Thursday, July 31, 2008


On Wednesday President Bush signed into law the Housing and Economic Recovery Act of 2008 (HERA), described in the various news articles as “a massive housing bill intended to provide mortgage relief for 400,000 struggling homeowners and stabilize financial markets”.

For purposes of THE WANDERING TAX PRO I am only interested in the provisions of the bill that directly apply to the federal Form 1040. These are included in the Housing Assistance Tax Act of 2008, a part of the bigger bill, and provide $15.1 Billion in tax incentives that are fully offset.

There are two major tax benefits for 1040 filers – a first-time homebuyer credit and a property tax deduction for “non-itemizers”.

(1) A “refundable” credit (if the credit is more than your total tax liability Sam will send you the difference - like with the Earned Income Credit) equal to 10% of the purchase price, up to a maximum of $7,500 ($3,750 if Married Filing Separately), is provided to a “first-time homebuyer” who purchases a new personal residence on or after April 9, 2008, and before July 1, 2009. To qualify as a “first-time homebuyer” the taxpayer(s) must have had no ownership interest in a principal residence during the three (3) year period prior to the date of closing on the purchase of the new home.

The 3-year look-back period involves ownership of a “principal residence” only. A renter who currently owns, or has owned during the 3-year period, a vacation property may qualify for the credit because the property was not his/her principal residence

The credit is phased out for joint filers with a “modified” Adjusted Gross Income (AGI) of between $150,000 and $170,000 and between $75,000 and $85,000 for single taxpayers.

Generally the credit is claimed on the tax return for the year in which the home is purchased. So if John Q Taxpayer closed on a residence in May of 2008 he will have to wait until early 2009 when he files his tax return to get the $7,500. However, if a taxpayer who already has filed a 2008 Form 1040 makes a qualifying purchase in, say, May of 2009 he/she can elect to file an amended 2008 return to claim the credit – and not have to wait until he/she files the 2009 Form 1040.

The amount of the credit allowed must be paid back to the IRS (on the annual Form 1040) in equal installments over a 15-year period beginning in the second year after the year for which the credit is claimed – 2010 for 2008 and 2011 for 2009.

CCH provides the following example –

Eduardo and Trisha, a married couple, are new homebuyers. They have never owned any other real property as a residence. Their combined modified AGI is $66,400 {I assume they do not live in New Jersey – rdf}. Their first-time home purchase qualifies for the full $7,500 credit. They purchase their home in June 2009. They may file an amended 2008 return to claim the credit. Repayments of the $7,500 credit would be at $500/year in 2010 and end in 2020.”

If the residence is sold, or is no longer used as a principal residence, before the credit has been fully repaid the balance is due on the tax return for the year in which the sale occurs or the use changes. In such a case the credit repayment claimed in that year will not be more than the amount of gain from the sale of the property to an “unrelated” person.

The balance of the credit does not have to be repaid if the homeowner dies. Special rules exist for an “involuntary conversion” or the transfer of the residence in a divorce.

If two unmarried individuals purchase a principal residence together they may each claim a credit appropriate to their individual situation, if they qualify, the total of which cannot be more than the $7,500 maximum.
(2) Taxpayers who own real property and pay real estate taxes, but who do not or are unable to itemize, can claim an “increased standard deduction” of the lessor of the amount of the real estate taxes actually paid during the year or $500, $1,000 if married and filing a joint return (if the total amount of real estate taxes you are paying is less than $500 or $1,000 - unless you purchased the property later in the year - you certainly do not live in New Jersey). This deduction, tough, is effective only for the 2008 tax year.
As stated above this is an addition to your standard deduction, much like the addition for being age 65 or older or blind, and not an “above-the-line” adjustment to income – so it will not reduce your AGI.

For 2008, if this applies, the maximum standard deduction (for a person under age 65 and not blind) would be increased to $11,900 for Married Filing Joint, to $5,950 for Single (or Married Filing Separate, I assume), and to $8,500 for Head of Household.

I see this special deduction as benefiting many of my senior citizen clients - whose mortgage has been paid off and who do not itemize because the standard deduction, enhanced by the additional amount for 2 individuals age 65 or older, provides a greater tax benefit.

One of the ways the tax savings from these two items is being “paid for” is by changing somewhat the rules for excluding gain on the sale of a personal residence. This “offset” has been tacked on to various unsuccessful bills in the past – and has finally made in into the Tax Code.

Effective with the sale of a principal residence after December 31, 2008, you can no longer exclude from gross taxable income under Internal Revenue Code Section 121 gain on the sale of such a home for any periods that it was not used as a principal residence. This applies to a previous vacation home or rental property that was converted to a principal residence or a once principal residence that is rented out prior to sale. The new law applies to “unqualified periods” that begin on or after January 1, 2009. This does not affect any sales that have already taken place or will take place in calendar year 2008.

Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG discusses this change, and provides an example, in his post “FANNIE MAE Bailout Bill Restricts Home Sale Exclusion For Former Vacation Homes”.

Another method to compensate the budget for the loss of tax revenue is increased credit card information reporting. Effective for sales made on or after January 1, 2011, banks and other credit and debit card processors are required to report a merchant’s total annual card receipts to the IRS, and to the merchant, much like a business would report payments that total over $600 for the year to a non-employee sub-contractor on Form 1099-MISC.

More specific details, or any corrections if the above contains any FUs on my part, will be posted here when they become available or as I get more information.

Any questions?


Wednesday, July 30, 2008


I couldn’t resist commenting on this recent post to a tax blog.

Babyboomer11852 discusses a client who was a “professional exotic dancer” in the post “
To Strip or Not to Strip!” at TAX RESOLUTIONARIES.

When it came to deductions the client brought up her “$12,000 breast augmentation”. Boomer concluded “But the breast augmentation could not be deducted as this was considered cosmetic surgery”.

It ain’t necessarily so, Boomer! While I agree that breast augmentation cannot be deducted as a medical expense because it is elective cosmetic surgery (unless it involved a severe psychological difficulty), there is a Tax Court precedent here that involves the client’s specific “industry”.

The article “
10 Craziest Tax Deductions” from AOL Money and Finance reports-

To get more tips, a stripper with the stage name ‘Chesty Love’ decided to get breast implants to make her a size 56-FF. A tax court judge allowed Chesty to write off the cost of her operation, equating her new, um, assets to a stage prop.”

This deduction has also been referenced in many other online and print articles and columns about “weird” tax deductions.

The Tax Court in this case stated that in order to be deductible as a business expense the size of the breast implants must be large enough that no girl would ordinarily get them for purely cosmetic reasons, the girl must work in a business where larger breasts would have a positive effect on income (i.e. dancer, actress, model, even waitress), and the breast implants were large enough in comparison to the girl's physique that they would pose more of a "burden" than a "benefit" in real life (i.e. big enough that guys spot them instantly from across the street).

So, as with just about any other tax deduction, “facts and circumstances” are important. I doubt that a girl going from 34B to 38C would qualify. Although if one could show that the surgery was directly related to the “enlargee’s” business as a dancer, actress, model or waitress (?–Hooter’s perhaps) and that it did indeed result in increased bookings and increased income it might be worth a try.

Over the years I have “done” (the tax returns for) a couple of “professional exotic dancers” (you might say a “handful” of dancers), among the few who actually declare their income. (I vividly remember a day during a tax season back when I had an office in Union when included in the day’s mail was an envelope with the tax “stuff” of a “go-go dancer” from New York, which included a copy of her recent pictorial in a Playboy publication, and an envelope with the tax “stuff” of an ordained Lutheran minister from Massachusetts.) But, alas, I never claimed a tax deduction for breast implants for any of my clients.


