Monday, June 30, 2008

TO FILE ELECTRONICALLY OR NOT TO FILE ELECTRONICALLY

An article on WebCPA.com reports “Committee Wants to Fine Tax Preparers Who Don't E-file”. It seems that the IRS Electronic Tax Administration Advisory Committee has listed this as its No. 1 recommendation.
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"At this time, ETAAC believes that all reasonable voluntary means have been exhausted with respect to encouraging preparers to e-file individual tax returns, and it is time to take a stance by announcing an e-file mandate for tax return preparers," the Committee stated in its annual report to Congress.

According to the article - “The mandate would apply to all paid preparers who use tax software and file more than 50 individual returns, with minimum penalties set for non-compliance.”

Those of you who know me know that in my 37 years of preparing 1040s I have never used tax software. I prepare all of the approximately 400 federal income tax returns that I do each year by hand.

I therefore do not file federal income tax returns “electonically”.

It is not that I am against electronic filing because of privacy concerns or any other such reasons. I file the majority of my full-year resident NJ-1040s via the NJ Division of Taxation’s “NJWebFile”, as I am required to do by state law unless the client elects to “opt-out” of electronic filing. I do this because it is free and easy to do. There is no tax software to buy and no need to register - you just go online and do it. I also do it because there is a benefit to my client – it gets a refund check to the client faster, and it is the only way that I can have a NJ state refund directly deposited to the client's bank account

The IRS currently does not offer a free method of filing returns online similar to NJWebFile. In order to file federal returns electronically a tax professional must first spend thousands of dollars to purchase a tax preparation software package, and continue to spend hundreds more each and every year for updates and support. One must then apply to the IRS to become an ERO (Electronic Return Originator). As I understand it the application processs includes providing the federal government with copies of your fingerprints.

I have no intention of wasting thousands of dollars on flawed tax preparation software. For me this is a truly unnecessary expense. When highly publicized tax software errors lead clients and friends to ask me what tax software package I use I simply point to my temple – indicating my brain. When I have raised my hand in response to the question of “who here still prepares 1040s by hand” at tax update seminars I am told by both speakers and participants things like, “You are the only one in the room who really knows how to prepare tax returns.”

I also have no intention of adding my fingerprints to some “big brother” national data base. What if I decide to murder an especially annoying client sometime in the future?

The article indicated that the requirement would apply to “all paid preparers who use tax software”. Since I do not use tax software perhaps I would be exempt from the requirement if passed.

If the Internal Revenue Service allows all taxpayers, and tax professionals, to file 1040s and 1040As for free online at the IRS website – and not via some Free File coalition of fast food tax preparation chains – then I will gladly join the bandwagon and file federal returns electronically.

TTFN

Sunday, June 29, 2008

MORE BUZZ

Here are two items that I missed in yesterday’s WHAT’S THE BUZZ posting:
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* Kay Bell of DON’T MESS WITH TAXES brings us up-to-date on the status of the energy tax credit for Honda hybrid cars in her post “Honda Hybrid Credit Drops Again July 1

* The George W Bush economic “stimulus” rebate election year bribe was supposed to save the economy because it was expected that upon receipt of the check Americans would all rush out and buy big-screen televisions or similar big-ticket items.
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However an article from Thursday’s Star Ledger titled “Report: Stimulus Checks Spent on Gas; Higher Fuel Costs Eat Up Tax Rebates, Consumer Advocates Argue in Study” tells us that New Jersey residents have used the money to pay for gas instead.
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According to the article - "The rebate check approach was created with the hopes that consumers would increase their spending on goods and services," said Brandi Kennedy, assistant director for the Montclair office of NJPIRG {New Jersey Public Interest Research Group - rdf}. "But as gas prices keep rising, American families have been pouring their stimulus money into their gas tanks."
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TTFN

Saturday, June 28, 2008

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

* The Tax Policy Center’s TAX VOX blog gives some specific examples of “What the Obama and McCain Plans Would Mean for Real Taxpayers”. Among his examples of “real taxpayers” post author Howard Gleckman discusses a “two-lawyer” family with one-child earning $200,000. For residents of the Northeast, including my clients in New Jersey, this situation is more common than in other parts of the country. These people, certainly not both lawyers, are not particularly wealthy, but basically on the upper end of “middle class”.

* In a “15-Minute Tax Tip” at MarketWatch.com Jennifer Openshaw gives a good example of the benefits of what I have been telling clients and readers for some time now.

