THAT TIME OF YEAR AGAIN

HAPPY ALL HALLOW’S EVE! (No, I am NOT the "model" in the above picture!)

Before I get to taxes I want to let you know about some breaking Presidential election news.

Click here and then click on the Election 2008 News Channel 3 box for this late-breaking news.

Now – on to our topic for the day –

It is that time of the year again – time for year-end tax planning.

Last year at this time I wrote a series of posts on the topic of Year-End Tax Planning, which, for the most part, still apply.

Here are links to the series -

PART I
PART II

PART III

PART IV

PART VI
OOPS!

You will also find a year-end tax planning item in the post STUFF.

Here are some things that you should be aware of when reading these posts and planning your year-end strategies –

(1) It is difficult to predict what the 2009 Form 1040 will look like. I quoted IRS HITMAN Richard Close yesterday in SOMETHING’S COMING as correctly saying, “Regardless of which candidate is elected, 2009 is going to be a year of change. Of course I’m mostly talking about the IRS. From simple things like forms, all the way to policy changes, things are drastically going to change.”

For one thing, while the special “0” capital gains tax rate for those in the 10% and 15% tax brackets is currently in effect through 2010, Congress may change this next year. Depending on who sits in the Oval Office there may be differing changes to the capital gains tax structure. So one should try to maximize the benefits of the “0”% tax rate in 2008.

The bottom line when the next tax year is such an unknown is that one should follow “traditional” tax planning strategies – defer income and accelerate deductions. There is no need to try to “second guess” the new Congress.

(2) Congress has already passed the annual AMT “patch” for 2008. However, the AMT is also an area that may be greatly revised, or even abolished altogether, in 2009.

(3) Congress has also extended the various popular tax breaks that expired on December 31, 2007 for two years. So the following items are in effect for both 2008 and 2009 -

* The option to deduct state and local sales tax instead of state and local income tax.
* The above-the-line “adjustment to income” for qualified tuition and fees.
* The above-the-line “adjustment to Income” for up to $250 in educator expenses.
* The residential energy tax credits.
* The ability to make tax-free transfers directly from an IRA to a qualified charity.

(4) You can click here to download a PRELIMINARY YEAR-END WORKSHEET and here to learn WHAT’S NEW FOR 2008.

So – any questions?

TTFN

SOMETHING'S COMING!

In his post “2009: The Year of Change” IRS HITMAN Richard Close predicts, “Regardless of which candidate is elected, 2009 is going to be a year of change. Of course I’m mostly talking about the IRS. From simple things like forms, all the way to policy changes, things are drastically going to change.”

I certainly agree with Richard.

For one, Congress is “chomping at the bit” to pass another “stimulus” bill, which may well be needed. It will no doubt include new tax cuts and benefits. Let us pray that it does not include any more GD (like extensions) rebates!

Even without the desire to pass a new stimulus bill there will be a major tax Act passed in 2009.

We are fast approaching the “sunset” of all the tax changes passed during the early Bush years. As it now stands, on January 1, 2011 the Tax Code will go back to the way it looked before George W took office. I expect, regardless of who the new Commander-In-Chief is, there will be attempts to make permanent all or parts of what has become known as the Bush tax cuts. Even Obama wants to keep some of the tax cuts.

One specific area of concern is the federal Estate Tax, also called by some the “death tax”. While repeal is probably too much to expect, there will certainly be big changes in store. While I am not a supporter of the concept of the estate tax, I want to make absolutely sure that the concept of “stepped-up” basis remains intact. It would be a true nightmare at tax time if inherited property had a “carry-over” basis. As it is now most taxpayers have no idea what they paid for an investment 5 years ago, let alone what their parents or grandparents paid for something 25 or 50 years ago!

Then there is the issue of the dreaded Alternative Minimum Tax (AMT). Congress has been passing an annual one-year “patch” for the past several years, on occasion waiting until literally the last minute to do so. The House Ways and Means Committee tried to completely abolish the AMT earlier this year, replacing it with a tax “surcharge”, but without success. Let us hope that the newly elected Congress will once and for all address this problem and realize that, as I have been saying all along, like Frankenstein in the old Hammer films, the AMT Must Be Destroyed!

While I will not be holding my breath, I would sincerely hope that when considering tax law changes next year the new Congress seriously looks at making the system simpler and fairer. McCain has proposed giving taxpayers the choice of calculating their liability under the current system or a simpler, flatter one. As I have said time and again, forget the current system – make the simpler one the only one.

Any change to the Tax Code is good for the tax preparation business. The 2010 tax filing season, when 2009 tax returns are prepared, should prove to be a very profitable one for those in my profession.

TTFN

ASK THE TAX PRO – MANY HAPPY STATE RETURNS

Q. In 2004 I was a part-year resident of Michigan (from January thru November) and a part-year resident of New Jersey (December), but received NO income from New Jersey itself (only Michigan, New York and Virginia). Do I have to file a part-year return for New Jersey? If I do, should I allocate 11/12 of the year's income/expenses to Michigan and 1/12 to New Jersey?

I understand I have to file non-resident state returns in New York and Virginia as well.

A. Yes - as a part-year resident of the great State of New Jersey (lucky you) you must file a NJ-1040 for 2004 to report all of your taxable income for period of residence – even though the period of residence is only one month.

As a resident of New Jersey you are taxed on all “taxable” income regardless of the source – not just income from sources within New Jersey.

You would not just allocate 1/12 of all income for the year. What you would report to New Jersey is the money that was actually received in the month of December – your period of residence.

You would only report wages received in the month of December – or for those days in the month of December that you were a NJ resident. You should be able to determine this amount from your pay stubs. You would not report 1/12 of the wages earned in Michigan if, as I expect, you did not work in Michigan while living in New Jersey. Except if, while a New Jersey resident, you received a final paycheck of severance pay or accumulated unused sick or vacation pay. It is possible that some of this information would be on your individual W-2s.

As for interest and dividends, again you would only report the amount received during your period of NJ residence. You would also report any capital gains from investment sales that took place during this period.

You would be allowed a deduction for “excess” medical expenses that you paid during your period of residence. As for your personal exemptions – in this case you would claim only 1/12 of the $1,000 or $1,500 NJ exemption amounts.

And yes, you would also have to file non-resident Virginia and New York state income tax returns. You would be able to claim a credit for the taxes paid to these states on your resident NJ-1040 or, if applicable, Michigan returns.

Any more questions?

TTFN

OBAMA THE RED MENACE

Sorry for the crack, Barrack. I couldn't resist the Broadway reference.

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Just thought I would weigh in with my comments on the issue of “redistribution of wealth” and "refundable" tax credits.

I personally do not believe in a “progressive” tax system, like the one currently in place, where individuals with higher income pay a higher percentage of their income in taxes.

An argument can be made that the more money a person makes the more he needs and benefits from the services and protections of the government - so a person who makes more should pay more taxes. If there were a flat tax then a person making $250,000 would obviously pay more than a person making $25,000 – although not proportionally so.

The truth is that in many cases the lower one’s income the more benefits, services and protections one receives from the government. I remember reading an article back in the late 1970s which compared a household of working taxpayers who earned too much to receive much government “assistance” of any kind to a household that was basically, as my mentor Jim Gill would say, “on the tit”, that is taking full advantage of the many welfare, disability and unemployment benefits available to them from the government. When one added up the dollar value of all the payments and free benefits and services received by the non-working household from various federal, state and local agencies and calculated the take-home pay, after various tax and other withholdings, of the working household it turned out that the non-working household actually ended up with a higher income!

I do not believe that the Tax Code should be used to “redistribute” wealth or assist in providing “welfare” to lower income individuals. The purpose of the federal income tax is to raise the money necessary to run the government – period. While the Code can encourage certain positive activities such as saving and investment, higher education, charitable contribution and volunteer work, home ownership, etc – all things that benefit society in general – it should not be used for “social engineering”.

I am also against the concept of “refundable” tax credits – credits that allow an individual or family to “make a profit” from filing a tax return. This includes the current Earned Income Tax Credit and the Child Tax Credit.

As the Tax Policy Center’s TAX VOX blog recently pointed out in a post, the Earned Income Tax Credit is basically the largest poverty program in the U.S. It distributes $42 billion to more than 20 million low-income families. It is, for the most part, just another form of Aid to Families with Dependent Children.

While I am not against tax relief for the working poor or the concept of providing aid to families with dependent children, or other types of welfare programs for the working poor, I strongly believe these concepts should not be incorporated into the Tax Code.

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The EITC does not provide the safeguards, checks, and balances required in other federal and state welfare programs necessary for responsible fiscal management. As a result, it is perhaps the most abused provision of the tax code. Studies have suggested that close to 30% of all EITC claims are bogus.

Refundable credits in general encourage tax fraud. This is because the fraudulent tax return that is created does not rely on withholding, which is carefully matched by the IRS, to generate the refund. The crook can make up “non-matchable” income, such as earnings from self-employment, to generate the phony refund.

A recent post at Pete Pappas’ THE TAX LAWYER’S BLOG asked the questions “Do 'rich' people have a civic duty to help the middle class and the poor?” and “How to you define rich?”.