Tuesday, July 29, 2008


The story you are about to read is true. The names have been changed to protect the screwed.

One of my clients is a couple who has been married and filing joint returns for probably close to 20 years – many of them with me. Each year they have filed as Alfred and Jane Wiedersein. They filed their 2007 Form 1040 requesting a substantial refund. When they got the check they noticed that it was less than the amount that we asked for on the 1040.

Alf called the IRS and found out that the problem was that Jane did not change her last name with the Social Security Administration when she married. The SSA still shows her Social Security number as belonging to Jane Taxpayer.

FYI, as I have been telling clients and readers for years now (below from my posting “Getting Ready to Prepare Your Return” from January 2007) -

The IRS is very picky about matching names to Social Security numbers. If a Social Security number and name reported on your tax return does not match exactly the name in the files of the Social Security Administration the IRS will remove the name and dependency exemption of that person and automatically recalculate the tax liability as Head of Household, Married Filing Separately or Single.
If you have changed your last name as a result of marriage or divorce during
{the year} make sure to notify the Social Security Administration of the change before filing your tax return. You do this by submitting a Form SS-5 to request a new Social Security card. Go to”

After all these years of filing joint returns with Alf under her married name the IRS picks 2007 as the year to question the issue!

Anyway Alf straightened things out regarding his 2007 Form 1040 with the IRS and received an additional refund. Jane subsequently changed her last name with the Social Security Administration.

But this is not the problem. Alf and Jane are now told by the IRS that they will not be getting an economic “stimulus” rebate check because a Social Security number on the 2007 Form 1040 does not agree with the records of the Social Security Administration!

As Alf had done, I, too, went to “Where’s My Stimulus Payment” on the IRS website and entered the appropriate information. Here is what I was told –

You did not qualify for the Stimulus payment because the Taxpayer Identification Number shown on your tax return for yourself or your spouse was not valid. Your last name and/or Social Security Number did not agree with either our records or those of the Social Security Administration, or you used an IRS issued number such as an Individual Taxpayer Identification Number or IRS number. You must have a valid Social Security Number to qualify for the Stimulus payment.

Helpful Information:
The 2008 tax instructions will include a worksheet to help those who did not qualify for a payment or those who received a reduced amount determine if they can obtain a benefit when they file their 2008 tax returns next year

In addition to the above response to his online inquiry, Alf was also told by an IRS representative over the phone that he would not be getting a stimulus check because of the Social Security number.

The IRS did not just reduce the rebate by the amount that would have applied to Jane – they disallowed the entire rebate check! And the check would have been substantial as Alf and Jane have three dependent children under age 17.

It is true that when I file Alf and Jane’s 2008 Form 1040 I will be able to get them the entire amount of the rebate to which they are entitled based on 2008 information. But why should they have to wait until 2009 to get this money? The whole purpose of the meshuga rebate is to get money into the economy now! And what if one of the 3 kids who were under age 17 in 2007 turn 17 in 2008. Alf and Jane will be screwed out of $300!

Jane is not a foreign citizen without a Social Security number who married an American serviceman. She is a native born American citizen. Now even Americans who marry foreigners with no Social Security number can get the rebate – but not Alf and Jane.

It apparently does not matter that the issue with the Social Security number has been resolved with the IRS for purposes of the 2007 Form 1040 refund – or that Jane has changed her name with SSA. They still do not qualify for the rebate!

I am at a loss as to what to do. I will probably write to my Congress persons, since the IRS has blamed Congress for screwing the Wiederseins, but who knows if this will do any good.

Any suggestions?


FYI, my “sitemeter” reports that THE WANDERING TAX PRO has exceeded 75,000 visits since returning to Blogger as its host (I am not quite sure if sitemeter started on the first post or was added a few days or weeks later). A pat on the back to me!

Monday, July 28, 2008


CCH reports in Baucus Unveils Enhanced Extenders Package” that “Senate Finance Committee Chairman Max Baucus, D-Mont., on July 24 introduced the Jobs, Energy, Families and Disaster Relief Bill of 2008 (Sen 3335), a revised $123 billion tax extender bill” which “extends tax incentives that expired at the end of 2007 or are set to expire at the end of 2008, such as the research and development tax credit, college tuition deduction and the state and local sales tax deduction”.

The bill also provides for a one-year “fix” for the dreaded Alternative Minimum Tax (AMT) and “creates mandatory basis reporting by brokers for transactions involving publicly traded securities such as stock, debt, commodities, derivatives and other items” – in other words requires brokers to report cost basis information on the Form 1099-B (hurray!!!!).


There are three (3) things that we know about the current economic “stimulus” rebate -

(1) Part or all of your payment can be used to offset past-due federal or state income taxes or non-tax federal debt such as student loans and child support.

(2) The rebate currently being issued is an advance on a special credit on your 2008 federal income tax return. It is calculated based on the information on your 2007 Form 1040 (or 1040A). You will reconcile your advance to your 2008 information on the 2008 Form 1040. If your situation has changed and you are entitled to a rebate that is greater than the amount you already received you can claim the additional amount on your 2008 tax return. If you got more then you are entitled to you do not have to pay back the difference.

(3) You must file by October 15, 2008 in order to get your advance payment this year.

Consider this situation -

John Q Taxpayer owes “Sam” about $10,000 in back federal income taxes from 2001 through 2004. He has been current with his 1040 payments since 2005. If he files a 2007 federal income tax return by October 15th he will not receive a “stimulus” rebate check, as the entire amount of the rebate will be applied toward his outstanding tax debt. He also will not be able to claim the rebate amount on his 2008 Form 1040 because technically he received the advance.

What if JQ filed a 2007 Form 4868 (Automatic Extension) in early April of 2008 and paid in full his anticipated federal income tax liability with the extension request. And what it JQ does not file his actual 2007 Form 1040 until December of 2008. Since he paid the entire 2007 tax liability in full with his extension there will be no penalty for late filing or late payment.

Because JQ filed his 2007 Form 1040 after October 15, 2008, he will not be eligible for an “advance” rebate.

When JQ files his 2008 Form 1040 he indicates that he is entitled to a $600 rebate, but did not receive an advance payment in 2008. The reason he did not receive an advance payment was not because the money was taken to pay back taxes. Because he submitted his 2007 income tax return after October 15th no advance payment was processed.

Will JQ be able to apply his $600 rebate against his 2008 tax liability on the 2008 Form 1040? Say his 2008 tax liability is $2,000 and he has $1,300 in federal income tax paid in either via withholding or estimated tax payments. Can JQ add the $600 rebate for which he qualifies, and which he did not receive as an advance in 2008, to the $1,300 in payments and only need to send “Sam” $100 when he files the 2008 Form 1040 in early 2009?

By following this strategy will JQ be able to avoid having his $600 rebate taken to offset past tax debts and be able to reduce his 2009 “out of pocket” payments for 2008 federal income taxes by the amount of the rebate if he wants to remain “current” with his 1040 filings?

Now what if JQ’s $2,000 tax liability for 2008 represents self-employment tax only? He is able to wipe out any federal income tax liability via deductions and credits. Will the amount of his rebate be applied toward self-employment tax liability? Remember, this rebate is very different from the one issued in 2001. This rebate is not an advance on a future income tax savings – but an out and out gift from the government.

So what do you think?


Sunday, July 27, 2008


The Senate passed the Housing and Economic Recovery Bill of 2008 (HERB 2008?) discussed in my similarly titled July 24th post by a 72-13 vote in a rate Saturday session. It is expected that George W will sign the bill into law early next week.

