Monday, December 31, 2007

NEW YEAR'S EVE CARNIVALS

The King of Debt has posted the “Carnival of Personal Finance #133 - Last of 2007 Edition” over at WE’RE IN DEBT.

The very last entry in the Carnival states, “The Wandering Tax Pro looks back at 2007”. I am last probably because I was a late entry. In the days of vaudeville they used to say that if you couldn’t get top billing it was better to be billed last than lost somewhere in the middle!

And then there is “Tax Carnival #27: Waiting for the Tax Ball to Drop” compiled by Kay Bell of DON’T MESS WITH TAXES.

Here I top on the list. Kay says, “As the traditional Auld Lang Syne says, let's not forget the old acquaintance of this soon-to-end tax year. To that end, Robert D Flach, aka THE WANDERING TAX PRO, brings us a review of 2007's tax happenings.”

Wait a minute! Later in the Carnival Kay says, “RDF is back on the midway of 2007's last Tax Carnival with an entry from his other blog, ANYTHING BUT TAXES! There, in "
Won't You Take This Advice I Hand You Like a Brother” he discusses the burden of proof during an audit, particularly when it comes to the cost basis of an investment sale.”

SAIL AWAY!

The following was initially received as a comment to my post “ASK THE TAX PRO – HOLIDAY TWO-FOR-ONE SPECIAL!” – the second question. It was a follow-up to my answer by the person who had originally posed the question. Rather than treat it as a comment, where my response might get overlooked by many, I decided to respond in a post.

COMMENT: My question was the one about living in Florida but being taxed by Louisiana. Thanks very much for taking the time to answer it. I'd just like to address some of the questions raised in your answer. I should have thought to mention them in the beginning as it would no doubt have helped you in your answer.
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The job I held in 2004 was actually for a cruise line. I lived and worked on board a cruise ship, and have done so since 2001. The cruise line is a Panamanian registered corporation. The company however is located in Miami, Florida. This means that I could have mail sent to me directly at the ship, or through the Miami office. The W-2 from the cruise line had my families home address listed because that's what I gave them in 2001 when I started with them. I also had a PO Box in Louisiana to which most of my mail was sent. This was the address that was on my federal forms for 2004. My cruise ship toured the Caribbean and the west coast of the states, so my mailing address was wherever the ship was. I had most of my mail sent to the PO Box so that my father could check it for me once in a while, and send me the contents to the ship address.
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When I originally filed my 2004 LA taxes in 2006 (when I found out I had to) I had already changed my license to a Florida one, and used my cruise lines office address as this was the closet thing to a "residency" I had living on the ocean. So they were filed with my Florida address. However, for 2004 they would have used the address they had on file for me, which would have been either my family’s home address from my Louisiana license, or my PO Box address from the federal return.

I know this is all quite confusing, more so for me as I’ve had so many different answers from so many people, especially the Revenue Departments, who claimed I was a resident because of my Louisiana license, and PO Box. Yet yesterday, someone from the same Louisiana Revenue Office said I would "not" be considered a resident for having a Louisiana license and PO Box! It never ends!!
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Hope these unfortunately lengthy answers clear up some questions. Thanks again for your help!

MY RESPONSE: Sorry to be so long in addressing your comment.

Ah, so you lived and worked on a cruise ship! You lucky bastard – I am jealous.

During the 1980s after the end of the tax filing season I would pack a bag and my uncle and I would board a ship to cross the Atlantic. Often the ship was the famous QE2. I loved being “at sea”. My uncle has since gone to his final audit and now I celebrate the end of the tax season by recuperating in Ocean Grove NJ. I miss cruising and crossing – however the single supplement makes the cost of a cruise prohibitive. But I digress.

You were actually neither a resident of Florida or Louisiana. You lived on the cruise ship in 2004, and had done so for several years prior. Your employment was certainly not temporary in nature. I believe that the cruise ship was your domicile.

The fact that you had a Louisiana driver’s license or maintained a Post Office Box in Louisiana does not in itself make you a Louisiana resident. You did not maintain a permanent residence in the state. The use of either your parents’ address or your Louisiana Post Office Box for correspondence was reasonable in your particular situation.

I seem to recall reading somewhere about specific Tax Court or IRS guidance on either the “tax home” or “domicile” of a person employed full-time on a cruise ship. However I cannot remember where or when, and could not find any references from some quick online searches. If I find anything I will report on it in a future posting. Meanwhile –
does anyone out there know of any Tax Court decisions or Revenue Rulings or the like concerning the domicile of a person living and working on a cruise ship?

Off the top of my head, I believe that you were not a resident of Louisiana for 2004 and should not have paid Louisiana state income tax on your 2004 earnings.

In your situation I would file an amended 2004 Louisiana return indicating you were a full-year non-resident, reporting “0” Louisiana source income, and requesting a full refund of the tax paid. I would attach to the return an explanation of your situation, stating that you lived on a cruise ship continually from 2001 through 2004, you did not maintain a residence in Louisiana, and that the use of a Louisiana mailing address was merely for convenience based on your employment situation.

Does anyone have a different answer?

BTW – if you want to know what I will be doing on New Year’s Eve check out today’s post over at
ANYTHING BUT TAXES. A taste – part of the day will be spent typing W-2s!

TTFN

Sunday, December 30, 2007

OOPS! THEY DID IT AGAIN!

I apologize in advance for the following rant.

I received an email last night from a total stranger asking a specific tax question about a year-end tax move currently in process. As it was sent late in the afternoon of December 29th it was expected that I would reply immediately. In fact, the email asked for an answer ASAP.

My reply was as follows:

“I solicit general tax questions for a weekly online feature ASK THE TAX PRO at my blog THE WANDERING TAX PRO.

I DO NOT PROVIDE FREE AND IMMEDIATE EMAIL ANSWERS TO SPECIFIC TAX QUESTIONS FOR ANY TOM, DICK OR RAY WHO DOES NOT WANT TO PAY HIS/HER TAX PREPARER TO ANSWER THE QUESTION, OR CANNOT GET A HOLD OF THEIR PREPARER ON A MINUTE'S NOTICE.”

I am glad to provide the free service of ASK THE TAX PRO, and in many cases enjoy researching and answering the questions.

However, my goat is gotten when someone thinks that because I write a tax blog providing free tax information and advice, including a weekly Q+A, I will also provide specific answers to specific tax situations on a moment’s notice free of charge! I am the WANDERING TAX PRO, not the PEOPLE’S FREE TAX CONSULTANT.

If you have a specific tax question about your individual situation that requires a prompt answer – ASK YOUR TAX PROFESSIONAL AND PAY HIM/HER FOR THE ADVICE!

TTFN

Saturday, December 29, 2007

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

* There has been a slight change (for the better) on the 2007 Form W-2. I explain the change in the post “Change to 2007 Form W-2" at my NJ TAX PRACTICE BLOG.
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* Kay Bell of DON’T MESS WITH TAXES reminds us that “Even if you're not feeling under the weather, now might be a good time to stock up on cold treatments and other over-the-counter (OTC) medications, especially if you have a flexible spending account (FSA).” in her post “Flexing Your Medical Account Muscle
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* The Tax Foundation has compiled “Our Wish List for Tax Policy in 2008” (“our” meaning “their”) over at the TAX POLICY BLOG. I agree with the list, especially #’s 1, 3 and 10, and would add THE WANDERING TAX PRO to #9. Unfortunately I also tend to agree with Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG who predicts “Sadly, I think they'll go 0-10”.

* Check out the Tax Policy Center’s “First Annual Lump of Coal Awards” over at TAXVOX. The post presents the five biggest fiscal losers of 2007. Of course #1 is the AMT Patch.

* TAX GIRL Kelly Phillips Erb lists her “Top Taxgirl Headlines of 2007”. She mentions a few items I forgot to mention in my “
2007 – THE TAX YEAR IN REVIEW” posting – especially the fact that Richard Hatch, the fat naked idiot who won the first “Survivor” tv contest, was convicted of tax evasion despite an appeal and sent to prison.