Here is what Jennifer says in a nutshell - Deposit $4,000 in a ROTH IRA for a graduating high school student, age 18. Deposit $4,000 more when they graduate from college. At 6% the first $4,000 compounds for 47 years (to age 65), becoming $66,647. The second $4,000 compounds for 42 years, becoming $52,450. That's a total of $109,087 from only $8,000! And, if in a ROTH, it is completely tax-free.
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* The CCH Tax Newsletter reported that the House of Representatives approved the Alternative Minimum Tax Relief Bill of 2008 (HR 6275) By a vote of 233 to 198 on June 25th. The bill would provide another one-year “patch” of the dreaded AMT.
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According to
“House Clears AMT Legislation with Revenue Offsets”, the cost of the patch is “offset by provisions that raise taxes on oil companies, hedge fund managers and others“.
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As mentioned in an earlier post on this bill, “GOP lawmakers noted that the Senate, as well as the White House, reject the idea of raising taxes to offset the cost of AMT relief. They predicted that a tax-free AMT relief bill will be passed by Congress and signed into law by President Bush in 2008.”
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The White House has threatened to veto the bill because it contains tax offsets to pay for it.
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* Blog reader Judy Wemhoff, Communications Manager for the National Community Tax Coalition of the Center for Economic Progress, has asked me to tell you that the National Community Tax Coalition is partnering with Frontera Asset Building Network to hold a regional summit for people working in the area of tax preparation for low-income individuals and families in Scottsdale, Arizona on July 23-25. For more information click here.
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TTFN

Tuesday, June 24, 2008

THIS JUST IN – IRS INCREASES MILEAGE RATES

According to IR-2008-82:
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The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2008. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.
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The rate will increase to 58.5 cents a mile for all business miles driven from July 1, 2008, through Dec. 31, 2008. This is an increase of eight (8) cents from the 50.5 cent rate in effect for the first six months of 2008, as set forth in
Rev. Proc. 2007-70.
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In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2008. The IRS normally updates the mileage rates once a year in the fall for the next calendar year.
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The new six-month rate for computing deductible medical or moving expenses will also increase by eight (8) cents to 27 cents a mile, up from 19 cents for the first six months of 2008. The rate for providing services for charitable organizations is set by statute, not the IRS, and remains at 14 cents a mile
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ARE YOU ONE OF THE MISSING 5 MILLION?

Testifying before a Congressional hearing about the “stimulus” rebates last week IRS Commissioner Shulman reported that 5 million retirees and disabled veterans qualify for an economic stimulus payment but have not yet filed a 2007 return to claim their payment.

In launching a special summer campaign to reach these individuals the IRS reminds us, “A special stimulus category includes recipients of certain benefits from Social Security and Veterans Affairs who do not normally have a requirement to file a tax return. However, these individuals must file a tax return before Oct. 15 this year to receive their economic stimulus payments.”

If you normally do not file a federal income tax return because your taxable income is below the filing threshold and you receive regular or disability-related Social Security, Railroad Retirement or Veterans benefits of at least $3,000, or you know someone who fits this description, you, or they, are entitled to a rebate check – but you, or they, must file a 2007 federal income tax return in order to get the check.

FYI, Supplemental Security Income (SSI) is basically a welfare payment and does not count as “qualifying income” for the “stimulus” rebate. If you receive only SSI, and no other Social Security, Railroad Retirement or Veterans benefits or other qualifying income such as wages reported on a Form W-2, you are not entitled to a rebate.

If you have not already filed a 2007 federal income tax return you still have time. You should file a Form 1040A reporting the gross amount of Social Security, Railroad Retirement or Veterans benefits on Line 14a. The return should show “0” taxable income and “0” tax liability.
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Write “Stimulus Payment” across the top of Page 1 of the Form 1040A. Even though you are not requesting a refund on the Form 1040A you should provide the appropriate bank information on Lines 44 (b), (c) and (d) if you want your rebate check directly deposited to your bank account.

You must file the 2007 federal income tax return by the October 15th due date for extended returns in order to get a check this year.

Make sure you file only one 2007 federal income tax return!

I have clients, a couple both in their 70s or 80s, who normally file a joint Form 1040 each year to report rental income and expenses on Schedule E. They have taxable interest and pension income and also receive non-taxable, due to their level of income, Social Security benefits. While they generally have a “0” tax liability after deducting the rental expenses and the Standard Deduction and personal exemptions, they still have to file because the “gross rents” puts their total income above the filing threshold.

They also regularly attend meetings of a senior citizen group at the local Senior Center. At one meeting the “stimulus” rebate check was discussed and they were told they had to file a Form 1040A to get the rebate.

A few weeks after I had prepared their 2007 Form 1040, and given them a copy, I got a call from the husband asking if I was going to send them a copy of their Form 1040A. I told them they did not file a 1040A but a 1040, and I had already given them a copy the of completed 2007 return.

No, he did not mean the 1040. He acknowledged that he had a copy of the 2007 Form 1040 that I prepared. He was talking about the Form 1040A he was told had to be filed in order to get the George W rebate check!