First of all, as I said in my comment to Pete’s post, rich in terms of a dollar amount is different in different parts of the country. A couple in one part of the country could truly live like royalty on what a couple in another part of the country (especially here in the Northeast) needs to just keep their heads above water. Unfortunately the Tax Code uses one set of numbers for the entire country – and unfortunately I cannot offhand think of an easy way to correct this inequity. The result is that those in New York, New Jersey, Massachusetts, Connecticut, California, and similar areas end up being royally screwed.

While the government may have a responsibility to help the middle class and the poor by providing various welfare and benefit programs, I do not believe the so-called “rich” have any civic duty to do anything other than treat their employees fairly, honestly and equally. Obviously the wealthy should not be allowed to improperly build their wealth on the backs of the working class – but that is where the “duty” ends.

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There may be a moral, ethical, or religious “duty” for an individual to be “charitable”, but it is not one that should be imposed by government through the use of the federal income tax system.

That’s what I think. So what do you think?

TTFN

THE BOTTOM LINE

I have been subscribing to the newsletter TAX HOTLINE from Bottom Line Publications (originally, I believe, known as Boardroom Books) for over 25 years now, and have mentioned it on several occasions here at TWTP.

I recently received the November 2008 issue to find that it is now called BOTTOM LINE WEALTH, and combines personal finance with tax issues. It is still an excellent publication.

The November issue has some items of interest that I would like to share with you.

Dr. Allen Sinai’s column ON THE ECONOMY deals with “What A New President Can Do”. He tells us that “newly elected presidents have often played a decisive role in shifting the US economy” and discusses what Kennedy, Reagan and Clinton did to fix inherited problems in the economy. The highlights below are mine.

“When John Kennedy was inaugurated in 1961, the country was in a recession. In an attempt to rev up the economy, Kennedy increased government spending and proposed cutting taxes. The eventual tax reductions stimulated consumer spending and business investment, and the economy entered a strong expansion.

When Ronald Reagan took office in 1981, the economy was stagnant while inflation was high. Reagan responded with big tax cuts and a massive increase in defense spending. The combination set off a boom that ran from 1982 through 1988.”

You will note that in both these cases, according to Sinai, tax cuts resulted in a stronger economy.

Slick Willy’s actions were a bit different.

“After taking office in 1993, Bill Clinton changed the economy’s course, balancing the budget and reducing the deficit. With Washington borrowing less, interest rates declined. That allowed consumers and businesses to take out loans, spend and prosper. Clinton presided over the best decade the US economy ever had.”

In Clinton’s situation balancing the budget and reducing the deficit did the trick.

Just something to think about when deciding on who to vote for this November.

The issue’s TAX BITES column tells us that “A new identity theft assistance unit has been set up by the IRS to help taxpayers facing identity theft problems” which is known as the Special Victims Assistance Unit (was it named by a fan of the LAW AND ORDER franchise?). For more information click here.

I wish to take exception to two of the “10 Questions to Ask…A Tax Preparer” suggested in an article by Martin S Kaplan CPA.

Question #3 is “Are you a licensed CPA? Enrolled Agent? Tax Attorney?” Kaplan tells us to “stick with tax preparers who have one of these designations”.

I have written several times, here at TWTP and in guest posts and comments elsewhere, that a CPA is not necessarily the best choice, and certainly not the most cost efficient, to prepare your tax return. While there are CPAs out there who are experienced in individual income taxes (several of them write tax blogs) and may even charge reasonable fees, just because a person has the initials CPA after his name does not mean that he is an expert when it comes to federal and state income taxes. You will notice the initials after the Kaplan’s name.

As for a tax attorney – if you think a CPA is expensive…! You certainly do not need a tax attorney to prepare a 1040. When you may need a tax attorney is if you are in deep doo doo (technical term) with the IRS.

Now an Enrolled Agent – there Kaplan is on the money.

Question #5 is “Do you use a computer to review returns before filing?” Here Kaplan says, “Some old-timers still don’t use tax-preparation software. Avoid these preparers. The Tax Code is simply too complex to do without software to double-check the tax preparer’s math and call potential errors and omissions to his attention.”

As one of the old-timers to which Kaplan refers I say “poppycock” (another technical term)! As I learned at a recent IRS Tax Forum class on the most frequent 1040 errors (see my post “IRS Nationwide Tax Forum 2008") relying on tax-preparation software causes a multitude of problems. One must manually check the math of all returns – especially software-generated returns.

I agree that the Tax Code is complex, which is why I keep up-to-date on the tax law by daily visits to tax blogs and other online resources and by attending several federal and state continuing education classes throughout the year. At many of these classes, after I identify myself as still preparing tax returns by hand, I am often told that I am the only person present (along with the one or two others in the room who also do manual returns) that actually knows tax law or how to prepare a tax return.

While taxpayers should obviously never rely on a “box” to properly and accurately prepare their tax returns, neither should tax preparers. Software-generated tax returns are only as good as the knowledge and experience of the person entering the data, and, I cannot say this often enough, need to be manually checked for math and other errors before being given to the client for filing.

While Kaplan’s article is flawed, the November issue of BOTTOM LINE WEALTH also has articles on investing and Social Security scams with great information.
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I highly recommend this newsletter as being an excellent, and very reasonably-priced, source of tax planning and preparation as well as investment information.

BLP has a special offer for you. They will send you six (6) Financial Guides plus 3 monthly issues of BOTTOM LINE WEALTH absolutely free. If you like BOTTOM LINE WEALTH you may continue to subscribe at the rate of just $39.00 per year (9 more issues for a total of 12) (plus sales tax where applicable), which is a savings of more than $20.00 off the regular rate. You will also receive all the benefits of BLP’s Continuous Service Guarantee. If I don't like it, I'll simply mark your bill "cancel," owe nothing and keep all the free reports and issues. Click here to sign up.

FYI, I have not been solicited or paid by Bottom Line Publication in any way to write this post. I did it all on my own.

TTFN

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

* Thank the Lord! Kelly TAXGIRL Erb reports that “Pelosi Confirms Tax Rebates ‘Unlikely’ Before New Year”. Kelly says – “In a move that should surprise very few, House Speaker Nancy Pelosi confirmed yesterday that Congress is ‘unlikely’ to approve an economic stimulus package that included tax rebate checks during this calendar year.”

Kay Bell also touches on the topic in her post “So Long to Second Tax Rebate”. Kay echoes my sentiments when she says of another rebate, “The immediate economic aid, to both individual taxpayers as well as our struggling economy, would be limited. And the costs could cause more problems by adding to our ginormous federal deficit.”

The Yellow Rose of Taxes quotes from an excellent post titled “Will There Be A Second Stimulus Check? I Hope Not” by David of MY TWO DOLLARS - "We do not have the cash to be throwing good money after bad; we are already doing that with the bailout."

But, unfortunately, it continues. Subsequent posts at the above and other blogs indicate that there may be some support for a second “stimulus” rebate check. However I doubt if any more tax legislation will be passed during 2008 – mainly because, as one blog post mentioned, I doubt that Congress, now adjourned for the year to campaign, wants to come back to Washington and do any more real work.

* Before we leave DON’T MESS WITH TAXES you should check out her post “401(k) Do's and Don'ts”.

The most important Don’t is “Don't take early distributions”! I just dealt with a client whose $19,000 premature 401(k) distribution cost $7,700 in federal income taxes – or 40.5%! And that did not count the state income tax cost. If you must take money from your plan prematurely borrowing is better than an actual distribution.

* And speaking of Kelly of TAXGIRL, she begins a series of very detailed posts on state taxes with “State Tax Primer from A to W: Alabama”. I hope she hasn’t forgotten about my ASK THE TAXGIRL question!

* According to a Buffalo newspaper article titled “Tax Forms Not Coming in the Mail” that according to the New York State Department of Taxation and Finance they “won’t be mailing tax forms directly to individuals anymore.” This means that the IT-201 and IT-203 packages will not be mailed out to resident and non-resident taxpayers. New York “expects to save $1 million in mailing, printing and processing costs”. For me, a tax professional who still prepares tax returns by hand, this means additional expense.

* Another blog list! Roni Deutch gives us her “Top 10 Common Misconceptions About Taxes” at her TAX HELP BLOG. I have discussed many of these misconceptions in the past at TWTP.

Roni makes a good point in her introduction – “Since most people have their tax returns prepared by a specialist, they usually do not feel it necessary to educate themselves on tax issues. However, this can result in grossly inaccurate returns, and can even lead to IRS fees and penalties. While many tax myths have been dispelled in recent years, there is still a lot of confusion out there.”

* The Tax Foundation has updated the Presidential Candidate Tax Plan Comparison section of our website to reflect recent changes and clarifications in Sen. McCain's and Sen. Obama's tax policies. The most significant changes: both candidates have recently outlined short term tax policies designed to help taxpayers deal with the current economic troubles. Check it out here. You will note that Obama continues to push “refundable credits” – which are currently probably the largest source of tax fraud.

* Last week it was Joe the Plumber. This week the most prolific tax news story concerned Sarah Palin’s $150,000 “make-over”. Kay Bell of DON’T MESS WITH TAXES, Joe Kristan of THE ROTH AND COMPANY TAX UPDATE BLOG, Richard Close of IRS HITMAN, Paul Caron of TAX PROF, Linda Beals of A TAXING MATTER, Dan Shaviro of START MAKING SENSE, and the Tax Foundation’s TAX POLICY BLOG all add their 2 cents worth on this “tax kerfuffle”. As for me, I have more important things to deal with at the moment. Just one question – who is paying for Michele Obama’s wardrobe? Maybe I’ll blog about it when I have more free time.