* Did you know that the Internal Revenue Code still limits the tax deduction for gifts from businesses to clients, customers and patrons to $25.00 per person, per year, plus incidental costs like engraving, packaging, insurance and mailing? It has been $25.00 for as long as I have been preparing tax returns, and I started in February of 1972! Of course you can give a gift that costs $100.00, but you can only deduct $25.00! It is one of many items that have never been indexed for inflation.
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* Nice try, but can’t beat the “wash sale” rules by selling 100 shares of a stock at a loss and then purchasing 100 shares of the same stock in your IRA account within a 30-day period. According to IRS Revenue Ruling 2008-05 -
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"If an individual sells stock or securities for a loss and causes his or her IRA or Roth IRA to purchase substantially identical stock or securities within a specified period, the loss on the sale of the stock or securities is disallowed under section 1091, and the individual's basis in the IRA or Roth IRA is not increased by virtue of section 1091(d)."
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TTFN

Friday, December 28, 2007

WHAT’S NEW FOR NJ FOR 2007

The 2007 NJ returns are now available on the NJ Division of Taxation website. Here is what is new for the NJ-1040 for 2007:

* The Civil Union Act established “Civil Unions” (CU) equivalent to marriage in New Jersey for same-sex couples. Beginning with tax year 2007, Partners in a Civil Union recognized under New Jersey law are considered to be married for NJ Gross Income Tax purposes and must file their New Jersey income tax returns, and property tax relief program applications, using the same filing status available for married couples.

The “Married” filing categories (on the NJ-1040 and the TR-1040) are now identified as “Married/CU Couple, filing joint return”, “Married/CU Couple, filing separate returns”, and “Qualifying Widow(er)/Surviving CU Partner”. “CU Partner” is the same as a “spouse” in the dependency listing. There is still a distinction for a “Domestic Partner”.
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* The reporting of the Pension Exclusion has been changed. Line 19 is now one line to report total taxable pensions, annuities and IRA withdrawals – there is no longer 19a, 19b, and 19c.
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Eligible taxpayers will now claim the Pension Exclusion on Line 27a, after calculating their total income (before exclusions) on Line 26. Any Other Retirement Income Exclusion is entered on Line 27b, with the two exclusions totaled on Line 27c. This change will make it easier for filers to determine whether or not they exceed the $100,000 maximum threshold. If the total taxable income exceeds $100,000 the taxpayer(s) cannot claim a Pension Exclusion or Other Retirement income Exclusion.
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* Beginning with tax year 2007, all individuals who are eligible for and claim a federal Earned Income Tax Credit will be able to claim a New Jersey Earned Income Tax Credit (NJEITC) equal to 20% of the federal credit allowed. Individuals with NJ Gross Incomes over $20,000 and those without a qualifying child will be able to get a NJEITC on their 2007 Form NJ-1040.
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* Resident taxpayers claiming a credit for taxes paid to other jurisdictions must now enter a two-digit code for the jurisdiction at Line 39 of the 2007 Form NJ 1040. A list of jurisdiction codes is provided in the NJ-1040 instruction booklet.

Regarding the property tax relief programs:

* The NJ Division of Taxation continues to waste taxpayer money, and create the potential for senior homeowners to miss out on their check, by having tenants and homeowners apply for the NJ Homestead Property Tax Rebate separately. Once again tenants apply via Form TR-1040, included in the NJ-1040 package, and homeowners must apply either online or by phone later in the year. The homeowner application packages are expected to be mailed out at the end of April.

* The income limits for residents applying for reimbursement under the Property Tax Reimbursement (PTR) Program (aka “Senior Freeze”) are as follows:
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For 2007: $45,135 if single, or $55,344 (combined income) if married or in a Civil Union, and
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For 2006: $43,693 if single, or $53,576 (combined income) if married or in a Civil Union.

The 2007 PTR applications (Forms PTR-1 and PTR-2) should mailed out in mid-to-late February.

TTFN

Thursday, December 27, 2007

BETTER SAFE THAN SORRY!

Here is the latest word from the IRS on the tax-season processing delays -

Following extensive work in recent weeks, the IRS expects to be able to begin processing returns for the vast majority of taxpayers in mid-January. However, as many as 13.5 million taxpayers using five forms related to the Alternative Minimum Tax (AMT) legislation will have to wait to file tax returns until the IRS completes the reprogramming of its systems for the new law. The IRS has targeted Feb. 11, as the potential starting date for taxpayers to begin submitting the five AMT-related returns affected by the legislation.”
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According to the IRS, the forms that will cause delays are:
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· Form 8863 - Education Credits
· Form 5695 - Residential Energy Credits
· Form 1040A’s Schedule 2 - Child and Dependent Care Expenses for Form 1040A Filers
· Form 8396 - Mortgage Interest Credit
· Form 8859 - District of Columbia First-Time Homebuyer Credit
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I am afraid that I am skeptical about “Sam” being able to begin processing most returns in mid-January. In this situation, I would rather go the way of television weathermen – and provide the “worst-case scenario” warning concerning an upcoming snow storm. I would rather be chastised for being too cautious when the storm turns out to be nothing than for not providing enough of a warning if instead it turns out to be the storm of the decade.
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I would rather tell my clients to expect excessive delays and have them pleasantly surprised when their check arrives on time than tell them all will be ok and find myself faced with tons of angry telephone and email messages wanting to know “where’s my check!!!”.
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And why isn’t Form 6251, the actual AMT form itself, not on the above list?

THIS JUST IN

I just thought you would want to know - George W signed the AMT patch bill into law while flying to Texas for New Year's. He has also signed the Mortgage Forgiveness Debt Relief Act.

2007 – THE TAX YEAR IN REVIEW

2007 started off with a bit of a shock for many seniors receiving Social Security checks concerning the monthly Medicare Part B premium deduction. Under the Medicare Modernization Act of 2003, the special "surcharge" kicked in for Social Security recipients whose 2005 “modified” AGI exceeded $80,000 if Single and $160,000 if Married. Those who fell victim to the surcharge saw their monthly premium amount increased from the basic $93.50 to between $105.80 and $161.40. The modified AGI includes tax-exempt interest income reported on Line 8b of Page 1 of the 2005 Form 1040.

February 2007 (I don’t remember the exact day) marked my 35th Anniversary as a paid tax preparer. This year I managed to survive my 36th tax filing season. Yes, I started out very young.

In what seems to be becoming a habit, Congress waited until the very last minute in December of 2006 to extend for 2007 only a group of popular tax breaks. The IRS had already “gone to press” with the 2006 federal income tax forms and instructions without these breaks. So we had to enter “E” on a certain line of the 2006 Form 1040 if claiming the above-the-line deduction for educator expenses and “T” on another line to indicate an adjustment to income for tuition and fees, or “B” if claiming either “E” or “T” and the actual deduction indicated on that particular line And we had to enter “ST” on Schedule A if opting to claim state and local sales tax instead of state and local income tax.

The occasional forgetting to enter the appropriate letter symbol prompted correspondence from “Sam” and a delay in issuing any refund.
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I read somewhere that this 2006 irresponsibility of Congress cost the IRS about $1 Million. Who knows how many million Congress’s 2007 irresponsibility will end up costing?

As I had mentioned in an April posting, I noticed a few common items on 1040s during the season. Interest income was up substantially – a result of “more better” CD rates. So were capital gain distributions from mutual funds – a sign that the market did pretty good in 2006.

Taxpayers were able to claim a special telephone excise tax rebate on their 2006 returns, or a special form if no tax return was filed – either the actual amount of excise tax paid over a three (3) year period or a standard rebate amount of $30.00-$60.00 based on the number of exemptions. All of my clients who were eligible claimed the standard telephone excise tax credit amount.
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The IRS reported that there was a lot of fraudulant rebate claims filed, and also that many taxpayers who were entitled to a rebate did not claim one.

For the first time taxpayers who elected to have their federal refund directly deposited could choose to have the refund sent to up to three separate accounts by using a special form. None of my clients did this. Everyone who elected direct deposit had all their money sent to one account.

I ended the tax filing season with probably a few less GD extensions than the year before. More of the extensions were “client based” – they got their information to me too late – and less were filed solely because of my workload.

Mark Everson left his position as IRS Commissioner in April of 2007 to become President and CEO of the Red Cross. Everson’s Chief of Staff Kevin Brown took over as acting Commissioner. Brown then left the IRS in mid-September to follow Everson to the Red Cross and become the organization’s Chief Operating Officer, and Linda Stiff, IRS Deputy Commissioner for Operations Support, became the acting Commissioner.

