Friday, November 30, 2007


Hey youse guys - I have posted a contest over at my other blog ANYTHING BUT TAXES.
Check it out!


Here’s a tax tip for retirees:

Many employers offer an Employee Stock Ownership Plan (ESOP), or allow employees to invest in company stock through their 401(k) or other qualified retirement plan.

Upon retirement or termination of employment you often have the option to rollover the balance in your former employer’s pension plan, including the stock, into an IRA. If your retirement plan contains appreciated employer stock you should not rollover the stock in the plan to an IRA.

Instead you should request that the shares of company stock be distributed to you. You will be taxed on your “basis” in the stock, which will generally be your contributions to purchase the stock over the years, in the year you receive the shares. You will not be taxed on the full market value of the stock.

The difference between your basis (the tax cost) and the market value of the stock is the “net unrealized appreciation” (NUA). This will not be taxed until you sell the stock. When you sell the stock the gain, including the NUA on the shares received, will be taxed at the long-term capital gains rate.

You do not have to hold on to the stock for a period of time, for example a year after the date of withdrawal. You can sell the stock right away. The shares are automatically considered to be long-term. You also can hold on to the stock as long as you want – perhaps selling off blocks of shares as money is needed or over a period of years to spread out the tax cost.

If the stock had been rolled-over into an IRA, when you withdrew money from the rollover IRA it would be fully taxed at ordinary income rates – you would lose the capital gain treatment on the NUA.

Of course if you withdraw the shares before your reach age 59½ (or possibly age 55) you will be subject to the 10% premature withdrawal penalty on the basis of the stock withdrawn.


Thursday, November 29, 2007


You know, the answer to just about any tax question that begins with “can I deduct” is “it depends”. And I do mean just about any question.

Can I deduct my cat? The obvious answer is a definite no (and certainly not as a “dependent”). But what about the owner of the cat who plays Morris in the tv commercials. The cat is what generates the income of his owner. And did you know you could deduct the cost of moving the family pet to a new home, if the move itself is deductible (I think I mentioned this in an earlier post).

Similarly, can I deduct cat food? Again one would expect the definitive answer to be no, except for Morris above. But a business deduction has been allowed for a scrap yard owner who used the food to attract wild cats who would chase away mice and snakes from the yard (Samuel T. Seawright, Et Ux., (2001) 117 TC No. 24).

Almost all “can I deduct” questions – such as can I deduct my cell phone or my car or my answering machine – requires that I ask the question, “Do you use it for business?” But not all.

Can I deduct commuting? The usual answer is no. But in T.C. Summary Opinion 2004-74 the court upheld that transportation costs to and from work are allowed as a medical deduction under Section 213 if the employment itself was explicitly prescribed as therapy to treat a medical condition. And you can deduct travel between home and a temporary work location (the job is expected to last and actually does last for one year or less) that is outside of the “metropolitan area” where you live and normally work.

Can I deduct the cost of a wig? You can if prescribed by a doctor for your mental health when hair loss was caused by a disease or accident. And many years ago we had a client who we called the “wig lady”. She was an undercover store detective who posed as a shopper to catch shoplifters, and often wore disguises in the course of her work – including wigs.

Can I deduct clarinet lessons? You can deduct both the clarinet and the lessons if prescribed by a doctor or dentist to help correct an overbite (Rev Rul 62-210).

Pretty much anything that a qualified medical professional will explicitly prescribe to treat a specific medical disease or condition will be deductible.

Can I deduct mortgage interest depends on the nature of the mortgage (acquisition debt or home equity), the amount of the loan principal, the purpose of the loan, and the number of personal properties you own. See my post on “So What Do I Think?”.

The answer to “Can I deduct my real estate taxes” is not always yes. It depends on whether or not you actually own the property and are liable for the taxes. However, there have been occasions where a person whose name was not on the title could deduct the taxes (i.e. a married couple live in and pay all the bills, including mortgage and taxes, for a home whose title is in the name of the husband’s parents).

Can I deduct charitable contributions now depends on whether or not you have the proper documentation as well as to whom the contributions are made.

And, of course, you can only deduct many of the above items if you are able to itemize on Schedule A – and medical or miscellaneous investment and job-related expenses are only deductible to the extent they exceed a percentage of AGI.

So, can you deduct dry cleaning? It depends!


Wednesday, November 28, 2007


Sorry to be so late in getting this breaking news to you – but, as usual for Wednesday, I was out of “the office” all day and just got back.
The IRS has issued the new “standard mileage rates” effective for travel on or after January 1, 2008. It seems to me that the announcement is later than usual this year.
The 2008 rate for business travel will be 50.5 cents per mile, up from 48.5 cents in 2007. Depreciation represents 21 cents per mile of this rate (up from 19 cents per mile for 2007).
The standard mileage rate is based on the fixed and variable costs of operating an automobile for business, including depreciation, maintenance, repairs, insurance, license and registration fees, and the price of gasoline.

The standard rate for miles driven for medical or moving purposes, based on a different calculation than that used for business driving, will drop from 20 cents a mile in 2007 to 19 cents per mile for 2008.
The rate for driving related to charitable purposes, set by Congress, remains at 14 cents a mile. This rate has remained unchanged for several years now.


Q. Please tell me: What is the 2007 Federal gross income allowed for a married couple filing jointly? My husband is 65 and I am 64. We are both on Social Security and between the 2 of us half of that total is under $32K.

As I understand it, if we don't earn up to a certain amount we don't have to file. I believe last year the amount was $17,900. Is it the same this year? Where can I find that figure each year? I've tried using the IRS official website, but couldn't find it.



A. The “filing threshold” for your situation for 2007 would be $18,550.00. This amount is listed in Chart A on Page 6 of the 2007 Form 1040 instructions.

The amount is determined as follows:

Standard Deduction for Married Filing Joint = $10,700.00
Plus the Additional Standard Deduction for Age 65 = $ 1,050.00 (1 person)
Plus the Personal Exemption of $3,400.00 x 2 = $6,800.00

When determining your filing threshold you would include the “gross proceeds” from the sale of investments and not the net taxable gain. You would have to file a Form 1040 Schedule D to report the cost basis of the investments sold even if your net Adjusted Gross Income was less than $18,550.00.
To determine if any of your Social Security benefits would be taxed you first take ½ of your combined total gross benefits (before deducting the Medicare premiums withheld). To that you add the total of your other net taxable income plus any tax-exempt interest that would be reported on Line 8b of the 1040. From this amount you subtract any “adjustments to income” that would be claimed on Form 1040 lines 23 through 32 (i.e. educator expenses, HSA contribution, moving expenses, alimony, IRA, SEP SIMPLE or Keogh contributions, and early withdrawal penalty on CDs). If the result is less than $32,000 none of your Social Security benefits will be taxable.

FYI, your filing threshold for 2008, when you will both be age 65 or older, is $20,000.00.

The information necessary to determine your filing threshold is available on the WHAT’S NEW FOR 2007 and WHAT’S NEW FOR 2008 Pages of my website. Each year I add a new WHAT'S NEW FOR Page.


Tuesday, November 27, 2007


"Mark Minassian's US Business Law / Taxes Blog" at recently reported that “each year, the Small Business & Entrepreneurship (SBE) Council releases its Small Business Survival Index. The index rates all 50 states on their suitability for fostering small business startup and growth based on a variety of factors, including personal and corporate tax rates, property tax rates, health care regulation, unemployment rates and workers compensation costs.”

Once again the state with the worst business climate was New Jersey. Mark points out that “high tax rates are the common denominator of the states at the bottom”. My reply to this ranking, as one who lives in and is all too familiar with the taxes of New Jersey, is “Constipation, Mr. Holmes!”

FYI, New York is #46 and California is #49. The top 5 are South Dakota, Nevada, Wyoming, Washington, and Florida.