I will provide details of how the bill affects 1040s as soon as I have digested it.


Saturday, July 26, 2008


* If I may be permitted to “toot my own horn” – check out my post “If You Want To Be a Business Then Act Like One!” at THE FLACH REPORT.

* CCH reports that “
IRS Commissioner Studying Controversial Private Collection Initiative”. I have said it many times before, and I will continue to say it – having outside collection agencies doing the job of the IRS is a very bad idea for lots of reasons (only one of which is that the IRS could do it cheaper) and the practice should be terminated.

* Kay Bell discusses the 10th Anniversary of the “IRS Restructuring and Reform Act of 1998” in her post “10 Years Of a 'Kinder, Gentler' IRS. Now What?” at DON’T MESS WITH TAXES.

* Michael of BEYOND PAYCHECK TO PAYCHECK discusses his economic “stimulus” experience in “
Stimulus Payments - A Braggy Uncoordinated Mess?”.

* The Wall Street Journal reports in the article “Their Fair Share” that IRS data for income tax returns filed for 2006 indicates “the 2003 Bush tax cuts caused what may be the biggest increase in tax payments by the rich in American history”.

According to the article – “the top 1% of taxpayers, those who earn above $388,806, paid 40% of all income taxes in 2006, the highest share in at least 40 years. The top 10% in income, those earning more than $108,904, paid 71%. Barack Obama says he's going to cut taxes for those at the bottom, but that's also going to be a challenge because Americans with an income below the median paid a record low 2.9% of all income taxes, while the top 50% paid 97.1%. Perhaps he thinks half the country should pay all the taxes to support the other half.”

It goes on to say, “Taxes paid by millionaire households more than doubled to $274 billion in 2006 from $136 billion in 2003. No President has ever plied more money from the rich than George W. Bush did with his 2003 tax cuts.”
Also on this topic,
Tax Foundation Fiscal Fact No. 135, "Summary of Latest Federal Individual Income Tax Data," explains that upper-income taxpayers pay federal income taxes at a rate disproportionate to their share of the nation's income. The Fiscal Fact includes detailed charts of the latest IRS data.
* The National Association of Tax Professionals believes that “the next Congress will probably be dominated or, at least, very favorably populated by Democrats. Our discussions on the Hill lead us to believe that healthcare reform will overshadow tax reform in the coming Congress. The Joint Committee on Taxation has stated that ‘Healthcare reform is the biggest fiscal challenge facing the country and likely will push tax reform to the back burner.’”

* An article at reports that “
Tax Documentary, ‘An Inconvenient Tax’, In The Works”. It will be “an unbiased, educational and entertaining look into the potential reforms that are inevitable come 2010 when the Bush administration tax cuts cease”. The film is scheduled to be released in November. TAX PROF Paul Caron also discusses the movie in his post “An Inconvenient Tax”. I don’t think I will wait until the DVD for this one.

* And for those of you who are interested, Paul also provides links to recent postings and commentary on the Presidential candidates’ tax plans in his post “More on the McCain and Obama Tax Plans”.

* On the same topic, the Tax Foundation’s TAX POLICY BLOG sets us straight on “
More Bogus E-mails About Obama and Taxes” that are apparently floating around out there.

* Kelly Phillips Erb’s post “Economic Stimulus Didn’t Help Us, Most Small Business Owners Say” at TAX GIRL quotes a survey conducted by Suffolk University that says - “Almost 80% of small business owners report that the economic stimulus checks made no difference to their own business”.

* Email tax scams are not limited to the United States. UK tax professional David reports on an email allegedly from HM Revenue and Customs regarding a tax refund that is very similar to one regarding an IRS refund that has made the rounds in the US in the post “
Beware: Tax Refund Scam” at his TAX REBATE BLOG (this refers to a UK rebate and not the George W “stimulus” rebate). Be warned – you must scroll down the “page” a bit before the post appears.

* Trish McIntire’s post “Chutes and Ladders” over at OUR TAXING TIMES brings up an excellent point that needs to be stressed. Various marketing campaigns and salespersons with no tax knowledge are constantly telling us casualty losses, or hybrid cars, or mortgage interest, or medical expenses or employee business expenses, etc, etc, etc are “deductible” or qualify for a “tax benefit” or “special tax treatment”. But, while technically correct, it ain’t necessarily so.

Trish’s post tells us about casualty losses. Many other items, such as mortgage interest and points, are only deductible if you are able to itemize on Schedule A and the total amount of itemized deductions before the item in question is added exceeds the Standard Deduction amount for your filing status. Even if you can itemize medical and employee business expenses are only deductible to the extent that they exceed 7½% or 2% of your AGI. If you are a victim of the dreaded Alternative Minimum Tax (AMT) you do not get any energy credit for purchasing a hybrid car.

Do not make any purchasing decisions based on a salesman’s or advertising campaign’s claims of a tax benefit. As your tax professional first!


Thursday, July 24, 2008


CCH reports that the House passed the Housing and Economic Recovery Bill of 2008 (HR 3221) by a vote of 272 to 152 on Wednesday. Swift approval by the Senate is expected. George W had initially opposed the bill, but now will sign it, and could do so as early as this week.
I have not studied the non-tax aspects, but Kay Bell points out in her post “Housing Bill -- and New Homeowner Tax Breaks -- Back on Track” at DON’T MESS WITH TAXES that there are those “who contend it's simply a handout to irresponsible homeowners and unscrupulous lenders”. I expect that it is a typical Congressional reaction and not a thoughtful response to the problem.
On the 1040 front the bill includes a $7,500 tax credit for first-time homebuyers – which in this case means taxpayers buying their first-ever residence as well as those who haven't owned a home for at least three years. The tax break will apply to those who purchase a home between April 9, 2008 and July 1, 2009 – so it will be available on the 2008 Form 1040. The full amount of the credit will only be available to individuals with incomes under $75,000 or couples earning less than $150,000, and it appears the credit will have to be paid back, interest-free, over 15 years.
I have read that the bill also includes a special $500 property tax deduction for single homeowners, and $1,000 for joint filers, for those who do not itemize deductions on Schedule A.
Once George W signs the final bill I will provide more detailed information.

Wednesday, July 23, 2008


Jimmie Clemons, retired, had received a 1099 reporting $44,800 in winnings from a casino. As his gambling losses for the year exceeded $44,800, he did not report any winnings or losses on his Form 1040.

The court, in Jimmie L Clemons, T.C. Summary Opinion 2005-109, upheld the IRS position that gross gambling winnings must be reported as income on Page 1 of the tax return, with losses, to the extent of winnings, allowed as an itemized deduction, which is not subject to the 2% of AGI exclusion.

While Jimmie was able to deduct $44,800 in losses to wipe out his $44,800.00 of income, the fact that the $44,800 in winnings was included in his Adjusted Gross Income caused 85% of his Social Security benefits to be taxed!