George W nominated
Douglas H. Shulman, Vice Chairman of the Financial Industry Regulatory Authority (formerly known as the National Association of Securities Dealers), to be the new Commissioner of the Internal Revenue Service in late November. A week later Everson was fired by the Red Cross because “he had engaged in a ‘personal relationship’ with a subordinate employee”. As of this writing I do believe that Shulman has yet to be confirmed.

The Tax Foundation reported that TAX FREEDOM DAY 2007 was April 30th, 2 days later than 2006. This is the day on which the average American has earned enough money to pay all federal, state and local taxes. The Foundation estimated that for 2007, government at all levels would take an average of 32.7% of the nation’s income, down from the 34% high in 2006.

On May 25, 2007, George W signed into law the US Troop Readiness Veterans' Care, Katrina Recovery, and Iraq Accountability Appropriations Act of 2007, a $120 Billion emergency war supplemental funding bill. Part of this legislation was the Small Business and Work Opportunity Tax Act of 2007, which was, up until last week, the only major tax legislation passed in 2007.

The act increased the federal minimum wage over a three year period, raised the “kiddie tax” age limit to from 'under age 18' to 'under age 19', or 'under age 24' for full-time students, beginning with tax year 2008, and increased the Section 179 “expensing” limits and indexed them for inflation.

As we will be voting for President in 2008, the various campaigns have been off and running for most of 2007. The candidates have embraced and suggested a variety of different tax plans and proposals, including the so-called “Fair Tax” national sales tax. Most of the ideas put forth by the candidates only add to the complexity of the Tax Code, and many are bad ideas. No one is calling for a real overhaul and simplification of the Code.

The IRS reported an increase in electronically-filed tax returns for 2007. 79.98 Million e-filed returns were accepted through October 15th, a 9% jump from the 73.3 Million e-filed returns received for all of 2006. Direct deposit of refund checks were also up. As of October 15th the IRS reports had directly deposited 61.4 million refunds, 8% more than last year.

While I encouraged my clients to have their 2006 federal, and NJ, income tax refunds directly deposited, I continued to prepare all my federal returns manually and have yet to file a 1040 (or 1040A) electronically. Where possible I did submit my 2006 NJ-1040 refund returns via NJWebFile. New Jersey requires that I file all full-year resident state tax returns electronically unless the client chooses to “opt out” by signing a form.

Of course the major tax story of 2007 concerned the dreaded Alternative Minimum Tax (AMT).
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As early as August the IRS and tax preparers were urging Congress to either reform the AMT or at least pass another temporary fix. There were also voices, mine included, calling for Congress to kill the damned thing altogether. As the year went on with no action in sight, the IRS and we tax preparers began to get worried. Treasury and IRS officials made several pleas to Congress to pass a patch before the Service had to “go to press” with the 2007 forms and instructions.

When Congress finally decided to do something it was split down party lines. The Democrats insisted that the income lost by passing another one-year fix had to be “offset” by increasing tax revenues elsewhere. One offset was to close a loophole for hedge fund investors. Republicans did not want any offsets. Both sides held out until, once again, literally the very last minute, after all the 2007 forms and instructions had been printed and the IRS software created, with the Democrats blinking first.

On the surface there was some merit to the Republican position. The revenue generated by the AMT over recent years was indeed “found money”. When creating the original Minimum Tax the Congress did not intend that it should penalize the middle and upper middle classes. The creation of the Minimum Tax was not really even a revenue-raising measure – but rather a typical lazy Congressional reaction to an outcry by citizens rather than a response to the problem that caused the outcry. But the current reality is that the moneys from the “unfixed” AMT had secretly been counted on to balance the budget, and providing offsets was the fiscally responsible thing to do.

While it seems just about everyone in both parties was against the current AMT and for the patch, there was talk that Republicans were not quite as sincere about fixing it as they appeared to be. This is because it is “blue states” that are hardest hit by this dreaded parallel tax system.

Anyway the bottom line is that Congress once again acted irresponsibly - and as a result the processing of 2007 tax returns and issuance of refund checks will be delayed.

Unethical tax preparation companies like Henry and Richard and Jackson Hewitt will no doubt take full advantage of the delays to push low-income taxpayers into usurious Refund Anticipation Loans.

Another 2007 tax story concerned the “subprime mortgage” crisis.

Families who wanted to buy a home that they could not afford had found lenders willing to give them a mortgage with a minimal down payment, a low interest rate, and small monthly payments for an initial limited period. When this initial limited period passed and it was time to refinance the mortgage, housing prices had dropped – such that in many cases the principal balance on the loan was more than the market value of the home – and interest rates had gone up. The overextended families could not afford the new monthly payments and the lenders had to foreclose on the properties.

In many situations the borrowers and lenders reached agreements so that portions of the mortgage debt were “forgiven” by the lenders. This debt forgiveness is generally taxable income to the borrower.

Once again Congress reacted instead of responding and passed a bill last week that excludes from taxable income for three years any “debt forgiveness” from a mortgage secured by a principal residence and incurred in acquiring, constructing or substantially improving the residence.

This is bad tax policy. Why do homeowners who have bitten off more than they can chew deserve tax relief any more than individuals who went overboard with credit card debt? Neither of them deserves any special treatment. No one put a gun to their heads to force them to borrow more than they could afford to pay back. Congress should not send a message to America that it is ok to be fiscally foolish and live beyond your means because you won’t have to pay the consequences.

There was no further action taken on the issue of registration and regulation (licensure) of all tax return preparers (including “unenrolled preparers” like me). However, NATP reports that the new IRS Director of the Office of Professional Responsibility has been quite public recently on the topic, telling the American Bar Association that his office is “preparing for what we believe is the inevitable”. The Senate bill (S. 1219) remains “out there”, but Congress has been too busy with other things.

While I support the concept of licensure, the Senate bill calls for testing of all unenrolled preparers. This would be literally impossible for the IRS to implement effectively, as there are currently some 1.2 Million of us. There would have to be some kind of “grandfathering”, and I have on several occasions suggested a method for NATP to pass along to Congress. At this point in my career I have no intention of taking a test to prove that I know what I am doing!

On the NJ state tax front there was really no activity to report. While both tenants and homeowners received increased property tax “rebates”, neither really has any more money in their pockets. The increased rebates were mostly paid for by the 2006 sales tax increase – so it was a case of taking money out of one pocket to put it in the other.

Such was the tax year in review. Did I forget anything important?

2008 will get off to a rocky start with the processing delays. Hopefully Congress will put an end once and for all to the dreaded AMT and extend the expired tax breaks early in the year. But I wouldn’t bet the farm on it!

TTFN

Wednesday, December 26, 2007

ASK THE TAX PRO – A TWO-PARTER: JOINT VS SEPARATE AND BUSINESS EXPENSES FOR A REALTOR


Before answering the question for today – did you hear that, in an attempt to close the tax gap, the IRS will be increasing its audits of small businesses?

