Million in back taxes (plus penalty and interest) to the California Franchise Tax Board!

* MY MONEY BLOG asks the question ‘If you had to choose between contributing $4,000 to a Roth IRA or keeping/putting it towards your Emergency Fund, which should you choose?’ in the post “Roth IRA Contribution vs. Emergency Fund Savings”. His answer – “I used to be in the Emergency Fund First camp, but now I think I’ve changed my mind.” I agree with MMB. One reason is, as the author puts it, “the annual $4,000 Roth IRA contribution limit is a ‘use it or lose it’ proposition. You can’t put nothing in this year, and then $8,000 the next. Once April 15th rolls around, you’ve missed out on potential tax advantages that may extend several decades (even to your heirs).”

If you do need money for an emergency, with a ROTH IRA you can always withdraw your actual contributions tax-free and penalty-free. There is no income tax or 10% premature withdrawal penalty until your total withdrawals exceed your total contributions.

* Jeremy Vohwinkle of ABOUT.COM: FINANCIAL PLANNING offers some good advice to college grads starting their first “real” job in his post “Make the Most of Your Paycheck from Your First Job”. Under the category “Begin Saving for Retirement” he suggests that you consider opening an IRA if your employer does not offer a 401(k). I would highly recommend that new employees contribute the maximum (or as much as they can afford) to a ROTH IRA in addition to participating in a 401(k) while their income is such that they qualify and their expenses are still relatively low. A few years of ROTH contributions now will grow to a sizeable tax-free amount at retirement 40+ years down the road.

* A report issued by the Treasury Inspector General for Tax Administration last month states that millions of taxpayers overlooked important tax breaks and made other costly mistakes on their 2006 returns. The report estimates that over 2 million individuals who were eligible to deduct state and local sales taxes didn't, 50% more than last year. This is possibly because, as Congress waited until literally the last minute to extend this deduction, this deduction was not indicated on Schedule A or included in the printed instructions for Schedule A. Many taxpayers also failed to claim the one-time telephone excise tax refund. As of September the IRS has only paid out half of the $8 Million it has anticipated. The report also concluded that the 2007 tax-filing season "generally" was successful, and also said "most" returns were "timely and accurately" processed by the IRS.

I would expect that most of the taxpayers who missed out on tax breaks on their 2006 return prepared their own returns, maybe via software, instead of using a competent tax professional. Or if they did use a paid preparer it was probably one employed by Henry and Richard or one of the other fast food chains.

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* The NATP’s TAXPRO WEEKLY email newsletter reports that “The IRS has certified the 2008 Honda Civic Hybrid CVT as eligible for the alternative motor vehicle credit. The credit amount for the vehicle is $2,100."

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* This past week I reported on the Social Security COLA increases for 2008, including the new Social Security wage base of $102,000. The SSA website has a page that lists the annual changes in the taxable wage base since Social Security began in 1937. FYI, the wage base for 1937 through 1950 was $3,000. When I started doing 1040s, in 1972, the wage base had tripled to $9,000. Since then the wage base has increased by 1033 1/3%! A tip of the hat to Kay Bell of DON’T MESS WITH TAXES for bringing this page to my attention.

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* The TAXALICIOUS blog brings us the “Willie Nelson Tax Commercial”. Willie is now doing commercials for Henry and Richard, exploiting his famous tax problems of a few years back. One can only imagine how much “more worse” his tax problems would have been if H+R Block had prepared his returns!

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* I apologize for wasting space here on TWTP on such an idiot – but I can’t help myself. Perennial tonsorially-challenged arsehole Donald Trump just can’t let go. He once again made a fool of himself putting down celebrities – including his obsession Rosie O’Donnell - in a recent interview on Larry King to promote his latest useless book. He said Rosie ate like a pig at his wedding, Joy Behar has no talent (what does Trump know of talent – he has none himself) and Angelina Jolie is no great beauty (what – did she turn him down?). If you can’t say anything nice about a person then don’t say anything. The only person Trump can say anything nice about is himself!

* Once again let’s leave with a joke – this time on “Verifying Donations” from the self-proclaimed TAX GURU’s website.

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TTFN

THIS JUST IN!

The IRS has announced the annual inflation-adjusted amounts for personal exemptions, the standard deduction, maximum pension plan contributions, and other tax items for 2008.

The deduction for each Personal Exemption for 2008 is $3,500.

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The Standard Deduction amounts for 2008 are:

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· $ 5,450 for Single
· $10,900 for Married Filing Joint and Qualifying Widow(er)
· $ 8,000 for Head of Household
· $ 5,450 for Married Filing Separate

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The additional Standard Deduction amounts for age 65 or older and/or blind for 2008 are:

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· $1,350 for Single and Head of Household – up from $1,300 for 2007
· $1,050 for Married (Joint and Separate) and Qualifying Widow(er) – same as 2007

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The 2008 Standard Deduction for a dependent is the greater of $900 or the sum of $300 and the dependent's earned income, not to exceed $5,450 (plus $1,350 if age 65 or blind) – up from $850 for 2007.

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The 2008 annual contribution limits for retirement plans are:

· $15,500 (plus an additional $5,000 if age 50 or older at the end of 2008) for 401(k) and 403(b) plans – same as 2007

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· $15,500 (plus an additional $5,000 if age 50 or older at the end of 2008) for 457 Plans (Deferred Compensation for state and local government employees) – same as 2007

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· $10,500 (plus an additional $2,500 if age 50 or older at the end of 2008) for SIMPLE plans – same as 2007

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· $46,000 for Defined Contribution KEOGH plans – up from $45,000 for 2007

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· $46,000 for Self-Employed SEP plans (allowable contribution equal to 25% of net earnings of up to $230,000, which translates to 20% multiplied by the total of "net earnings from self-employment" from Schedule C, Schedule C-EZ or Form K-1 less the deduction for 50% of self-employment tax) – up from $45,000 for 2007

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· $5,000 (plus an additional $1,000 if age 50 or older at the end of 2008) for traditional and ROTH Individual Retirement Accounts (IRA) – up from $4,000 for 2007

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The compensation limit for participation in a SEP is $500.00 – same as 2007.

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The maximum Hope credit, available for the first two years of post-secondary education, is $1,800, up from $1,650 in 2007.

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I will be adding a WHAT’S NEW FOR 2008 Page to my website with the above information, the 2008 tax rate schedules and additional 2008 changes by the end of October.

IT’S THAT TIME OF YEAR AGAIN – PART II

The traditional year-end tax planning moves of deferring income and accelerating deductions outlined in Part I apply only if you pay the “regular” federal income tax. However, they may backfire if you fall victim to the dreaded Alternative Minimum Tax (AMT).

It is important to, when preparing your preliminary 2007 Form 1040, determine if you will be an AMT victim.

Part I discussed accelerating medical and miscellaneous deductions, and making a 4th Quarter state estimated tax payment in December instead of January. However, when calculating the dreaded AMT medical expenses are only deductible to the extent they exceed 10% (not 7½%) of AGI, and taxes and miscellaneous investment and job-related expenses are not deductible at all.

If you consistently pay AMT year after year it really doesn’t matter when you pay your taxes, investment expenses or job-related expenses. They will never be deductible (as long as the AMT exists in its current form).

However, if you usually pay the “regular” tax and, due to some special circumstances, you discover you will pay AMT for 2007 you should postpone paying additional taxes, investment and job-related miscellaneous expenses, and possibly medical expenses, until 2008 – hopefully a year when you will not be subject to AMT.

The AMT tax rate is a flat 26% or 28%. If under “regular” tax you are in the 28% bracket for 2007, and you also expect to be in this bracket for 2008, and you will be paying AMT for 2007 (but not necessarily for 2008) at the 26% flat rate it may pay to actually accelerate income to be claimed in 2007. The additional income will be taxed at 28% in 2008, but only at 26% in 2007.

Plus, if you will not be paying AMT in 2008, the increased income could affect the “read my lips taxes” (personal exemption and itemized deduction phase-outs) if claimed in 2008. These “taxes” are not a consideration in calculating AMT.

At this point it is a bit difficult to determine if you will be an AMT victim for 2007. As of this writing, Congress has still not enacted an AMT fix to extend the increased exemption amounts. So the 2007 AMT exemptions are currently $33,750 for Single and Head of Household filers, $45,000 for Married Filing Joint and Qualified Widow(er)s, and $22,500 for Married Filing Separate.