You must file a 2007 federal income tax return, be it a 1040, a 1040A or a 1040EZ, to get a rebate. But only one income tax return is required. One return covers both your regular income tax obligation and the application for the “stimulus” rebate! You do not have to file a second federal income tax return, a separate Form 1040A, to apply for the rebate!

Any questions?

TTFN

FYI- Check out today’s posting at THE FLACH REPORT titled “Call Your Tax Guy First”!

Monday, June 23, 2008

PAYING FOR THE “STIMULUS” REBATE ELECTION YEAR BRIBES

The Government Accountability Office (GAO) issued a report on June 19th on "Tax Administration: Data on the Effects of the Economic Stimulus Program on the Internal Revenue Service's Telephone Service and Costs" (GAO-08-916T). According to the report’s summary (emphasis is mine).
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The costs for implementing the economic stimulus legislation may be up to $862 million. IRS received a supplemental appropriation of $202 million for implementing the economic stimulus legislation. The Social Security Administration received a supplemental of $31 million and the Financial Management Service received a supplemental of $64 million. The reallocation of hundreds of IRS collections staff to answering taxpayer telephone calls will also result in up to $565 million in foregone enforcement revenue, according to IRS estimates.”
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As Key Bell of DON’T MESS WITH TAXES put it in a post on this subject, “administering the stimulus payments is likely to cost the agency, and the U.S. Treasury, much more than all our spending of the checks will recoup.”
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The report also discusses the effects of the Economic Stimulus Act of 2008 on the Internal Revenue Service's (IRS) telephone service.
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Demand for telephone assistance related to the economic stimulus legislation has been unprecedented, according to IRS. For the week ending May 24, volume was almost six times greater than the same week last year. Despite reallocating staff from collections work to answering stimulus-related calls, the percent of callers waiting to speak with an assistor who got through has declined markedly to 39 percent for the week ending May 24 compared to 80 percent for the same week last year.”
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What a mucking fess! And we, and the IRS, still have to look forward to the millions of errors regarding the rebates that will no doubt be made on 2008 tax returns.
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TTFN

Saturday, June 21, 2008

THE GREAT BLOG OFF

TAX GIRL Kelly Phillips Erb has just completed “The Great Blog Off” – a project of the b5media group of blogs in which each member blogged once every hour for a 24 hour period. This “blog off” was used to support the charity Accion International. It was like a “walk-a-thon” only with postings not miles.

Kelly provided a marathon of ASK THE TAX GIRL posts, which included lots of valuable information.

In one of the posts the TAX GIRL was asked “Can you name other web sites that you read?”. Her answer included the following –
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You’ll get straight talk from Robert Flach at the Wandering Tax Pro - which I appreciate.”
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Thanks, Kelly, for including me on your list. I am honored that you think TWTP is worth recommending.
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And keep up the good work.

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

* Paul Caron, the TAX PROF, reports that since the IRS announced the 2008 mileage rates on November 27, 2007, the price of a gallon of gasoline in the U.S. has risen 31.2%, from $3.079 to $4.039. I actually paid $4.00 per gallon ($3.999) in New Jersey, one of the less expensive gas states, on Father’s Day. No wonder the National Treasury Employees Union has called on the IRS to increase the 2008 optional Standard Mileage Rates, as Paul reports in “Group Calls on IRS to Increase Standard Mileage Rate in Light of Record Gas Prices”.

The Tax Foundation’s TAX POLICY BLOG also reports that “Sen. Coleman Seeks Increase in Mileage Reimbursement Rate”. The post states that Sen. Charles Schumer (D-NY) “has a bill pending (S. 3032) to temporarily standardize business, medical, and moving reimbursement rates at 70 cents per mile, with charitable reimbursement increased to 40 cents per mile”.

The IRS had increased the standard mileage allowances during the year in 2005. In that instance there was one rate for the first 8 months of the year and another for the last 4 months. I hope that when (and I do expect it to happen) the IRS, or Congress, raises the SMAs for 2008 they make it retroactive and effective for the entire year 2008. Anytime there are two separate rules for a deduction at various times of the year it is a true PITA for we tax preparers.

FYI, generally the SMA for business, medical and moving travel is set annually by the IRS, while the SMA for charitable driving is set by Congress. The current 14 cents per mile for charity has been around for quite a while now (there was a temporary increase for Katrina-related charitable driving).

* Glad to hear Joe Kristan and his associates at ROTH AND COMPANY survived the floods in Iowa. On June 16th he posted some tax advice and information for individuals who were affected by the floods – and for those who are victims of similar natural disasters in a covered disaster area at the firm’s TAX UPDATE BLOG.