Q. Great website you have.

Here’s my question - To file jointly or separate? I’m a realtor and she’s a 9-5 state worker. I’ve been paying a whole lot each year at tax time by filing jointly with my commission-based income and her W-2 income. My broker does not withhold tax per commission check. We both make over $140k/yr.
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What’s your opinion of filing separately? Should we stay the course and simply set aside tax dollars? What advantages are there if I set up separate business (for real estate services, write offs etc.)?
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Thank you for your time & advice, Tax Pro!
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A. Part One:
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Generally, by filing separately you will pay the same or more in federal income taxes. But there are situations where filing separately can produce a lower overall combined federal and state tax. I discussed the issue in my postings “
JOINT OR SEPARATE? THAT IS THE QUESTION! - PART ONE” and “JOINT OR SEPARATE? THAT IS THE QUESTION! - PART TWO”.
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Because of the 7½% of Adjusted Gross Income (AGI) exclusion for medical expenses and 2% of AGI exclusion for miscellaneous deductions, if one spouse has excessive deductions in either category applying the % exclusion to the separate AGI could produce a lower combined separate taxable income.
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There are many situations where you will not be able to receive a specific tax benefit, or you will receive a reduced benefit, if you file separate 1040s. These were recently outlined in my post “
SOME MORE STUFF TO THINK ABOUT”.
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As with any case where you are faced with options, you should do separate tax calculations to see which one will result in the lowest overall tax. In this situation you will need to calculate three (3) sets of federal and state tax liabilities - one for a joint return and one each for the husband and wife’s separate returns. Because the dreaded Alternative Minimum Tax (AMT) increases the AGI exclusion for medical expenses to 10% and does not allow a deduction for miscellaneous deductions you should calculate the AMT as well as the “regular” tax when doing your liability comparisons.
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I have found that if a couple has qualified dependent children and their income causes the Child Tax Credit to begin to phase-out, allocating the dependency deduction(s) to the lower-earning spouse on a separate return may result in a greater Credit then they would be allowed to claim on a joint return. However, AMT could apply and wipe out any net tax savings.
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Part Two:
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As a realtor with no tax being withheld by your brokerage you should be receiving a Form 1099-MISC to report your commissions. Even though you are, to a degree, “employed” by a specific Real Estate brokerage firm (i.e. Century 21, ERA) you are considered to be an independent contractor for tax purposes. You do not have to create a separate real estate business.
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You should already be filing a Schedule C to report your commission income and deduct your business expenses, such as auto mileage to show houses and meet with clients, your dues and fees, multiple listing books, entertainment and meals, gifts to clients, promotional materials, etc. Unfortunately you will be subject to “self-employment tax” (the equivalent of Social Security and Medicare tax) on your net earnings.
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And, as there is no tax withheld from your commission checks I trust you are paying quarterly estimated taxes.
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I hope I have been of help.
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TTFN

Monday, December 24, 2007

HO! HO! HO!

Whoop de do and dickory dock – Don’t forget to hang up your sock!

As has become my annual custom, I will be spending Christmas Eve typing W-2s!
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Happy Holidays to All!

TTFN

Sunday, December 23, 2007

AS THE CONGRESS TURNS

Before adjourning for the year Congress sent five (5) bills to George W for signature. He either has signed or will sign all five.

I have posted a brief analysis of these five bills on the FEDERAL TAX UPDATE Page at my website.

But there are a lot of tax issues that Congress has chosen not to deal with until next year -

· Hopefully Congress will take up the repeal of the dreaded Alternative Minimum Tax, as called for in Rangel’s mis-named “mother of all tax reforms” bill. If not it will need to pass another temporary fix – and not wait until the last minute to do so!

· The extension of popular tax breaks which expired on December 31, 2007, such as the above-the-line deductions for educator expenses and tuition and fees and the option to deduct state and local sales tax instead of state and local income tax, was not included in the 2007 AMT fix bill.

· The extension of the residential energy credits, which also expired on December 31, 2007, was not included in the Energy Independence and Security Act of 2007, one of the five bills passed before Congress left for the year.

· The Senate passed a bill to extend and expand military tax relief which differed from the House version, and a conference committee must deal with this in 2008.

· A farm bill will also need to go to conference committee in 2008.

· The House passed a patent reform bill that would ban patents on tax strategies, but the Senate has not acted yet.

· Congress has discussed requiring brokers to report cost basis information along with gross proceeds from the sale of securities on the Form 1099-B, and requiring credit card processing companies to report merchant credit card payments, both measures to help deal with the tax gap, but has taken no action in 2007.

· Several tax-related bills are currently pending, including one to crack down on Refund Anticipation Loans (RALs) and another to regulate “unenrolled” tax return preparers (such as myself).

There will either be a lot of Congressional action on the tax front in 2008, or, as it is an election year, lots of inaction.

TTFN

Saturday, December 22, 2007

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

* CCH reports that the House voted unanimously to approve the Mortgage Forgiveness Debt Relief Act of 2007 (HR 3648), which creates a three-year exception to current law so homeowners caught in the current subprime FU do not have to pay federal taxes on debt forgiveness from mortgage loans. George W signed the bill into law on December 20th.
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* Joe Kristan of ROTH AND COMPANY TAX UPDATE BLOG reports –
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When you are on hold for the IRS practitioner helpline, they play selections from "The Nutcracker." So much for 'kinder and gentler'."
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Speaking of Joe Kristan, his “Thanks Santa, But Go Away” post provides an excellent commentary on the rush to action by Congress in the past week, with five (5) tax-related bills being sent to George W for signature – all of which, as he points out, and rightfully so, represent bad tax policy. Joe makes very good points in his individual comments on each of the 5 bills.

The common element of all of these bills seems to be that Congress does not think – it just reacts! And more often than not the reaction is not in the best interests of the country, but in the best interests of the Congress-person’s press secretaries, or the lobbyists who are throwing money at the Congress-persons, and most times solely for expediency sake.

* I have come across two recent surveys related to tax preparation.
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The National Society of Accountants biennial survey of nearly 8,000 qualified tax preparers showed that average tax preparation fee for an itemized Form 1040 with Schedule A and a state tax return increased less than 2 percent during the past two years -- rising from $201 to $205. The average fee charged by tax pros for an in the Middle Atlantic region (NJ, NY, PA) was $209.
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The average cost to prepare a Form 1040 and state return without itemized deductions was only $115, up from $110 two years ago.
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Most accountants bill on a flat-fee basis for tax preparation, with some billing on an hourly basis. Hourly fees for tax services average $122.12 nationally. The Middle Atlantic (NJ, NY, PA) average was $139.07.
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I hope my clients are reading this!
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Bankrate, Inc. commissioned GfK Roper to conduct a random survey of Americans' attitudes about taxes. The survey found that sixty percent of Americans think the tax system is skewed to benefit the rich. This despite the documented findings to the contrary discussed here in previous posts. Furthermore, three in ten Americans disclosed that they feel clueless about tax preparation and planning.

* Kay Bell of DON’T MESS WITH TAXES reports in her post “Bad News for Those Who Owe, Too” that the IRS will be grabbing the money from checks received for balances due on 2007 returns immediately as a “direct debit”. The IRS payment should show up as an “ACH” withdrawal and not a check on your bank statement. So you better have the money in the bank when you mail your check to “Sam” next year!

Oi vey! So no good news for taxpayers for tax year 2007– your refund will take longer to get to you and the money you owe will be taken by the IRS sooner!

* The NATP TAXPRO WEEKLY reports:
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The IRS has issued Notice 2008-05 clarifying the definition of a qualifying relative for purposes of claiming a dependency exemption. In general, to be considered a qualifying relative of a taxpayer, the individual cannot be a qualifying child of any other taxpayer. The IRS has clarified the definition of "any other taxpayer" (such as a parent) to exclude persons who are not required to file a tax return and do not file a tax return, or only do so to claim a refund of withheld tax.
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This ruling is a major shift from what we have come to understand in the way of claiming dependency exemptions. One of the most common instances of this situation involves a taxpayer who lives with another person for the entire year and that person has a child who is not the taxpayer's child. Assume that the child's parent does not work and the taxpayer provides over half the support for both the child and the child's parent. This ruling clarifies that the taxpayer is eligible to file as head of household, claim the child tax credit, and the dependency exemption.
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Prior to this clarification, it was widely understood that in this situation, the taxpayer was not entitled to the dependency exemption, the head of household filing status or the dependency exemption because the child was the qualifying child of the parent, and thus could not be the qualifying relative of the taxpayer
.”
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TTFN

Friday, December 21, 2007

SOAPBOX

I support the concept that if Congress cuts taxes in one area it must “pay for it” in some other area. This is necessary for at least the appearance of attempting to balance the budget.

The Democrats proposed we cut the AMT and increase taxes on hedge fund investors to pay for it.

However, why does a tax cut here have to always be paid for with a tax increase there? Why can’t we pay for a tax cut with a similar cut in unnecessary government spending instead?

To cover the cost of the AMT fix, how about a few less bridges to nowhere or ridiculous government studies?

This is also an issue in my home state of New Jersey. The answer to balancing the budget is automatically raising taxes and fees and never cutting expenses.

Unfortunately “pork” is the currency of politicians – whether it be personal pork (i.e. allowing NJ officials to hold two or three or more elected and/or appointed - often no-show - paying jobs at once, with double and triple dipping into the benefits pool), or special interest pork, or constituent-based pork.

Oi vey!

TTFN

Wednesday, December 19, 2007

PASSED AT LAST. PASSED AT LAST. THANK GOD ALMIGHTY, PASSED AT LAST!