* Michael Rozbruch of the TAX RESOLUTION UNIVERSITY blog provides some good advice in his post “How to Hire a Tax Resolution Company You Can Trust - 7 Ways to Ensure That Your IRS Tax Problems Are in Good Hands”.

Of course the first rule to remember in hiring a Tax Resolution Company is to never hire a firm that promises they can resolve your IRS debt for “pennies on the dollar”!

* Condolences to blogger June Walker on the loss of her brother. We are glad that June is back blogging again. Her blog deals with tax issues for the self-employed (like my former THE FLACH REPORT blog used to) and often contains some excellent advice and information.

I hope all is well with fellow tax-blogger Ryan Ellis (the former TAX PLAYA) of the TAX INFO BLOG. He hasn’t posted in over a month.

* Here is a new one – instead of “I didn’t file my taxes because the dog ate my 1040” a New York State politician is claiming he did not file because he was a victim of “Non-Filers Syndrome”! You have got to be kidding! Check out TAX PROF Paul Caron’s post “Embattled NY Official Raises 'Non-Filers Syndrome' as Tax Defense". What an idiot!

Maybe Dick Wolf can use this as a defense on LAW AND ORDER for a “perp” who kills a tax auditor.

* Peter Pappas poses three interesting questions at the end of his post “In Their Own Words: McCain v. Obama on Taxes” over at THE TAX LAWYER’S BLOG – questions that you may want to take the time to answer. I did.

The questions are – (1) How do you define “rich?”, (2) Is imposing higher taxes on “rich” people “punishing success?”, and (3) Do “rich” people have a civic duty to help the middle class and the poor?

* This week’s TAXPRO WEEKLY email newsletter from the National Association of Tax Professionals brings us two items of interest.

First up - "IRS has $266 Million in Undeliverable Refunds and Stimulus Payments: The IRS is urging taxpayers to make sure their mailing address is up-to-date. If a taxpayer has moved since he or she last filed a tax return, Form 8822, Address Change Request, should be filed with the IRS. It is critical that taxpayers who are due a stimulus check update their addresses with the IRS before year-end, because by law, economic stimulus payments must be sent out by December 31 this year."

Let me preface the second item by quoting from the opening lyrics to Lerner and Lowe’s “I’ve Grown Accustomed to Her Face” from MY FAIR LADY – “Damn, damn, damn, damn!” - "Reminder - Brokers’ Statements to Arrive Later Beginning in 2009: The recent bailout bill extends the date by which brokers must furnish information forms to customers. This includes Form 1099-B and also other forms from brokers, including realtors. Beginning with statements furnished in 2009, brokers will avoid penalties if they furnish these forms on or before February 15, as opposed to the previous due date of January 31."

I suppose I shouldn’t complain – what with the often multiple “corrected copies” of Consolidated 1099 Statements from brokerage houses these last few years the final information is rarely provided until mid-March – which is a real PITA and often the cause of a GD extension.

* I will be glad when the election is finally over. I don’t think I can take One Day More. It certainly makes you think. If we just look at the issue of taxes – in many cases, based on what they have said, neither candidate really knows his arse from a hole in the ground when it comes to the Tax Code (I hope all four of the candidates have read my post “Taxes 101 for Politicians”). And, judging from the constant posts about lies and discrepancies in ads and the debates at the Tax Foundation’s TAX POLICY BLOG and other blogs, neither have any clue as to what either the tax changes of the Bush years have actually done or what each other has proposed regarding tax policy. If these guys are so clueless when it comes to the issue of Taxes are they just as clueless when it comes to other important election issues? Oi vey!

* Always leave them laughing. I got this in an email forward on Monday: Best stock market trader quote of the week: “This is worse than divorce. I've lost half my money but I still have my wife!”

TTFN

JUST A REMINDER – NJ PROPERTY TAX RELIEF DEADLINES

Just wanted to let New Jersey homeowners know that the deadline for filing an application for the NJ Homestead Rebate, which can be done either by phone or online, and the NJ Property Tax Reimbursement (PTR-1 or PTR-2) is October 31, 2008.

You can also check on the status of your NJ Homestead Rebate here.

FYI, the income limit for the NJ Homestead Rebate application has been reduced. NJ homeowners with “New Jersey Gross Income” (Line 28 on the NJ-1040) of over $150,000 will not receive a rebate this year. The income limit for tenants remains at $100,000.

Below is the filing information for tenants, from the NJ Division of Taxation website –

- If you are required to file a 2007 New Jersey income tax return, you must complete your tenant homestead rebate application and file it at the same time you file your New Jersey income tax return (April 15, 2008). If you request an extension of time to file your State income tax return, the filing deadline for your rebate application is also extended. File your rebate application with your State income tax return on or before the extended due date.

- If you have already filed your 2007 New Jersey income tax return but did not complete the tenant rebate application even though you are eligible, you have until October 31, 2008, to file the tenant homestead rebate application, Form TR-1040. If you filed a traditional paper income tax return, you can submit a paper Form TR-1040, or you can file your tenant rebate application through NJ WebFile, the Division of Taxation's free Internet filing system.

· 2007 Tenant Rebate Application
· 2007 Tenant Rebate Instructions

- If you are not required to file a 2007 New Jersey income tax return because your income is below the minimum filing threshold, you have until October 31, 2007, to file your 2007 tenant homestead rebate application, Form TR-1040.

TTFN

THIS AND THAT

THIS –

You are all aware, or should be, of my weekly WHAT’S THE BUZZ feature, which appears every Saturday (except during my tax season hiatus). I bring you links to the best blog postings and online articles on tax-related topics from the week that I have come across in my “wanderings” on the web, often providing my own commentary on the subject.

I have created a new free monthly newsletter that does the same thing for personal finance and other topics titled FROM THE DESK OF ROBERT D FLACH. It is sort of a giant Personal Finance Blog Carnival – only I have personally selected the entries.

You can download a free copy of the premiere “issue” (in “pdf” format) by clicking HERE.

Each month as a new issue is published I will provide you with a link so you can download a copy.

And, of course, you are always welcome to suggest posts or articles on the subject that you feel would be of interest to my readers.

THAT -

While I have you I just wanted to let you know that the “35th Money Hacks Carnival - The 1925 Railroad Edition” is up and running at THE MONEY HACKS (“a place to discuss money for the rest of us”).

My post “Taxes 101 for Politicians” appears under the “Politics” category. Odd choice of category – though there is no “Taxes” category.

While you are there check out “10 Smart State Income-Tax Saving Strategies” from FIX MY PERSONAL FINANCE, included under the “Saving, Frugality and Shopping” heading. The author starts off with the excellent point, “You can’t do serious tax planning unless you take state and local taxes into account, too”.

I found “Are You Stupid for Paying Your Mortgage” from KIRBY ON FINANCE under “Dealing With The Economy” interesting, and also recommend “529 College Savings Plan” from PASSIVE FAMILY INCOME under “Investing”.

As somewhat of a train buff myself I enjoyed his pictures.

TTFN

ASK THE TAX PRO - DEPENDENTS AND HEAD OF HOUSEHOLD

This question was originally submitted as an unrelated comment to an earlier TWTP post.

Q. If a man (age 24) lived with and provided over half the support for his girlfriend (age 22) and her child (age 2) all year, can he claim them as dependents and file as Head of Household? Between her short job and interest earnings, the girlfriend didn't make quite $3,400.

A. First question – can the taxpayer claim his girlfriend as a dependent?

To be claimed as a dependent one must be either a “qualifying child” or a “qualifying relative”.

The first test for a “qualifying child” is that “the child must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.” I assume that the “girlfriend” does not meet this test (are we talking about Arkansas?) – so she is not a “qualifying child”.

The tests for being a “qualifying relative” are –

1. The person cannot be your qualifying child or the qualifying child of any other taxpayer. We have shown that the girlfriend is not the taxpayer’s “qualifying child”, and let us assume she is not the “qualifying child” of anyone else (no info to the contrary provided) – so we assume she passes this test.

2. The person either (a) must be related to you or (b) must live with you all year as a member of your household (and your relationship must not violate local law). It is stated in the question that the girlfriend lived with the taxpayer, and we will assume that it was for the entire year – so she passes this test. If she moved in with the taxpayer in February she would not pass the test. The comment about “must not violate local law” has to do with common-law marriages – which I will say is not an issue in this situation.

3. The person's gross income for the year must be less than $3,400. The question indicates that her income was less than $3,400 - so she passes this test. The $3,400 mentioned here represents the amount of the personal exemption for 2007. For 2008 the amount to use is $3,500.

4. You must provide more than half of the person's total support for the year. According to the information provided the taxpayer did – so this test is also passed.

So the girlfriend is a “qualifying relative” – even though she is not related to the taxpayer.

There are now three (3) more tests to pass –

(1) Dependent Taxpayer Test - If you could be claimed as a dependent by another person, you cannot claim anyone else as a dependent. It appears that the taxpayer boyfriend is not being claimed as a dependent by anyone else, so this test is met.

(2) Joint Return Test - You generally cannot claim a married person as a dependent if he or she files a joint return. We should make sure the girlfriend is not married to someone else and filing a joint return with her spouse. Let us assume she is not (no info to the contrary) and say she passes this test.