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However, everyone, myself included, expects that Congress will act before year-end (Congressman Rangel of the House Ways and Means Committee has promised to have a bill that includes a 1-year AMT fix on the House floor by next week - see my post on "As The Congress Turns") and make the exemption amounts at least $42,500, $62,550 and $31,275 again for 2007. I will let you know when this happens, and what the exemption amounts will be, here at TWTP.

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There also exists the possibility that the AMT will either be totally eliminated or drastically revised in 2008. House Ways and Means Committee Chairman Charles Rangel has proposed killing the Alternative Minimum Tax. However, to be safe, you should plan your 2007 year-end tax moves with the assumption that the AMT will continue in its current form for at least 2008.

To be continued……………

TTFN

AS THE CONGRESS TURNS

Today's CCH daily email Tax Newsletter reports that "Rangel Says AMT/Extenders Bill Now; Broader Tax Reform Legislation in 2008”.

According to the article, Senate Finance Committee Chairman Charles Rangel told reporters yesterday “to expect the introduction of two separate tax bills during the week of October 22”. One bill would extend a group of popular business and individual tax breaks, among them the “big three” – the above-the-line adjustment to income for educator expenses and tuition and fees and the option to deduct state and local sales tax instead of state and local income tax. This bill would also include another one-year AMT fix. Rangel expects this bill will reach the House floor before the mid-November adjournment.

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The second bill is Rangel’s "mother of all reform" bills that would totally eliminate the AMT (hurray!) and cut taxes for about 90 million Americans, lower corporate tax rates and close many business tax loopholes. Rangel expects to see this bill on the House floor sometime in 2008.

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I expect the “extenders” bill will easily pass both House and Senate – but the “mother of all reform” will be another story.

SOCIAL SECURITY UPDATE

The Social Security Administration has announced that the monthly Social Security and Supplemental Security Income (SSI) benefits will increase by 2.3 percent in 2008. This is the smallest increase in Social Security benefits in four (4) years. This increase will begin with the checks that Social Security beneficiaries receive in January 2008. Increased payments to SSI beneficiaries will begin on December 31.

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The average monthly Social Security check will increase from $1,055.00 to $1,079.00. For a married couple who both receive benefit checks the average total will increase from $1,722.00 to $1,761.00.

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Social Security and SSI benefits increase automatically each year based on the rise in the Bureau of Labor Statistics' Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), from the third quarter of the prior year to the corresponding period of the current year.

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The earnings base for Social Security withholding on wages and the Social Security portion of Self-Employment Tax for 2008 is $102,000, up from $97,500 for 2007. So the maximum amount of Social Security tax to be withheld from wages for 2007 is $6,324 and the maximum Social Security portion of self-employment tax is $12,648.

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The standard Medicare Part B monthly premium will be $96.40 in 2008, an increase of $2.90, or 3.1 percent, from the $93.50 Part B premium for 2007. The 2008 amount is the smallest percentage increase in the Part B premium since 2001 and is $2.10 less than the increase in the premium for 2007. Thankfully the increase in Medicare premiums will not wipe out the increase in benefits..

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The income-based Medicare Part B monthly premiums for 2008 are:

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SINGLE:

Premiums - - - - Income of:

$ 96.40 - - - $82,000 or less

$122.20 - - - $82,001-$102,000

$160.90 - - - $102,001-$153,000

$199.70 - - - $153,001-$205,000

$238.40 - - - Above $205,000

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MARRIED FILING JOINT:

Premiums - - - - Income of:

$ 96.40 - - - $164,000 or less

$122.20 - - - $164,001-$204,000

$160.90 - - - $204,001-$306,000

$199.70 - - - $306,001-$410,000

$238.40 - - - Above $410,000

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MARRIED FILING SEPARATE:

Premiums - - - - Income of:

$ 96.40 - - - $82,000 or less

$199.70 - - - $82,001-$123,000

$239.40 - - - Above $123,000

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The income base used to determine these premiums is one’s Adjusted Gross Income (AGI) plus any tax-exempt municipal bond interest income (reported on Line 8b of the Form 1040).

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The earnings limitations for 2008 are:

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1) Under Full Retirement Age - $13,560.00 per year or $1,130.00 per month ($1.00 in benefits lost for every $2.00 in earnings above the limit).

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2) The Year You Reach Full Retirement Age - $36,120.00 per year or $3,010.00 per month (applies only to earnings for months prior to reaching full retirement age - no limit on earnings beginning the month you reach full retirement age; $1.00 in benefits lost for every $3.00 in earnings above the limit).

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There is no limit on earnings beginning the month an individual reaches full retirement age.

TTFN

ASK THE TAX PRO – STATE TAXES FOR A NJ RESIDENT WORKING IN NYC

Q. My husband and I recently moved to Millburn NJ. I will be working in NJ while he will work in NYC. We are unsure how NJ and NY state taxes are applied. Does he have to pay state taxes in both states? How does this affect our federal return - do we file jointly or individually?

I have heard of "double tax" for people living in NJ and working in NY, but can't seem to determine whether it is the truth or a tax myth. Thanks for any light you can shed on this subject. I hope this fits into the criteria of the type of question you will answer.

Thanks,

Erin

A. A good question, Erin. And one that applies to many NJ taxpayers.

First, if you must live in New Jersey at least you have chosen a nice, albeit expensive, place to live. I worked for many years in nearby Summit. One suggestion – go to Route 22 to buy gas for your car.

The basic answer is that you will not be “double-taxed”. You will receive a credit on the NJ return for the state income tax you pay to NY on your husband’s wages. However, as with anything involving taxes, it ain’t quite that simple.

If you live in one state (New Jersey) and work in another (New York) you must first pay state income tax to the state in which you work (New York) on the wages earned in that state. The non-resident state (New York) will not directly (see below) tax you on your other income (i.e. NJ wages and self-employment earnings, interest, dividends, capital gains, etc.).

The state where you live (New Jersey) will tax you on all of your taxable income from all sources, including wages earned in another state (New York). Your resident state (New Jersey) will allow you to claim a credit for any non-resident state income tax paid to another state (New York) on income taxed by both states.

Your husband will have New York state income tax withheld from his wages. He will probably not have New Jersey state income tax withheld.

He will have to file a New York State Form IT-203 – Nonresident and Part Year Resident Income Tax Return. The way this works is that first you calculate the NY state income tax liability as if you were a full-year NY resident – reporting all income for the year that is taxable to a NY resident and claiming all deductions for the year allowed for a NY resident. You then divide your New York State Adjusted Gross Income from New York State sources (in this case the wages earned from your husband’s employment in NY) by your New York State Adjusted Gross Income from all sources (as if you were a full-year resident) – and multiply the result by the NY state income tax liability you had initially calculated as if you were a full-year resident.

Sound confusing? Here is an example:

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Let us say your federal AGI for 2007 is $150,000 and your husband’s W-2 from his New York State based employer indicates $50,000 in NY wages. For simplicity sake you have no federal “adjustments to income” and no New York additions (i.e. non-NY municipal interest) or subtractions (i.e. taxable state income tax refunds, interest from US government obligations like Series EE savings bonds, taxable Social Security benefits, and certain retirement income). Your allowable New York State itemized deductions total $24,999 (not the same as your total allowable federal itemized deductions). You do not have any dependents (NY does not allow a “personal exemption” deduction for you or your husband – only for dependents). So your NY taxable income, figured on all of your 2007 income as if you were a full-year resident, is $125,001. You NY tax would be around $7,725.

Your NY total AGI is $150,000. Your NY source AGI is $50,000. So your 2007 NY state income tax liability would be $2,575 ($50,000/$150,000 x $7725).

On the NJ-1040 resident return you would figure your NJ Gross Income Tax liability on all your 2007 income, from all taxable sources. Let us say this comes out to $4,860. You would then divide your NY source income, say $50,000, by your New Jersey Gross Income, say $150,000, and multiply this by the $4,860. This would give you a credit of $1,620 ($50,000/$150,000 x $4860) for the $2,575 in state income tax paid to NY. So your 2007 NJ Gross Income Tax liability would be $3,240 ($4860 less the $1620 credit).

You will note that you paid $2,575 in state tax to New York, but got a credit of only $1,620 on the NJ-1040. This is because the NY tax rate, 6.85%, is higher than the 5.525% NJ rate.

You will also note that your initial NJ Gross Income Tax liability – like the initial NY tax liability - is based on all your income from all sources – including the salary taxed by NY. If a large portion of the total income taxed by NJ represents earnings also taxed by NY it is very possible that you will have a balance due on your NJ-1040 despite the credit, which could be substantial enough to require quarterly NJ estimated tax payments to avoid underpayment penalties.