Monday, November 26, 2007


I prepare 1040s. That is what I do for a living. I have been preparing 1040s for 35 years. Each year I attend between 20 and 60 hours of continuing education on 1040s to keep up-to-date on new developments.

Over the years clients have asked me to fill out, or at least help them fill out, all kinds of non-tax forms and applications - mortgage or loan applications, census forms, college financial aid applications, prescription drug or utility discount program applications, immigration forms, etc, etc, etc.

I do not prepare these forms for a living. I do not have any special training or experience in filling out these types of forms or applications. For the most part I do not even fill them out for myself.

I do not know why clients expect that I know how to complete these things. I suppose because 1040s have to do with numbers and so do these forms and applications then I should be able to complete them just like that. Or perhaps it is that most of these forms are for some kind of government program or reporting, and if I know the Tax Code I must also know every other federal and state government code, regulation, etc.

I do not like to fill out these forms, and, for the most part, do not want to fill out these forms. Especially during the tax filing season, when I barely have time to relieve myself let alone deal with non-1040 items. When asked to prepare such a form I do exactly what the client would have to do – read the instructions and attempt to answer the questions as best I can. I have no special insight to reading and understanding instructions.

I can, and do, happily provide specific answers for the part of the student college financial aid form that deals with the information reported on the parents’ and student’s tax returns. I can understand clients asking me this specific information, and have no problem providing it. However, I do not want to fill out the entire form.

And, while technically not tax forms, I also do prepare the NJ property tax rebate application for clients – at it is easy to do online and requires certain information reported on the NJ-1040. I will also prepare the PTR-1 or PTR-2 “senior freeze” application, although, to be perfectly honest, I would actually prefer not to.

How do I charge for doing something I know nothing about? Often clients will give me $10.00 or $20.00 for filling out the form as a “tip”. Perhaps I should apply my hourly rate in these situations and charge clients a minimum of $50.00 per form or application for taking up my valuable time – maybe this would stop them from asking me to fill out non-tax forms.

I do know that some tax professionals attempt to build up a sideline income by preparing financial aid and other such forms – but they actually have some training and experience in the area. This is not something that I want to do.

So clients - take a hint and do not bring such forms and applications to me along with your 1040s!

And fellow tax professionals – how do you feel about this issue?


Saturday, November 24, 2007


Not much buzz this week, considering the holiday.

* TAX PROF Paul Caron brings to our attention an article from the Dallas Morning News that reports “While presidential contenders in both parties denounce the AMT, few offer even a cursory explanation of how they would pay to scrap it or keep it from spreading.”

Speaking of the TAX PROF, as expected Paul provides links to all the appropriate press releases and reporting on George W’s nomination of
Douglas H. Shulman, Vice Chairman of the Financial Industry Regulatory Authority (formerly known as the National Association of Securities Dealers), to be Commissioner of the Internal Revenue Service.

* Wow! THE WANDERING TAX PRO has been nominated in the tax category as one of the "Twelve Blogs of Christmas" in Dan Meyer’s 3rd annual award presentation at TICK MARKS. Click here to check out the previous 2 years’ winners. Dan will be posting winners between now and Christmas.


Friday, November 23, 2007


A few of my previous postings have generated some interesting comments.
For my posting “
ASK THE TAX PRO – STATE TAXES FOR A NJ RESIDENT WORKING IN NYC” I have received and responded to several additional questions about NJ and NY state taxes, particularly on the issue of “nexus” - the connection required to exist between a state and a potential taxpayer such that the state has the constitutional right to impose a tax.

Over at “
ASK THE TAX PRO – ALLOWED OR ALLOWABLE” I have been carrying on a discussion on the issue of depreciation recapture as it relates to the home office deduction for a one-man corporation with a CPA.

I am disappointed that I have not received any comments on my suggestion that we do away with the depreciation deduction for real estate on the 1040 in my post “
HERE IS SOMETHING TO THINK ABOUT.” I had especially hoped to hear the opinions of my fellow tax bloggers.

I welcome comments and questions on any of my postings. Let me know if you agree with me or think I am dead wrong, or if you need further clarification on the issue discussed. You are certainly welcome to “weigh in” on the above two discussions.

You may want to review my post “
BTW, todays posting at ANYTHING BUT TAXES is a discussion of acronyms.

Thursday, November 22, 2007

May your stuffing be tasty,
May your turkey plump,
May your potatoes and gravy
Have never a lump.
May your yams be delicious
And your pies take the prize.
And may your Thanksgiving dinner
Stay off your thighs!

Happy Thanksgiving Everyone!

Wednesday, November 21, 2007


Q. Are the distributions from an S Corporation taxed as a qualified dividend at 15% or at the shareholders’ marginal tax rate? Is there any way for an S Corporation distribution to be taxed as a qualified dividend or capital gain?
A. “Distributions” from a "Subchapter S" corporation are generally tax-free, as they usually represent a payment of “previously taxed income”.
Sub-S distributions are not considered to be dividends. For tax purposes they are treated as “drawings” from the shareholders’ “capital account” (called here an "Accumulated Adjustments Account”), similar to a way distributions from a partnership are treated.
The income and expenses of a Sub-S corporation are passed-through to the shareholders. Shareholders are taxed on the income of the corporation whether or not they actually receive a distribution. The income is taxed when it is earned by the corporation, and not when it is distributed to the shareholder. Again, this is basically the same tax treatment as a partnership.
The income and deductions passed through from a Sub-S corporation are reported on the Form 1040 of the shareholders, and are taxed based on the individual nature of the item. Ordinary business income is passed through as ordinary income on Schedule E and is taxed at ordinary “marginal” income tax rates. Interest, dividends, capital gains dividends and short and long term capital gains from the sale of assets that are received by a Sub-S corporation are taxed by the shareholder as interest, dividends and capital gains, and are reported on Schedule B or Schedule D.
Interest is taxed as ordinary income, dividends are taxed as either ordinary income or qualified dividends (at lower capital gain rate) depending on the original source of the dividend, capital gain dividends are taxed as long-term gains, short-term capital gains are taxed as ordinary income and long-term gains are taxed at the appropriate capital gains rate.
Similarly, any charitable contributions, investment expenses and Section 179 expense from the corporation are “separately stated” on the appropriate 1040 schedule or form, as are “tax preference items” that affect the dreaded Alternative Minimum Tax.
The only possible way a distribution from a Sub-S corporation could be taxed as a qualified dividend, at the lower capital gain rate, is if the corporation had “earnings and profits” (E&P) from prior tax years during which it operated as a “C” corporation. For example, the corporation was formed in 2000, but did not elect Sub-S status until 2004, and it had accumulated net profits from the period of operation as a “regular” corporation. A distribution from E&P could be taxed as a “qualified dividend”.
The IRS has “ordering rules” to determine how a distribution made by a Sub-S corporation with E&P is taxed. Distributions are first considered to be from the “Accumulated Adjustments Account” (AAA) – income generated by the Sub-S corporation that has been previously taxed to the shareholders. These distributions are tax-free. Any distribution in excess of AAA is considered first to be from E&P and taxed as dividends.
Under IRC 1368(e)(3) you can make a special election to take distributions first from E&P instead of AAA. The election is made on a year-by-year basis.

The only time a distribution from a Sub-S corporation could be treated as a capital gain is if the distribution is in excess of the taxpayer’s "basis" in the Sub-S corp. This is last on the list in the “ordering rules”.
As mentioned above, qualified dividends earned by the Sub-S corporation that are passed through to the shareholder are taxed at the special capital gain rates, as are passed-through capital gain dividends and long-term capital gains.
BTW, todays posting to ANYTHING BUT TAXES contains lots of interesting "stuff".