* There has been a lot of buzz about Obama and McCain’s tax policies – and we haven’t even had the conventions yet! As one would expect, McCain has the better of the two, although his is certainly not perfect. Obama wants to further complicate the Tax Code with targeted tax breaks for the “less fortunate” (most of them already pay no taxes) and increased income and Social Security taxes on those he considers to be “wealthy”. An article on my Comcast.net homepage titled “McCain, Obama Offer Different Visions on Taxes” is just one of the online comparisons.

* An article in Thursday’s USA TODAY (“How Much Do You Make? It’d Be No Secret in Scandinavia”) reports that each year Sweden, Finland and Norway makes public every one of its citizen’s tax returns, so anyone can look up what his in-laws or neighbors make.

* An “As The Congress Turns” update - The CCH Tax Newsletter reported in
Ways and Means Approves AMT Patch with Revenue Offsets” that on June 18th.

According to the article the Alternative Minimum Tax Relief Act of 2008 (HR 6275) “will never reach a vote in the Senate because Republicans object to the revenue-raisers.” Republicans “predicted that history will repeat itself and that the Democratic-controlled Congress will eventually pass an AMT relief bill without revenue offsets, just as it did in 2007”.

Oi vey! It looks like it will be down to the wire again this year with regards to “extenders”. All this nonsense about “sunsetting” and “extenders” is relatively new in the tax world – unique to George W’s tenure. In the past when Congress passed a tax measure it was the permanent law until a future Congress changed or repealed it. Tax law never “expired”.

It is just one more example of how Congress is basically lazy and prefers to “react” with a quick fix rather than “respond” with thoughtful legislation to actually deal with the causes of a problem or issue.

* TAX GIRL Kelly Phillips Erb reports “JK Harris and Company, LLC, a national tax debt firm that promised to help folks settle tax debts, has agreed to change its advertising practice and pay millions of dollars in restitution under a settlement with attorneys general in 18 states.” in her post “Tax Debt Firm Settles With Attorneys General In Multiple States”.
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JK Harris is one of the companies that erroneously advertise they can settle your outstanding tax debts for “pennies on the dollar”. According to Kelly (emphasis is mine), “Among the allegations against JK Harris was that the company regularly advertised it could help people who owed taxes to the IRS by filing an Offer in Compromise while knowing that the taxpayers may not qualify. The company took money upfront for this service, it was alleged, and the money was not refunded.”
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As I continue to advise my readers – if you owe a ton to “Sam” and think you may qualify for relief via an Offer in Compromise do not contact any of the “pennies on the dollar” firms that advertise on television and elsewhere. Talk to your tax professional first, or to a reputable and competent tax professional like Kelly. You can find a tax pro in your area by going to
www.taxprofessionals.com .
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* Kay Bell reports in DON’T MESS WITH TAXES that “Congress Taking a Look at Rebate Process” in light of all the FUs that have surfaced lately regarding the “stimulus” payments. According to the posting (emphasis is mine) -

Oversight Subcommittee Chairman John Lewis (D-Georgia) and Social Security Subcommittee Chairman Michael R. McNulty (D-New York) noted that,To administer the rebate checks, the IRS and the Social Security Administration (SSA) received an additional appropriation of $50.7 million and $31 million, respectively, to ensure that the rebate checks are fully and properly paid.’”

$81.7 Million of the taxpayers’ money wasted to process this unnecessary election year scam! That means that the federal deficit is $81.7 Million more than it should be (and don’t forget to add the humongous amount of the actual rebates themselves)!

* Kay also discusses the new Heroes Earnings Assistance and Relief Tax (HEART) Act, which George W signed into law last week, in her post “HEART Act Now Official”.

TTFN

Monday, June 16, 2008

I wanted to take a brief break from my GD extension hiatus to mention that my thoughts are with fellow tax-blogger Joe Kristan (of the ROTH AND COMPANY TAX UPDATE BLOG) and his fellow Iowans as they deal with the floods.
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While I have never personally been victim of such a natural disaster, many of my fellow New Jerseyans have been.
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Good luck and stay dry!

Saturday, June 14, 2008

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

* Want to know what happened to your “stimulus” rebate check. Maybe your state took it! The Tax Foundation’s TAX POLICY BLOG reports on this issue in its post “States Seize $47 Million in Stimulus Checks for Back Taxes”.

* The RONI DEUTCH TAX CENTER TAX HELP BLOG provides an extensive comparative analysis of the various tax views of McCain and Obama in the appropriately titled post “
Obama & McCain: Tax Views of the Next President”.

* TAXVOX, the blog of the Tax Policy Center (TPC), also compares the tax policies of the O and McC in its post “
TPC Looks at the Obama and McCain Tax Plans”. TPC has concluded that “their schemes are, well, painfully predictable” and “Each would raise the national debt by trillions of dollars”.