Another area of concern is the fact that the NJ state tax is a “gross” tax, while NY for the most part follows the federal 1040. Certain deductions allowed to reduce NY source Adjusted Gross Income are not deductible against NJ Gross Income. For example, if you are making deductible IRA contributions you can allocate a portion of the contributions to your NY source earned income and claim an adjustment on the IT-203. NJ does not allow a deduction for IRA contributions. Also, NJ does not treat contributions to a Section 125 medical “flexible spending account” as “pre-tax”, while NY does. So the amount of NY source income taxed by NY may be less than the amount of your husband’s NY wages that is taxed by NJ.

If the $50,000 NY source wages from the above example represents $53,000 in gross salary and $3,000 in federal and NY “pre-tax” FSA contributions, than $53,000 will be taxed by NJ and you will only be allowed to use $50,000 as “income actually taxed by other jurisdiction” in the calculation of the credit.

Or if you are permitted a $5,000 deductible IRA contribution on your federal 1040, you can claim a % of this as an adjustment to income on the NY return. The amount taxed to NJ would be $50,000 (no “pre-tax” in this example), but the amount used in the credit calculation for income taxed by NY would be the $50,000 minus the allowable NY IRA deduction.

You will only be taxed by NY on wages actually earned while physically in the State of New York. If you spent 5 days at a work-related conference in Chicago and 2 days training at a branch office in Connecticut you do not owe NY tax on the allocated earnings for these 7 days. Because, as discussed above, the NY tax rate is higher than the NJ tax rate, it is very likely that you will pay less net state tax on money taxed by NJ. So you should keep track of any days that your husband works in a state other than New York. Be advised that days worked at home do not count as days outside of NY. If your husband works one day a week at home in NJ it is the same as if he went into the office in NYC.

It is not as easy as saying $25.00 per hour x 8 hours x 7 days = $1,400.00 earned outside of NY. There is a complicated formula that must be used to allocate the income.

By allocating some of your NY W-2 wages to NJ you will increase your NY refund, but you will also increase the balance due to NJ – such that you may be penalized for underpayment of estimated tax to such an extent that it wipes out the net state tax savings from the allocation.

Since you are working in NJ you should have the maximum amount of NJ Gross Income Tax withheld from your wages. If you are not already claiming “Married- but withheld at higher Single Rate–0”, or just “Single-0”, for NJ income tax withholding purposes you should be. You may also need to have an additional amount of NJ state income tax withheld. You can file a separate NJ-Form W-4, other than your federal Form W-4, so you can have a different withholding status for federal and NJ state taxes.

You should prepare a preliminary 2007 NJ-1040 and 2007 IT-203 in November to see where you stand with your Uncles Jon and Elliot and see if you should have additional NJ tax withheld or make a 4th quarter NJ estimated tax payment.

The fact that you work in two different states does not affect how you file your federal Form 1040. You should determine whether to file joint or separate federal returns in the same manner as you would if you both lived and worked in the same state. See my posts on “Joint or Separate? That is the Question” Part I and Part II. In your case, you would file the NJ and NY state income tax returns using the same filing status as you use for your federal income tax return.

As you can see from this long and perhaps confusing answer - multi-state issues are involved and complicated. Anyone in your situation should most definitely consult a tax professional.

I hope I have provided some help, and not made you even more confused. Let me know if you need me to clarify any of the items discussed above.

TTFN

THIS JUST IN – CRAZY CAT GREETING CARD SCAM EMAIL

I just got word on a new email scam – from a Verizon employee who got it from Verizon’s security department:

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“Recently, an email that looks like a humorous greeting card has been has been identified. The e-mail contains one or more links.

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The e-mail includes the text "Here is the new Psycho cat card". Other similar texts and messages that tries to persuade you to click on a link, or open an attachment can also appear.

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This e-mail is a scam!

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If you received such an e-mail:

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-- Do not reply to the e-mail

-- Do not click any links, or open any attachments in the e-mail

-- Delete the e-mail”

A BETTER IDEA

Before I start – I enjoyed yesterday’s installment of the SHOE comic strip. In it the pudgy protagonist is at the gym. He asks his trainer, “What’s my best hope of getting a firm, buff body?” The trainer replies, “Reincarnation.” I expect that if I ever went to a gym and posed that question I would get the same answer!

Now, down to business.

If Congress feels sorry for the financial foolish and wants to provide some relief to individuals who overextended themselves such that they lost their homes to foreclosure (see my posting "To Err is Human. To Forgive is Taxable"), instead of forever exempting debt-forgiveness income resulting from personal residence foreclosures from federal income tax how about this –

Individuals with taxable mortgage debt forgiveness income resulting from a foreclosure on their personal residence in calendar years 2007 and 2008 can request a special no-fee Installment Agreement spreading the payment of their outstanding 1040 balance over a three (3) year (36 month) period. No interest or penalties will be charged on the balance due as long as the payments are made on time. This will be available to single taxpayers with “Modified” Adjusted Gross Incomes (AGI minus the tax forgiveness income) of $100,000 or less, and joint filers with a MAGI of $200,000 or less.

Let us say the bank foreclosed on your home in 2007. The resulting debt-forgiveness income was not exempt because you were not “insolvent”, and you must report the forgiveness as taxable income on your 2007 Form 1040. As a result you have a balance due of $5,400.00 on your 2007 Form 1040.

Under my proposal you would be able to make monthly payments to the IRS of $150.00 from April 2008 through March 2011, for a total of $5,400.00. You would not be charged the normal “user fee” for establishing an Installment Agreement, and no interest or penalties would accrue on the $5,400.00 as long as you made the $150.00 payment each month.

The Form 1099-C would have a box to check if the debt forgiveness it reports applies to the mortgage on a personal residence. Copy B of Form 1099-C would be required to be attached to the 1040. There would be a box to check on the bottom of Page 2 of the Form 1040 to indicate that the taxpayer wishes to elect the free Installment Agreement of 36 equal payments of the balance due. The first payment would be sent with the filing of the 1040, and there would be a box to check on the 1040-V to indicate that the remittance is the first payment of a qualified foreclosure Installment Agreement.

There would be no need to create offsetting income to make up for lost tax revenue, as this “relief” would not reduce the income tax due on debt forgiveness – just allow taxpayers to pay it off over time without P+I.

So what do you think?

TTFN

BLOG ACTION DAY

In addition to being the final deadline for filing your 2006 tax returns, today, October 15th, is also the inaugural Blog Action Day. Hey, nobody told me.

The topic of the day is “environmental issues”. Rather than being redundant I refer you to DON’T MESS WITH TAXES and today’s post by Kay Bell “Blog Action Day: Environmental Tax Breaks”.

I can also refer you to my posting “THE AMT AND THE ENERGY CREDIT FOR HYBRID VEHICLES”.

I trust this will cover any obligation I may have as a blogger.

I promise to sign up in advance for next year’s Action Day.

IT’S THAT TIME OF THE YEAR AGAIN! – PART I

BEFORE I START – JUST A REMINDER THAT IF YOU EXTENDED YOUR 2006 TAX RETURNS YOU BETTER GET THEM IN THE MAIL TODAY – EVEN IF YOU CAN’T PAY ALL, OR ANY, OF THE TAX DUE!

It’s the time of year, just as the final deadline for filing the 2006 tax return arrives, when our thoughts should turn to 2007 returns. It is time for year-end tax planning.

As I have said many times before, while the average taxpayer will avoid thinking about income taxes until the approach of the April deadline forces him to do so, once the ball drops on One Times Square at midnight on December 31st and the New Year is rung in, there is very little that can be done to cut your tax bill.

However, during the last two months of the year you can do a great deal to reduce your tax liability.

Here’s what to do. Sit down with paper and pencil and list your anticipated income for 2007 and all your allowable deductions to date. What you want to do is, using your 2006 return as a guide, prepare a projected 2007 tax return. Once this is done you can decide what steps to take to make sure you pay the absolute least amount of federal, state and local income tax for 2007 and 2008.

You can download a PRELIMINARY TAX RETURN WORKSHEET from the FORMS AND WORKSHEETS Page on my website. Tax information for 2007 (i.e. standard deduction and personal exemption amounts, tax rates, etc.) are available on the WHAT’S NEW FOR 2007 Page. I will be adding a WHAT’S NEW FOR 2008 Page by the end of October.

Before I get into year-end tips I must do the usual “disclaimers”.

· There are no written in stone year-end tax planning rules that apply to all taxpayers in all cases. As with any other transaction, year-end strategies must be evaluated in the context of the special facts and circumstances of your individual situation.