Tuesday, November 20, 2007


Perhaps the best piece of tax advice I can give anyone is DON’T ACCEPT TAX ADVICE FROM ANYONE OTHER THAN A PROFESSIONAL TAX PREPARER.

Don’t listen to a broker, a banker, an insurance salesman, or your Uncle Charlie!

You wouldn’t ask your butcher for a medical opinion, so why would you listen to tax advice from your MD?

Many people in the “financial industry” may be experts in their particular field, but know absolutely nothing at all about federal or state income taxes. Well maybe not nothing. They may have a little knowledge about taxes – but in this case a little knowledge can truly be dangerous.

I am sure for the most part those who give you free tax advice are doing so out of a genuine desire to help you, and sincerely think they know what they are talking about. But there are also those out there who are only interested in making a commission by selling you an annuity or other investment and give you false tax advice to try to convince you to give them your money.

For a case in point I refer you to TAX GURU Kerry Kerstetter’s post “Beware Taking Advice From An Insurance Salesman”.

Remember, an insurance broker is a salesman, as is a stock broker. They make their money by selling you something. So take anything they tell you regarding taxes with several grains of salt.

If you are given any tax information by any non-tax person be sure to check it out with your own tax professional before taking any action. You may have to pay your tax pro a few bucks for the consultation – but it is money well spent, and far more preferable to losing thousands of dollars by following bad advice.

If you don’t have a tax professional you can turn to you can find one in your area at Or you can always ASK THE TAX PRO!

BTW, today’s post at ANYTHING BUT TAXES discusses movie sequels.


Monday, November 19, 2007


In a letter enclosed with her birthday card to me my cousin asked a tax question about claiming her daughter for 2007.

Her daughter lives “at home”. She became employed teaching 3rd grade in the fall of the year and is expected to earn about $12,000 for 2007. “I am wondering since we supported her for the first 9 months of 2007 {including about $7,000 in college tuition – rdf}, can we claim her?” my cousin asked.

I emailed my cousin explaining the rules for who qualifies as a dependent – under age 24 and a full-time student for 5 months of the year. She responded that her daughter graduated in mid June and turned 24 in September, “so it sounds like a go for 2007”.

I emailed her back and explained that unfortunately the "under age 24" rule does not apply to the period for which the dependent was a full-time student, or for the period during which the parents provided his/her support, but to the entire calendar year. If her daughter turned 24 in September of 2007, my cousin does not get her for 2007. To claim a dependent on your 2007 Form 1040 the “child” must be enrolled as a full-time student during any part of any five months during 2007 and under age 24 on December 31, 2007.

So it is not a go for 2007. The parents cannot claim my 2nd cousin as a dependent on their 2007 Form 1040. However, the daughter will be able to claim an education tax credit for her 2007 tuition on her own return, even if the tuition was actually paid by her parents, which should wipe out any federal tax liability. While a qualified “educator” (i.e. teaching 3rd grade), the daughter will not be able to claim the $250 “above-the-line” deduction for “educator expenses” because she did not spend at least 900 hours during a school year as an educator in 2007. But she will not need the deduction – the tuition credit will be enough to bring her liability to “0”.
BTW - today's posting at my ANYTHING BUT TAXES blog deals with the difference between debit and credit cards.

Sunday, November 18, 2007


I have turned my birthday celebration into a 3-day week-end affair.

I started on Friday night with a dinner of Veal Saltimbocca and Chocolate Cake at RENATO’S, a true hidden treasure behind the pizza parlor next to the police station in the heights section of Jersey City. While it has been around for a while now I only discovered it three years ago Christmas Eve.

Saturday it was Chicken Picata and Chocolate Moose Cake at GINO’S RESTAURANT, about two blocks from my apartmant.

This afternoon I will be off to Madison to see a matinee performance of “The Musical Comedy Murders of 1940” at the Bickford Theatre and then to MARCO POLO in Summit for a couple of greasy cheeseburgers – the best cheeseburger in the world!

I have also celebrated my natal day by creating a new blog – ANYTHING BUT TAXES. Check it out!


Saturday, November 17, 2007


An article on the homepage reports that George W today has demanded that Congress send him legislation that keeps middle-class Americans from being hit at tax time next year by the dreaded alternative minimum tax. This even though he has promised to veto the House-passed AMT fix and tax break extender bill.


Today is the first day of the rest of your life. And tomorrow is the first day of my 55th year, since it will be the 54th anniversary of my birth. For those of you who are looking a bit confused, I started out as a paid tax preparer during the 2nd half of my freshman year in college (age 18) – so I have been doing 1040s professionally for 2/3 of my life!

* Jeremy Vohwinkle of ABOUT.COM: FINANCIAL PLANNING started the week off right with a discussion of the fact that “compound interest is a wonderful thing and the longer your money has to grow, the more it will grow” in his posting “How Much Should I Save for My Childs College Education?”. My only comment is that his use of 11% average annual return may be a bit high to aim for.

* GC of the MY OPTIONS TRADING JOURNAL blog, which I discovered from one of the “widgets” in the right hand margin, provides an excellent discussion of “
What is Sub-Prime Mortgage?
* The Silicon Valley Blogger of THE DIGERATI LIFE: A Blog About Money, Personal Finance, Geeks and Cyberspace… Here In Silicon Valley has some interesting suggestions in his post “Force Yourself To Save! 15 Painless Ways To Pay Yourself First”, many of which I agree with. I do take exception to his #14 – “Request for higher income withholding”, for which he actually provides a disclaimer. Rather than having more tax withheld, I would take the additional amount that would have been withheld and have it automatically deposited in a credit union money market account, or some other form of “current” (i.e. non-retirement) saving or investing account that can be directly transferred from your paycheck.
* William Perez of
ABOUT.COM: TAX PLANNING reports on a website that is “devoted to understanding and explaining how the federal government raises and spends money” in his post “How the Government Spends Your Tax Dollars”.

* Thursday’s CCH email tax newsletter reported in “
Baucus Plans Estate Tax Fix in '08; Major Overhaul in '09” that “At a November 14 Senate Finance Committee hearing, Republicans and Democrats, in rare agreement, said that the current estate tax situation is a quagmire and needs to be fixed”.
* The TAX GIRL discusses the federal free e-file program and the Free File Alliance in her post “Does the E in E-file Mean Excessive?”. Check out my comment on the posting.
Kay Bell also puts in her 2 cents on the topic in “Free File Foes Head to Court” over at DON’T MESS WITH TAXES.
* Click on “IRS Has $110 Million in Refund Checks Looking for a Home” to see if you are one of the 115,478 taxpayers who are due refund checks totaling about $110 million that were returned to the IRS as undeliverable.
* My birthday isn’t the only one being celebrated this week. Kay Bell’s DON’T MESS WITH TAXES blog turned 2 on Wednesday (November 14th). Happy Birthday to DMWT! And Kay, I like your site's new look.

* Every now and then Congress, or at least some of its members, actually does something right. On Thursday Senate Finance Committee Chairman Max Baucus and Ranking Member Chuck Grassley introduced legislation to prohibit the Patent and Trademark Office from granting patents for common tax strategies and tax planning inventions.
* The Tax Foundation posed “some questions on fiscal policy that we would like to see asked of the candidates” in Friday night’s Democratic debate in Las Vegas” in its post “Questions for Tonight's Democratic Debate” at TAX POLICY BLOG. Here is one that I especially like -
“Currently, approximately one-third of all tax returns have no individual income tax liability due to the various credits and deductions in the code. But many of you have proposed various tax credits for certain purposes, whether it's education, health expenditures, or housing. How can you provide these credits to those who have no individual income tax liability unless you make these credits refundable? And if you are making these credits refundable, what is the difference between this and merely increasing spending through some traditional budget program? Shouldn't it come down to whether or not the IRS or some government agency like HHS is more efficient at achieving the goal you are seeking?”
Someone will have to let me know if this question was asked and answered.