* Did you hear? “Taxgirl Goes (Back) To the Movies!”. Kelly Phillips Erb has begun her now annual contest a bit early this year.

According to Kelly, here is how it works – “I’m asking you to nominate films for me to review - with a twist. You make the nomination and if I agree, I’ll blog about the tax consequences of the events in the movies. You know, like the fact that Julia Roberts’ character still has to report her income from prostitution in PRETTY WOMAN… and how Nicolas Cage’s character has to pay income tax on all of his winnings in IT COULD HAPPEN TO YOU and still has a gift tax issue to wrangle with. Trust me, you don’t get this level of film review anywhere else…

Readers “vote” on the review by submitting comments. The person who nominated the most commented film review of the summer will receive a “cool” Taxgirl T-Shirt. Check out the post for more details and rules (such as “nothing with Jessica Simpson or Lindsey Lohan in it”).
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* Check out this video from 1962 of JFK speaking on his proposed tax cuts at the Tax Foundation’s TAX POLICY BLOG.
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* Friday’s “Tip of the Day” at the Small Business Taxes and Management website reports – “Minimum wage to increase . . . Be prepared. The federal minimum wage increases to $6.55 an hour on July 24, 2008. That may still be less than the minimum wage in the states you do business in. The U.S. Department of Labor has an interactive site that lists the minimum wage, planned increases and the hours threshold for premium pay for all the states. Go to
www.dol.gov/esa/minwage/america.htm and click on the state you're interested in.'
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* I seem to recall quoting someone, I don’t remember who, a while back in stating that Republicans can’t use the word “tax” unless it is followed by the word “cut”, and Democrats can’t say “tax” unless it is followed by “the rich”. Or at least who they perceive to be rich. An article on my mail.com homepage reports that “Obama Wants Payroll Tax on Incomes Above $250,000”.

According to the article – “The 6.2 percent payroll tax is now applied to all wages up to $102,000 a year, which covers the entire amount for most Americans". Under Obama's plan, the tax would not apply to wages between $102,000 and $250,000, but all annual salaries above the $250,000 amount would be taxed.

Obama has also criticized McCain for “being open to letting taxpayers invest part of their Social Security payments in private investment accounts”. This idea is only bad when it is being touted by the opposing party. Democrats were ok with it when Jimmy Carter proposed it. Back then it was the Republicans who “boo hoo-ed” the suggestion.

TTFN

Thursday, June 12, 2008

WHERE THE FAKAWI

I have come down with a serious case of “manana”! I continue to put off to tomorrow (and the day after, and so on) the GD extensions that I should be working on today!
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Drastic measures are called for. Since I spent two weeks “1040 Free” I must now “re-hiate” (is that a word?) and spend a full week “Blog Free”.
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For the entire week beginning Monday, June 16th I will be “locked behind closed doors” catching up on the GD extensions. I will be working at tax season pace.
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I will not be posting to THE WANDERING TAX PRO, ASK THE TAX PRO, THE FLACH REPORT, NJ TAX PRACTICE, or ANYTHING BUT TAXES during this period (unless there is world-shaking breaking news, such as the Supreme Court declares the federal income tax unconstitutional). I also will not be “wandering” the web or dealing with non-essential emails.
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I will post tomorrow, if I have something to say, and there will be a WHAT’S THE BUZZ entry Saturday. I hope to post my reviews of CRY BABY: THE MUSICAL and GYPSY on ANYTHING BUT TAXES on Friday and Sunday respectively.
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To the handful of clients whose GD extensions have fallen victim to my “manana disorder” I apologize and thank you for your patience and understanding.
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It is my hope to end the month of June with all GD extensions either done and out or red
-filed.

REBATE RUMBLINGS

Oi vey! I have clients who, according to the IRS payment schedule, should have received their “stimulus” rebate check weeks ago but are still waiting for the money. And now I hear that the IRS has actually sent two rebate checks to some individuals in error!

It appears that the IRS lied, or at the very least misled us. They originally said, or strongly implied, that all those who filed their 2007 federal income tax return by the April 15th deadline would receive a check in the first mailing. The clients who are still awaiting their promised checks all had a balance due to Sam on their 1040, so they, appropriately so, waited till the last minute to mail out their tax return and payment (I always tell my clients – “Let ‘Sam’ wait for his money”). The IRS now says that the first mailing is only to individuals whose 1040 was processed by the IRS by April 15th.

Yesterday a TAXWATCH article by Andrea Coombes at MarketWatch.com reports “Stimulating Confusion: As Millions of Taxpayers Await Checks, Others Find Themselves With Two”.