· Always keep in mind the state tax consequences of your federal tax actions.

· You should review your year-end situation with your tax professional.

· And remember – your first criteria for evaluating any financial transaction you are considering should always be economic. Taxes are second.

Now, here are some basic year-end tax planning tips -

1) Traditional year-end planning calls for postponing the receipt of taxable income until 2008 and accelerating allowable deductions to be claimed in 2007, the idea is to reduce your 2007 taxable income to a minimum. This strategy will generally apply if you expect to be in the same tax bracket for both 2007 and 2008, or it you will be in a lower bracket in 2008.

If, however, you anticipate a substantial increase in taxable income in 2008, which will push you into a higher bracket, you should do the reverse and accelerate the receipt of taxable income to 2007 and postpone deductible expenses until 2008. Income received in 2007 will be taxed at a lower rate, and deductions claimed in 2008 will yield a greater tax savings.

Not sure what your 2008 income will be. Follow the rule of “when in doubt – defer” - go the traditional route and postpone income and accelerate expenses.

As of this writing, except for the annual COLA adjustments, the tax rates and brackets for 2008 will be basically the same as those for 2007 – so this is not a consideration. While the Democrats continually talk about raising taxes at the upper levels, I doubt that there will be any change in the rates or brackets until 2009.

2) It does not pay to itemize unless the total of your allowable deductions exceeds the standard deduction that applies to your filing status, plus any additions for age or blindness. If you decide to accelerate allowable deductions to claim them in 2007, you can accelerate all you want, but it will be wasted unless your total “itemizable” deductions exceed your applicable standard deduction. For 2007 the standard deduction amounts are:

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· $ 5,350 for Single
· $10,700 for Married Filing Joint and Qualifying Widow(er)
· $ 7,850 for Head of Household
· $ 5,350 for Married Filing Separate

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The additional Standard Deduction amounts for age 65 or older and/or blind are:

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· $1,300 for Single and Head of Household
· $1,050 for Married (Joint and Separate) and Qualifying Widow(er)

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Let us assume you usually do not have enough deductions to itemize. However, after preparing your projected 2007 return you discover that, because of some special circumstance, you will be able to itemize this year. During the last two months of the year you should incur, and pay for, as many deductible expenses as possible.

If, on the other hand, your projected return indicates that you do not have anywhere near enough deductions to be able to itemize, postpone making any deductible payments until 2008. Making these payments in 2007 would not produce any tax savings, while it is possible that by deferring them until next year you may be able to itemize in 2008.

3) The timing of deductions is especially important when it comes to medical expenses and miscellaneous job-related and investment expenses. You are allowed to deduct medical expenses only to the extent that they exceed 7½% of your Adjusted Gross Income (AGI), and most miscellaneous deductions are only deductible to the extent that the total exceeds 2% of AGI.

If you anticipate a 2007 AGI of $70,000.00 you must exclude the first $5,250.00 of medical expenses – the first $5,250.00 is not deductible. If your medical expenses to date are close to or more than $5,250.00 and you will be able to itemize, pay any outstanding medical bills and schedule, and pay for, check-ups, doctor visits and needed dental work in November and December. If medical payments to date are substantially less than $5,250.00, put off paying any more medical bills until 2008. The same concept applies for miscellaneous deductions.

If you expect to be able to itemize, and you are making quarterly state estimated tax payments, make the 4th quarter payment in December, instead of waiting until the January 16, 2008 due date, so you will be able to deduct the payment on your 2007 Schedule A.

4) If you do not have the cash available to pay for deductible items that you have scheduled as part of your year-end tax plan, you can use a credit card to pay for the item and still get a 2007 deduction. Allowable expenses charged to a credit card (VISA, Master Card, American Express, Discover) are deductible in the year charged, and not in the year that you actually pay for the charge.

5) When preparing your projected return you should review the performance of your investment portfolio for the year. Add up all your realized gains and losses from actual sales for the first 10 months of the year, with separate net totals for short-term (held one year or less) and long-term (held more than one year) activity. Gains and losses from the sale of inherited property are always considered long-term. Include in the long-term calculation any “capital gain distributions” from mutual funds.

Now do a similar calculation for unrealized “paper” gains and losses on the investments you still hold. You may want to sell something before the end of the year at a loss to wipe out year-to-date gains, or at a profit to take advantage of year-to-date losses in excess of $3,000.00.

Tax law changes scheduled to take effect in 2008 regarding the capital gains tax rate for lower-income investors and the “Kiddie Tax” rules create some special tax planning opportunities. I will discuss these opportunities in a future installment of this series of posts on Year End Tax Planning.

The year-end tips discussed above all deal with the “regular” income tax. However, while these strategies may reduce your “regular” income tax for 2007, these actions may backfire and end up costing you if you fall victim to the dreaded Alternative Minimum Tax (AMT)! I will discuss year-end planning and the AMT in Part II. I will also discuss tax breaks expiring in 2007 and opportunities to take advantage of future tax breaks in upcoming installments.

to be continued . . . . . . . . . . . . .

TTFN

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

* AccountantsWorld.com Tax Headlines reported on Rudy Giuliani’s tax plan. According to the article Giuliani said he would "make sure" the Bush tax cuts, scheduled to expire on 12/31/2010, are made permanent. He would index the dreaded AMT to inflation "so it doesn't begin to grow and affect more Americans in a way that it was never intended to do so." Giuliani also vowed to permanently repeal the estate tax and to create new tax saving accounts, as well as new health savings accounts that he said would help people buy insurance on the private market.

Another AccountantsWorld.com headline reports “Which States Are Best for Business? The 2008 State Business Tax Climate Index”, referring to the annual ranking determined by the Tax Foundation. While not quite last on the list, New Jersey is #49 – with the next to worst business tax climate (no surprise here). Wyoming is #1 and Rhode Island is #50.

* Speaking of presidential tax plans, the Tax Policy Center has developed a “matrix” of the 2008 presidential candidates’ tax proposals. According to the Center, “This matrix provides a side-by-side comparison of the 2008 presidential candidates' tax proposals, as gleaned from their websites and public statements. It outlines their proposed tax cuts, as well as adjustments to existing credits, capital gains taxation, corporate taxes, tax administration and more. The matrix will be updated as new information and proposals are released.” I have not had a chance to review it in detail. When I do I will provide comments.

* TAX GIRL Kelly Philips Erb gives some good examples of “Fearing the Taxman: When Not To Be Scared” with a list of “the top five things that taxpayers are irrationally afraid of - and shouldn’t be”. They are, with my comments –

· Being aggressive when it come to deductions: Do not audit your own return! If you spent the money and it is deductible you should deduct it.

· Audits: I do about 400 returns each tax season and I haven’t been to an office audit in probably ten years. The last actual audit I had to deal with was part of the National Research Program (see my October 6th “What’s the Buzz” post).

· Not having enough money to pay your bill: As I have said in previous posts, it is very important to get your tax returns in the mail on a time even if you cannot pay all, or any, of the tax due to avoid multiplying your penalties ten-fold.

· Correspondence from the IRS: More than half of all notices from “Sam” are incorrect. As soon as you get a notice from “Sam” you should send it to your tax professional ASAP. See my post “Oh No - A Letter from the IRS!”.

· Making a mistake: Hey, even I make a mistake on a 1040 every now and then. And nobody makes more mistakes than the IRS (except perhaps the NJ Division of Taxation).

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Kelly also weighs in on the issue of tax forgiveness for debt forgiveness in her excellently titled post “Suddenly, Being Financially Irresponsible Pays Off!”. As Kelly puts it “Great. Now homeowners have yet another incentive to spend beyond their means - as if interest only and subprime mortgages aren’t enough.” And my answer to her Fix The Tax Code Friday question is, in a word, no. Stupidity should not be rewarded.

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* NATP’S “Tax Tip of the Week” reminds us not to forget that “the new 2008 model year cars include hybrid vehicles that qualify for the Alternative Motor Vehicle Credit". Eligible 2008 model vehicles and the maximum credit include:

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· Ford Escape 2WD Hybrid — $3,000
· Ford Escape 4WD Hybrid — $2,200
· Mercury Mariner 4WD Hybrid — $2,200
· Mercury Mariner 2WD Hybrid — $3,000
· Chevrolet Malibu Hybrid — $1,300
· Saturn Aura Hybrid — $1,300
· Mazda Tribute 2WD Hybrid — $3,000
· Mazda Tribute 4WD Hybrid — $2,200

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And don't forget - victims of the dreaded AMT do not get the credit.