I have seen many examples where a client with net gambling losses for the year is royally screwed by "Sam" -
* Just like in the case of Jimmie Clemons, because of the way Social Security and Railroad Retirement benefits are taxed, there often exists a situation where an individual is taxed on $1.85 for every additional $1.00 in income. A taxpayer in such a situation who has $3,000 in gambling winnings reported on a Form 1099, and $4,000 in substantiated gambling losses, ends us increasing his AGI by $5,500 ($3000 x 185%). Even if he can take full advantage of an itemized deduction of $3,000 in losses, he still ends up paying $383 in federal income taxes in the 15% bracket, or $638 in the 25% bracket - all on net losses for the year of $1,000!
* Even if a taxpayer can deduct enough losses to wipe out his gambling income, the increase in AGI caused by reporting gross winnings on Page 1 of the Form 1040 can reduce or even wipe out a multitude of deductions and credits that are affected by AGI, and could even cause one to fall victim to the dreaded Alternative Minimum Tax (AMT).
* One can only receive the full tax benefit of deducting gambling losses if the total of his other “itemizable” deductions equals or exceeds the allowable standard deduction. What if a single taxpayer with $5,000 in winnings and $6,000 in losses in 2008 only has $2,000 in other itemized deductions (i.e. state and local income taxes and charitable contributions). While he can deduct $5,000 in gambling losses, he only gets a tax benefit on $1,550 of the losses ($5,000 losses + $2,000 other deductions = $7,000 Schedule A - $5,450 standard deduction = $1,550). If he is in the 25% bracket, he ends up paying $863 in federal income tax on $1,000 of losses!
* While New Jersey allows one to "net" gambling winnings and losses on the state income tax return (a person with $5,000 in winnings and $6,000 in losses would have "0" taxable income), most states follow the federal return, which will increase the total tax cost of gambling losses. FYI, since NJ state lottery winnings are exempt from NJ state income tax, NJ state lottery losses cannot be deducted against other gambling winnings in calculating the net amount taxed by NJ. If, in the above example, $2,000 of the $6,000 in losses represents NJ state lottery tickets, the taxpayer must report a net of $1,000 in gambling winnings on his NJ-1040.
I should point out that losses from any type of wagering transaction can be deducted against your gambling winnings. If you win in the slots your deduction is not limited to losses from slot machines. You can deduct losses from the lottery, 50-50s, bingo, table games such as poker and blackjack, charity raffles, horse racing, keno, etc., up to the amount of your winnings. It is a good idea to keep your losing lottery, raffle and racetrack tickets for the year, and keep track of slot activity by using a player’s card, in case you make a big score. If you are unlucky enough to be chosen for an audit of your losses here is a word of advice – make sure your losing racetrack tickets do not have footprints on them.

You should also know that winnings from a “no purchase necessary” marketing sweepstakes or contest are not considered to be gambling winnings for the purpose of calculating deductible gambling losses. The IRS defines gambling winnings as winnings from a “wagering transaction”. A recent IRS “Technical Advice Memorandum” (TAM 200417004 ) states that such winnings are not gains from a “wagering transaction” because the winner did not furnish “consideration” for the chance to win the prize. If you win the Publishers’ Clearing House sweepstakes, or a trip to Club Med by being the 10th caller to a radio station, you must report the winnings, or the market value of the trip, as income on your Form 1040, but you cannot deduct any losing lottery tickets, slot machine losses, or any other kind of gambling losses against this income.

So who said the Tax Code had to be fair?


Tuesday, July 22, 2008


The IRS standard mileage allowance for business use of your car is 50.5 cents per mile for January 1 - June 30, 2008, and 58.5 cents per mile for July 1 – December 31, 2008. The IRS recently increased the SMA for the 2nd half of 2008 due to the large increases in the price of gas.
This rate applies no matter where in the United States you drive, and no matter what type, model or make of car you drive. It is available for both a car that you own and a car that you lease.
You can deduct the standard mileage allowance in lieu of the actual expenses if operating your car, which include-
· auto club membership
· depreciation
· gasoline
· insurance
· license and registration
· lease payments
· repair and maintenance
· tires
· wash and wax
Or you can elect to deduct the business portion of your actual expenses.
In addition to the standard mileage allowance you can deduct any business-related parking fees and tolls. A self-employed individual can also deduct the business portion of any auto loan interest and state and local personal property taxes on Schedule C. Employees cannot deduct the business portion of auto loan interest, but they can deduct qualifying state and local personal property taxes as a tax on Schedule A.
Employees report auto expenses on Form 2106 or 2106EZ "Employee Business Expenses". The total of all employee business expenses is deducted in the "Miscellaneous" section on Schedule A. Miscellaneous expenses are only deductible to the extent that they exceed 2% of the taxpayer's Adjusted Gross Income (AGI). Sole proprietors report auto expenses on Schedule C.
You cannot use the standard mileage allowance if the car is used for hire, such as a taxi, if you have 5 or more vehicles in use for business at the same time, such as a fleet operation, or if you have claimed a Section 179 expense deduction and/or any method of depreciation other than straight line in the past.
Generally to claim the standard mileage allowance you must elect to do so in the first year the car is placed in service (the year you purchased the car, or the first year you used the car for business if later). If you claim the standard mileage rate in the first year you can switch to actual expenses in a later year - but if you claim actual expenses in the first year you may not be able to change over to the standard mileage allowance in later years. If you choose to claim the standard mileage allowance on a leased car you must use it for the entire period of the lease.
You cannot deduct commuting - the miles from your home to your place of business or your first business stop of the day and from your place of business or your last business stop of the day back to your home. You can deduct travel between different job locations, and travel from your home to a temporary (usually lasting less than one year) job location outside the metropolitan area where you live and normally work.
Whether you claim the standard mileage allowance or actual expenses you must keep good records. You must document the total mileage on your car for the year with a breakdown of business, commuting and other personal miles, and the date and business purpose for each business trip. A pocket date book is good enough. Enter the car's mileage on the first and last day of the year, and enter the business miles and name of client visited or business purpose for each trip. You should also record parking fees and tolls in the date book.
Of course you must reduce the deduction for business use of your car by any reimbursement you receive from your employer under an "accountable" plan. If your employer reimburses you at a rate lower than the IRS allowance, say 30 cents per mile, you can deduct the difference. However, if your employer reimburses you at a rate higher than the IRS allowance, say 60 cents per mile, you may have additional taxable income.
If your employer gives you a flat monthly car allowance, say $100.00 per month, which is included in the taxable wages reported on your Form W-2, you do not have to reduce your deduction by this amount.
BTW – My post “A Sample of Sampling” today at THE FLACH REPORT discusses a method for documenting business mileage.

Monday, July 21, 2008


My post “1040 FYI: SUMMER DAY CAMP AND THE CHILD CARE CREDIT” appeared in the following Blog Carnivals this week-end:
* “
Carnival of Financial Planning - July 19 2008 Edition” at the Skilled Investor’s PERSONAL FINANCE BLOG (the first entry in the category of TAXES – the last category of the Carnival).

* “Carnival of Financial Learning #8 - Cute Kitten Edition” – a new one for me - compiled by “average Joe” Faron Benoit at FINANCIAL LEARN (the last entry in TAXES, again the last category of the Carnival). I liked the cat pictures – and found the Editor’s Pick post "Question to You - Does a Stripper Pole in Master Bedroom Increase Value of a Home" an interesting topic.


Do you want to check out the 2007 and 2006 tax returns filed by Barack Obama and John McCain (and Cindy McCain)?

The “Tax History Project” over at TAX ANALYSTS provides copies of these returns, as well as the 2000 through 2007 returns of Hillary Clinton, George W and Dick Cheney. It also has prior year returns from the term of the first George Bush and other past Presidents.

You will note that McCain was a victim of the dreaded Alternative Minimum Tax (AMT) for both 2006 and 2007 – but Obama was not because his income was too high.

The returns for McCain and Obama are also available on their respective campaign websites.


Saturday, July 19, 2008


* TAX GIRL Kelly Phillips Erb posts about a study that suggests “IRS Car Charity Rules Drives Donations Down”. Kelly tells us -
The accounting firm of Grant Thornton reports that between tax year 2004 and 2005, the number of car donations valued at more than $500 dropped by approximately 67%. The total value of donations fell more than 80%.”