It appears that while I was visiting with my parents in their assisted living facility at the Jersey shore the one-year AMT fix finally passed - with only 2 days to spare!
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I first heard about it from Joe Kristan in his ROTH AND COMPANY TAX UPDATE BLOG posting “House Caves, AMT Patch Passes”, which reported-
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The House of Representatives caved this afternoon and passed a an "AMT Patch" for 2007 with no offsetting tax increases. The President is expected to sign the bill.
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The House apparently passed the version of HR 3996
passed by the Senate December 6. The bill increases the AMT exemption to $66,250 for a joint return and $44,350 for single filers. The amounts were $62,550 and $42,500 for 2006. If Congress had failed to pass a "patch," the exemptions would have reverted to $45,000 for joint returns and $33,750 for singles, adding an estimated 19 million additional taxpayers to the AMT rolls.
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As the patch only covers 2007, it kicks the problem into 2008 - an election year. More fun awaits
.”
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The vote was 352-64.
..
Treasury Secretary Henry M. Paulson, Jr. issued the following statement:
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"I thank the House for taking action today on an AMT patch that will protect millions of Americans from an unexpected tax increase this year. With legislation now on the way to the President for his signature, the Internal Revenue Service can begin the remaining preparations for next year's filing season.
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The IRS is doing all it can to have a fully successful filing season. However, it is likely that there will be some delays, including delays of some refunds. The Treasury Department and the Internal Revenue Service will do everything possible to keep American taxpayers informed throughout the course of the upcoming filing season
."
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As usual, TAX PROF Paul Caron provided full coverage in his post “House Passes One-Year AMT Patch Without Offsetting Tax Increases; President Bush Is Expected to Sign Bill”. The title just about says it all.
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So the fix is in for 2007. Thank God! I can now finish the memo to go out with my annual January pre-tax season mailing to clients that covers the AMT mess and will tell them that, thanks to the irresponsibility of Congress, their 2007 refunds will be delayed by several weeks.
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As Joe Kristan pointed out “more fun awaits” in 2008 when, or rather if, Congress finally attempts to put this dreaded tax to death.

ASK THE TAX PRO – HOLIDAY TWO-FOR-ONE SPECIAL!

As the questions are beginning to pile up I have decided to respond to two (2) ASK THE TAX PRO submissions this week.

Q. I don't know if this is a question you can answer but maybe you can direct me to where I can find out.

My question is: Why is there a limit on wages subject to Social Security withholding? My wife cannot understand why there is any limit at all. I know that the small Medicare portion has no limit. Just wondering if there even is an answer to this question.

Appreciate any help you can give me so I can give my wife an intelligent answer other than that the Government can do anything they want!!

A. I don’t know that the government can do anything they want – there are Constitutional and legislative guidelines and parameters.

There have always been limits on the amount of wages subject to Social Security withholding. The same wage limit used to also apply to the Medicare portion of the “FICA” tax.

When Social Security began in 1937 the maximum earnings subject to the combined FICA tax was $3,000, and the tax rate paid by the employee was only 1%. The tax rate was raised to 1.5% in 1950, but the $3,000 wage threshold remained.

When I first started doing payroll in 1976 the wage base was $15,300 and the FICA tax rate was 5.85% - 4.95% for Social Security and .9% for Medicare. Back then most full-time employees maxed out on FICA and got a small “raise in pay” toward the end of the year.

The earnings cap went up a couple of thousand per year, indexed for inflation since the early 1970s. By 1980 the maximum earnings had grown to $25,900 and the tax rate was 6.13%. In 1990 the earnings base was $51,300 and the employee (and employer) FICA tax rate became 7.65% - 6.2% for Social Security and 1.45 % for Medicare - which it still is today. By 2000 the wage threshold was $76,200.

In 1991 the “Revenue Reconciliation Act of 1990" separated the Medicare wage limit from the Social Security wage limit and increased it to $125,000. It went to $135,000 in 1993. The “Omnibus Budget Reconciliation Act of 1993” repealed the Medicare wage cap altogether. Since 1994 the Medicare portion of the FICA tax has been applied to all wages, without limitation.

For 2008 the maximum amount of wages subject to Social Security tax will be $102,000.

There has been talk over the past few years of repealing the Social Security wage limit – but nothing has been done.

I hope this will satisfy your wife.

This next question was originally submitted as a comment to my post on
ASK THE TAX PRO – STATE TAXES FOR A NJ RESIDENT WORKING IN NYC. However I felt my reply as a responding comment would be “lost”, so I decided to use it as an “official” ASK THE TAX PRO question.

Q. I have a question if you don't mind.

In 2004 I had a Louisiana driver’s license and my family’s home address was in Louisiana. However, I worked in Florida the entire year and earned my income there. Of course Florida has no state income taxes. Now Louisiana is telling me I need to file for 2004, and that I owe them money.

I'm told you only pay taxes to the state you earned the income in. Does LA have a right to claim money from me? Other than my W-2's I can't prove that I was in Florida, or is that all I need? And of course by this time there's penalties and interest that put it up to about $900!

What should I do?

A. First – I am not familiar with Louisiana tax law or Louisiana state tax returns. I seem to recall doing a Louisiana state return for a member of the cast of the off-Broadway show ONE MO’ TIME, a Louisiana state resident performing in NYC – but that was about 25 years ago! However, the general concept of residency for taxation purposes is similar in most states.

It is not true that you only pay taxes to the state in which you earned the income. You first pay taxes to the state in which you work and earned the money. If you are not a resident of that state, you also pay taxes to your state of residency. You get a credit on your resident state tax return for taxes paid on the same income to the non-resident state. For example, a NJ resident who works in NY first pays NY state income tax on the earnings. The earnings are also reported on the NJ resident income tax return, and a credit it taken on the NJ-1040 for the tax paid to NY using a specific formula. A nonresident is only taxed on income earned in the nonresident state, while a resident is taxed on all income earned from all sources.

One problem you face is that you did not pay state income taxes to Florida, and so cannot claim a credit on a Louisiana resident return.

In New Jersey you are considered a full-year resident if –

· New Jersey was your “domicile” (permanent legal residence) for the entire year, or

· New Jersey was not your domicile, but you maintained a permanent home in New Jersey for the entire year and you spent more than 183 days (i.e. more than half of the 365 days of the year) in New Jersey.

A permanent residence, or domicile, is considered to be the place to which you intend to return after a period of absence (a vacation, a temporary business assignment, education, etc).

The first question I would ask is what was the reality of the situation regarding your residence and work in Florida? Did you move from Louisiana to Florida with the intent of moving your domicile and living and working in Florida? Or did you accept a temporary job in Florida, all the while expecting to return to Louisiana when the temporary job was over? Was the reason you were in Florida the fact that you were in college there, and worked part-time locally while a full-time student? Or did you graduate from college in Florida and decide to stay there?

Second, from which address did you file your 2004 federal income tax return?

Louisiana certainly has the right to ask you for taxes if they consider you to were a Louisiana resident. It is up to you to prove that you were a legitimate Florida resident for 2004.

One way to determine your true domicile is where you receive your mail, where you maintain a driver’s license, where you are registered to vote, etc.

If you worked in Florida in 2004 and moved back to Louisiana in 2005 (and were not a full-time college student in Florida in 2004) it does not mean that you were not a legitimate Florida resident for 2004. It is possible that you intended to move your domicile to Florida, but after a period of time you determined you could not find a proper job, or you were offered a better job back in Louisiana, or a family situation required your return, or you simply did not like living in Florida.

The bottom line is you have to prove to Louisiana that your permanent legal residence, or domicile, for 2004, or at least for the period of your employment, was in Florida. Your W-2 is a start. Did you also rent an apartment in Florida? Did you maintain a Florida telephone number? Did you register to vote in Florida? Did you file a change of address with the Post Office?

You should review the situation with your, or your family’s, tax professional. If it is determined that you are indeed subject to Louisiana state income tax for 2004 do not just automatically accept the state’s assessment. Have the tax pro prepare an actual LA state return for 2004 to make sure the tax is calculated properly.

Does anyone out there have anything else to add?

TTFN

Tuesday, December 18, 2007

YOU LIKE ME! YOU REALLY LIKE ME!