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* TICK MARKS’ Dan Meyer discusses what will prove to be an unsuccessful attempt to pass a special “war tax” surcharge to fund George W’s mess in Iraq, rather than passing the cost on to “our” grandchildren (not mine – no children) via continued increased national debt. He makes a good point about a possible “return next year as a potentially effective election-year campaign tactic”.

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* The Market Watch daily email newsletter reports that “IRS Steps Up Scrutiny of Tax Strategy” – that tax strategy being like-kind exchanges (aka “1031 Exchanges”). According to the article, “The use of like-kind exchange has surged over the past decade as real-estate investors searched for legitimate ways to postpone, or avoid, taxes on big gains. According to the Treasury report, taxpayers filed more than 338,500 forms reporting like-kind exchanges in 2004, deferring more than $73.6 billion. That represented a doubling of the number of like-kind exchanges reported in 1998. The total dollar amount deferred 'more than tripled' in that time period.”

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As usual my timing is perfect – I haven’t done a like-kind exchange of real estate in over 20 years and now just when I have to deal with the issue on my big remaining multi-year project the IRS decides to look more closely at them! BTW Joe Kristan of ROTH AND COMPANY TAX UPDATE BLOG also discusses this issue.

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* The MILLIONAIRE MOMMY NEXT DOOR has compiled “110 Personal Finance Calculators: Fast Answers For Your Financial Questions” - a comprehensive collection, organized by category, of 110 personal finance calculators and helpful tools. As MMND puts it, “They're free, found online and designed to help you find fast answers to your financial questions”. A tip of the hat to Key Bell of DON’T MESS WITH TAXES for bringing this compilation to my attention.

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TTFN

VERRRRY INTERESTING…..

Yesterday’s blog posting by TAX PROF Paul Caron, titled “Republicans Introduce Taxpayer Choice Act”, reports on a very interesting tax proposal put forth by conservative Republican Representatives John Campbell of California, Jeb Hensarling of Texas, and Paul Ryan of Wisconsin.

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Under the proposed Taxpayer Choice Act –

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· Taxpayers have a choice whether to continue under current income tax or opt into new system.

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· There would be two tax rates: 10% on first $100,000 of income and 25% on income over $100,000 for joint filers (the threshold would be $50,000 for single filers).

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· Capital gains and dividends continue to be taxed at a 15% maximum rate.

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· The dreaded AMT would be repealed.

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· There would be a large standard deduction ($12,500 single; $25,000 joint), and

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· A $3,500 personal exemption (a $39,000 no-tax threshold for a family of four).

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· All current itemized deductions (including home mortgage interest, charitable contributions, and state and local taxes) and credits would be eliminated.

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Actually it does not sound so bad. It is certainly worth serious consideration. My only question is why should taxpayers have a choice of tax “systems”? Why not just make the new system apply to everyone?

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A simple, semi-flat tax system would certainly not put me out of business, or even hurt my bottom line. As long as the fee for preparing the new simple return was reasonable (and my fees are certainly reasonable – actually perhaps unreasonably low) I believe that taxpayers, my clients included, would still prefer to have it prepared by a professional – either just to be sure it was done correctly or so they wouldn’t have to be bothered doing it themselves. And, as I have stated in the past, I would make a lot more money during tax season if I did nothing but 1040A short forms all day.

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Besides, it appears there would still be Schedules C, D and E to deal with, enough remaining complications so that I would not become bored.

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Go to Paul’s post and click on the various informational links. After reviewing it carefully let me know what you think.

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As a postscript, the Q+A on the Taxpayer Choice Act linked in the posting gives an excellent answer to “What’s so wrong with the AMT?” –

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“The Alternative Minimum Tax (AMT) was designed in 1969 as a mandatory add-on to the existing tax code. It was aimed at preventing 155 wealthy taxpayers from exploiting loopholes in the tax code to escape legitimate tax obligations. But because it was never indexed for inflation, the AMT next year will subject close to 30 million more taxpayers to an automatic tax increase.

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Most of these folks are far from rich. Under current tax law, for instance, in tax year 2007, about 70% of married taxpayers with children earning $75,000 to $100,000 {the taxpayers earn the $75,000, not the children - rdf} will be subject to AMT. Over the next 10 years, the AMT’s scope will impose $841 billion in higher taxes, mostly on middle-income families. Under the AMT law, these millions of taxpayers will be required to calculate their taxes two ways – under the existing code, and under the AMT = and then pay the higher tax. This is clearly an illegitimate tax that should be repealed without penalizing taxpayers.”

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TTFN

AS THE CONGRESS TURNS

I was going to save this for Saturday’s WHAT’S THE BUZZ posting – but decided not to wait.

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Today’s CCH daily Tax Headlines email newsletter reports that the Tax Collection Responsibility Bill of 2007 (H.R. 3056) was passed by the House yesterday by a vote of 232 to 173. This is good news! I have always said that outside collection agencies should not be collecting federal, or state, tax debt.

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The article goes on to say “House Ways and Means Committee Chairman Charles B. Rangel, D-N.Y., said the bill is intended to stop so-called ‘bounty hunters’ from earning a commission by harassing taxpayers for money owed to the Treasury. IRS employees collect unpaid taxes at a much faster pace than PCAs, or about $20 collected for every $1 spent on collections, Democrats said.”

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Linda Beale, a law professor who teaches tax courses at Wayne State University Law School, reports in her posting “Veto Threatened for End of Privatization of Tax Debt Collection” at A TAXING MATTER that "Bush's ‘senior advisers’ would recommend a veto if H.R. 3056, a bill to end privatization of federal tax debt collection, is enacted”, as it would be inappropriate to allow tax bills to go uncollected.

Linda points out quite correctly that “If we would provide the IRS the resources and personnel to do the debt collection directly, we could collect more money with less taxpayer cost”, and poses the following interesting question - “If the White House is so concerned about the inequity of taxpayers avoiding their obligation to make payment on tax debts, why isn't it lobbying Congress for adequate funding of IRS enforcement needs?” Good question, Linda!

BTW, TAX GIRL Kelly Phillips Erb points out that one of the three private collection agencies that currently dun delinquent taxpayers is a Texas law firm! Just a coincidence?

I will keep you up-to-date on further developments.

TTFN

ASK THE TAX PRO – SALE OF PERSONAL RESIDENCE

I thought I would repeat this ASK THE TAX PRO item from a year or so ago. It still amazes me how many taxpayers think that the old rules still apply!

Q. If I sell my home do I have to buy a more expensive one in order to avoid paying income tax on the gain?

A. It appears that there is still some confusion about the rules for taxing gain on the sale of a personal residence. Many people still think the “old rules” still apply.

THE OLD RULES:

In order to postpone paying income tax in the current year on the gain from the sale of your personal residence you had to “buy up” – purchase, or build, a new home that cost more than the sale price of your old home – within 2 years of the date you closed on the sale of your old home. The tax was deferred for as long as you continued to “buy up”, or until you sold your last home.

Homeowners age 55 and older could make a once-in-a-lifetime election to exclude up to $125,000.00 in gain.

These rules no longer exist!

THE NEW RULES:

Thanks to the Tax Reform Act of 1997, if you sell your personal residence after May 6, 1997, you can totally exclude from income up to $250,000.00 of gain if single, or $500,000.00 if married, regardless of your age at the time of the sale, if during the 5 years prior to the sale you owned and lived in the home for a total of 24 months (they do not have to be consecutive). The exclusion is not a one-time election – it is available once every 2 years.

In most cases, if the gross proceeds from the sale of the residence is less than the $250,000.00 or $500,000.00 threshold you will not receive a Form 1099-S and you do not even have to report the sale on your Form 1040.

If you are married and sell your home, which you and your spouse owned and lived in for 3 years, and realize a gain of $475,000.00 you do not have to pay any income tax on this gain. If the net gain is $525,000.00 you will only pay tax on $25,000.00 at the appropriate capital gains rate.

If you do not own and live in the home for a full 24 months you may still be able to exclude some, or all, of the gain if you had to sell the residence because of certain IRS-approved “special circumstances”. I have been surprised by some of the situations that the IRS has accepted as a “special circumstance”.

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As I have discussed in previous posts, if you used part of the residence as a deductible "home office" you will have to "recapture" some or all of the depreciation you claimed over the years. See my August 8, 2007 and August 20, 2007 posts.

You should still keep the original Closing or Settlement Statement for the purchase of your home for as long as you own it, and maintain documentation on all capital improvements made to the home over the years.