Friday, November 16, 2007


* I am in the “Carnival of Everything Finance #7” at the EVERYTHING FINANCE blog.

* FIRE FINANCE has issued a listing of the “
Top 100 Personal Finance Blogs - Ranked By Traffic” for October 2007. Of 800 PF blogs THE WANDERING TAX PRO was #42 on the SiteMeter Rankings list! The only other tax blog on this particular listing is DON’T MESS WITH TAXES at #29. Kay is also #10 on the Quantcast Rankings list.


“The latest uncertainty arises from the inability of the Congress to fix the alternative minimum tax. Or, more precisely, it arises from the inability of the Congress to turn its attention in a timely way to the question. The problems with the AMT are not new and did not surface yesterday. The problems have been growing during the past few years, and they were predicted by tax experts even earlier. The need to repair the AMT is not an emergency like the devastation of a hurricane. It is not sudden and unexpected. It is not the product of uncontrollable nature but the result of bad planning and design by the very institution, the Congress, that now stumbles to clean up its own failures.”
The above is an excellent summary of the AMT dilemma by Prof Jim Maule of MAULED AGAIN from his post “When Congress Can't Do Things On Time”.

The IRS continues to comment that the longer Congress takes to pass the fix the longer it will take to process returns with AMT, or who would have had to pay AMT under the old rules – so taxpayers will have to wait longer than necessary to get their refund checks.

So where the fakawi?

CCH reports that “Senate Democratic leaders said on November 15 that they would attempt to pass the House-approved alternative minimum tax (AMT)/extenders bill (the Temporary Tax Relief Bill of 2007 - H.R. 3996) by unanimous consent (UC) before recessing for the Thanksgiving holiday. If the UC fails as expected, the Senate plans to turn to an amendment offered by Senate Finance Committee Chairman Max Baucus, D-Mont., that would provide a one-year AMT patch without offsets and a two-year extension of expiring tax provisions with the cost offset.”
The National Association of Tax Professionals has prepared four different scenarios detailing how late passage of AMT legislation will affect taxpayers.

In one of the scenarios a married couple with 2 children, wages of $75,000, itemized deductions of $26,000 and $6,000 in qualifying day care expenses would pay $5,489 more in federal income tax if there is no AMT fix! They would pay $4,289 in AMT (in addition to $3,511 in regular tax) – there would be no AMT with the “patch” – and lose the $1,200 Credit for Child and Dependent Care Expenses. Oi vey!

The taxpayers would get a refund with or without an AMT fix - $6,189 with and $700 without. However, if an AMT fix is passed it will take much longer than usual for the check to make its way to the taxpayers.

BTW, my comments on the dreaded Alternative Minimum Tax lead off the “View Point” column in the current (Fall 2007) issue of the National Association of Tax Professionals’ quarterly TAXPRO JOURNAL. Click here to check it out.


I have a unique tax simplification proposal. I haven’t heard it discussed or proposed anywhere else. I submit it is something to think about.

What if we did away with the depreciation deduction for real estate?

According to the IRS, depreciation is “an income tax deduction that allows a taxpayer to recover the cost or other basis of certain property. It is an annual allowance for the wear and tear, deterioration, or obsolescence of the property”. The IRS discusses depreciation in detail in Publication 946 - How To Depreciate Property.

Let’s look at depreciation from the point of view of the Income Statement. Basically, if you purchase an asset (i.e. equipment, a vehicle, or real estate) that will last more than one year you spread the cost of the asset over its “useful life”. You purchase a new computer. You certainly do not purchase a new computer each year – you expect that it will continue to provide service for several years. So you divide the cost of the computer over a period of years to reflect this fact, and to properly report the “economic reality” of the purchase.

If you deducted the full cost of the computer in the year of purchase this would distort the true cost of doing business. Since you generally purchase a new computer every five years, claiming a deduction of 1/5 of the cost each year “more better” represents your cost of operations.

Thus depreciation is used to “recover the cost or other basis of certain property”.

Another way to look at depreciation is from the Balance Sheet perspective. When you purchase an asset that asset has value to you. You trade the asset of cash for a computer. If you sold your business the value of the computer would be included in the value of the business. As an asset ages its value drops. A two-year old computer does not have the same value in the market as a comparable brand new computer. Depreciation is used to reflect the drop in value of the asset.

Thus depreciation is used to reflect the “wear and tear, deterioration, or obsolescence of the property.”

There are several ways to depreciate an asset. The simplest method is “Straight Line”. You deduct the cost of the asset evenly over its life. If you purchase a computer for $1000 and you expect it to last for five years you would deduct $200 per year. There are also “accelerated” methods which recognize that the value of an asset will be reduced disproportionately, with the reduction in value being greater in the earlier years. As you well know, when you buy a new car it drops in value the minute you drive it off the lot.

To simplify matters, the government provides guidelines for the “useful” life of different types of assets. The current depreciation system is called the “Modified Accelerated Cost Recovery System” (MACRS), which came about with the Tax Reform Act of 1986. MACRS is divided into two separate depreciation systems:

General Depreciation System (GDS) – this is “regular” MACRS and is used most often. It provides the shortest “recovery periods”. You can use the accelerated “150% Declining Balance” method or the Straight Line method over the GDS recovery period.

Alternative Depreciation System (ADS) – you can elect to deduct the cost of the asset over a longer life using the Straight Line method. In some instances, such as for “listed property” which is used less than 50% of the time for business, ADS must be used.

MACRS allows the cost of the asset, other than real estate or improvements thereto, to be deducted over 3, 5, 7 and 10 years. The most common recovery periods are 5-year, for cars, computers, copiers, typewriters and software, and 7-year, for furniture and fixtures.

For tax deduction purposes depreciation begins when the asset is “placed in service” and not necessarily when it was purchased. If I purchase and pay for a computer online in December of 2007, but the computer is not delivered to my office until the first week of January 2008, then depreciation begins in January and I can begin to deduct depreciation on the computer in tax year 2008.

Tax rules call for a “half-year convention”, which treats all assets whose cost recovery begins during the year as being placed in service on the midpoint of the year. It basically allows for 6 months of depreciation. Under certain circumstances assets can be depreciated using a “mid-quarter” convention, provided a greater first year depreciation for assets purchased early in the year.

Real estate is treated differently in the Tax Code. First of all the cost of land is never depreciated. So one must remove the value of the land from the purchase price of the property. The adjusted purchase price of Residential Real Estate, including residential rental property, is recovered over a “useful life” of 27.5 years. Non-residential Real Estate (i.e. commercial property), including the portion of a residence that is used as a home office, has a useful life of 39 years. The depreciation of real estate uses a “mid-month” convention.

If we look at economic reality, a building has a life of much more than 27.5 or 39 years. The building I lived in before moving to my current apartment was 100 year old and still going strong. And, for the most part, the value of real estate does not drop in value over the years. If properly maintained its value will generally increase. My parents purchased their first home for $13,000 and sold it many, many years later for $75,000 (and they were robbed).

For all intents and purposes, again for the most part, real estate does not “depreciate”. You do not replace a building every few years because it no longer provides the same service or function. And the value of real estate as a component of the value of a business does not drop as it ages. So why do we allow a tax deduction for the depreciation of real estate?

Where depreciation of real estate comes into play most often in the world of 1040s, at least in my 35 years of experience, is with the rental of a 2-family building. One floor of the building is used as the personal residence of the owner and the other is rented out. Depreciation is claimed as a deduction against rental income on Schedule E and, in most cases, either creates or increases a tax loss. It is possible for the rental activity to provide positive cash flow, but because of the depreciation deduction result in a deductible loss. The depreciation deduction can increase the return’s refund by up to $1,000 or more!