I couldn’t contain myself. I had to stop work and publish this post.

I am the tenth awardee of the TICK MARK blog’s “Twelve Blogs of Christmas”! I join Ryan Ellis of TAX INFO BLOG in the tax blog category.

Blog author Dan Meyer of Tennessee writes that my “'What's the Buzz’ column, included at least weekly, is a good review of tax posts”.

Thanks Dan for including me in your annual list! It is true what winners of the various performing arts awards say – recognition from your peers is indeed a great honor.

Now, back to work!

TTFN

Monday, December 17, 2007

STUFF

This “don’t do today what you can put off till tomorrow” has got to stop! I need to wake up early and go directly to the desk tomorrow morning – and not spend the morning entering my post and basically futzing around to avoid work. So here is the post that I would have published tomorrow. I will be back on Wednesday with a special Two-For-One Holiday Special ASK THE TAX PRO – unless there is breaking news on the AMT fix bill before then.

* CCH reports that –

The Senate on December 14 approved legislation offering tax relief to homeowners caught in the sub-prime mortgage crisis. The bill was approved as an amendment to the Mortgage Forgiveness Debt Relief Bill of 2007 (HR 3648) and creates a three-year exception for debt forgiveness on home loans. When debt is forgiven on a home loan, the homeowner usually must count the amount forgiven as income and pay taxes on it. The measure also extends a provision allowing homeowners to deduct mortgage insurance payments from their taxable income.”

Like the military tax relief bill passed last week, this bill now returns to the House for compromise. The Senate has also sent a farm bill to the House.

Let’s hope the House realizes that the priority is the AMT fix and deal with that before anything else. The clock is ticking! I like TAX GURU Kerry Kerstetter’s recent comments on the topic -

The longer this mess drags on in DC, in terms of our rulers officially addressing this fiasco, the more obvious is their utter incompetence at dealing with common sense. While they may not agree with me that the entire AMT system should be jettisoned, how hard is it to understand the need to at least adjust the threshold figures for inflation, as most other items in the tax code already are?"

Back to the mortgage bill - forgiving tax on debt forgiveness for people who made foolish financial decisions is not a good thing. The really strapped can already avoid tax on debt forgiveness if they are considered to be bankrupt - their debts exceed their assets. Congress is not providing relief to those whose credit card debt has been forgiven as a result of foolish financial activity, so why homeowners? A fool is a fool - and should not be rewarded for foolish behavior!

And as I have always said, I have no clue why PMI premiums should be deductible – other than the fact that the PMI industry probably has a good lobby and lots of money to spread around.

* Jim of BLUEPRINT FOR FINANCIAL PROSPERITY discusses some “
Dumb Year End Money Moves: Marriage, AMT, Bonuses & More”. He makes a good point – Don’t Get Married. While I think it may be good overall advice, in this context Jim means Don’t Get Married at the end of the year.

I have always told my clients that, for tax purposes, you should get married early in the year and have children late in the year. Your filing status is determined by your situation on the last day of the year – December 31st. If you get married on December 25th you are considered by the IRS and your state to be married for the entire tax year, and must pay tax accordingly.
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As I mentioned in a recent post, the marriage penalty is alive and well in the Tax Code. If both husband and wife work they will most likely pay more income taxes as a married couple, whether filing joint or separate, then as two single filers. Since you are going to pay for the privilege for the entire year no matter when you tie the knot, by marrying early in the year you get to enjoy the corresponding benefits (?) of marriage for most of the year.

I have never thought to include the above advice in my Year-End Tax Planning postings. Perhaps I should include it, and the below advice about when to have a child, in my Start The Year Off Right series.

Regardless of when a child is born during the year the parent(s) will be able to claim a dependency deduction and the Child Tax Credit for the entire year (if qualified). If your son is born on February 1, 2008, you will get up to a $3,500 deduction and $1,000 credit, and if a single parent possibly claim Head of Household status. If he is born on December 26th, you still get up to a $3,500 deduction and $1,000 credit, etc. So a child born late in the year gets you all the available tax benefits for the year with a lot less “out-of-pocket” than one born early in the year. If your wife is due any day now, do whatever you can to make sure the child makes his/her appearance by December 31st!

As a point of information, if a child is born and dies in the same year you are allowed to claim a dependency deduction for the entire year. This is true even if the child only lives for a day of so.

* Kay Bell has posted the “Tax Carnival #26: Stocking Stuffers” over at DON’T MESS WITH TAXES. Oi vey – I can’t believe that I forget to submit a posting! It seems that it was only last week when her last Tax Carnival appeared. I will make sure to send her something for the next Carnival, to posted on New Year’s Eve.

I especially liked the post on “
More Than 40% Pay Zero Federal Income Tax” from Super Saver at MY WEALTH BUILDER. I totally agree with her comment, “I don't believe a tax system that allows 40% to opt out is sustainable, especially if that segment requires significant services from the government.”

* TAX PROF Paul Caron brings to our attention an editorial from the Wall Street Journal in his post “WSJ- Taxes and Income”. The editorial points out -

Every Democrat running for President wants to raise taxes on ‘the rich’, but they will have to do something miraculous to out tax President Bush. Based on the latest available tax data, no Administration in modern history has done more to pry tax revenue from the wealthy.”

TTFN

DEAR CONGRESS

As promised, here is the letter that I have sent off to my representatives in the Senate and the House regarding their unacceptable behavior regarding the dreaded Alternative Minimum Tax:

Dear “Member of Congress”:

The irresponsible behavior of Congress with regards to the dreaded Alternative Minimum Tax, described by a colleague as “the poster child for complication, frustration, indiscriminant penalization, and a disregard for the best interest of Americans”, is unacceptable and inexcusable!

As Professor James Maule pointed out so well in his law blog, “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.”

Your failure to act responsibly will, when the promised temporary fix is finally passed, cause the Internal Revenue Service to unnecessarily waste millions of tax dollars and will seriously delay the processing of 2007 federal income tax returns and the issuance of 2007 federal income tax refunds. This delay will cause many, many thousands of lower-income taxpayers, who can least afford it, to fall prey to usurious Refund Anticipation Loans pushed upon them by unethical tax preparation companies.

I have been preparing 1040s in New Jersey for 35 years. I would characterize the bulk of my practice as being members of the middle and upper middle class. During the first half of my career I never prepared a return on which the client paid the dreaded Alternative Minimum Tax. During the past few tax seasons at least every 5th return is hit with this additional tax, and I check for AMT on probably every other 1040 “long form”.

Unfortunately, Congress has been using the increasing income generated by this despicable parallel tax, unadjusted for inflation, to pass tax cuts, which have misled my clients into thinking that they would be saving money while in reality they end up paying more via the “back-door” AMT.

The Alternative Minimum Tax as it now exists no longer does what its predecessor, the original Minimum Tax, was created to do. Len Burman has written in an article titled “The Alternative Minimum Tax – Assault on the Middle Class” in a recent issue of the “Milken Institute Review”, “Remember the political embarrassment the AMT was meant to eliminate – those 155 high-income earners who paid no tax. In 2005, 711 returns reported incomes of over $1 Million without any tax liability.”

The very existence of an Alternative Minimum Tax is an excellent example of the laziness of the Congress. When the issue arose that excessive “loopholes” were causing some high-income taxpayers to avoid paying any federal income tax, instead of closing the loopholes and fixing the Tax Code the reaction of Congress was to provide a “quick fix” with a Minimum Tax.

There is no question that a temporary “fix” for the Alternative Minimum Tax for tax year 2007 must be passed immediately. Get off your arse and just do it!

For the future, it is obvious that the solution to the problem of the Alternative Minimum Tax is to abolish the add-on tax altogether and not just temporarily fix it every few years. But to do this the “regular” tax needs to be properly “fixed”. I have written in my blog THE WANDERING TAX PRO that “this would require too much work on the part of a Congress that needs to spend more of its time and energy raising money and running for re-election than it does on actually doing what they were elected to do!” Please prove me wrong and do away with the AMT properly early in 2008.

Very truly yours,

Robert D Flach

Please get your letter off to your Congress-persons ASAP!

BTW - the Senate passed its version of a military tax relief bill - the Defenders of Freedom Tax Relief Bill of 2007 (S. 1593) – last Wednesday. It is different from the one previously passed in the House – so there is a need for compromise. Kay Bell of DON’T MESS WITH TAXES discusses the bill in her posting “Military Tax Relief Approved by Senate”.