PS - A word to the wise (or actually the not so wise) - A recent Tax Mama “tax quip” gave an excellent example of how not to “ASK THE TAX PRO”.

TTFN

WHERE THE FAKAWI?

I am very pleased to announce that all 2006 GD extensions for which I had all the necessary information have been completed and mailed out to the client – with one exception. And there is only one (1) red filed 2006 GD extension.

The one exception is the multi-year project that I am sure I mentioned in earlier WTF updates. I need to do 2004, 2005 and 2006 federal returns for a client that involves like-kind exchanges, hurricane damage, self-employment income, and multiple property sales.

I also have a 2005 return to complete (regarding the sale of part rental property/part personal residence), which will be done by week’s end, and a set of fiscal year corporate income tax returns (federal and state for one corporation), which I will complete on Thursday (everything is done – I just need to write-up the returns).

Of course there are three separate files of returns to review for possible amendment, create specialized worksheets for, and review the billing status of – but nothing pressing. And I am awaiting information on two (2) 2005 sets of income tax returns – I currently have absolutely no information.

I plan to take it easy this week-end and most of next week – as a reward – before sitting down to the final big project. Perhaps a TDF offering in NYC.

So that is where the fakawi!

IN THE COURTS

My September 2007 issue of TAX HOTLINE got buried in a pile and I just found it. The lead item under Tax News on Page 1 concerns a tax case that the US Supreme Court has agreed to hear in its 2007-2008 term, which just began.

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The case is Kentucky Dept. of Revenue, et al. v. Davis, George, et ux.

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The Internal Revenue Code exempts from federal income tax the interest earned on state or local municipal bonds, and on dividend distributions that constitute interest from a mutual fund’s investment in state and local municipal bonds. However Kentucky law, like that of most states, requires that interest income earned on bonds issued by other states be included in an individual's taxable gross income for state income tax purposes. If you own a bond issued by a Kentucky municipality the interest is exempt from Kentucky state income tax. But interest on bonds issued by New York State is fully taxed by on the Kentucky Form 740. I don’t think I ever prepared a Kentucky state income tax return.

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George and Catherine Davis filed a class action complaint arguing that Kentucky's policy of taxing out-of-state bonds was in violation of the dormant Commerce Clause - the doctrine that the Commerce Clause forbids states from interfering with interstate commerce. The state trial court ruled in favor of the Kentucky Department of Revenue and declared the tax policy constitutional. However, The Kentucky Court of Appeals reversed the lower court and struck down the tax policy. It held that the tax discrimination rather than the bond issuance was at issue, and the taxation was indisputably undertaken in the state's capacity as a regulator. The court concluded that the Commerce Clause was incompatible with such a discriminatory state policy.

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TAX HOTLINE points out that if the decision is upheld by the Supreme Court than “the majority of states, including California and New York {and New Jersey – rdf} would have to exempt all municipal bond interest, regardless of where the bonds were issued, or tax them all.”

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The item ends by raising the possibility that the states may have to issue refunds on previously taxed out-of-state bond interest for all “open” years.

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Let us keep our fingers crossed that the Supreme Court rules all municipal bond interest must be treated equally by the states. It means refunds for my clients and billable hours for me!

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I will let you know what happens.

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TTFN

HAPPY BELATED BIRTHDAY

Do you know what turned age 94 this past October? The US Income Tax!

In February of 1913 the 16th Amendment was ratified by the required three-fourths of the states. The amendment gave Congress the power to “lay and collect tax on incomes, from whatever sources derived, without apportionment among the several states, and without regard to any census or enumeration.” On October 3, 1913, Congress passed the Revenue Act of 1913, which created the first permanent federal income tax.

Congress had made two previous attempts at instituting a federal income tax. The first, in 1861, was an emergency measure to fund the Civil War and was repealed in 1872. In 1894, in response to complaints that excessive reliance on tariffs as a source of revenue caused the price of imported goods to rise, Congress again passed an income tax law, which the Supreme Court ruled unconstitutional in 1895.

In celebration of this special occasion, here are some facts about the very first Form 1040:

· The tax applied to salaries and wages, interest, dividends, rents, royalties, pensions and annuities, income from estates, trusts, sole proprietorships and partnerships, and gains from the sale of most types of property.

· The salaries and wages of state and local government employees were exempt from income tax.

· Interest from federal, as well as state and local, government bonds were exempt from income tax.

· Deductions were allowed for “personal” interest, federal excise taxes, taxes paid to state and local governments, casualty and theft losses, bad debts, business expenses, and depreciation of property used in business.

· There was an exemption of $3,000.00 for single persons and $4,000.00 for married couples.

· A “normal” tax of 1% was applied to the first $20,000.00 of taxable income. Dividends were exempt from this “normal” tax. An additional or “super” tax of from 1% to 6% was applied to income, including dividends, in excess of $20,000.00.

· The return was due “on or before the first day of March”.

· There was only one page of instructions!

· In the first year of the income tax only 1 out of every 271 American citizens were taxed and $28 Million in revenue was raised.

Over the years the federal income tax has evolved into the complicated “mess” that it is today. According to former Treasury Secretary Paul O’Neill, “Our tax code is so complicated; we’ve made it nearly impossible for even the Internal Revenue Service to understand.” Here are some of the landmarks of this evolution.

· A personal exemption allowance for dependents and a deduction for charitable contributions were added in 1917.

· Capital gains were singled out for preferential treatment in 1922, although profits on the sale of certain types of property received special tax treatment as early as 1918.

· A deduction for medical expenses was introduced in 1942.

· The Standard Deduction was added in 1944 as an alternative to requiring taxpayers to itemize qualified expenses.

· An Income Averaging method of tax computation was initiated in 1964, to be taken away by the Tax Reform Act of 1986.

· A “minimum” tax on specified “tax preference” items first appeared in 1970, and was replaced by the dreaded Alternative Minimum Tax (AMT) in 1979.

· An Individual Retirement Account for taxpayers not covered by an employer pension plan was introduced in 1974.

· The refundable Earned Income Credit for low wage earners with dependent children was created in 1975.

· Unemployment compensation was made partially taxable in 1979, and was eventually made fully taxable. I remember saying at the time, “The next thing you know they will be taxing Social Security”.

· Social Security and Railroad Retirement benefits became partially taxable in 1984.

By the way, if you who think taxes are too high today, from the end of World War II through the early 1960s the top tax rate was more than 90%!

More details on the history of the federal income tax appears on the TAX HISTORY Page of my website.

SHAMELESS SELF PROMOTION

Just to let you know - the special Post-Tax-Season sale price of $1.00 each for receiving my Special Reports as a “pdf” email attachment will expire on October 31st.

Can I be frank with you (no, I was not Frank last night). While there are no direct costs to producing THE WANDERING TAX PRO, I do devote quite a lot of quality time to researching and writing my posts. This blog does not generate any income (I am not using it to solicit new business as I am not accepting any new clients at this time). I have yet to receive a penny from any of the few online affiliate programs to which I belong (I am very selective in what I chose to “advertise” on my sites).

So, if you have found THE WANDERING TAX PRO helpful or educational in the past you can support its continuation by purchasing one of my Special Reports.

Hey, I can’t give away all my knowledge and experience for free! The reports on tax deductions have the potential of putting hundreds of dollars in your pocket for an investment of only $1.00 each.

Click here to see what I have to offer for only a buck.

TTFN

DO NOT CALL

I got an email yesterday reminding me to re-register my telephone number online for the Federal Trade Commission’s DO NOT CALL list to keep telemarketers from bothering me – except for “political organizations, charities, telephone surveyors” and “companies with which you have an existing business relationship”.

I heard on the radio the other day that the reason why political organizations are exempt is because of the “first amendment” right of free speech. Bullpucky! The reason political organizations are exempt is because politicians wrote the law that created the Do Not Call list and they did not want to be cut off from a potential source of campaign funds.

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Your phone number will remain on the registry for five years from the date you register. So if you registered when the list first began you will probably need to re-register. You can check your phone number’s expiration date by clicking on the Verify a Registration button on the website. You will receive an email with the verification information.

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As an additional point of information, the website states the following:

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“Did you get an email claiming that your cell phone is about to be assaulted by telemarketing calls because of a new cell phone number database? Those claims are not true. In fact, federal law prohibits telemarketers from using automated dialers to call cell phones. You may place your personal cell phone number on the National Do Not Call Registry, but there is generally no reason to do so. For more information, see the FTC's press release "The Truth about Cell Phones and the Do Not Call Registry".”