(3) Citizen or Resident Test - You cannot claim a person as a dependent unless that person is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico, for some part of the year. There is no indication in the facts given that the girlfriend is not a US citizen – so we will assume she meets this test.

So, the girlfriend meets the tests for being a “qualifying relative” and the tests for being a dependent. The taxpayer boyfriend can claim her as a dependent on his tax return.

Next question – can the taxpayer claim his girlfriend’s 2-year old child as a dependent?
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The question does not say that the taxpayer has legally adopted the child, so under the test we discussed above the child would not be his “qualified child”.

The first test for “qualifying relative” is that the person cannot be the “qualifying child” of another taxpayer. The child is the “qualifying child” of her mother. However this does not necessarily disqualify the child for the taxpayer boyfriend because according to IRS Publication 501 (Exemptions, Standard Deduction, and Filing Information) – “A child is not the qualifying child of any other taxpayer and so may qualify as your qualifying relative if the child's parent (or other person for whom the child is defined as a qualifying child) is not required to file an income tax return and either:

· Does not file an income tax return, or
· Files a return only to get a refund of income tax withheld.”

Based on her taxable income as presented, the mother does not have to file a federal income tax return, although she may file a return with no dependents and a “0” tax liability only to claim a refund of any income tax withheld on her small W-2 earnings.

However, if the mother filed a tax return to claim the Earned Income Credit based on her child, as could apply in this example, then the boyfriend could not claim the 2-year old as his dependent. If the boyfriend came to me to have his tax return prepared with the above information I would also want to see if the mother would be eligible for the Earned Income Credit (also available on the NJ state income tax return) and see how much of a credit she would receive.

It the EIC is not an issue then we can assume, based on the limited facts given, that the child would pass the other tests for being a qualifying relative and a dependent.

One must look carefully on the support test. If the mother is receiving child support payments from either the father or a government welfare program perhaps the boyfriend is not paying more than half the support for the 2-year old. We must also find out if the child’s father is claiming her as a dependent on his return using Form 8332. It is important to ask questions and get all the information before making a decision.

So we have determined that the taxpayer boyfriend can claim his live-in girlfriend as a dependent, and maybe the girlfriend’s 2-year old child as well.

Last question – can the taxpayer file as Head of Household?

According to Pub 501 – “You may be able to file as head of household if you meet all the following requirements.

1. You are unmarried or “considered unmarried” on the last day of the year.
2. You paid more than half the cost of keeping up a home for the year.
3. A “qualifying person” lived with you in the home for more than half the year (except for temporary absences, such as school).”

The taxpayer boyfriend, it appears, meets the first two requirements.

.

A “qualifying person” is someone who “lived with you more than half the year, and he or she is related to you in one of the ways listed under Relatives who do not have to live with you on page 14, and you can claim an exemption for him or her.”

Page 14 of Pub 501 lists the “Relatives who do not have to live with you” as

· Your child, stepchild, foster child, or a descendant of any of them (for example, your grandchild). A legally adopted child is considered your child.
· Your brother, sister, half brother, half sister, stepbrother, or stepsister.
· Your father, mother, grandparent, or other direct ancestor, but not foster parent.
· Your stepfather or stepmother.
· A son or daughter of your brother or sister.
· A brother or sister of your father or mother.
· Your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

A person who is your “qualifying relative” only because he/she lived with you all year as a member of your household is not a “qualifying person” for purposes of meeting the Head of Household test.

Publication 501 specifically provides the following example (the highlight is mine)-

“Example 3—girlfriend.

Your girlfriend lived with you all year. Even though she may be your qualifying relative if the gross income and support tests… are met, she is not your qualifying person for head of household purposes.”

So the taxpayer boyfriend cannot file his tax return as Head of Household.

.

Just a disclaimer - there was really not enough information provided in the question to answer the question with certainty. As I said above it is very, very important that all the "facts and circumstances" be given to your tax preparer so he/she can make an informed decision.

.
Does anyone have anything to add?
.

TTFN

CARNIVAL OF MONEY STORIES

Before I get back to work I just wanted to report that the Carnival of Money Stories: Edition #81 is now appearing at SO CAL SAVVY.

The blog’s host is “newly married and out-of-work. On one income I’m making our bucks stretch and still enjoying everything Southern California has to offer us. I want to save a buck, but also enjoy life as a twenty-something in the city. It’s a process, but I want to share what I’ve learned and get feedback from others!”

My post on “Taxes 101 for Politicians” is included – the only entry under the “Taxes” category.

EVALUATING TAX FREE INVESTMENTS

{As this is still a busy time – finishing up the last two GD extensions – it is a good occasion to bring you a “rerun”. Here is a post from December 26, 2006 - my father's birthday - that is still relevant today}

With the yield on tax-free municipal bonds high relative to the yield on most taxable investments, you should seriously take a look at tax-free bonds and bond funds as an investment alternative.

When evaluating tax-free municipal bond investments you must first determine the “equivalent taxable yield” of the bond. This is done by subtracting your effective tax rate from 100% and dividing the tax-free yield by the result.

Let us say you are a NJ resident in the 25% federal and the 5.525% state tax brackets. You will be able to itemize, so you save 25% of the 5.525% state tax. Your effective tax rate is 29.144% (5.525% x 75% = 4.144% + 25%). 100% - 29.144% = 70.856%.

A 3% yield on a NJ municipal bond is equal to earn-ing 4.23% on a taxable investment (3% divided by 70.856% = 4.23%). A NJ muni paying 3.5% will pay the same as a taxable bond or CD paying 4.94% (3.5% divided by 70.856% = 4.94%).

If you are looking at a bond from another state (you live in New Jersey but the bond is issued by a Florida municipality) you would only factor in your federal tax bracket. If that is 25% you would divide the muni yield by 75% to determine the equivalent taxable yield.

Not a math wizard. For a helpful “Tax-Free Vs Taxable Yield Calculator” you can go to www.investinginbonds.com and click on “Calculators”.

While it is true that interest on the obligations of a state or local government is exempt from federal income taxes under IRC Section 103(a), tax-free bond income is not always tax free. You should take the following facts into consideration before you decide to invest in a tax-free municipal bond or bond fund.

* Tax-free income from state and local municipal bonds and municipal bond funds is 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!

* Tax-free income from “private activity 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 interest on state or local bonds or bond funds, while exempt from federal taxation, may be taxed on your resident or non-resident state tax returns. For example, interest from a NJ bond is exempt on the NJ resident and non-resident returns, but income from a Massachusetts municipal bond is not. Similarly, a NJ resident with income from a multi-state municipal bond fund must pay NJ state tax on that portion of the income that is attributable to the fund’s investments in non-NJ bonds.

* 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.

* If you borrow money to buy shares in a tax-free bond fund on “margin”, the interest charges are not deductible as investment interest on Schedule A.

As with any investment, changes in interest rates could affect the value of a municipal bond or shares in a muni bond fund. If you believe that interest rates will rise in the near future it would be wise to limit your consideration to short-term and intermediate-term bonds.

TTFN

TAXES 101 FOR POLITICIANS

This post is written especially for members of Congress, the two Presidential candidates included, and their speech writers and advisers. However all are welcome to read on.

Over the past months various Congresspersons, among them those who chair and sit on the committees that actually write tax law and the candidates for the Presidency, as well as several politicians at the state level, have proven their total “cluelessness” when it comes to even the most basic of tax knowledge. So I have decided to try to explain to them some of the fundamental concepts of the 1040. I am aware of the level of intelligence of the average Congressperson, so I will try to explain the law as simply as possible.

If any of this is “over your head” please feel free to ask questions via posting a comment.

Basically the US Internal Revenue Code says that “everything is taxable ‘except’ . . .” and “nothing is deductible ‘except’ . . .” It is in the “exceptions” that the meat, and complexity, of the tax law lies.

There are three types of tax benefits – exclusions from income, deductions and credits (well actually four if you also add the special capital gains and “unrecaptured Section 1250” tax rates – but that is an item for another post).

Among the more familiar exclusions from income are interest from municipal bonds and dividends from funds that invest in municipal bonds, most life insurance proceeds, gifts, all or part of Social Security and Railroad Retirement benefits (based on the taxpayer’s filing status and level of income), etc.

The availability of a tax deduction or a tax credit (or in the case of taxable Social Security or Railroad Retirement benefits an exclusion from income) often depends on the level of the taxpayer’s income – generally the taxpayer’s Adjusted Gross Income (AGI) or the Adjusted Gross Income with some minor modifications (MAGI). Over the last 20+ years Congress has felt that what they consider to be higher-income taxpayers do not deserve certain tax breaks and have decided to place various different AGI or MAGI “phase-outs” on various different deductions, credits and exclusions. To insure confusion the income ranges are different for just about each deduction, credit or exclusion that is phased-out.

There is a big difference between a deduction and a credit – which seems to confuse most politicians.

A deduction is a dollar for dollar reduction of taxable income. If your taxable income is $100,000 and your allowable deductions total $50,000 you will calculate your tax liability based on $50,000 of net taxable income.

The value of a deduction depends on one’s individual tax bracket. A deduction of $1,000 will be worth $250 (put an additional $250 in your pocket – or reduce what you will owe by $250) to a taxpayer in the 25% bracket, only $150 to someone in the 15% bracket, but $350 to one who falls in the 35% bracket. It is possible that a deduction of $1,000 will push you into the next lower tax bracket, so part of the deduction will be worth, say 25%, and part worth 15%.