In a comment on the post I wrote –

“. . . are they speaking from the point of view of the charitable deductions claimed on Schedule A or from that of the charities that solicit donations of used vehicles? Are they saying that taxpayers are claiming smaller deductions or that individuals are donating less vehicles?

The total dollar amount of charitable deductions claimed for donating vehicles would certainly decrease under the new laws. Taxpayers can no longer attempt to get away with deducting the full ‘blue book’ value of a ‘clunker’ that had to be towed away. They are now, in most cases, limited to the sale proceeds of the donated car as reported by the charity on Form 1098-C. This was the intended purpose of the legislation

According to the Grant Thornton press release the % drops represent changes to the deductions claimed on Schedule A, comparing IRS statistcs for 2005 returns (the first year the rules applied) to 2004 returns, and not necessarily to the actual number of automobiles donated to charity.

As I mentioned in my comment, donating a car to charity avoids all the agita and aggravation of a private sale of a used car. Just as donating all your unwanted “stuff” to Goodwill avoids all the agita and aggravation of a yard or garage sale.
* Kelly also reports that “Stimulus Checks Not Encouraging Consumers to Spend”. This comes as no surprise to me.
* The Summer issue of Tax Watch, the Tax Foundation's quarterly tax policy newsletter, is available to download. Highlights from the issue include:
· Sizing Up Obama's Social Security Tax Plan
· Senate Testimony: Time to Clean Up the Tax Code
· U.S. States Lead World in High Corporate Taxes
· High Gas Prices Fuel Tax Debates
In discussing America’s tax burden the newsletter points out that it varies widely state by state. In terms of “Tax Freedom Day” (highlight is mine) - “Taxpayers in Connecticut, New Jersey, New York, California and Washington work the longest to pay their tax bills.” And, “The lowest tax burden in 2008 was in Alaska. . . Mississippi had the second lowest burden, followed by Montana, West Virginia and Alabama.”

In discussing Obama’s Social Security and income tax proposals Tax Foundation Senior Economist Gerald Prante says –

Obama has called for the top federal income tax rate to revert from 35% to 39.6%. Add to that an uncapped payroll tax rate of 12.3% and the typical state’s top income tax rate, and the result is a top marginal tax rate of between 55 and 61%.”

* Say it isn’t so!

Speaking of the Tax Foundation, its TAX POLICY BLOG also reports that “Speaker Pelosi has suggested another round of economic stimulus” in it’s post “
Economic Stimulus: Take Two”. The post correctly comments (highlight is mine) -
Every time the government collects revenue, holds it, then sends it back in the form of rebates, some of that money disappears. The first round of stimulus checks will cost up to $862 million in lost enforcement revenue and administrative costs, an absolute deadweight loss to the economy. Instead of utilizing this "revolving door" of taxation, perhaps citizens could keep just a little more of their paychecks and buy gasoline with their own money. If giving money back to the taxpayers provides stimulus, letting taxpayers keep their paychecks also provides stimulus in the form of...wait for it...consumption and savings.”
The “Yellow Rose of Taxes” Kay Bell also discusses a second round in her post “Rebates: One Down, One To Come?” at DON’T MESS WITH TAXES. I echo her two requests of Congress “if the rebate sequel does indeed happen” -
First, please don't send us costly mailings saying we're going to get the money and then a second one that says the check is in the mail. We'll take your word for it in order to save the country a few bucks.

And second, don't promise us delivery dates. I know it was done with the best of intentions, but many folks were frustrated when their rebates didn't synch up with the payment schedule.”
* Kay also provides us with detailed lists of summer and fall “sales tax holidays” in her post “Sales Tax Holidays On Tap”. New Jersey was nowhere to be found on the lists.

* The TAX RESOLUTIONARIES blog discusses a Tax Court Case (Ralph D. Konchar, et ux. V. Commissioner, Tax Court Summary Opinion 2004-59) that concerned itself with the question “Is Mary Kay Cosmetics A Hobby, Trade or Business?”.


Friday, July 18, 2008


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


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

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

These rules no longer exist!


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

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

If you do not own and live in the home for a full 24 months you may still be able to exclude some, or all, of the gain if the primary reason for the selling the home is a change in employment, a change in health, or an "unforeseen circumstance". An unforeseen circumstance is described as "an event the taxpayer doesn’t anticipate before purchasing or occupying the residence".

Two private letter rulings give an idea of what the IRS considers to be qualified "unforeseen circumstances" -

(1) A police officer and his wife purchased a townhouse to be used as their principal residence. After signing the purchase contract, but before the closing, the officer applied to train with the K-9 unit of the police force. After moving into the townhouse the officer was notified that he was accepted to the unit. A K-9 officer is required to maintain a 6x9 foot kennel in his/her home for his/her "partner". The homeowners association for the townhouse did not permit kennels. The taxpayers sold the home before they had lived in it for two years. In PLR200504012 the IRS permitted a partial exclusion.

(2) A taxpayer purchased a home to be used as his principal residence. Less than two years later he was attacked outside of his house. The attacker put a gun to the taxpayer’s head, forced him into his vehicle, and demanded that he drive his attacker to various locations over a period of an hour. The taxpayer was forced to use his ATM card to get cash for the criminal. Traumatized by the event, and afraid to continue living in his home, the taxpayer moved and rented out the property. When the tenant moved out he sold the home. In PLR 200630004 the IRS permitted a partial exclusion.

An exception has also been granted when a couple found “themselves” pregnant with twins after purchasing their residence and sold the home because it was not big enough.

The amount of the exclusion allowed in such a case is determined by dividing the number of months owned and used as a personal residence by 24 months and multiplying the answer by the $250,000.00 or $500,000.00 maximum allowed. If you and your spouse owned and lived in the home for 12 months you could exclude up to $250,000.00 ($500,000.00 x 1/2).

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


Thursday, July 17, 2008


I have “spun-off” my 1040 tax preparation business from Robert D Flach LLC to a new corporation – TAXPRO SERVICES CORPORATION. You can check out the new corporation’s website at
Robert D Flach LLC will now be limited to my writing and publishing business. That website remains
Just thought you might want to know.


This is a very important reminder – I hope my clients are reading it!

As a result of the Pension Protection Act of 2006 you must now have a hard-copy receipt for every single dollar you contribute to a church or charity in order to claim a tax deduction on Schedule A that will stand up to IRS audit.

The law effectively says that charitable contribution deductions will not be allowed for any monetary contributions by cash or check unless the donor maintains a record of the contribution. The record must be in the form of an actual cancelled check, a bank record (i.e. a copy of the front of the check included on your monthly bank statement), a credit card receipt (or an entry on a bank or credit card statement indicating a credit or debit card charge), a paystub, or a written communication from the donee showing the name of the donee organization, the date of the contribution, and the amount of the contribution.

You can no longer tell the IRS that you put a five or ten dollar bill in the collection plate each week. You must write a check to the church for the $5.00 or $10.00 each week or you must take advantage of the church's "envelope" system, which will provide you with a written receipt at the end of the year.

The law does not say that all contributions of more than $50.00 or more than $100.00 must be documented, like the previous requirement for a written receipt for a single contribution of $250.00 or more. It says that all cash contributions must be documented. So if you give the the DAV a dollar for a poppy you must get a receipt!

A point of information - raffle tickets purchased from a church or charity are not deductible as a charitable contribution (unless you give the ticket back to the charity and do not participate in the drawing). They are considered to be the same as purchasing state lottery tickets. They may, however, be deductible as a gambling loss if you have winnings to report.