I certainly do not have to register my cell phone – since I do not have one. And as for my “regular” phone – when it is turned on (usually only during the tax filing season) I never answer the phone without first screening the call via my answering machine.

TTFN

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

* The CCH email tax newsletter reported that the “House Overwhelmingly Passes Mortgage Forgiveness Tax Bill”. According to CCH, “Despite GOP objections to the length of tax relief included in the Mortgage Forgiveness Debt Relief Bill of 2007 (HR 3648), the measure won overwhelming bipartisan support in the House on October 4.” The bill passed by a vote of 386 to 27.

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* The IRS has issued a notice on “Online Auction Sellers” and a fact sheet on “Reporting Auction Income and the Tax Gap” to provide guidance to individuals who sell items online (i.e. via e-bay).

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* In news relating to my posting on “To Err is Human – To Forgive is Taxable” Market Watch reports that “the number of mortgage loans entering the foreclosure process in the second quarter set another record, according to the latest data from the Mortgage Bankers Association”.

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* Note to Kirk Walsh, who blogs at kirkwalsh.com – “Right on, brother!” Check out his open letter to the cafones in Washington in his posting “Congress: Act on the AMT NOW!!!!!"

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* And speaking of the cafones in DC, Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG has this to say about them in his “Congress Writing New Tax Break for Owners of $2 Million Houses” posting update on foreclosure debt forgiveness – “So - to pay for a tax break for deadbeats with a net worth of $2 million or more, Congress proposes to remove a tax break for people who actually pay off their loans. Thank goodness we have Congress to look out for the little guy.”

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* Kay Bell of DON’T MESS WITH TAXES reminds us that the IRS National Research Program (NRP) “Audits from Hell” – or more appropriately in this case, as she puts it, “Audits from Purgatory” – will begin this month. The “Audits from Hell” to which she refers were the old TCMP (Taxpayer Compliance Measurement Program) audits from the 1990s - under which every single line on a tax return had to be documented, including showing the IRS marriage and birth certificates.

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This is the second go round for the NRP audits. 45,000+ returns were reviewed for tax year 2001 under this program. Only one of my clients fell victim – and the IRS couldn’t have made a better choice if they had asked me which of my clients I would want to be selected. They chose a client whose entire life is well documented via computer and hard copy back-up. We didn’t even go to the audit. I prepared a huge mailing of copies of all the requested documentation and mailed it to the auditor. Needless to say there was “no change”.

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I think the volume of my mailing intimidated the auditor. In gathering the information for the review we discovered a $25.00 error which I disclosed in my cover letter – but this was not indicated in the final audit report.

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This time around the IRS is going to review 13,000 or so randomly selected 2006 Form 1040s. The IRS admits that returns for this program are chosen from "various categories", although it does not identify these categories. Kay feels, and I agree, that “you can expect the IRS to look at groups it believes are most likely to under report income. That includes self-employed individuals, independent contractors and folks with substantial capital gains and losses.”

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Kay ends her posting with excellent advice – “And if you are unlucky enough to be one of the chosen, contact a tax professional as soon as you get the letter.”

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* Ryan Ellis of TAX INFO BLOG ends his posting “Commuting Expenses Are Never Deductible” with some excellent basic tax planning advice - “The basic rule always applies: don't change your life for tax benefits, but construct your activities in such a way that they can become tax-advantaged.” The post also provides a good answer to a common question.

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* I came across a new (at least to me) tax-related Q+A blog this week – that of “June Walker: Tax & Financial Advisor to the Self-employed since 1979” (not quite as long as me, but close). June provides the answer to a good question from a “freelancer” in “Shared Rent: You May Still Deduct For Home Office”

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* THE Tax Foundation’s TAX POLICY BLOG discusses the IRS release of income tax data by AGI percentile for Tax Year 2005 in “New Data on Share of Federal Income Taxes Paid by Top 1%, Top 5%...” The blog reports that “In 2005, the top 1 percent of tax returns earned 21.2 percent of adjusted gross income and paid 39.4 percent of the nation's federal individual income taxes” and “in 2005, the top 1 percent of tax returns paid nearly the same amount in federal individual income taxes as the bottom 95 percent of tax returns”.

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* Along the lines of “always leave them laughing” - the TAX GURU provides us with the laugh via his post on “Appropriate Attire for an IRS Audit?”, which he discovered on humor website FunnyBone.

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TTFN

FREE MONEY

Several banks are offering a “referral fee” to depositors who recommend new customers, and also give a similar “signing bonus” to the referred new customer.

A recent email from Capital One stated “Simply ask your friends and family to apply for a Capital One consumer credit card, and for every approved and activated new account (up to 12) both you and your friend will earn a $25 statement credit referral bonus”.

Amboy Direct has a “refer-a-friend” program that gives the new customer referred $25.00 when he/she opens an Amboy Direct Savings Account, and the referring depositor $10.00.

Wachovia Bank reports that, under its Customer Referral Program, “When the person you refer opens a new personal checking account at any Wachovia Financial Center we'll send both of you a $25 Wachovia Visa Gift Card”.

ING used to have a referral program, but I could not find it mentioned on the website.

If you are interested in applying for a Capital One (“what’s in your wallet?”) credit card, an Amboy Direct savings account, or a Wachovia personal checking account, and you do not know of anyone who can refer you under these programs, send me an email at rdftaxpro@mail.com (with THE WANDERING TAX PRO in the “Subject Line”) and I will be glad to refer you.

It will be nice to finally make some money from this blog.

TTFN

ASK THE TAX PRO – OCTOBER 15th DEADLINE

Q. Oi vey! I filed an automatic extension back in April, giving me until October 15th to file my 2006 income tax returns, because I did not have the money to pay the tax I owed. The deadline is fast approaching, but I still do not have the money to pay the tax due! What can I do?

A. The most important thing is to make sure you get your 2006 Form 1040 (or 1040A) – and any applicable state income tax return - in the mail by (preferably before) October 15th, even if you cannot pay all, or any, of the income tax due!

The reason for this is the difference between the penalty for paying late (.5% - or ½ of 1% - of the balance due per month, or part thereof) and the penalty for filing late (5% of the balance due per month, or part thereof). The penalty for filing late is 10 times as much as that for paying late!

The automatic extension granted by filing Form 4868 back in April extends the time to file the return, not the time to pay the tax. The tax was due on April 17th, with or without an extension, and the clock for penalty and interest assessments began to run on April 18.

Your options for dealing with the balance due on your return are as follows:

(1) You can mail the return, with a payment of as much of the amount due as you can afford to send, before October 15. Once the return has been processed, “Sam” will send you a notice for the remainder of the tax due, plus penalty and interest. You can then pay all, or part, of the balance due. “Sam” will continue to send you notices, with penalty and interest accruing, until you are paid in full. I would only suggest using this method if you are able to pay the full balance in two or three payments.

(2) You can request an “Installment Agreement” by submitting Form 9465 (Installment Agreement Request) with your return. You can also request an Installment Agreement by completing an Online Payment Agreement Application at the IRS website. With such an arrangement you agree to pay a certain amount per month. Your application indicates how much you wish to pay (for example, if you owe $1,000 you may want to send $100-$200 per month) and on which day of the month you want to make the payment. You can arrange to have the monthly payment automatically deducted from your bank account. There will be a “user fee” for setting up an Installment Agreement, which depends on your method of payment and level of income. Of course penalty and interest will continue to accrue until the entire amount is paid in full. The greater the amount of your monthly payment the less the amount of penalty and interest you will pay.

(3) You can charge the amount you owe on your 2006 Form 1040 or 1040A to a credit card via the Official Payments Corporation website. I am torn about recommending this method. For one, you will be charged a convenience fee of 2.49% of the payment up front. Plus, you will be paying interest on the declining balance at the rate charged by your credit card company, which in many cases will be substantially higher than the combined fees, interest and penalties charged by the IRS in an Installment Agreement. You should do a comparison calculation before choosing this option. On the somewhat plus side - if you are forced to default on your credit card payments at least you won't have the IRS after you with its arsenal of liens and levys. Plus, you have a better chance of reducing your credit card payments via working with a credit counseling agency or negotiating with the credit card company upon default than getting an equally favorable Offer In Compromise accepted, and credit card debt is much easier to discharge in bankruptcy than income tax obligations (see below).

The above options are for those who owe a manageable balance to “Sam” and will be able to pay it off within a period of 2 years or less. However, if you owe your “uncle” a ton of money that you will never be able to pay off without winning the lottery there are two other options available to you. You can submit an “Offer In Compromise” or request a “Partial Payment Installment Agreement”. You should consult a tax professional if you are interesting in these options.