TTFN

Sunday, December 16, 2007

STOP WHINING WARREN!

Warren Buffett continues to whine that he is not paying enough in federal taxes and campaign for more “progressivity” in the Tax Code.

I have never been a fan of the “progressive” income tax system - where the more you earn the greater the percentage of your earnings that are taxed. I favor a more flat tax system.

Is it fair that an individual with a higher level of income must pay a higher percentage of that income in tax? Obviously a person with an income of $1 Million should pay more taxes than one making only $50,000. But a taxpayer earning $1 Million who would pay a flat 20% tax would certainly be paying more tax than a taxpayer paying that flat 20% on $50,000 of earnings, although not proportionately so.

Is it fair that a large, and growing, segment of the American population are “non-taxpayers” – individuals who pay absolutely no federal income tax, although beneficiaries, perhaps even at a greater level, of government protections and programs?

The Tax Foundation has produced a “Fiscal Fact” report that shows just who pays what.

Foundation President Scott Hodge, responding to a recent joint appearance by Buffett and Hillary Clinton, has pointed out –

A new report by the Congressional Budget Office shows that Buffett and Clinton have their facts quite wrong. Indeed, the 'super-rich', the top 1 percent of households, are now paying a record 27.6 percent of federal taxes (those taxes measured by CBO) and a record 38.8 percent of income taxes. By contrast, the bottom 80 percent of households—representing 90 million households—pay 31.1 percent of federal taxes and just 13.7 percent of income taxes.
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In other words, the top 1.1 million American households pay a greater share of the income tax burden than the bottom 90 million combined.”
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A posting by TAX PROF Paul Caron led me to Greg Mankiw's Blog (Random Observations for Students of Economics), which discusses the same Congessional Budget Office report used as a source by the Tax Foundation Fiscal Fact in the post “Tax Rates: Current vs Historical Averages”. Greg comments –
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“Notice that all groups are paying lower tax rates than the historical average. But in contrast to some popular perceptions, the change is not concentrated among the upper income groups. In fact, the opposite is true.”

As a fellow blogger (I can’t recall whom) pointed out – if Warren Buffett thinks he should be paying more to the federal government he can always make a donation to the federal treasury!

TTFN

Saturday, December 15, 2007

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

* The PPC Thompson Tax and Accounting Newswire reports that –
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In a recent information letter addressed to Congressman John Sarbanes, the IRS explained why ‘meal replacements and dietary supplements’ to help people reduce their weight are not a deductible expense under IRC Sec. 213(d)(1). INFO 2007-0037 notes that IRC Sec. 262 prohibits a deduction for personal, living, or family expenses. Food is a personal item, so its cost is nondeductible. Meal replacements, diet foods, and dietary supplements are substitutes for the food that people normally consume. So, the cost of these items is a nondeductible personal expense under IRC Sec. 262.
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While the IRS concluded in Rev. Rul. 2002-19 (2002-1 CB 778) that obesity is a disease, the IRS added that taxpayers who are diagnosed as obese cannot deduct any portion of the cost of purchasing reduced-calorie diet foods because, once again, they are substitutes for the food that people normally consume to satisfy their nutritional requirements.”

* The IRS, in Revenue Ruling 2007-72, has stated that the cost of a self-administered pregnancy test kit qualified as a deductible medical expense under Internal Revenue Code Sec. 213(d)(1)(A), even though it tested the healthy functioning of the body rather than attempted to detect disease.

FYI, my special report DEDUCTING MEDICAL EXPENSES ON YOUR 2007 FORM 1040 explains in detail just about everything you always wanted to ask about deducting medical expenses. Click here for more information.
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* Do you have a nanny, or any other “household employee”? Kathleen Webb of 4nannytaxes.com answers the question “Why Should You Pay the 'Nanny Taxes?” in her website’s blog. You may also want to review my posting of “Ask the Tax Pro – The Nanny Tax” as a companion piece.
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* KPE’s posting on “Ask the Taxgirl: Anniversary Presents” at TAX GIRL just goes to verify “My Best Tax Advice” - DON’T ACCEPT TAX ADVICE FROM ANYONE OTHER THAN A PROFESSIONAL TAX PREPARER!
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* The internet’s BAG LADY provides an interesting look at the “Fair Tax” national sales tax proposal in her posting “Is There Really a Fair Tax?”. I wonder if there can ever be a truly a “fair” tax system. The current one is certainly not particularly fair.

* Kudos to Trish McIntire of OUR TAXING TIMES for her recent letter to the editor, reprinted in her blog posting “A Nasty Tax Surprise”.

Her letter clearly describes the current problem -
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All year Congress has assured us that they plan to extend the patch for 2007. However, with just days to go before they adjourn for Christmas, they still have not gotten an AMT bill passed.”

The letter ends with the plea - “Please contact your Representatives, Senators and the White House and demand that they stop playing politics and pass an AMT patch. There are bills dealing with AMT in Congress now but they need a compromise and members of both parties putting down the rhetoric and thinking of the people who elected them first.”

I apologize for the delay in writing and posting my letter to my local Congress-persons to chastise them for their inaction. I will have it in the mail, and on the blog, next week!
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Kelley Phillips Erb, our TAX GIRL, has posted an open letter to Congress on the subject at “Fixing the AMT: A Plea to Congress”. As I said in my comment: “Kelly – you were too polite in addressing the arseholes in DC. They need a good chastisement for their irresponsibility and laziness!”
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* Kay Bell of DON’T MESS WITH TAXES and Joe Kristan of ROTH AND COMPANY TAX UPDATE BLOG have each been posting a Year-End Tax Planning series lately. Kay’s Part 5 – “Taking Care of Details” – does not have to do with actual year-end tax moves, but does provide some excellent advice.
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Speaking of Kay, in her post “AMT Take 3” she tells us -
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Here in D.C., the word from IRS folks who've been talking with us at the annual Taxpayer Advocacy Panel meeting is that next week is make or break for the AMT patch.
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If legislation to keep millions -- estimates range from 20 to 25 million taxpayers -- isn't okayed by next Friday, Dec. 21, then the 2008 filing season will be disrupted on a scale heretofore unseen
.”
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* TALKING TAXES, the blog of the Citizens for Tax Justice, provides the responses of the Republican Presidential candidates to the question "Who in this country is paying more than a fair share of taxes relative to everyone else: the wealthy, the middle class, the poor or corporations?" in its post “GOP Debate: Who's Paying Too Much in Taxes?
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While not actually answering the question, Fred Thompson (former DA of NYC – on tv at least) made an excellent observation – “Five percent of Americans pay over half the income taxes in this country. 40 percent of Americans pay no income taxes at all.”
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In the spirit of providing equal time to the Democrats, AccountingWorld.com provides an article, titled “Dems Call for Taxes on Wealthy at Debate” (so what else is new), with the comments of the Democratic Presidential candidates at a recent debate in Iowa.
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TTFN

Friday, December 14, 2007

SOME MORE STUFF TO THINK ABOUT

A while ago I brought up as a topic for discussion doing away with the tax deduction for depreciation of real property. See my post “Here is Something to Think About”.

Generally, real estate appreciates in value over the years, so the depreciation deduction distorts the economic reality of a rental or business activity. And, as depreciation must be recaptured on the sale of the property, at a potentially much higher capital gain tax rate, the taxpayer really does not get much overall tax benefit from the deduction. The recapture of depreciation, a legitimate practice under the current tax law, only causes confusion and aggravation for many taxpayers and increased “agita” for tax preparers.

I would like to offer up for discussion some other suggestions for changes to the current Tax Code to make it simpler, fairer, and more representative of economic reality.

* The double-taxation of corporate dividends has been an inequity in the Tax Code that has been around it seems forever.

As you know, corporations are taxed by the federal and state governments on their net earnings before any dividend distributions. When the corporation distributes its earnings to shareholders in the form of dividends, the shareholders must pay tax on these dividends to their "uncles" (Sam and Jon, for example).