There are two types of deductions – those that are allowed “above the line” and those that are claimed “below the line”. The “line” is your Adjusted Gross Income.

Deductions that are allowed “above the line” include business deductions claimed on Schedule C (self-employment income), Schedule F (self-employed farm income) and Schedule E (rental income and income related to “pass-through” entities such as partnerships, Sub-S corporations and estates and trusts), the expenses of selling a capital asset that are included in the cost basis of the asset when calculating gain or loss on Schedule D, and “adjustments to income” such as educator expenses, IRA and self-employed pension contributions, qualified tuition and fees, one-half of the self-employment tax paid on Schedule SE, qualified health insurance premiums for self-employed taxpayers, moving expenses, student loan interest, etc. All of these deductions are taken on Page 1 of the Form 1040.

“Above the line” deductions reduce your Adjusted Gross Income and so could reduce the amount of tax benefits that are “phased-out” based on AGI or MAGI (as discussed above), thereby increasing certain other tax benefits. Because of this an “above-the-line” deduction of $1,000 could actually reduce your net taxable income by much more than $1,000. As a result such deductions are “more better” than those that are allowed “below the line”.

Deductions that are claimed “below the line” include the standard deduction, plus any additional amount for age, blindness and real estate taxes paid, the deduction for personal exemptions, and Itemized Deductions reported on Schedule A - such as real estate taxes, state income taxes or state sales taxes, mortgage, home equity and investment interest, contributions to church and charity, gambling losses (to the extent of winnings reported as income) and excess medical, casualty and theft, job-related and investment expenses.

An itemized deduction is only of tax benefit if the total amount of your allowable itemized deductions exceeds the total standard deduction allowed for your filing status and situation. Making a contribution of $1,000 to charity will provide absolutely no tax benefit if you are single and your total itemized deductions, including the contribution, are only $4,000. Charities may advertise that you will get a tax deduction if you give them your used car – but this is not true if you are not able to itemize.

(Not to complicate matters, but there may be occasions when you are either required to, or will pay less tax if you, claim itemized deductions when the total is less than your appropriate standard deduction – again a subject for another post.)

The tax benefit of a deduction claimed “below the line” is always limited to the amount of the actual deduction. A $1,000 “below the line” deduction will only reduce your net taxable income by $1,000. So a “below the line” deduction is not as good as an “above the line” deduction.

A credit is a dollar for dollar reduction of actual tax liability. A credit of $1,000 will be worth $1,000 to every single taxpayer, regardless of one’s tax bracket. A credit of $1,000 means that you can put $1,000 in your pocket, or reduce what you owe by $1,000. In most cases a credit is better than a deduction, regardless of where the deduction is located in relation to the “line”.

The personal exemption deduction for a child, $3,500 for 2008, is worth $525 “in pocket” for a taxpayer in the 15% tax bracket. Claiming a $1,000 Child Tax Credit is the same as putting $1,000 in your pocket, and this is true whether you are in the 15% bracket or the 25% bracket.

A tax credit is of no benefit if you already have a “0” tax liability – unless the credit is “refundable” (like the Earned Income Credit or in some cases the Child Tax Credit). A $1,000 Hope Education Credit will put $0 dollars in the pocket of a couple who has already reduced their tax liability to “0” using other deductions and credits.

Similarly a deduction will be of no tax benefit if your net taxable income is already “0”.

Tax deductions, whether above or below the line, are allowed in calculating net taxable income. Tax credits are allowed after the initial tax liability has been calculated. So there are occasions when a deduction is better than a credit – if claiming the deduction reduces your net taxable income to “0” so that you will not receive any tax benefit from a non-refundable credit.

I don’t want to overtax (pun intended) the brains of any Congresspersons or other politicians, knowing of their limited attention span, so I better end here. I hope my little “primer” has been of some help. John or Barack, Joe or Sarah, Chuck or Jon – any questions?

TTFN

WHAT'S NEW FOR 2009

I Just wanted to let you know that the WHAT’S NEW FOR 2009 Page, with the various new amounts for deductions, credits phase-outs, etc that will apply to the 2009 Form 1040, is now “up and running” at www.robertdflach.net.

This Page includes the 2009 personal exemption, standard deductions, pension plan contribution limits, Section 179 and long-term care insurance premium deduction limits, Social Security and Medicare information, annual gift tax exclusion, etc. You can also download the 2009 Tax Rate Schedules.

I will add new information for 2009 to this page as it becomes available.

SOME FINE WHINE

I currently subscribe to “Digital Cable” through COMCAST, which more than doubles the cable stations that I can watch. I can now watch BBC America, the Hallmark Channel, the Travel Channel and Disney, among others. I have about 200 channel choices.

I swear in the “olden days” before cable tv (which was portrayed in “PSAs” shown in movie theatres as a “monster in your living room”) when there were only 7 broadcast channels to choose from (for me 2, 4, 5, 7, 9, 11, and 13) there were more varied choices than there are today with 200 channels - and I never had any trouble finind something entertaining to watch! I often find myself singing a revision of the Bruce Springsteen song, now “200 Channels and Nothin’ On!”

While the remaining broadcast channels do often come up with some good shows, their schedules continue to be chock-a-block with the steaming piles of excrement called “reality tv”, brain-dead game shows and cloned talent contests, as do the various cable stations.

MTV, VH-1 and E are full of unwatchable soft-core porn reality shows – with absolutely no socially redeeming value and also no entertainment value. E’s only saving grace is THE SOUP.

TLC (The Learning Channel) should be called the “Circus Side-Show Channel”. With the exception of WHAT NOT TO WEAR and reruns of WHILE YOU WERE OUT (two shows which actually are excellent for what they are) this station is all about freaks and geeks – from the “tree-man” to the “man without a face” to the “tattooed lady” (HOLLYWOOD INK).

BRAVO, TNT and A+E run constant reruns of the LAW AND ORDER and CSI franchises – how many times can you watch the same episode?

BBC America does have PRIMEVAL, TORCHWOOD, occasional mystery series like WIRE IN THE BLOOD, GAVIN AND STACEY, and GRAHAM NORTON - but its schedule is mostly made up of reality shows – which are more outlandish than the copied American versions. When I first got Digital Cable BBC America had daily reruns of the old SAINT and AVENGERS series, but they disappeared within a month.

The Hallmark Channel’s series of original mysteries (somewhat reminiscent of the days of McMILLAN AND WIFE, McCLOUD, BANACEK, etc – although certainly not as good) have original entries only very rarely. And, like TNT, BRAVO and A+E with L+O and CSI, how many times can you watch the same Perry Mason movies and Murder She Wrote and Matlock episodes?

The Travel Channel still has an hour of new Samantha Brown (now doing week-end getaways) almost every week, but fills much of its prime-time schedule with a show about a fat guy eating fried bugs and cooked animal testicles in exotic places, someone who makes “No Reservations”, and poker tournaments.

The Disney tween-targeted sitcoms and movies are ok on occasion for killing time – but not as a steady diet.

Oi vey! Thank God for FANCAST and NETFLIX.

TTFN

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

It seems that I used up most of the good Buzz in my Hump Day bonus entry. There are still a few good items left -

* Kelly “TAXGIRL” Erb brings us some good news from the Supreme Court in her post “The Tribe/Supreme Court Has Spoken: Fat Naked Guy Stays in Jail”. “Fat Naked Idiot” Richard Hatch, poster boy for the multitude of complete idiots who abandon all self-respect to appear on a steaming pile of excrement that we call “reality tv”, “has lost his final challenge: the U.S. Supreme Court has declined to hear his appeal on tax evasion charges”. Kudos to the Court for a wise decision.

* Oops - they did it again! In its post “Fact Checking Tax Policy Discussion in the Final Presidential Debate” the Tax Foundation’s TAX POLICY BLOG tells us that “both candidates did make many of the same dishonest and misleading statements they've made in the past two debates and on the campaign trail” in Wednesday night’s debate.

* Bruce the TAXGUY ended the week with a guest post in his ongoing series on choosing a tax professional by Anonymous (is this the same person that posts so many comments on blogs) titled “Things Your Tax Pro May Not Tell You”. Be sure to read my lengthy comment on this post.

* Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG points out that it was 77 years ago yesterday (Friday) that Al Capone was convicted of tax evasion.

* Just about every other tax blog is talking about “Joe the Plumber” (who TAXGIRL tells us is not really a plumber) from DON’T MESS WITH TAXES to TAXGIRL to MAULED AGAIN to the TAX POLICY BLOG to TAX PROF to the ROTH AND COMPANY TAX UPDATE BLOG and on and on. Pick one or two and read about Joe and his apparently more than fifteen minutes of fame.

* Thanks to Michael Rozbruch of the TAX RESOLUTION UNIVERSITY blog for the kind words in introducing my guest post on “5 Ways to Avoid IRS Tax Problems”. It is nice to know that I am thought of by my peers as “one of the blogosphere’s best tax bloggers”! If you haven’t already done so be sure to check out my post.

TTFN

CHECK OUT MY GUEST POST!

Check out my guest post “5 Ways To Avoid IRS Tax Problems” today at the TAX RESOLUTION UNIVERSITY blog. I was “returning the favor” to blog author Michael Rozbruch who had written a guest post for TWTP during my recent GD extension hiatus.

Thanks, Michael, for having me, and thanks for the kind words – “one of the blogosphere’s best tax bloggers”!