As a last resort there is always bankruptcy. Income tax debts may be eligible for discharge under Chapter 7 or Chapter 13 of the Bankruptcy Code. Of course you will need a lawyer – who you will have to pay in full up front before you can even start the bankruptcy process.

But before you do anything else make sure to get that 2006 Form 1040 or 1040A prepared and signed and in the mail ASAP. If you are using a tax professional to prepare your return and you haven’t given him/her your 2006 “stuff” yet get it to him/her today! Even so, speaking as a tax pro myself, at this late date there is no guarantee that your return will be done in time for an October 15th filing – and whose fault is that!

TTFN

ON THE AISLES

Recently I saw four musicals in less than a week. Shades of London (actually on one trip to London, with the Theatre Guild, I believe I saw 14 shows in 7 days)!

These four musicals were entries in the 4th Annual New York Musical Theatre Festival (NYMF) – included in my $105.00 Gold Membership.

The first show was THE BRAIN FROM PLANET X at the Acorn Theatre on 42nd Street, the largest of the venues in the Theatre Row complex off Ninth Avenue. It was a send-up of the black and white sci-fi films of the 50s, i.e. “The Brain from Planet Arous” and “Plan Nine From Outer Space”, similar to, but broader in its comedy (the brain sings and dances and has a horny female assistant) and with a larger cast than, IT CAME FROM BEYOND, which I had seen as part of the 2005 NYMF. Like IT CAME FROM BEYOND, sets and props were minimal.

The show was fun and the cast seemed to be enjoying the frivolity as much as the audience.

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Next up was I SEE LONDON, I SEE FRANCE: THE UNDERWEAR MUSICAL at the tiny TBG Theatre on 36th Street just off Eighth Avenue. Ad exec Gina, who has just turned 35 (or, demographically, 35-49) inherits the underwear campaign of her ex-boyfriend, who has run off to the tropics with the firm’s blonde receptionist after the success of his how-to book on “Nailing the Youth Market”, and falls for the weather-obsessed underwear model “big” Kenny. The show was sold out.

Of the four shows I saw this one has, in my opinion, the best chance of being picked up for an off-Broadway production after the festival (like ALTAR BOYS and THE GREAT AMERICAN TRAILER PARK MUSICAL from previous festivals). It was smart, witty, well cast and well directed. The tiny stage was not a drawback – the director made excellent use of screens and projections to set the scenes. The chorus of imaginary bimbos, or in this case “Bunnys”, that haunted Gina was an effective touch. While the entire cast was good, the “Temp” stood out as an excellently written and equally well portrayed character.

My next outing was a double-header, with shows at 1:00 pm and 8:00 pm.

The matinee was SHERLOCK HOLMES (THE EARLY YEARS) at the Theatre at St Clements on 46th Street, where I had been to see a NYMF production last year. The book was co-written by Robert Hudson, who happened to post a comment to my earlier posting on NYMF promising me “as brilliant a night as you have ever had in your entire life”.

As the title would suggest, the story takes place early in the career of the famous London detective. It reports that Holmes met Watson, not in their teens as a fellow student in an elite boarding school as the 1985 film YOUNG SHERLOCK HOLMES proposes, but when he answered an ad for a “flatmate” placed by a weary Mrs. Hudson, tired to attending to Holmes on her own.

The villain in this entry in the Holmes saga is not Professor Moriarity but two larcenous nurses. The mystery for which Holmes has been hired to solve is not the most taxing one, and its solution fairly obvious, at least to me, but the various plot lines are played out with humor. A trio of “bobbies” who would rather be dancing is just one of the comic touches, as is Inspector Lestrade’s amorous feelings towards Mrs. Hudson. The story plays up Holmes’ implied “alternative life-style”, with indications that his interest in Dr. Watson is more than just as a scholarly companion, without overdoing it.

This is not the first musical interpretation of the famed detective. I saw Fritz Weaver as Sherlock Holmes, Peter Sallis as Dr Watson, Martin Gabel as Professor Moriarity and Inga Swenson as Irene Adler in the musical BAKER STREET as a youth in 1965. The show had a book by Jerome Coopersmith and music and lyrics by Marian Grudeff and Raymond Jessel, with some songs by Jerry Bock and Sheldon Harnick. It was directed by Hal Prince.

In between shows I had an early dinner of my usual Caesar Salad and Meat Loaf at a surprisingly empty “Joe Allen” on Restaurant Row. I finally confirmed with the waiter what I had always suspected - that the theme of the restaurant’s theatre posters was famous flops.

The evening show brought me back to the small TBG Theatre on 36th Street for the musical review THE KIDS LEFT, THE DOG DIES, NOW WHAT? At least half the audience for this sold-out opening night performance was a friend or acquaintance of the producer, who held up “traffic” receiving congratulations from each of them on the way out of the theatre.

As described on the promotional post card left on every seat, along with a promotional sticky pad, the show “follows a group of baby boomers valiantly struggling with the effect of gravity on their bodies, divorce on their hard-won bank accounts, grandchildren on their self-images, and the dating scene on their egos.”

Five talented performers, three women and two men, portray about 20 of the 78 Million baby boomers that are currently “defiantly hanging on to their youth” (this writer included) in a variety of scenes and songs (accompanied by only a piano), similar in concept to the long-running review I LOVE YOU, YOU’RE PERFECT, NOW CHANGE, although with an older outlook.

While the music in each of these productions was “toe-tapping”, one did not leave the theatre humming the scores. It points out the fact that the most difficult part of any musical comedy is writing a score of a dozen or so unique melodies, each moving along the story but also able to stand alone as a potential “standard”. The Rodgers and Harts or Hammersteins, Frank Loessers, Lerners and Lowes or Lanes, Jerry Hermans, Julie Stynes, and Stephen Sondheims of the world are indeed few and far between.

All in all 4 entertaining offerings, certainly a bargain at the $20.00 per ticket price.

FYI, there is only one week left before the curtain closes on this year’s New York Musical Theater Festival.

TTFN

TAXTOBERFEST IS HERE!

I just got the word from Kay Bell over at DON’T MESS WITH TAXES that “Tax Carnival #23: TaxtoberFest 2007” is now appearing at her blog. This installment includes my posting on “Some Important Points About Points”.

Let us raise a stein and celebrate!

DEMOCRAT PROPOSES A NEW TAX

Representative John Dingell of Michigan wants to tax carbon dioxide emissions.

According to Dingell, “The earth is getting warmer and human activities are a large part of the cause. We need to act in order to prevent a serious problem. The world’s best scientists agree we need to reduce greenhouse gas emissions by 60-80 percent by 2050 in order to limit the effects of global warming and this legislation will put us on track to do just that.”

His proposed Carbon Tax bill, in addition to taxing emissions and gasoline (on top of the current gas tax), also reduces, and eventually phases out, the itemized deduction for mortgage interest on houses over 3000 square feet.

“These homes have contributed to increased sprawl and longer commutes. Despite new homes in and of themselves being more energy efficient, the sheer size, sprawl and commutes lead to dramatically more energy use – or to put it more simply, a larger carbon footprint"

The mortgage interest deduction would be limited as follows:

· 85 percent of mortgage interest for homes 3,000-to-3,199 square feet
· 70 percent of mortgage interest for homes 3,200-to-3,399 square feet
· 55 percent of mortgage interest for homes 3,400-to-3,599 square feet
· 40 percent of mortgage interest for homes 3,600-to-3,799 square feet
· 25 percent of mortgage interest for homes 3,800-to-3,999 square feet
· 10 percent of mortgage interest for homes 4,000-to-4,199 square feet
· 0 percent of mortgage interest for homes 4200 square feet and up

Historical homes (those built prior to 1900) and farm houses would be exempt from the phase-out. Homeowners also could get exemptions if they purchase carbon offsets to make their homes carbon neutral or own homes that are certified carbon neutral.

Dingell estimates that 10 percent of homeowners would be affected by the proposed mortgage interest deduction changes, although recent surveys suggest the number is much higher.

The money raised by this Carbon Tax bill would be used as follows:

· Expand the Earned Income Credit (to help lower income families compensate for the increased taxes on fuels),

· Benefit the high way trust fund and the airport and airway trust fund, and

· Fund Medicare and Social Security, universal health care programs, the state Children’s Health Insurance Program, conservation, renewable energy research and development, and the low income Home Energy Assistance Program

So what do you think about all this? It’s not me asking – it is Dingell himself. You can submit your comments on his proposals here.

TTFN