Corporate earnings distributed as dividends are taxed by Sam at up to 50% (35% top corporate tax rate plus 15% maximum individual tax rate on “qualified” dividends) or more (if the dividends do not qualify for the lower rate due to the shareholder’s holding period). Plus corporate income and dividends received are also taxed at the applicable state tax rate. In New Jersey the corporate tax rate is 9.36% (with the 4% “surcharge”) and individual dividend recipients could be taxed at up to 8.97% - so we are talking a total of 68.33% or more of dividend income going to your “uncles”! NJ has a special problem - even if the corporate net taxable income is "0" NJ corporations must pay a "minimum tax" of from $500 to $2,000.

I would propose that corporations be allowed a “dividend distribution” deduction of up to the amount of net taxable income. So if a corporation distributed all of its net income for the year to its shareholders as dividends it would pay no federal income tax.

This move would not only do away with the unfair double taxation of dividends, but would also help to do away with most corporate tax fraud, offshore shelters, and special interest tax loopholes. To avoid paying federal income tax a corporation would no longer have to resort to Enron-like scams or pay Congress-persons, or lobbyists to pressure Congress-persons, to pass special corporate tax loopholes. All they would have to do is distribute their earnings to their shareholders as dividends.

Not having to pay federal income tax could lead to increased corporate dividend distributions. Without the double-taxation of dividends, Congress could repeal the special capital gain rates on qualified dividends, unless they wanted to continue to encourage investment by taxing dividends at preferential tax rates.

* The “marriage penalty tax” was a popular topic a few years ago. While the Bush tax cuts did away with this penalty to a degree for those in the lower brackets, this penalty is still alive and well in the federal Tax Code.

To truly do away with the marriage penalty I would suggest changing the “Married Filing Separately” filing status to be totally equivalent to that of “Single”. By filing separately, a married couple, regardless of level or income or individual situation, would pay the absolute same federal income tax that they would if they were both single.

If memory serves me, early in my career New York State allowed its married taxpayers to file as if they were two single individuals on the same state tax return. I would rewrite the federal Form 1040, and 1040A, to allow this as well.

To do this the Tax Code would need to be rewritten to remove all the disadvantages of filing separately and make the Tax Rate Schedule for Married Filing Separately the same as that for Single. Currently if you file a separate tax return –

· You cannot claim the Credit for Adoption Expenses, the Credit for Child and Dependent Care Expenses, the Earned Income Credit, the Credit for the Elderly or Disabled, or the HOPE or Lifetime Learning Education Credit.

· You cannot claim an Adjustment to Income for tuition and fees, student loan interest, or a spousal IRA.

· You will probably be ineligible for a ROTH IRA or a deductible IRA if an active participant in an employer pension plan.

· You will not be able to exclude from income savings bond interest used for qualified educational expenses.

· A greater amount of your Social Security benefits may be taxed.

· The maximum net loss deduction is limited to $1,500 for each spouse.

· You will not be able to deduct a loss on rental property.

· One spouse’s passive loss cannot be used to reduce or wipe out the other spouse’s passive income.

· You will not be able to convert a traditional IRA to a ROTH IRA.

I would also look at ways of reducing the “marriage tax benefit” for families with only one earner. Taxpayers should not be penalized, or excessively rewarded, for being married.

* The above two proposals are the most controversial. I would also favor making all legal and contingency fees relating to court and legal awards and settlements deductible “above-the-line” as an “adjustment to income” – not just those relating to discrimination suits. Recipients should only be taxed on the amount they actually receive “in hand”. Having to deduct the related legal fees as a miscellaneous itemized deduction subject to the 2% of AMT exclusion is definitely unfair.

And I would like to see gambling losses allowed as an “above-the-line” deduction, to the extent of winnings as is currently permitted. This would fix the current inequity that has individuals who actually lost money from gambling activities for the year paying tax on their gross earnings. It is true that losses are deductible, to the extent of winnings, as a miscellaneous itemized deduction not subject to the 2% of AGI exclusion, but one needs to be able to itemize without counting the gambling losses to be able to fully benefit, plus the current method increases AGI and as a result unfairly penalizes taxpayers elsewhere on the return

So Kay, Kelly, Gina, Trish, Dan, Joe, Jim, Kerry, Paul, Ryan, and everyone else out there – what do you think? BTW, I am still waiting for your comments on my real estate depreciation idea!

TTFN

Thursday, December 13, 2007

AMT UPDATE – WHERE THE FAKAWI?

CCH reports that –
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House Ways and Means Committee Chairman Charles B. Rangel, D-N.Y., succeeded in his promised effort to pass an alternative minimum tax (AMT) relief bill on December 12, but the new measure contains more than $50 billion in revenue increases that critics believe are unlikely to win support in the Senate. Rangel said that he introduced the AMT Relief Bill of 2007 (HR 4351) in hopes that GOP lawmakers would agree to pay for a one-year AMT patch, rather than forcing the federal government to borrow money to offset the cost. The bill passed the House on a party-line vote of 226 to 193.”
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The bill would extend AMT relief for nonrefundable personal credits and increase the AMT exemption amount to $66,250 for joint filers and $44,350 for individuals, provide relief for AMT taxpayers who have exercised incentive stock options, and make changes to the refundable AMT credit. It also includes a provision to increase the eligibility of the refundable child tax credit.
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Accountingweb.com reports –
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Chairman Rangel’s legislation removes provisions that would tax carried interest of private equity managers at ordinary income rates instead of the current capital gain tax rates, but would retain the provision to close a tax loophole that allows hedge fund managers to defer taxes by sheltering their pay in offshore tax havens”.
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According to Ways and Means ranking Republican Jim McCrery, the Rangel bill will not survive a Senate vote. "We've been down this road before," McCrery said. Eventually House Democrats would be forced to accept an offset-free AMT bill. "Until that happens, considering AMT legislation with unnecessary tax increases does nothing-nothing except contribute to chaos in our tax filing season and delay tax returns for tens of millions of taxpayers," he said.
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The White House is standing firm in its promise to veto an AMT tax fix package that is paid for by raising taxes elsewhere.
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The longer this farce continues the longer the processing of tax refunds will be delayed!
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I will continue to keep you posted on developments.

DID YOU DONATE A CAR TO CHARITY IN 2007?

Did you donate a car to charity in 2007?

Did you receive a Form 1098-C, including a COPY B, from the charity?

In order to claim a deduction on your 2007 Schedule A of more than $500.00 for donating a motor vehicle (car, motorcycle, boat, or airplane) to charity, you must attach to your Form 8283 Copy B of IRS Form 1098-C!

The Form 1098-C will include the name and Taxpayer Identification Number of the charity, the vehicle identification number of the auto, and the date of contribution. Form 1098-C must be given to you within 30 days of either the date of the contribution or the date of the disposition of the vehicle (i.e. sale) by the charity. The Form 1098-C will also include additional information depending on what the charity does with the donated car, and this information will determine what you are allowed to deduct.

If you have not yet received a COPY B of Form 1098-C, from the charity give them a call and ask when they will be mailing it to you. It is possible that the car you donated has not yet been sold, especially if donated late in the year, so all the necessary information is not yet available.

If you have received a Form 1098-C, but it does not include a copy identified as COPY B (you are sent a COPY A and/or COPY C, but no COPY B), call the charity and tell them that you need them to send you a COPY B.

I recommend being a pest, and continuing to call the charity and bother them until you get a COPY B of Form 1098-C in your hand.

The charity can give you a statement in lieu of a Form 1098-C as long as it contains all the necessary information – the same information that would be included on a 1098-C – a copy of which can be attached to your 2007 tax return instead of the 1098-C. However, as a preparer I would much prefer to attach an actual COPY B of a Form 1098-C to the return instead of a statement – just to be safe.

I know that “Sam” has been inflexible in the past regarding attaching the requested COPY B of a Form W-2 to the tax return. So I expect that “he” will be just as inflexible with the requirement for attaching COPY B of the Form 1098-C, even though a COPY A, C or D will have the exact same information.
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Your 2007 return will be held up long enough already with the Congressional AMT FU - you don’t want to give the IRS a reason to hold up sending out your refund any more!

Any questions?

BTW, I have written a special report on DEDUCTING CONTRIBUTIONS: ALMOST EVERYTHING YOU ALWAYS WANTED TO KNOW ABOUT DEDUCTING CONTRIBUTIONS ON YOUR 2007 TAX RETURN. Click
here for more information.

TTFN