The IRS is quoted in the article as advising - "If a taxpayer receives more than one stimulus payment the erroneous additional payment should be returned to the IRS". The IRS further advises “If the erroneous payment was a paper check, write ‘void’ in the endorsement section on the back of the check, and attach a note that says you are returning an ‘erroneous stimulus payment check’”. Mail the check and the note to the IRS center where you filed your tax return

Actually for some individuals (I don’t use the word taxpayer, because you don’t have to actually have paid any federal income tax to be entitled to a rebate) who receive a second “stimulus” check the payment will not be a mistake. The IRS says it will be mailing out about 350,000 additional checks in July to recipients whose original “stimulus” payment did not include the $300 per eligible child.

Speaking of the “stimulus” rebate, TAX GIRL Kelly Phillips Erb reports in her post “Rebates Push Deficit to Record Highs” that “The economic stimulus payments - which qualify more or less as “free money” from the government - pushed the federal budget deficit to an all-time high of $165.9 billion in May.” This should not come as a surprise.
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Considering all the confusion and costs involved with these “stimulus” rebates it is only natural that, as Jim of BLUEPRINT FOR FINANCIAL PROSPERITY points out in his post “
Second Economic Stimulus Check: Obama’s Economic Plan", presumptive Democratic Presidential candidate Barack Obama called for Congress to send out another round of such checks in a speech at the North Carolina State Fairgrounds. .
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To quote the lyrics of a popular folk song from my high school and college activist days – “When will they ever learn? When will they ever learn?”
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TTFN

FYI – Today's posting at ASK THE TAX PRO deals with taxpayers who file a separate return.

Tuesday, June 10, 2008

TDHTDA!

Too Damned Hot To Do Anything!
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I am not only unmotivated to get back to the GD extensions, due to my 1040 Free time-off, but this heat had drained me of all energy.
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I have been keeping up with online tax blogs and articles, and I just had to comment on an article from WEBCPA.com titled “Government Probes Tax Refund Anticipation Loans”.
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I first read about the GAO study in yesterday’s (June 9th) post at Kay Bell’s TAX BLOG at BankRate.com. In “More Anti-RAL Efforts” Kay points out –
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It's quite clear that Uncle Sam doesn't like refund anticipation loans, or RALs. Congress and other government agencies have been trying for years {and rightfully so – rdf} to eradicate these high-interest loans that impatient taxpayers get instead of waiting for their official IRS refund checks.
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The latest effort to end the loans, or at least keep the heat on providers, comes via a Government Accountability Office, or GAO, undercover investigation of tax preparers earlier this year. The Congressional investigative arm wanted to find out what tax preparers disclose to clients about the loans' fees
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The WEBCPA.com article gave more detail on the investigation. The various businesses offering RALs that the GAO investigated included –“immigrant assistance centers, seasonal tax preparers operating out of trailers, auto dealers and rent-to-own stores that offered to apply the tax refund toward purchases, and even shoe stores. The report includes photos of several of the businesses. A photo of the shoe store shows a sign in its window offering ‘free shoes with processed tax return’."
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That is a new one on me – tax preparation in a shoe store! The best I had seen was a sign in a barber shop that advertised tax preparation services within. You could get your hair cut, a manicure, and your tax return prepared all in one sitting! In my early days in the business I had looked into renting a desk at a local real estate or insurance office to prepare tax returns – but I had never considered renting a chair at the barber shop!
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Granted the great unwashed masses have been known for lapses in judgement. But I can’t imagine anyone with an ounce of intelligence going to a shoe store to have their tax return prepared. You wouldn’t go top a bakery for a root canal. For once there is something worse than going to Henry and Richard.
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But then after 36 years of dealing with the public nothing should surprise me anymore.
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Keep cool!
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TTFN
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PS – Check out this week’s postings to ASK THE TAX PRO
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Monday, June 9, 2008

THE COST OF WORKING IN NEW YORK CITY

This past week-end I heard from a NJ resident client who had been laid off from his job in NJ and was considering a job offer that would have him working in New York City. The job would pay $105,000 annual salary, which is $10,000 more than his former NJ position. He wanted to know the additional tax cost of working in NYC.

The client is single with no dependents. He was just barely able to itemize for 2007 because of NJ state income tax and SUI/SDI contributions.

I made the assumption, based on his 2007 Form W-2, that he would be contributing $5,000 to a 401(k) plan and at least $2,000 for health insurance through a Section 125 plan.

I determined that he would be paying about $2,000 more in total state income tax by working in New York instead of New Jersey.

New York allows more deductions. There is a $7,500 “standard deduction” on the NY IT-203 return, while only $1,000 is allowed on the NJ-1040. In addition, New York treats contributions to a Section 125 plan as “pre-tax”, like the federal return, but New Jersey does not (although contributions for medical expenses are deductible to the extent total medical expenses exceed 2% of NJ Gross Income).