IRS AND SSA ANNOUNCE 2009 INFLATION-ADJUSTED NUMBERS

Yesterday (Thursday) the IRS and the Social Security Administration announced some of the various inflation adjustments for 2009. Here is the word -

* The value of each personal exemption, for the taxpayer, spouse and dependents, is $3,650 for 2009, up $150 from 2008.

* The new standard deduction amounts for 2009 are -

· $11,400 for married couples filing a joint return (up $500),
· $5,700 for singles and married individuals filing separately (up $250), and
· $8,350 for heads of household (up $350).

* The maximum Earned Income Tax Credit (EITC) for low and moderate income workers and working families with two or more children is $5,028, up from $4,824. The income limit for the credit for joint return filers with two or more children is $43,415, up from $41,646.

* The 2009 annual contribution limits for retirement plans are:

· $16,500.00 (plus an additional $5,500.00 if age 50 or older at the end of 2008) for 401(k) and 403(b) plans
· $16,500.00 (plus an additional $5,500.00 if age 50 or older at the end of 2008) for 457 plans (Deferred Compensation for state and local government employees)
· $11,500.00 (plus an additional $2,500.00 if age 50 or older at the end of 2008) for SIMPLE plans
· $49,000.00 for Defined Contribution KEOGH plans
· $49,000.00 for Self-Employed SEP plans (allowable contribution equal to 25% of net earnings up to $245,000, which translates to 20% multiplied by the total of "net earnings from self-employment" from Schedule C, Schedule C-EZ or Form K-1 less the deduction for 50% of self-employment tax)

* The compensation limit for participation in a SEP is $550.00.

* The annual gift exclusion rises to $13,000, up from $12,000 in 2008.

* Monthly Social Security and Supplemental Security Income benefits will increase 5.8% in 2009, the largest COLA increase since 1982, effective with benefits received in January 2009.

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

* Based on the increase in average wages, the maximum amount of earnings subject to the Social Security tax (taxable maximum) for 2009 will increase to $106,800 from $102,000. The maximum Social Security tax to be withheld from wages in 2009 will increase to $6,621.60 from $6,324.00. The maximum amount of the Social Security portion of “self-employment tax” will be $13,243.20.

* For most Social Security beneficiaries the standard monthly Part B premium will be $96.40 in 2009.

The monthly premium will be higher if you filed a 2007 individual tax return and your modified AGI for 2007 was more than $85,000, or if you are married (file a joint tax return) and your annual income is more than $170,000. The premiums for the “higher income” beneficiaries will be as follows-

SINGLE:

Premiums - - Income of:

$ 96.40 - - - $85,000 or less

$134.90 - - - $85,001-$107,000

$192.70 - - - $107,001-$160,000

$250.50 - - - $160,001-$213,000

$308.30 - - - Above $213,000

.

MARRIED FILING JOINT:

Premiums - - Income of:

$ 96.40 - - - $170,000 or less

$134.90 - - - $170,001-$214,000

$192.70 - - - $214,001-$320,000

$250.50 - - - $320,001-$426,000

$308.30 - - - Above $426,000

.

MARRIED FILING SEPARATE:

Premiums - - Income of:

$ 96.40 - - - $85,000 or less

$250.50 - - - $85,001-$128,000

$308.30 - - - Above $128,000

For more info on the IRS increases click here and here – click here and here for info on the Social Security changes – and click here and here for more info on the Medicare Part B premiums.

I will report on additional 2009 numbers of interest here as information becomes available. Within the next two weeks I will be creating a WHAT’S NEW FOR 2009 Page on my website at www.robertdflach.net. I will let you know when it is “up and running”.

TTFN

IF I HAD MY DRUTHERS

A while back the Director of Publications for the National Association of Tax Professionals asked me to contribute to an article for the association’s quarterly TAXPRO JOURNAL, for which I had written in the past, on what would be my proposals for changing the Tax Code if I were running for president. I received the “proofs” last week.

* I begin by stating that I would repeal the dreaded Alternative Minimum Tax (AMT). I expect that this would be high on the list of most tax professionals.

*I would do away altogether with the “marriage tax penalty” by making the filing status “Married Filing Separately” equal in every way to that of “Single”. No longer would any tax benefits be unavailable to married taxpayers choosing to file single – and the Tax Rate Schedule (and corresponding Tax Tables) for MFS would be the same as the one for Single. The filing status would be renamed “Married, But Filing as Single”.

What I do not say in the article, an afterthought, is that I would probably reduce somewhat the “marriage tax benefit” so that the Tax Rate Schedule for MFJ is closer to that of Head of Household. I would probable balance this out by allowing a slightly higher personal exemption deduction, perhaps $500 or $1,000 more, for dependent children, similar to what NJ does on the NJ-1040 (the exemption for the taxpayer and spouse and age or blindness is $1,000 each while for dependents it is $1,500).

A couple choosing to file separately would be able to file a “2-column” Form 1040 (or 1040A) – so that they could report their individual items of income, deduction and credit separately, but end up with one net refund or balance due amount. This is similar to the way I remember the New York State income tax return to be when I first started out in the business.

* Another proposal, which I first put forward in 2002 when George W was first looking for ways to “stimulate” the economy, is to allow taxpayers to “carry back” as well as “carry forward” net capital losses in excess of the annual maximum deduction (which would now be annually adjusted for inflation) to apply against gains in prior years. I would probably have a three-year carry back period. I discussed this idea in detail in my post “Dear George”.

This idea came about because many of my clients had reported and paid a substantial amount of federal, and state, income tax on six-figure capital gains, most short-term, in 1999 and 2000, but when everything turned around in 2001 and 2002 they had six-figure realized capital losses. The bottom line was that over a 2 or 3 year period of investment activity they had a net capital gain of “0” or a minor net gain or net loss. But they had been highly taxed in the years they had gains – and were only able to deduct a maximum of $3,000 in the years they had losses, with the excess loss “carried forward”. Unless these taxpayers would have a big score in future years they would never be able to fully claim all of the losses in their lifetime.

I do believe that one of the reasons we ended the Clinton years with a budget surplus was because of the taxes paid on excessive capital gains during the “dot.com” boom.

* I would make all items of deduction indexed annually for inflation. If we are going to index some items we should index them all. As I point out in the article, I believe the $25 limit on business gifts has remained unchanged for as long as I have been doing taxes – over 35 years – and the $3,000 limit on deductible net capital losses has been the same for decades.

* One current inequities in the law is that a person who wins a legal settlement, award or judgment, except in the case of a claim for unlawful discrimination, must report the gross amount as income on Page 1 of the 1040, which increases AGI and adversely affects a multitude of deductions and credits, and deduct the associated legal costs as a miscellaneous itemized deduction subject to the 2% of AGI reduction. In these cases a person could be awarded $300,000 but only end up “in pocket” $100,000-$150,000 after the lawyer takes his chunk.

In the case of claims for unlawful discrimination the associated legal fees and court costs are allowed as an “above-the-line” adjustment to income, so that the AGI properly reflects the true economic reality. I would allow the same adjustment to income for the corresponding costs of all settlements, awards and judgments.

*I would permanently do away with the first George Bush’s “read my lips” taxes – the phase-out of personal exemptions and itemized deductions based on AGI. And I would also repeal the 2% of AGI reduction of miscellaneous itemized deductions.

While I did not address the issue in my proposals for the article, several of the other contributors mentioned increasing, or doing away with, the phase-out ranges for various tax benefits, stating (1) it discourages ambition and (2) it discriminates against residents of certain high cost-of-living states (like California and those in the northeast). I would most likely do away with all phase-outs of deductions, credits, etc based on income. If an item has merit as a deduction or credit it should apply to all taxpayers. If you want to increase the tax on “high income” individuals that just raise the rate!

If there must be a phase-out or cut-off I would opt for one much higher cut-off MAGI amount (no more bothering with phase-outs) for all tax benefits – say $150,000-200.000 for an individual taxpayer (including Married Filing As Single) and $300,000-$400,000 for a joint return.

I would certainly, as a fellow tax professional suggested, remove all of the income and “employer plan covered” restrictions on deductible IRA and contributions and ROTH contributions.

* One minor item that irks me is that the standard mileage allowance deduction for using your car for doing volunteer or charity work is not set by the IRS along the same lines as the SMA for business, medical and moving use – but is set by Congress. Except for a recent increase restricted to driving related to Hurricane Katrina relief, this number, currently only 14 cents per mile, has not been raised in years. It should be the same as the allowance for medical and moving travel.

*I ended my list of presidential tax proposals by calling for a Federal Tax Amnesty Program similar to the type of program that has been successfully used by many of the states to raise tax revenue quickly. I discuss this in my post “Tax Amnesty”. I also said I would call for reinstating the “President’s Advisory Panel on Tax Reform” and take their findings seriously.

There are two additional proposals that I did not include in the article but probably should have –

(1) Do away with the deduction for depreciation of real property. I discussed this idea in detail in the post “Here Is Something to Think About” last year. I suggest that you go back and read that post in full to see what I am talking about. I was very disappointed that I did not get many comments on the topic at the time from my “peers”.

(2) I would also do away with “refundable” tax credits, such as the ones for Earned Income Credit and the Child Tax Credit. I would actually take a long, hard look at the Earned Income Credit, which is really a welfare program. You can read my thoughts on the EIC here.