Congress has been cracking down on charitable contributions lately - first donations of motor vehicles (cars, motorcycles, boats, etc) and now cash contributions and non-cash contributions of used clothes and household items (only donations of used items in "good" condition can be deducted - Congress has not defined "good"). I do not deny that there has been widespread "over-estimation" of cash and non-cash contributions over the years, but it seems that, especially in the case of cash contributions, Congress has gone a bit overboard.

As the IRS is bogged down with the economic "stimulus" election year bribe checks it has not yet begun to audit 2007 returns. I will be interested to see if there is any increase in the audit of Schedule A charitable contributions. I will also be interested to see the IRS statistics for 2007 returns to see if there is a substantial drop in cash contribution deductions.

BTW, I have written a special report on DEDUCTING CHARITABLE CONTRIBUTIONS, which I will be updating for tax year 2008 before the end of the summer. Click here for more information.


Wednesday, July 16, 2008


While the interest from a municipal bond, or municipal bond fund, is exempt from federal income tax, capital gains are taxable!

If you sell a tax-free bond, or shares in a tax-free bond fund, for more than your cost, you must pay federal income tax on the capital gain. If you buy a bond for $10,000 and sell if for $10,500 the $500 gain is taxable. However, if, instead, you sell the bond for $9,500 you have a deductible $500 capital loss. Any “accrued interest” that is part of the purchase or sale price of the bond is not included in determining the gain or loss when the bond is sold. You must also pay federal income tax on any "capital gain distributions" from a tax-free mutual bond fund.

In addition, tax-free income from municipal bonds and municipal bond funds must be included in the calculation of the taxable portion of Social Security and Railroad Retirement benefits. In certain situations, each $1.00 in tax-free bond interest can result in an additional 85 cents of taxable income!

And finally, interest from certain “private activity” municipal bonds is considered a “tax-preference” for purposes of calculating the dreaded Alternative Minimum Tax (AMT). If you are a victim of the AMT the interest from these bonds is taxed at a rate of 26% or 28%. The amount of "private activity interest" should be reported separately on the Form 1099-INT.


Tuesday, July 15, 2008


The State of New Jersey has begun to mail out the Property Tax Reimbursement (aka Senior Freeze) checks to senior and disabled homeowners who filed their PTR-1 or PTR-2 form by the original June 2nd deadline.

If you have not yet submitted your PTR-1 or PTR-2 application there is still time. The deadline was extended to August 15th. Based on past years this deadline will again be extended to October.

For more information click on -

BTW – this is my 500th post since bringing THE WANDERING TAX PRO back to Blogger


This 1040 FYI was “inspired” by a GD extension I completed this past week-end.

Rental real estate activities are considered to be “passive” activities even if the owner “actively” participates in the activity. Generally losses from passive activities can only be applied against “passive income”. You cannot use a passive loss to offset W-2 income or interest and dividends. As accountants love acronyms, the rule is that you need a PIG (positive income generator) to offset a PAL (passive activity loss).

There is a special exception to the rule for rental real estate activities in which you “actively” participate – i.e. you own more than 10% of the property and are substantially involved in its management. Up to $25,000 in rental real estate losses can be used to offset other income, such as wages and interest and dividends.

This special $25,000 allowance is “phased-out” as your “modified” Adjusted Gross Income (AGI) goes from $100,000 to $150,000. To calculate “modified” AGI you start with “regular” AGI, subtract any taxable Social Security or Railroad Retirement benefits, and add back –

· net passive losses (including rental losses),
· excluded US Savings Bond interest used for higher education expenses,
· excluded employer adoption assistance payments,
· the deduction for contributions to IRAs and other qualified retirement plans,
· the deduction for ½ of self-employment tax,
· the deduction for student loan interest,
· the deduction for qualified tuition and fees, and
· the deduction for “Section 199” domestic production expenses.

Taxpayers who are considered to be a qualified “real estate professional” do not have to treat their rental real estate activities as passive activities and can deduct all rental losses in full.

Internal Revenue Code Section 469(c)(7)(B) defines a real estate professional as a taxpayer who (1) spends more than 750 hours and (2) performs more than one-half of his or her personal services during the tax year in real property trades or businesses in which he or she materially participates.

A real estate professional is generally considered to be a real estate agent or broker, a landlord, a professional property manager, a developer or in the construction business.

Under Internal Revenue Code Section 469(c)(7)(D)(ii) time worked as a real estate professional does not count unless taxpayer owns 5 percent or more of the activity. According to the IRS, “If, for example, the taxpayer works full-time for a construction company, but does not own any of the company, he is not a real estate professional”.
It is important to properly document time spent in rental activities if you’re claiming to be a real estate professional. Taxpayers ideally should keep contemporaneous daily time reports, logs, or similar documents. If the taxpayer uses appointment books, calendars, or narrative summaries to identify services performed over a period of time that estimate time spent on real estate property trades or businesses the time estimated must be reasonable.
This issue arose when a client whose return was extended (waiting for a Form K-1) informed me that for 2007 he was a general partner, one of three, in a partnership that owned and managed rental real estate. The partnership generated a substantial net loss. My client’s “modified” AGI was well over $150,000 for 2007, so none of the real estate loss was deductible on the 2007 return. The 2007 loss will be “suspended” until a year when his MAGI is less than $150,000 or until he terminates his interest in the partnership.
My client told me that his partners’ accountant said that they qualified as real estate professionals and were therefore exempt from the $150,000 income threshold.
One partner worked for a hedge fund that invested in commercial real estate. Another partner monitored the risks of an insurance company's investments in securities backed by residential and commercial mortgages. The third, my client, worked with mortgages for a bank.

If they did not each own more than 5% of the hedge fund, insurance company or bank, which they obviously did not, then the time they spent working in these positions does not count toward qualifying for real estate professional status. It is as if they were bus drivers. The only time that counts toward the one-half of all work is time spent working on real estate investments in which they have a material ownership. The time involved in running the real estate partnership would count - but because the partners are all employees each would have to spend over 2000 hours per year on this activity.

A Real Estate Professional is one who is self-employed in the real estate field managing properties that he/she has a substantial ownership interest in. If in 2008 the three partners do not have "day jobs" and spent their entire time (at least 750 hours each) actively managing the real estate properties held by the partnership then they could each be a real estate professional. Working as an employee in an industry that is somewhat tied to real estate investment and management does not cut it unless you have a 5% or more ownership in the firm for which you work.


PS – Don’t forget to visit ASK THE TAX PRO. Today is Twofer Tuesday!

Monday, July 14, 2008


I received an email from the National Society of Tax Professionals (I am a long-time member) this afternoon to report that victims of floods, storms and tornadoes in six (6) states now have until August 29th to file certain returns. Previously, these deadlines varied by state.
The announcement affects counties in Indiana, Iowa, Illinois, Nebraska, West Virginia and Wisconsin that qualify for individual assistance. Affected counties in Missouri were already granted relief until Aug. 29.
For more information, check the IRS website’s Tax Relief in Disaster Situations page.


Here is some updated info on the “stimulus” rebate election year bribes.

A few days before you actually receive your check you will receive a letter from the IRS telling you that the check is in the mail and identifying the amount of your rebate.

Talk about government waste. As NY Senator Charles Schumer has said, “There are countless better uses for $42 million than a self-congratulatory mailer that gives the president a pat on the back for an idea that wasn't even his."

One client had just received a notice telling her that she owed a penalty for underpayment of estimated tax for her 2007 Form 1040, which we had been expecting. A few days later she got the letter from the IRS discussed above that told what the amount of her the “stimulus” rebate check would be and that it was on its way.