However the New York tax rate is higher. In this situation the top rate will be 6.85% for New York vs. 6.37% for New Jersey - and the higher NY rate is applied to more income. If a taxpayer’s federal AGI, after NY adjustments, is more than $100,000 the top 6.85% rate applies to more income.

For 2008 the maximum amount of New Jersey SUI and SDI contributions is $256. The maximum amount of New York SDI that is withheld is $31-32.

The client would file a non-resident IT-203 and pay tax to New York State based on his NY state taxable wages, with Section 125 contributions treated as “pre-tax”. He would report the NY wages on the NJ return, adding back the Section 125 contributions, and determine the tax liability based on his total taxable income from all sources. He would then claim a credit for the proportionate amount of the NJ tax liability that applies to the wages that were also taxed by New York. Even if the NY salary was his only taxable income he would have a small balance due to NJ because of the Section 125 add-back.

Since the client will be able to itemize and deduct state income tax withheld, “Sam” will reimburse him for part of the additional $2,000 – up to $500 or more (the client is in the 28% bracket for federal taxes). This will help to reduce the effective tax cost of working in NYS. Of course this is as long as the client is not a victim of the dreaded Alternative Minimum Tax, which he was not for 2007.

I mentioned to the client that there may be increased costs for commuting, and for eating lunch in NYC. He told me that the $110 cost of the monthly bus pass to NYC would be equal if not less to what he was spending in gas and maintenance on his car – plus the bus stops in front of his apartment complex. And he will be brown-bagging it.

My final comment was to consider that working in NYC might add at least an hour to his daily commuting time.

TTFN

Saturday, June 7, 2008

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

* THE DIGERATI LIFE blog has a guest post from Heather Johnson on “The Entrepreneur’s Guide to Avoiding a Tax Auditwith some good advice that bears repeating.
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* Paul Caron, the TAX PRO, has discovered an interesting take on who is responsible for the passage of the Tax Reform Act of 1986. Check out his posting “Who Was Most Responsible for Reagan Tax Cuts?
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* Think your taxes are too high? In his post “
Happy Tax Freedom Day Czech Republic” at the Tax Foundation’s TAX POLICY BLOG Scott Hodge reports “To Americans who complain about high taxes in the U.S. I say, ‘it can always be worse’. While American taxpayers celebrated Tax Freedom Day this year on April 23rd, our friends at the Liberal Institute in Prague have announced that Tax Freedom Day will arrive on June 7th in the Czech Republic.”

* An article on AccountingWeb.com by “Tax Mama” Eva Rosenberg
(is there a Tax Papa?) titled “I Am Going To Sue” discusses a tax situation that is really very common.

* Gina Gwozdz responds to a question on the “
Alternative Motor Vehicle Credit” in her TAX TIPS blog. Her answer also points up the fact that you should never listen to tax advice from anyone other than an experienced tax professional.

TTFN

Thursday, June 5, 2008

AND THEY'RE OFF!

Now that it is pretty much a done deal that it will be Obama Vs McCain in November, TAX GIRL Kelly Phillips Erb has posted a comparison of the candidates’ tax plans. Click here to check out the post.

Here is my 2 cents worth on the plans-

McCain:
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(1) Make most Bush tax cuts of 2001 and 2003 permanent. OK so far. The whole idea of “sunsetting” is stupid, as is making tax changes temporary with the need to extend each or every other year.
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(2) Raise the Estate Tax personal exemption from $1 million to $5 million. While not a fan of the Estate Tax I am hesitant to do away with it altogether because of a fear of losing the “stepped-up basis” in inherited property. So I am OK with this as well. I would also make the Gift Tax exemption (unified credit) equal to the Estate Tax exemption.
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(3) Eliminate the dreaded Alternative Minimum Tax (AMT) altogether. Yes! Yes! Yes! A resounding OK – two thumbs up for this proposal. The AMT must be destroyed!
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(4) An alternative two-rate income tax code that claims would simplify the system. Taxpayers would choose which code to use. Here is where we start to differ. I have discussed this proposal in the past. Why make it an option – make the simplified system the official tax system.
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(5) Raise the limits on tax rates, which would shift taxpayers from the 28% rate to 15%. I suppose it sounds good on the surface.
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(6) Reduce the corporate tax rate and close corporate tax loopholes. You can’t do one without the other – so I am OK with this. For my money the best way to reduce corporate taxes is to create a “Dividends Paid” deduction for corporations.
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Obama:
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(1) Keep the Bush tax cuts for all but those earning more than $250,000. What makes Obama think that a couple earning $250,000 is wealthy. Perhaps in Kansas the couple is filthy rich – but not so in New York or New Jersey. Why should we punish those who earn more by having them pay a disproportionately higher share of taxes while we continue to increase the number of tax “non-payers”?
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(2) More tax cuts for the middle class resulting in about $1000 per family. The concept is OK – but it depends on the details.
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(3) Seniors making less than $50,000 would be exempt from tax. Creating more tax “non-payers”. Why not just do away with the tax on Social Security benefits for those age 65 or older.
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(4) Increase the capital gains tax rates to between 20 and 28%. No! No! No!
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(5) Simplification of the tax code. Yes! Yes! Yes! However, Democratic candidate plans have called for more complicated credits and deductions.
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Perhaps the only thing that George W did right in his 8 years in office was create the commission to review and make recommendations for substantially simplifying the Tax Code. But when it did not recommend exactly what he wanted he turned his attention elsewhere. This process needs to be reinstated.
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What do you think?
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TTFN