The problem arises when the taxpayer(s) sell the property.

With a two-family house as described above, if the required conditions are met one half of the gain on the sale, up to $250,000 or $500,000 depending on filing status, is eligible for exclusion under Section 121. The other half is taxable as a capital gain. Any depreciation “allowed or allowable” (see my post on “Ask The Tax Pro – Allowed or Allowable”) over the years must be “recaptured”, or added back, to the taxable gain from the rental half of the property.

If the total net gain on the sale of the property is $100,000, generally (but not necessarily if, for example, capital improvements were made directly to the rental half) $50,000 will be allocated to the personal residence and $50,000 to the rental activity. If the taxpayer claimed $25,000 in depreciation on Schedule E over the years, or was entitled to claim $25,000 in depreciation (the “allowable” portion of “allowed or allowable”), the taxable capital gain is $75,000.

While long-term capital gain is taxed at 5% or 15%, gain resulting from depreciation recapture can be taxed at up to a maximum of 25%. In the above example, if the taxpayer was in the 25% bracket before adding the capital gain, $50,000 is fully taxed at 15%, for $7,500 in tax, and the $25,000 depreciation recapture would be taxed at 25%, for $6,250 in tax, resulting in total federal tax of $13,750 (effective 18 1/3% tax) – plus the appropriate state income tax on $75,000.

The above is the tax reality. But here is what the taxpayer will probably be thinking:

· “I sold my personal residence and my gain was only $100,000 – so I do not have to pay any federal or state income taxes!” – or

· “Since it was a two family house I only have to pay tax on half the profit - $50,000!” – or, worst of all

· “Hey, I just bought a new house that cost more than what I sold the old one for, so there is no tax!”

What is “more bad” is if the sale, after claiming all closing costs from the purchase and sale and capital improvements made over the years but before factoring in the depreciation recapture, results in a net loss! If we assume $25,000 in depreciation recapture against a $5,000 loss (50%) that is $20,000 taxed at up to 25%, or $5,000 in federal tax, plus state tax on the $20,000. You have to answer your client when he screams, “but I lost money – why am I paying tax?”

It is possible that recaptured depreciation can add $12,000+ to the overall federal and state tax bill – which more often than not comes as a complete shock to the taxpayer. And of course I was not told about the sale, which happened in May, until I get the client’s “stuff” in March of the following year. And again of course, the taxpayer did not increase withholding or make any estimated tax payments to cover the gain.

You try to explain to the client that he/she/they was/were saving $500-$1,000 each year by deducting the depreciation in the past, and now they are just paying “Sam” back – but clients cannot always understand or accept this. That $500-$1,000 per year was spent a long time ago!

In the “good old days”, when ordinary income rates were higher and there was a 50% or 60% capital gain exclusion (I am dating myself again) instead of reduced capital gain rates, it was easier to show a client that he actually made money in the long run by claiming depreciation – but not so today when the possible 25% rate on depreciation recapture could be the same as the rate for ordinary income.

And you won’t avoid the problem simply by not deducting depreciation when it is “allowable” – back to the “allowed or allowable” rule.

So we can see that in the long run depreciating real estate on the 1040 only results in increased “agita” for both taxpayer and tax professional.

Doing away with this deduction would provide “Uncle Sam”, and corresponding state uncles or aunts, with additional tax money up front, instead of having to wait years or decades to finally collect it. And bottom line - doing away with the depreciation deduction would more correctly tax the actual economic activity.

Recent court cases and IRS regulations have more clearly defined the difference between a capital improvement that is depreciated and a repair that is currently deducted, moving away from the dollar amount as the criteria and towards the nature of the expense as the determining factor. This is a topic for another posting. Under my suggestion there would also be no depreciation of true capital improvements – they would simply be added to cost basis.

No longer “allowing” the depreciation of real estate would not only affect the tax on the sale of rental property, but also remove the need for a taxpayer to recapture depreciation claimed on a home office when the residence is sold.

As THE WANDERING TAX PRO deals with individual income tax issues I will not go into this suggestion from a corporate tax point of view, at least at this time. Perhaps I will discuss it in a future posting.

So, what do you think - should we do away with the depreciation deduction for real estate, at least on the 1040? I am especially interested in hearing the opinions of my fellow tax bloggers.

This post has been especially long, and I apologize if it was because of my being long-winded.


Thursday, November 15, 2007


According to New York Times economics columnist N. Gregory Man, “Republican consultants advise using the word 'tax' only if followed immediately by the word 'cut.' Democratic consultants recommend the word 'tax' be followed by 'on the rich’.” Why doesn’t anyone try following the word ‘tax’ with ‘simplification’ anymore?
And economist Martin A. Sullivan points out that, “There may be liberty and justice for all, but there are tax breaks only for some." Rarely for the middle class taxpayers who need it most!
That said, on to more “stuff” from the Monday’s Year-End Tax Update Seminar -
In order to avoid the 10% penalty on a premature withdrawal from an IRA or pension plan, the distribution must be "rolled over" to an IRA or other qualified plan within 60 days. Often a taxpayer will use this 60-day rule to take a short-term loan from an IRA or pension account.

Originally this rule could only be waived if the taxpayer was performing military service or was affected by a Presidential-declared disaster or a terrorist or military action. However, the Economic Growth and Tax Relief Reconciliation Act of 2001 gave the IRS the authority to waive the 60-day rule when failure to do so would be "against equity or good conscience".

IRS Rev. Proc. 2003-16 states that the 60-day rule may be waived in hardship cases and when the taxpayer has made a good faith effort to comply with the rule but did not do so through no fault of his/her own.

A waiver will be automatically granted if the taxpayer instructed a financial institution to deposit the rollover into a qualifying plan but the institution failed to do so. The financial institution must have received the funds within the 60-day period and the taxpayer must have followed all the procedures required by the financial institution for an IRA rollover. The financial institution’s FU must be fixed, and the money deposited into a qualified IRA account, within one year from the beginning of the original 60-day period.

To get the 60-day rule waived in any other situation (casualty, death, disability, disaster, hospitalization, incarceration, postal error, restrictions imposed by a foreign country, etc) a taxpayer must request a "private letter ruling" (PLR). There is a substantial fee for requesting a PLR to waive the 60-day rule.

The book for the NATP “Famous 1040 Workshop” I attended on Monday provided a chart of how the IRS has ruled on this issue in recent PLRs.

A waiver was granted when a taxpayer’s mother, and another’s mother-in-law, died during the 60-day period, when mental and physical illness impaired taxpayers’ ability to handle his/her financial affairs, and in the case of a hurricane.

Waivers have also been granted when taxpayers were not given correct or timely advice on the subject by a qualified professional financial advisor on whom the taxpayers had relied. So you are not stuck if your broker or banker, who wrongly think they know all about taxes, FU-ed. A waiver was not granted when the bad advice came from a friend or relative. In one situation a friend told a taxpayer that he could take totally tax-free distributions from his traditional IRA once he turned age 59½. So don’t rely on tax advice from your neighbor or drinking buddy or Uncle Ira!

The current issue of NATP’s TAXPRO MONTHLY reports in detail on a recent PLR (200736036) for which the 60-day waiver was denied.

Here’s the story:

A taxpayer changed jobs and wanted to rollover the funds from his former employer’s 401(k) into an IRA. He went online to the website of a financial institution and opened what he thought was an IRA account. The paperwork he submitted to the 401(k) plan indicated that he would be depositing the money into an IRA account at the financial institution. The plan sent the taxpayer a check payable to the financial institution, which he mailed to the institution with an IRA deposit slip indicating the number of the account he had opened online. The assumed rollover was made well within the 60-day period.