She was just about to write a check to “Sam” for the underpayment penalty when her check arrived – for the amount of her rebate minus the 2007 underpayment penalty!

The advance notice did not mention the reduction for the 2007 penalty. But she did receive another letter from “Sam” a few days after the check had arrived explaining what had been deducted from the rebate.

I anticipated that if you owed money on a 2006 or earlier 1040 the outstanding balance would be subtracted from the rebate check. However I was surprised that the rebate system is so sophisticated so as to be able to withhold taxes, penalties and interest due on the current return.



For the next few weeks I will be presenting a series of “1040 FYI” posts on current tax law, some, but not all, updated from the “archives” of THE WANDERING TAX PRO before my return to Blogger as my “host”.

I will continue to do a WHAT’S THE BUZZ posting on Saturdays, and will “interrupt” the series if appropriate for “breaking” tax news.

Let’s start off with a post that is appropriate for the summer:

If both you and your spouse work, or if you are a working single parent, the cost of sending your dependent child under age 13 to a summer day camp is eligible for the Credit for Child and Dependent Care Expenses.

Only day camp expenses qualify for the credit. The cost of an overnight/sleepover camp does not qualify.

If you have one qualifying child you can claim the credit on up to $3,000.00 in expenses. For two or more qualifying children the maximum is $6,000.00.

The amount of child care expenses eligible for the credit is further limited to the earned income of the taxpayer or spouse. If one spouse earns $50,000.00 and the other $2,500.00, only $2,500.00 of expenses is eligible for the credit.

If one spouse works and the other is disabled or a full-time student, the non-working spouse is "deemed" to earn $250.00 per month if there is one qualifying child or $500.00 per month if there is more than one. This applies to only one spouse per month. If both spouses are full-time students during the same month, only one is "deemed" to earn the $250.00 or $500.00.

The amount of credit allowed depends on your Adjusted Gross Income. If your AGI does not exceed $43,000.00 the credit ranges from 35% to 21%. The credit is 20% if your AGI is more than $43,000.00.

In most cases, if you are married you must file a joint return to be able to claim the credit.

The credit is allowed for a dependent who is under age 13. However, you can claim the credit on expenses you have incurred up to the child's 13th birthday. If your child will turn 13 this November you can still claim the credit on any day camp expenses incurred during the summer.

Day camp costs also qualify for reimbursement under an employer-sponsored "pre-tax" Dependent Care Benefit plan. In most cases you will receive a greater tax benefit by running the day camp costs through your employer's "flexible spending" dependent care program than if you claim the credit.

If you will be claiming the credit on payments made for a summer day camp, be sure to get the name, address and Employer Identification Number of the camp when registering. You will need this information to complete Form 2441, the IRS form used to claim the credit.

Some states, such as New York, also allow a Child Care Credit on the state income tax return.


Sunday, July 13, 2008


The Telephone Excise Tax Refund (TETR) was a one-time payment available for tax year 2006. It was designed to refund excise taxes previously collected on long distance telephone services billed after Feb. 28, 2003, and before Aug. 1, 2006. The excise tax had originated in 1898 as temporary luxury tax to help pay for the Spanish-American War.
I discussed this refund in my January 2007 post “An Update On the Telephone Excise Tax Refund”.
Only about 70% of the individuals eligible for a refund claimed one on their 2006 income tax return, or filed a special 1040EZ-T form to request the refund. What is even more surprising is that, according to a report from the Treasury General Inspector for Tax Administration only 5.6 percent of the 12.8 million eligible businesses claimed the refund.
It is not too late to request this excise tax refund if you are among the 30% who did not do so last year. Individuals have until April 15, 2010, to send in an amended return (if you have already filed your 2006 Form 1040 or 1040A) of to file an original 2006 return if you did not have to do so for any other reason. Corporations have until March 15, 2010.
Click here to go to an IRS webpage “chock-a-block” with info and links on this refund.

Saturday, July 12, 2008


* A article has some good advice - “Rollover For Retirement: If You're Switching Jobs, Don't Be Tempted To Cash Out Your 401(k)”. Your 401(k), or other retirement funds, should be the very last place you turn if you need money.

I remember years ago when there was a slump in the construction industry. Our office was across the street from the local Ironworkers Union office and many members became clients. In order to “make ends meet” several took withdrawals from their union retirement annuity fund, of course with no or minimal income tax withholding. When tax time came around and they did not have the money to pay the federal and state income taxes, plus the 10% premature withdrawal penalty, on the distribution they had taken these guys dipped into the fund again, which resulted in additional federal and state taxes and premature withdrawal penalty. And so on.

* Bruce THE TAX GUY discusses “The Envelope System” of tax record keeping in his post “Audit Insurance”. This "Envelope System” is one that I, and many other tax preparers, have been telling our clients to use to keep track of possible deductible expenses during the year. I have even toyed with creating and marketing a loose-leaf book version of this system – and may still do this at some point in the future.

* Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG reports on the volume of changes to the Tax Code during the Bush the 2nd years in his post “That’s How They Say They Aren’t A 'Do-Nothing' Congress”.

* A couple of years ago one of my clients, a fireman, ran for Mayor of his local suburban municipality. While the client himself did not pose the question, I myself did consider whether or not any of his “out of pocket” campaign expenses were deductible – from the point of view of “job-seeking”. I came to the same conclusion as TAX MAMA Eva Rosenberg in her post “Political Candidate Expenses”.
* As you know, or should know, I neither post to my various blogs nor do I read postings to other tax blogs during the tax filing season (February 1 – April 15). In the course of my daily “wanderings” on the web on Friday I came across the title of an entry from this past February by TAX GIRL Kelly Phillips Erb on a listing of posts related to the “stimulus” rebates that caught my eye – “Money for Nothing and Your Checks For Free: Is There Something More to Tax Rebates?
The post looks at the question of why individuals have to file a 2007 federal income tax return in order to get their rebate check and wonders, “Is it possible that the filing requirement is actually meant to “encourage” more taxpayers to file?
I agree with her conclusion that “I don’t believe that Congress puts all that much thought into the best method to lure taxpayers into filing tax returns”. To be perfectly honest I don’t think Congress puts all that much thought into most of the legislation they write. However the post brings up some interesting questions and issues and reports some interesting statistics on non-filers and non-payers – for instance “The Tax Foundation reports that the total of the non-filers and those that paid nothing comprise 41% of the US population.”
* Kay Bell does a thorough job of bringing us up-to-date on various tax and rebate-related scams in her post “They're Baaaaccccckkkkk!” over at DON’T MESS WITH TAXES.

* FYI, my ASK THE TAX PRO post “Using the IRS As Your Bank” has appeared in 2 Blog Carnivals so far this week - “
Money Hacks Carnival #19 — Personal Finance Destinations” at MONEY HACKERS NETWORK, and “Finance Fiesta: No Debt Plan Edition” at NO DEBT PLAN, a personal finance blog teaching you how to live debt free and use credit wisely, where it received an “Honorable Mention”.

* Did you check out my answers for two (2) New Jersey state income tax questions in Friday’s post to ASK THE TAX PRO?