Tuesday, June 3, 2008

THIS JUST IN!

Something under the YHGTBFK category just caught my attention.

I read on my mail.com homepage that idiot convicted tax evader Richard Hatch, the poster boy for the lack of intelligence shared by all participants in reality television, has appealed his conviction to the United States Supreme Court!

What is there to appeal? Millions of the great unwashed saw him win the $1 Million prize on the first SURVIVOR, which he failed to claim on his Form 1040 along with other obviously taxable income! How stupid can you be?

I expect that the Supreme Court will ignore this new plea for attention.

The article also mentioned that Hatch was writing a book about “his experiences with the legal system”. A word of advice to the cafone – if anyone buys the book and you receive royalties be sure to declare them as income on your tax return!

IN THE COURTS

I came across an interesting Tax Court case in the June issue of NATP’s TAXPRO Monthly.
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The case is David and Gail Vigil v. Commissioner (TC Summary Opinion 2008-6).
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Vigil had deducted $3,463 for meals and entertainment, $12,347 for travel expenses, $7,862 for supplies, and $17,199 for car and truck expenses. In audit the IRS disallowed all of these deductions because Virgil failed to provide any substantiation.
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You are allowed to deduct “all ordinary and necessary business expenses paid or incurred during the taxable year in carrying on any trade or business” under Internal Revenue Code Section 162(a). However taxpayers are also required under IRC Section 274(d) to maintain and substantiate records for such deductions claimed.
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In this situation Vigil claimed that he kept a record of the various locations where he conducted his business and also of the mileage driven. He used credit cards for business expenses and kept the receipts. However he gave the original receipts and documentation to his tax preparer, a CPA, but did not keep any copies. The CPA developed a drug problem and later died. The CPA’s wife, who took over the business, also developed a drug problem. Even with the help of the local sheriff Mr. Vigil was unable to get any of his documentation back from her.

In a situation where receipts and documentation are not available you can “estimate” deductible expenses if you can produce sufficient evidence and establish a rational basis on which the estimate can be made under the famous “Cohan Rule” (Cohan v. Commissioner, 50 TC 823, 827-828). In addition you can substantiate deductions through reconstruction of expenditures through other credible evidence if your records are lost or destroyed through circumstances beyond your control (Smith v. Commissioner, TC Memo 1998-33).

The Tax Court decided for the IRS because Virgil was not able to adequately reconstruct his records and he did not provide sufficient evidence for the court to estimate the amount of his expenses.

There are two morals to this story –

(1) Make sure you have receipts and documentation (i.e. a travel diary) for all business expenses.

(2) If you give original receipts to your tax professional make sure you get them all back with the completed return. You may want to make copies just in case before handing the receipts over to your preparer.

A possible third moral – beware if your tax preparer has traces of a white powder around his nose!

Whatever you do also never give or send original receipts or documents to the IRS. Give the IRS, or state tax auditor, photocopies of your receipts and documentation - always keep the originals for yourself in a safe and secure place. You can show the IRS or state auditor originals, but do not let him/her keep them.

As an aside, in this case Virgil deducted both actual auto expenses and the standard mileage allowance. You can’t do both – it is one or the other. And there are special rules as to which you can deduct.

TTFN

Monday, June 2, 2008

CARNIVAL UPDATE

Before leaving on a jet plane for a Taxpayer Advocacy Panel meeting Kay Bell of DON’T MESS WITH TAXES managed to post the appropriately named “Tax Carnival #37: Leaving on a Jet Plane”. It includes my post A TAX PLANNING OPPORTUNITY.

Speaking of blog carnivals, my post on EVERYBODY OUGHT TO HAVE A WILL from the ANYTHING BUT TAXES blog appears in the
Carnival of Everything Finance: # 18 at EVERYTHING FINANCE by Tushar Mathur. Look for it under the “Everything Else Finance” category.

While you are there check out Mad Madeline Kane’s poem DEAR IRS from her MAD KANE HUMOR BLOG.

TTFN