The taxpayer was surprised to receive a Form 1099-INT for the account the following January. This was his first indication that the account he had opened online was not an IRA account. He requested a PLR to waive the 60-day rollover period so he could correct the error. In submitting the facts of the case to the IRS the taxpayer indicated that the financial institution claimed it never received the IRA deposit slip.

While this does involve a bank FU, it is more of a misunderstanding or miscommunication between the taxpayer and the financial institution. A waiver was granted by the IRS in several previous PLRs involving miscommunication.

Unfortunately in this situation the IRS took a hard line and denied the waiver, claiming that the taxpayer was solely responsible for the FU.

I suppose that the taxpayer could have been able to tell from the online confirmation for the opening of the account that it was not an IRA. An IRA account would have “IRA” in the title in some way.

The moral of the story is that with something as important as the rollover of substantial 401(k) funds you should not use the internet, but deal face to face, or at least by telephone, with a real person from the financial institution so you can make it clear that you want an IRA account. The NATP article advises to let the financial institution set up and facilitate the rollover. Then, “if a mistake occurs, it is likely that relief will be granted because of the financial institution being responsible instead of the taxpayer himself.”


Wednesday, November 14, 2007


Q. I read your article entitled "Home Office Expenses of a One-Man Corporation" and found it very helpful. One point you made in the article is that you cannot reimburse for depreciation on the home office. Then later, you said that when you sell your home you do not have to recapture the depreciation unless you were reimbursed for it. Keep in mind, I am summarizing and leaving out some of your discussion.
I have understood that you have to recapture the greater of the allowed or the allowable on depreciation. That being the case, if my understanding is correct, would you not have to recapture the depreciation that you could have somehow taken using the office in home? In other words, isn't depreciation required to be computed even though you did not claim the deduction anywhere on the return?
I am probably getting twisted up in the rules a little. I appreciate your input on this.
Best regards,
A. You must "recapture" depreciation that is "allowed or allowable”.
Depreciation that you have actually deducted on your tax return (and was not disallowed by the IRS) has been “allowed”. Depreciation that can be deducted on a tax return is “allowable”.
In the case of a home office for a one-man corporation, where you cannot reimburse yourself for depreciation, depreciation is neither “allowed” nor “allowable”. If the Tax Code, or some official interpretation thereof, prevents you from taking a deduction for depreciation, a depreciation deduction is not “allowable”.
The “allowed or allowable” rule comes into play when you are able to claim a deduction for depreciation on your tax return, but for some reason you elect not to do so. For example, if you had a rental property for which you reported income and deductions on Schedule E, but over the years never deducted depreciation on the property (God only knows why). When you sell the rental property you must add back, or “recapture”, the depreciation that you would have been able to claim as a deduction on the building during the years that it was available for rent. This is depreciation that was “allowable” under the Tax Code.
I hope I have clarified the issue for you. Let me know if you have any other questions.
Fellow tax bloggers – am I correct here?

Tuesday, November 13, 2007


As I mentioned in Monday morning’s post I spent yesterday at the National Association of Tax Professionals’ annual Year-End Tax Update Workshop, aka “The Famous 1040 Workshop”. I attend each year.
The format for this annual event is to (1) summarize the basic tax information (i.e. personal exemption, standard deduction, deduction and credit limits and phase-outs, etc) that will be used in preparing the current year, in this case 2007, Form 1040 (or 1040A) and provide a heads up on the information available for the next year, 2008, review new tax laws passed during the year and discuss other new developments from regulations, rulings and the courts, (2) give a refresher on a few tax topics of interest (this year it was medical fringe benefits and retirement plans for the self-employed), and (3) supply the 2 hours of annual “ethics” education that is now required for certain licensed or certified professionals (a reaction to the Enron and other accounting scandals).
For me there was nothing new. It was just a reminder of what I have already researched and written about on the Federal Tax Update, Federal Tax Legislation and Information, and What’s New for 2007 and 2008 Pages of my website and here at THE WANDERING TAX PRO. I am already both “ethical” and “moral”, and have been for my 35 years in the business. So since I am neither licensed nor certified for anything I don’t need a class on ethics every year.
Below is a compilation of some of the items of interest discussed yesterday for your information-
* I forgot to mention when discussing changes to the 2007 federal forms that the Schedule A has added a line under the interest category to report the new one-year only (so far) deduction for PMI (not to be confused with PMS). You can deduct the “private mortgage insurance” (PMI) premiums paid in 2007 on insurance contracts issued in 2007 in connection with the purchase of a personal residence. The deduction is phased-out as AGI goes from $100,000 to $110,000 (or $50,000 to $55,000 for Married Filing Separate). Qualified private mortgage insurance premiums will be reported in Box 4 of the 2007 Form 1098. PMI premiums are deducted on Line 13 of the Schedule A, bumping investment interest to Line 14. This is obviously the result of successful lobbying by the mortgage insurance industry.
* If you are claiming an above-the-line deduction for qualified tuition and fees on Line 34 of your 2007 Form 1040 you must complete and attach the new Form 8917. This form is to make sure there is no “double-dipping” of education tax benefits.
* The Nonbusiness Energy Property Credit has a $500.00 “lifetime” maximum. If you made qualified energy-saving purchases this year but claimed the full $500.00 on your 2006 Form 5695 you are out of luck for 2007. Or if you claimed a credit of $300.00 for 2006 you only have $200.00 left for 2007.
* The “Minimum Tax Credit” (MTC) has been increased for 2007, and a portion may now be refundable. You may have a minimum tax credit if you were a victim of the dreaded AMT in the past due to a “timing issue” such as the exercise of an Incentive Stock Option (ISO) or a depreciation deduction. This topic is too complicated to go into here. Besides in 35 years I have never had a client with an MTC.
* The IRS has another new form for 2007. Form 8919 is for employees who are treated by their employer as an independent contractor and given a Form 1099-MISC when they should really be getting a Form W-2. You would use this form to pay the employee share only of FICA tax instead of paying self-employment tax on the 1099 amount. In order to qualify your situation must meet 1 of 7 requirements.
* The IRS website provides the latest up-dated information on the energy credit available for certified hybrid vehicles. The FEMA website has a listing of all the federal disaster areas for 2007.
I have another Year-End Tax Update Workshop, the National Society of Tax Professionals version, scheduled for December 7th in Atlantic City. I had hoped that the AMT fix bill would have been passed by then so it could be included in the discussion, but I doubt it. Senate Majority Leader Harry Reid told reporters on November 6 that the Senate would not consider legislation for the one-year AMT patch until after Congress returns from its Thanksgiving recess on December 3rd!
If an AMT patch is ever passed it will probably not be until January! Even if it gets through the Senate and a conference committee before Christmas it may be vetoed by George W, and Congress will have to either rewrite the bill or try to override the veto. It is déjà vu all over again as for the second year in a row Congress has waited until the very last minute to pass tax legislation that affects the current year’s 1040, causing the IRS to incur additional expense and taxpayers to suffer additional aggravation.
I echo the frustration and anger of Trish McIntire’s post “Here We Go Again” at OUR TAXING TIMES. The way these arseholes in Congress (there is no other way to describe the cafones) are handling the AMT fix is, as Trish puts it, “a shining example of their disregard for anything but their own agenda”.


Monday, November 12, 2007


Guess who is now appearing in the 126th “Carnival Of Personal Finance” at MILLION DOLLAR JOURNEY (The Making of a Millionaire - A Canadian Personal Finance Blog). Me, of course! My post on the Nanny Tax is the first of two under the category Tax Talk.


I forget to include this Year-End Tax Planning Tip in my recent series:

Mutual funds buy and sell stock and other securities throughout the year. Gains on these sales increase the "net asset value," or NAV, of the fund, and your shares in the fund increase in value.