So there you have it – the proposals of the Flach for President tax plank (click here for more details on some of the above). What do you think about my ideas – and what tax changes would you propose if you were running for the White House?

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TTFN

WTF???

{Oi vey! Something in the system FU-ed my Hump Day Bonus Buzz post. The following items were supposed to be included in the original post – and were when I originally published the post. I have absolutely no idea what happened.}

* Bruce of TAXGUY continues his series on “Mistakes Made When Choosing a Paid Tax Preparer” by adding more of his own 2 cents on the subject in the post “Paying Too Little OR Too Much. . .” and adds a guest post this morning from Russ Fox, author of the TAXABLE TALK blog.

* Speaking of the “stimulus” rebate – some good news for a change. Late yesterday (Tuesday) Kelly the TAX GIRL reported that “IRS Changes Gears on Rebate Checks” with regards to “couples who did not received a rebate check due to an error matching your spouse’s married name and Social Security number”. Like the clients in my post “Royally Screwed”. The topic is also reported here.

Kelly points out – “Last month, the IRS was adamant that rebate checks would only be mailed to those who showed a perfect match. But now, without additional comment, the IRS has announced that it mail checks this month to an additional 260,000 married taxpayers whose names did not match Social Security numbers. Letters announcing the change of position will be mailed to affected taxpayers in a few days; checks should arrive by the end of the month.”

Actually, this is not news to me. As I reported in my post “From the Horse’s Mouth” Lyle Lauterbach, the head of the NJ office of the IRS Taxpayer Advocate Service, told the NJ chapter of the National Association of Tax Professionals’ Annual Meeting and Conference last month that “the IRS has been dealing with the problem of a non-matching name and Social Security number as it relates to the economic ‘stimulus’ rebate and expects to have a solution by October – so those who had been RS-ed could possibly receive a rebate check in November.”

SURPRISE – A HUMP DAY BUZZ!

Lots of timely buzz so far – so I thought I would bring you an extra entry this week:

* First and foremost – Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG reminds us what today – October 15th – is in his post “It Tolls For Thee”.

* Pete Pappas of THE TAX LAWYER’S BLOG gives us some first-hand examples of how the IRS is not always as “kinder and gentler” as they would like you to believe in “Horrifying Tax Tales”.

* Pete also has begun a 10-post series on the 2 full opinions and 8 Memorandum opinions issued by the Tax Court through October 10, 2008. He begins with Patrick S. Arnold v. Commissioner in the post “Tax Court Update - October 2008”.

* TAX GIRL Kelly Phillips Erb provides a good overview of the tax treatment, old and new, of mortgage debt forgiveness in the appropriately-titled post “Foreclosures, Debt Forgiveness and Mortgage Losses Explained”.

* The Tax Foundation has set up a special page on its website titled TAX FACT CHECK. As the Foundation explains –

“Tax talk is filled with statistics, and everyone knows the old Mark Twain saying about the three types of lies: ‘lies, damned lies, and statistics.’ Taxpayers, voters, the media, and even elected officials often have a difficult time sorting through all the information—and misinformation—on taxes that circulates on the internet, in the media, in political speeches, and in election debates and ads. Tax policy is a complicated, often confusing subject, and it's no wonder that so many people have trouble understanding it.

The Tax Foundation helps sort through the facts, lies, nuances, and half-truths with its Tax Fact Check publications, blog posts, and podcasts. Tax Foundation scholars analyze political speeches, debates, campaign advertisements, websites, and other sources to separate the tax facts from the falsehoods and help taxpayers understand and evaluate what they read and hear.”

Be sure to check out this page tomorrow morning to discover the tax-related factual FUs from tonight's final Presidential debate.

* I just came across the October 3rd “Friday Tax Quote” from the TAX LAW FORUM blog written by attorney Rob Teuber (the highlight is mine) –

“My father has a great expression: ‘The capital gains tax has created more millionaires than any other government policy.’ The capital-gains tax tends to make investors hold longer. That is almost always the right decision.” Chris Davis

Something for those who call for the repeal of the special capital gains tax rates to think about.

* Kay Bell of DON’T MESS WITH TAXES quotes former Bush Treasury official Bruce Bartlett in her post “Another Stimulus Package? Say It Ain’t So”, who, after the first rebate was approved in January, wrote in a Wall Street Journal op-ed piece (the highlight is mine) -

“In short, there is virtually no empirical evidence that tax rebates are an effective response to economic slowdowns. The increased personal saving doesn't help the economy because the federal budget deficit, which can be thought of as negative saving, offsets all of it in the aggregate. The main benefit of a tax rebate would seem to be political -- giving politicians a way of appearing to be doing something about the nation's economic problems that is superficially plausible.”

* When will they ever learn? Kay follows up the above post with a report that the Democrats, led by candidate Obama, want more rebate checks. Their thinking – find an idea that doesn’t work and keep doing it! In her post “Second Stimulus Plan in the Works” Kay states –

“In announcing his new economic policy plan today, the Democratic presidential nominee called on Congress ‘to pass a plan so that the IRS will mail out the first round of [Obama's proposed] tax cuts as soon as possible.’ Yep, that's the second rebate, which I argued against just this morning.”

I recently saw a musical about dorm life in which the college kids sang that Democrats are idiots and Republicans are evil. While I do not believe that all Republicans are evil (just Cheney and George W’s other advisers) it looks like Democrats may indeed be idiots!

TTFN

MY FAVORITE “SWEETENER” FROM THE BAILOUT BILL

{ IMPORTANT REMINDER – Before I begin my post I just want to remind you that tomorrow, October 15th, is the final deadline for filing your 2007 Form 1040 on time. If you owe “Sam” it is very important that you get your completed Form 1040 (or 1040A) signed and in the mail by October 15th – even if you cannot pay all or any of the tax due on the return. If “Sam” owes you it is not an issue – there is no penalty or interest (other than for underpayment of estimated tax) if “he” owes you. }

Now on to the business at hand -

Can you guess what provision of the recently signed kitchen sink “don’t call it a bailout” Act is my absolute favorite?

No it is not the one that “fixes” the standards imposed on tax prepares so that they now conform to the standards imposed on the taxpayer. This issue never really concerned me all that much.

And no, I do not ride my bike to work. I work out of my home, so my commute consists of walking from the living room to the office.

I am obviously “pleased as punch” that the annual AMT fix was included – but that is not my favorite “sweetener”.

Of course it is the provision that brokers will be required to report (to the taxpayer and to the IRS) the adjusted cost basis of publicly traded securities, and identify the gain or loss as short-term or long-term, in addition to the gross proceeds on Form 1099-B.

Actually many brokerage houses already do include a Profit and Loss statement, showing both sale and purchase information and indicating the amount of gain or loss, in their Consolidated Year-End Statements, and most mutual fund houses will provide an Average Cost Statement for fund shares sold during the year – although this information is not also sent to the IRS.

This information is essential for we tax professionals to properly complete a return that involves the sale of investments. It is the rare client that keeps complete and accurate records of the purchases, splits, dividend reinvestments for all his/her stocks and mutual funds.

The biggest culprit for the delay in the timely completion of a 1040 - and the cause for many a GD extension - is missing cost basis information!

Often the Profit and Loss reports in the Consolidated Year-End Statements are incomplete. Mostly this is because the initial purchase, and/or some of the dividend reinvestment, was made while the taxpayer was a client of a different brokerage firm. The YE Statements will only reflect cost basis information for purchases made by that firm – except on the very rare occasion when either the client or the broker, who has moved over from another house, has provided the firm with the appropriate missing cost basis information.

As is common today with stockbrokers, there is frequent moving from firm to firm as upward mobility. A broker may start out with Oppenheimer and then move to UBS for awhile and then move again to Merrill Lynch (or should I now say Banc of America) as they are enticed by signing bonuses and increased income opportunities. Many of these brokers will take their clients with them from house to house, as the enticing firm hopes will happen. While the broker, who has purchased all of a taxpayer’s stocks and funds over his investment life, should know the correct cost basis for each investment purchased, this information does not always make it to the new firm’s computer data base (mostly due to the laziness of the broker).

And then there are still brokerage firms whose year-end 1099 statements do not include a P+L – only the Gross Proceed information required to be reported on a 1099-B.

Many mutual fund houses will only report the cost basis of shares purchased within the past five or so year period (and only on an “Average Cost” basis and not using “FIFO”). A taxpayer may have purchased his initial shares of a Fidelity fund a dozen years ago, and have done so directly from Fidelity, but apparently the Fidelity data base does not go back that far.

While I may have some of the information available to me from documentation I have copied over the years and attached to prior year tax return copies in my files, and some information can be determined or “estimated” via online resources, I really do not have the time during the tax filing season to waste doing excessive research for one return.

If the client contacts me during the “regular” year, say in November or December, with his/her investment sales for that year I would have no problem doing the necessary research, for an hourly fee of course (although probably less than the fee that I would be charging if forced to take precious time in the tax season to do the work). But I can count on the fingers of one hand the number of clients who have done just that over the past 35+ years.

No, the best source of cost basis information is the broker who purchased the investment for you in the first place.

Over the years I have gotten many of my clients’ brokers properly trained – and to their credit I must admit that for the most part they have been ready and willing to be of help in this area. I actually have several brokers who send me directly (via postal mail or as email attachments) copies of the clients’ Consolidated Year End Statements, with any missing cost basis information filled in by hand. This includes the various several corrected copies that have become common lately. Other brokers have provided me with their email address so I can contact them directly to request missing information, and I usually get a prompt and thorough response. This is a big help to me in properly preparing the tax return, and is greatly appreciated.