Wednesday, July 9, 2008


I have accumulated a lot of “Buzz” items so far this week – and it is barely Wednesday! So here is a special mid-week “Buzz” posting -
* Jay Lotz does a good job of “
Comparing the Roth 401(k) and Traditional 401(k)” at PERSONAL FINANCE HACKS and provides a detailed example based on his particular situation. He also makes a fine point regarding a common misconception of retirement tax planning – “I never understood why people plan to be in a lower tax bracket when they retire. I want to get RICH. I’d be THRILLED to be in the 35% tax bracket at retirement!” The post also has a link to a “Traditional vs. Roth 401(k)/403(b) Analyzer” so you can do your own comparisons.
* Bloggers love to make lists. The INTERESTING MONEY blog, written by a 20-something married grad student, gives us “
5 Reasons Why You Should Open a 529 Account Right Now”. He points out that “You don’t need kids to open a 529 account. In fact, you can open an account for yourself, for your spouse, or for whomever you please. With a few clicks, you can change the beneficiary at any time.”

* A TAX CONSULTANT FOR ALL SEASONS asks the question “
Do You Know Your Taxpayer Rights?” – and then goes on to explain them to you.

* Have you seen the “1040-DOG US Individual Canine Income Tax Return” yet? The 1040-DOG is a new one for me. I heard about it from Trish McIntire’s TAX DOG blog. I wonder if there is a 1040-CAT.

* Kay Bell brings us up-to-date on the issue of Refund Anticipation Loans – or RALs – at DON’T MESS WITH TAXES with her post “Anti-RAL Efforts Continue” (as they should! - rdf). To repeat what I have said all along – RALS are bad and tax preparers should not be allowed to offer RALs! We have enough to do to properly prepare a tax return - we should not also be loan sharks.

* The Tax Foundation’s TAX POLICY BLOG provides some interesting “Tax Facts”.

* National Taxpayer Advocate Nina E. Olson has delivered her mid-year report to Congress to identify the priority issues the Office of the Taxpayer Advocate will address in the coming fiscal year. Included in the areas the report identifies for particular emphasis in FY 2009 are tax-related identity theft, cancellation of debt income, IRS collection practices, monitoring the private debt collection program, working with the IRS to help taxpayers with “disproportionate tax liabilities” due to AMT resulting from the exercise of incentive stock options, and working with the IRS to address problems in the “correspondence examination” program

According to the IRS press release, “The National Taxpayer Advocate is required by statute to submit two annual reports to the House Committee on Ways and Means and the Senate Committee on Finance. The statute requires these reports to be submitted directly to the Committees without any prior review or comment from the Commissioner of Internal Revenue, the Secretary of the Treasury, the IRS Oversight Board, any other officer or employee of the Department of the Treasury, or the Office of Management and Budget. The first report is submitted mid-year and must identify the objectives of the Office of the Taxpayer Advocate for the fiscal year beginning in that calendar year. The second report, due on December 31 of each year, must identify at least 20 of the most serious problems encountered by taxpayers, discuss the 10 tax issues most frequently litigated in the courts during the prior year, and make administrative and legislative recommendations to resolve taxpayer problems.”

* FYI, I have begun a 3-part (at least) series of posts on “Choosing the Best Legal Form For Your Business” over at my THE FLACH REPORT blog, which deals with Schedule C issues. Check it out.


Monday, July 7, 2008


I have just gotten the word from hostess Kay Bell that “Tax Carnival #38: Lingering Tax Fireworks” is now appearing at DON’T MESS WITH TAXES.

The Carnival includes the post “A Very Interesting Question” from my ASK THE TAX PRO blog under the Tax Troubles category.

While we talking about Blog Carnivals – the very same ASK THE TAX PRO post also appeared in two other Carnivals last week – the “Carnival of Everything Finance #19” at the EVERYTHING FINANCE blog (at the bottom of the Everything Else Finance section) and the “
Carnival of Money Stories Edition #66” at MY GOOD CENTS.

And speaking of ASK THE TAX PRO – check out today’s Q+A about “Using the IRS As Your Bank”. Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG weighs in on the question in his post "IRS: Your Friendly Banker?"


Saturday, July 5, 2008


I trust you all had a “successful” Fourth of July celebration. As promised I spent the day cleaning the office, and also put in some time getting the various “to do” files up to date. Now on to the next room!

* Kelly Phillips Erb, the internet’s TAX GIRL, provides an excellent primer on the difference between the federal deficit and the federal debt in her post “Ask the Taxgirl: Who Owns the US Federal Debt?”.
* Kelly also answers the question - “Who Benefited From the Economic Stimulus Plan?”. It came as no surprise to me! As for myself – I made about an additional $200.00 during the tax season by filing 1040As for rebate purposes only.
* A TAX QUIP from Tax Mama Eva Rosenberg discusses “Preparing Offer in Compromise”.
An Offer in Compromise is what is being advertised in the tv ads that promise you can settle your tax debt for “pennies on the dollar”. If you think an Offer in Compromise may be appropriate for your situation DO NOT pay attention to these erroneous tv ads – and DO NOT contact the companies that make such a promise. Trust me - you will not be let off the hook for “pennies on the dollar”. If you want to know more about an Offer in Compromise contact your tax professional.
* I realize that TWTP is about individual income tax issues – but Ryan Ellis reports on a change for partnership returns that will affect extended 1040s in “IRS Shortens Extension Deadline for Partnerships” at his TAX INFO BLOG.
* Kay Bell provides a one-two punch on increased state excise taxes in her posts “New England Cigarette Taxes on the Rise” and “Fuel Taxes Increase Again” over at DON’T MESS WITH TAXES.
William Perez makes a good suggestion in his post “Making a Mid-Year Tax Projection” at his tax-planning blog on “July is a good time to do some quick tax math and make projections for how your taxes might look for the full year.”
FYI, you can find 2008 tax information on the WHAT’S NEW FOR 2008 Page of
* Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG has found what he thinks some Americans have been doing with their economic “stimulus” rebates (those who have actually received them, that is) and tells us in his post “ Well, They Do Call It ‘Stimulus’”.
* Hypnotist (?) Joshua Seth gives 4 excellent suggestions for “
What To Do With Your Tax Rebate Check” at his blog, which I learned about from the Carnival of Everything Finance #19.

Thursday, July 3, 2008


In a change from my usual July 4th week-end schedule I will NOT be working away on the GD extensions.

Instead, my railroad flat desperately needs some serious summer housecleaning. I will begin by cleaning and organizing the office today (Friday) and working my way through the apartment Saturday and Sunday.

I will take a few minutes to post a WHAT’S THE BUZZ entry tomorrow (Saturday).

I intend to begin work on Monday with a clean desk – not in relation to work to be done but actually clean in terms of dust, garbage and clutter!



The New Jersey Department of the Treasury has announced that the 2007 Homestead Property Tax Rebate applications will be mailed out to “normal” (non-senior and non-disabled) homeowners over the next two weeks.

Residents in Morris and Ocean counties should receive their applications today. The expected delivery date for the rest of NJ, based on county of residence, is –

July 7 – Atlantic, Essex, Monmouth and Sussex counties

July 10 – Camden, Hudson, Hunterdon, Salem and Somerset counties

July 12 – Gloucester, Mercer, Middlesex and Passaic counties

July 16 – Bergen, Burlington, Cumberland, and Warren counties

July 18 – Cape May and Union counties.

The rebate can be applied for either online or via telephone. The filing deadline, which will probably be extended, is currently August 15, 2008.

Rebates will be issued to qualified homeowners with 2007 NJ Gross Income (as per NJ-1040) of $150,000 or less. Those with income of $100,000 less will receive 20% of their property taxes up to a maximum of $2,000. Those with income between $100,001 and $150,000 will receive 10% up to a maximum of $1,000.

Checks for senior and disabled homeowners who submitted their application by the original June 2nd deadline will be mailed out on or about July 31st.

According to the NJ Division of Taxation website – “If you have not received your application by July 23, call the Homestead Rebate Hotline at 1-888-238-1233 for assistance”.