Federal law requires that funds distribute net capital gains each year to shareholders. During the fourth quarter the fund manager will calculate the net gains for the year, declare a capital gain dividend, and distribute this dividend to shareholders. This is usually done in mid to late December. The shareholder will pay federal and state income tax on this distribution. After the distribution is made the NAV of the fund will drop.

Basically, if your shares are worth $10,000 on December 1st and the fund issues a $1,000 capital gain distribution on December 15th your shares will be worth $9,000 on December 16th. If you had purchased the shares on December 1st you would be stuck with paying tax on $1,000 without actually receiving a financial benefit from the $1,000. You started out with $10,000 but end up with $9,800 or so ($9,000 NAV plus $1,000 dividend received less federal and state income tax on $1,000 dividend).

If you want to purchase shares in a mutual fund during the fourth quarter of the year, wait until after the capital gain dividend has been issued, and the NAV has dropped, before purchasing the shares.

I am now off to the National Association of Tax Professionals’ annual year-end “Famous 1040 Workshop”. I will let you know if I learn anything of interest.

PS – Click the links below to read my series on Year-End Tax Planning:



I just finished writing and have begun “shopping around” an article on Tax Blogging in which I said:

“The ‘blogosphere’ has a Tax Man (although he has not posted in quite a while now), a Tax Girl, a Tax Mama (is there a Tax Papa?), a Tax Playa (or the “blogger formerly known as Tax Playa” - he has since changed the name of his blog to the “Tax Info Blog”), a Tax Prof, and a Tax Guru. I expect any day now to come across a blog by Deducto the Tax Dog or Ira the Tax Cat, not to mention the Tax Monkey.”

It turns out that there actually is a TAX DOG, although he is Lizzie and not Deducto. TAX DOG is the name of a blog not about taxes but about “turning a shelter dog into an office (and home) pet”. It is written by fellow tax blogger Trish McIntire, who also writes OUR TAXING TIMES.

I have a tax cat. I started out with three, but sisters Thelma and Louise have since gone to their final audit. I now work out of my home so my cat, an all black - with a spot of white on her tummy – 14-year old named Nosey, is already an office cat. I often come into the room to find her sitting on my desk or in my chair. At one point I had a convertible couch (actually a gift from a client to my mentor many years ago) in the office and Nosey would sit there during the “season” while I did tax returns. Sometimes she would talk to certain clients who dropped off or stayed around for a "sit down", but most of the time she would just sleep.

When you get a chance check out the TAX DOG.


Sunday, November 11, 2007


* As usual Paul Caron, the internet’s TAX PROF, has comprehensive coverage of Friday’s passage of the Temporary Tax Relief Act of 2007 in his post “House Approves One-Year AMT Patch, 216-193

Paul reports that 8 Democrats crossed party lines to vote against the AMT fix bill, while Republicans voted as a block against it. The Republican vote is no surprise (see my post on “AMT Update”).

* Last week the House unanimously (410-0) passed H.R. 3997, the Heroes Earnings Assistance and Relief Tax Act of 2007 (aka the HEART Act), which provides $2 Billion in tax relief for members of the military and their families. Click here for a summary of the bill’s provisions for military personnel.

The bill also excludes from the taxable income of members of qualified volunteer emergency response organizations (i.e Volunteer Fire Departments and volunteer EMS squads) rebates of state or local income, real property or local personal property tax, and qualified reimbursement payments (up to $30 a month) for expenses incurred in connection with volunteer duties, effective with tax 2008.

The tax relief would be paid for by increased penalties for business and information returns.


Saturday, November 10, 2007


* Kay Bell, the yellow rose of taxes, not only writes the blog DON’T MESS WITH TAXES, but she also writes extensively on taxes for the website, including the blog TAXES: EYE ON THE IRS. She has also written an excellent introduction to taxes for the beginner titled “13 Basic Tax Lessons”.

* KPE of TAX GIRL points out that New Jersey is #1 on yet another list concerning tax rates in her post “So Exactly How Much Do You Want To Smoke”. The “Garden State” has the highest cigarette tax in the country at $2.57 per pack.
* George W has signed into law the Internet Tax Freedom Act Amendment Acts of 2007 (H.R. 3678). This Act prohibits “multiple and discriminatory” taxes on internet access until Nov. 1, 2014. A moratorium on charging taxes for internet access or applying multiple taxes to a single online transaction was first enacted in 1998 and was extended in 2004.
* Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG provides an on target response to Warren Buffet’s recent complaint that his tax rate is too low in his post “That’s a Funny Way of Tilting”.
Joe also reports that the IRS may allow taxpayers to access their personal tax data through the IRS website starting as early as next summer in his post “Taxpayers To Get Access To Their IRS Accounts?”.
* The IRS reports that a new record for electronic filing was set in 2007 with just under 80 million tax returns e-filed, an almost 9 percent increase over 2006. Tax professionals electronically filed over 57 million returns and approximately 22.5 million returns were e-filed by taxpayers doing their own returns. Over 57 percent of all returns filed in 2007 were e-filed.
Tax refunds that were directly deposited in 2007 also set a new record of almost 61.5 million, an increase of 8 percent over 2006.
FYI, for the 35th consecutive tax season I have prepared all my 2006 1040s by hand, and all returns were submitted via postal mail. I did, however, as I am required to do, filed my 2006 NJ resident returns online via NJWebFile whenever possible, and when the client did not elect to “Opt-Out”.
* Presidential election season is off and running. Candidates from both parties have recently announced some ridiculous targeted tax proposals, obviously in attempts to attract voters from specific groups.
The Tax Policy Center’s TAX VOX blog reports that Barack Obama wants to exempt seniors making less than $50,000 from paying any federal income tax. Kelly Phillips Erb, the TAX GIRL, reports that Mitt Romney has said publicly that parents who home school their children should get a federal tax credit to help offset the expense of teaching.
Instead of thinking up more ways to complicate the Tax Code I wish more candidates would propose ways to simplify it.
* My post “Here’s Something New” at the NJ TAX PRACTICE BLOG discusses a new balance due letter a client received from the NJ Division of Taxation. If you receive such a letter, send it to your tax preparer ASAP!

*The Tax Foundation’s TAX POLICY BLOG reminds us not to forget a unique tax deduction allowed as a “Moving Expense” if you relocated due to a new job in its post “More Strange Tax Deductions: Shipping Pets”. According to
IRS Publication 521:
“You can deduct the cost of packing, crating, and transporting your household goods and personal effects and those of the members of your household from your former home to your new home. For purposes of moving expenses, the term ‘personal effects’ includes, but is not limited to, movable personal property that the taxpayer owns and frequently uses.
If you use your own car to move your things, see Travel by car, earlier.
You can deduct any costs of connecting or disconnecting utilities required because you are moving your household goods, appliances, or personal effects.
You can deduct the cost of shipping your car and your household pets to your new home.”

* Joe Kristan’s response to the news item “
IRS Translates Tax Law Into Chinese, Korean, Russian & Vietnamese” was “MAYBE THEY'LL GET TO ENGLISH SOON”! I doubt it.

Friday, November 9, 2007


The House has just passed the Temporary Tax Relief Act of 2007 (H.R. 3996) by a vote of 216-193. This Act provides a one-year fix for the dreaded Alternative Minimum Tax and extends for another year the popular expiring tax deductions for educator expenses and qualified tuition and fees and the option to deduct state and local sales tax instead of state and local income tax.

Now it is on to the Senate.


This coming January I will be launching a new print newsletter to provide tax planning and preparation advice, information and resources especially for sole proprietors and one-person LLCs who report business income and expenses on Schedule C (or C-EZ) called THE FLACH REPORT.

You can click here to download a sample issue of the newsletter, which will be published 6 times a year. The sample issue covers such issues as -

· Setting Up a One-Person LLC,
· Applying For a Federal ID Number,
· The Effective Cost of Self-Employment Tax, and
· Putting Your Children on the Payroll

The normal annual subscription price for THE FLACH REPORT will be $29.95. However I am offering a special Charter Subscription price of $19.95 (1/3 off) for those who subscribe during 2007.

If you download the sample issue please email me at and let me know what you think.


No word yet on any progress in the passage of the AMT fix bill. However, even if Congress does get off its duff and pass the bill it will face another obstacle.
Linda Beale at A TAXING MATTER writes in her post “
AMT Patch: White House Threatens Veto”. that George W’s advisers will recommend he veto the AMT fix bill for three reasons:
· An AMT patch should not have to raise taxes on anyone to pay for the relief for ordinary taxpayers.
· The offsets--like the carried interest provision and the delay of the world-wide interest allocation change for multinationals--hurt the ability of US taxpayers to be competitive globally.
· The bill repeals private debt collection for federal income taxes.
The word from a report on NPR’s “Market Watch” program last night is that the Republicans do not care about an Alternative Minimum Tax fix because it is the “Blue States” (i.e. New York, New Jersey, California, Massachusetts) that are hardest hit by the dreaded AMT. The bastards!

Thursday, November 8, 2007


* Well we didn’t exactly vote the bastards out, but from what I have heard the G.R.I.P. (Get Rid of Incumbent Politicians) “movement” here in New Jersey (see my post on “Get a G.R.I.P") did make some progress. Apparently the opposition candidates in many races received more votes than expected based on past experience.

And, for the first time in 17 years, we voted down two Public Questions!

I do not feel that the defeat of the Stem Cell question was a vote against stem cell research per se, although it was probably a small factor. I certainly support such research. It was instead a vote against unnecessary state borrowing. I do believe that part of the money raised would be used to unnecessarily build a state research facility, which would increase the opportunity for government corruption and graft that always accompanies state-sponsored construction in New Jersey.

To be more effective in future elections the GRIP movement needs to be formally organized so that it can aggressively campaign to vote out the bastards.

* While everyone enjoys getting a check from the government, the Homestead Rebate program is not the way to deal with ever-increasing property taxes. The money to fund the rebate must come from somewhere – and the only place it can come from is NJ taxpayers.
To give you a check for, say, $1,500 to put in one pocket the State increases the sales tax by 1% and adds a multitude of nickel and dime taxes and fees to take $1,500 out of the other pocket. And your property taxes continue to rise.

* Why must the answer to balancing the budget, or subsidizing tax reform and targeted tax breaks, always be raising taxes and fees and never reducing unnecessary government spending?

NJ, for example, still faces a budget crisis. But I can assure you that of all the various options that the Governor and the legislature will be considering, cutting expenses will not be on the list. Because the DFBs (clean version is Damned Fool Bureaucrats) in Trenton, and probably Washington as well, don’t want to give up any pork.

All the more reason to support a GRIP movement and vote the bastards out.

*Pardon my rant, but can anyone please explain to me the entertainment value, education value, or any kind of “socially redeeming” value of any kind there is to watching a pompous Brit verbally abuse and humiliate restaurant owners and employees?

Why would anyone with the slightest level of intelligence watch this excrement?

And why would any restaurant owner in his right mind allow this piece of crap to be filmed in his/her establishment?

I am speaking about the Fox television show known as “Kitchen Nightmares”. I have, obviously, never watched this garbage, but I have been subjected to ads for the show and have seen clips on E!’s “The Soup”.

As H.L. Mencken so correctly observed, “Nobody ever went broke underestimating the intelligence of the American public."


Wednesday, November 7, 2007


Q. I am starting out as a nanny in Princeton, NJ and I live in Plainsboro, NJ. My employer will pay me $650.00 a week for my service and it will be my responsibility to pay for all my taxes and/or deductibles out of my pocket. Therefore, I would like to know:

· What taxes and/or deductibles would I be responsible for?

· What arrangements should I make to pay these taxes?

· What is the percentage of the individual taxes that I would have to pay?

Thank you

A. I am making the following assumptions in providing my answer -
(1) You are age 18 or older, and
(2) You will be working in the home of your employer, and not providing child care services in your own home or some other location.
First and foremost, you are not be responsible for “all of your taxes and/or deductibles” out of your own pocket.

A nanny, or a housekeeper, baby sitter, health aide, private nurse, maid, caretaker, yard worker, or similar domestic worker, who is hired directly by a family to work in the family’s home, and the family controls what work is done and how it is done, is an employee of the family under common law. You are a “household employee” and fall under the “nanny tax” rules.
Under the “nanny tax” rules, a domestic employer who pays a household employee more than $1,500 in cash wages in the calendar year for 2007, or $1,600 for 2008, is required to pay “payroll taxes” on the wages paid to the employee. These payroll tax obligations include:
· FICA (Social Security & Medicare) Taxes (7.65% of Gross Wages),
· FUTA (Federal Unemployment) Tax (0.8% of gross Wages in most circumstances), and
· NJ State unemployment and disability insurance contributions
The FICA taxes are shared equally between employer and employee. Each contributes 7.65% of the gross wage. Generally the employer will withhold the employee’s share from the cash wages paid. In your case $49.73 should be withheld from your $650.00 weekly pay for FICA taxes. If the family fails to collect this tax from you (the employee) via payroll deductions, the family will be liable for both the employer and employee portions of the tax or 15.3% of gross wages.

The FUTA tax is paid 100% by the employer. There is no withholding for FUTA tax.

The family should also withhold a small amount, $6.01 per week until the less than $300.00 annual maximum is met, for NJ state unemployment and disability contributions.
Deducting federal and state income taxes is optional. If income taxes are not withheld from the cash wages by the employer then the employee is required to make periodic payments of any amounts due.
If your employer does not withhold federal or NJ state income taxes from your $650.00 weekly payment you should make quarterly federal and state estimated tax payments. If we assume you will be filing your tax returns as a single person with no dependents you should put aside $73.00 for federal and $11.00 for state income taxes (Single-1) or, more better, $83.00 for federal and $11.00 for state income taxes (Single-0), each week and send this money to “Sam” and “Jon” on April, June, September and January 15th.
Click here to download the 2007 federal estimated tax payment vouchers and instructions, and here for the 2007 NJ vouchers. Once you are “in the system” you will receive the vouchers and instructions from “Sam” and “Jon” automatically each year.
Your employer must provide you with a Form W-2 (and not a Form 1099-MISC) in January, just as any other employer must do for its employees.
I infer from the information provided in your question that your employer wants to treat you as an independent contractor and not an employee so they can avoid the required payroll taxes. However, as discussed above, under the law you are indeed an employee.
The IRS has reaffirmed the position that you are an employee and not an independent contractor in at least two private letter rulings (PLR 199923014 and 199923015). In these rulings the IRS disregarded a written contract's designation of a worker as a contractor, ruling that the substance of the relationship and not its label determines the worker's status.
If your employer family does not treat you as an employee and file a Schedule H with its annual Form 1040 (and the appropriate NJ state payroll tax returns) to report and pay the required payroll taxes they are committing tax fraud and are subject to substantial penalties. There is no statue of limitations on the failure to report and remit federal payroll taxes.

I am sure you have heard the stories of domestic employers whose political careers were cut short, or never begun, because they failed to pay payroll taxes on their household employees.
For more information on the nanny tax issue you can check out the FAQ Page of (the site of an accounting firm that provides services to domestic employers), IRS articles on “Employment Taxes for Household Employees” and “Hiring Household Employees”, and IRS Pub 926Household Employer’s Tax Guide”.
I hope I have been of help. Let me know if you have any other questions on the subject, or need clarification of anything I have discussed above.