This issue was on my mind recently as one of the GD extensions I worked on had lots of cost basis.

For one thing, the client has three separate brokerage accounts with the same firm – all in the client’s name only. During 2007 the broker moved to a new firm and took the client with him, opening three accounts at the new firm. So I have six (6) sets of Consolidated Year-End Statements to contend with. And I am not talking about a handful of trades. Each of the six different accounts had a multitude of trades. All-in-all there is pages and pages and pages of trades to report! While both the old and the new firm include a P+L report in the year-end statement, there are a great many sales that do not have purchase details.

The client has confirmed that he has had the same broker since day one, so it was the same broker that made each and every purchase.

Without questioning why the need for three separate accounts, and without accusing the broker of “churning” the accounts to generate commissions and fees (if the broker has college age children I certainly know who paid the tuition last year), the bottom line is that since there was only one broker who made all the purchases over the years there is absolutely no reason why that one broker cannot provide me with the missing cost basis information.

Unfortunately for we tax preparers, this new important requirement does not take effect for a few years. It begins with stock acquired in 2011, mutual fund shares acquired in 2012, and “other securities” acquired in 2013. Too bad it did not begin with all investments acquired in 2009 – I see no reason why it could not. Oh well. I plan to put in 50 tax seasons before retiring - I have 13 more to go - so I will be able to benefit from this provision.

This new requirement will not absolve taxpayers from the need to keep good investment records! And note that it only applies to shares of stock purchased on or after January 1, 2011. So if in 2012 you sell stock that you purchased in 1993 the broker has no obligation to report the cost basis. My special report MY BEST ADVICE has a section on “Keeping Track of Investment Cost Basis”. Click here to order.
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A major problem in the calculation of cost basis for stocks sold comes when the company whose stock is initially purchased has gone through a multitude of splits, mergers, spin-offs and buy-outs over the years – the most infamous example being AT+T. I hope the information required to be reported by brokers will be correctly adjusted for such items.
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And what of inherited investments – will the brokerage houses be required to determine the date of death value?

Any questions?

TTFN

WHAT'S WRONG WITH THIS PICTURE?

Couple A lived comfortably, but within their means. They have listened to the voices of many financial and tax advisors (mine included) and each year contribute the maximum to their employer’s 401(k) plans, including the “catch-up” amounts. They have over the years paid down their mortgage. While they have, on occasion, refinanced to get a lower rate, they have not taken additional cash out in any of the refinances.

Couple B purchased a home for an original appropriately proportionate mortgage of about $150,000. As the market value of their home increased over the years they have constantly refinanced to take out additional cash equal to the jump in value, using some of the money to pay off credit card debt, which, once paid off, they promptly begin to build up all over again. The mortgage, and home value, had grown to in excess of $300,000. They obviously lived above their means.

Couple A received their recent 401(k) account statements and discovered that, due to the current financial FU, their investment for retirement has been cut in half. They are “out of pocket” in excess of $100,000 each!

Couple B got to the point that they could not afford to pay their mortgage. The value of their home plummeted, so they could not refinance again to get more cash. It got to the point where they just packed their car and drove away from the property, abandoning it and the mortgage. The home was eventually sold (to one of my clients – so you know this part is a true story) for a little over $100,000 in a foreclosure sale. The bank wrote off $200,000 in mortgage debt as uncollectible, and Couple B were “forgiven” some $200,000 in mortgage debt.

Couple A did everything right. Through no fault of their own, but as a result of the actions of Couple B, and many, many more like them, they have lost over $200,000.

Couple B did everything wrong. Yet they have walked away from $200,000 in debt. They are basically $200,000 “in pocket”

Generally when debt is forgiven the amount of the forgiveness is fully taxable as ordinary income. As Couple B was forgiven $200,000 in mortgage debt they would pretty much have to pay federal income tax on $200,000 (although not quite that simple – there is a calculation). However, George W and his colleagues in Washington in their infinite wisdom have passed a law that exempts the $200,000 in mortgage debt forgiveness for Couple B from federal income tax (actually there were provisions in the Tax Code prior to the Mortgage Forgiveness Debt Relief Act of 2007 under which they could avoid tax on all or part of the debt forgiven – for a good overview of the appropriate tax law check out TAX GIRL Kelly Erb’s post “Foreclosures, Debt Forgiveness and Mortgage Losses Explained”).

Plus the same politicians have also decided to bail out the irresponsible bank(s) who continued to allow Couple B to refinance and repeatedly take out more and more cash.

So the moral of the story – do not conduct your financial life in a responsible and prudent manor. Be irresponsible and reckless. If anything happens you can count on the government to bail you out.

As Yakov Smirnoff would say, “What a country!”.

TTFN

A CALL FOR HELP

Since Sunday is reserved for “Anything But Taxes” – let me pass along this plea for help from the American Humane Association to my New Jersey readers:

Very few legislative session days are scheduled before the New Jersey legislature adjourns on Dec. 15. More than ever, these five critical bills need your support:

Senate Bill 1989/Assembly Bill 2981, which would increase penalties for animal hoarding.

Assembly Bill 2668, which would require cross-reporting of child and animal abuse.

Assembly Bill 2979/Senate Bill 1990, which would increase penalties for committing acts of serious animal cruelty in front of children.

Assembly Bill 1951/Senate Bill 1275, which would prevent insurance companies from unfairly discriminating based on the breed of dog in the home.

Assembly Bill 1419, which would allow pets to be included in domestic violence restraining orders.

Please help us get these important bills scheduled for a vote today by contacting the following legislators:

To support S1989/A2981, please ask the Senate Economic Growth Committee and the Assembly Agriculture and Natural Resources Committee chairs, respectively, to schedule the bills for a committee vote and to vote for their passage.

To support A2668, please ask Assembly Agriculture and Natural Resources Committee Chair Douglas H. Fisher to schedule it for a committee vote and to vote for its passage.

To support A2979/S1990, please ask the Assembly Agriculture and Natural Resources Committee and the Senate Economic Growth Committee chairs, respectively, to schedule the bills for a committee vote today.

To support A1951/S1275, please ask your state senator to support the bill today.

To support A1419, please ask Assembly Judiciary Committee Chair Linda R. Greenstein to schedule the bill for a committee vote and to vote for its passage.

Your help will be greatly appreciated.

TTFN

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

I couldn’t stay away – even for a week!

* A special thank you to Bruce of TAX GUY, Trish of OUR TAXING TIMES and Michael of the TAX RESOLUTION UNIVERSITY for providing guest posts here at TWTP during my GD extension hiatus. I hope you all had a chance to check out their posts.

* Oi vey! In the WebCPA article “Palin Releases Tax Returns” it is reported that “H&R Block prepared the returns”! No wonder the returns have caused problems.

* Check out my post “It Sucks To Be New Jersey” at the NEW JERSEY TAX PRACTICE BLOG. The items reported in the post should come as no surprise to NJ residents.

To add to the info in the post - AccountantsWorld.com recently reported “Property Taxes Remain Highest in NY and NJ”. Constipation, Mr. Holmes!

* Kay Bell of DON’T MESS WITH TAXES brings us up-to-date on the topic of state sales tax “holidays” in her post “Sales Tax Holidays, Fall Editions, Underway”.

* In “Bailout Breaks for You and Me!” Kay reports that the energy-efficient home improvements that were eligible for a total cumulative tax credit of up to $500 in 2006 and 2007 are back through 2009. She points out “This means that projects such as adding insulation, installing thermal windows and doors or putting film on your windows could once again get you a $500 credit. Upgrades to your heating and air conditioning systems also count, as well as do the more extensive energy upgrades of solar and, new this year, wind energy systems.”

* And finally - for self-employed taxpayers who have filed extensions Kay points out that there is “Still Time to Save on Taxes with Self-Employed Retirement Accounts”, although not much.

* William Perez of WILLIAM’S TAX PLANNING BLOG at About.com continues on the topic of extended energy credits in “Tax Provisions in the Bailout Legislation” and tells us that the Act “adds two new types of improvements that qualify for the credit:

· biomass fuel stoves with a thermal efficiency rating of 75% or more {huh? – rdf}, and
· asphalt roofs with cooling granules.”

* TAX GUY Bruce continues his discussion of mistakes made when choosing a paid tax preparer by adding “Picking A CPA With Too Much 'Accounting' Experience That Doesn’t Relate To You!” to the list.

It is a sad fact that, as I mention in my comment on the post, most uninformed individuals continue to automatically connect income taxes with the initials CPA – when in reality it is a rare occasion when a CPA is the right choice for the average, or even slightly above-average, 1040. The purpose of a CPA firm is to compile audited financial statements for businesses. As Bruce puts it having a CPA prepare your 1040 is like using “a sledge hammer to hang a picture frame”.

The series continues on Wednesday with a guest post from the “re-married mother of one who lives in the southwestern U.S.” that writes the blog BLUNT MONEY. The post makes some excellent points (the highlight is mine) -

“It’s also important to realize that preparers only have the information that you provide them to work with. If you provide them with inaccurate or incomplete information, you’ll get less than stellar results. They cannot make up missing data, or suggest deductions that you don’t appear likely to qualify for. It’s your responsibility to provide truthful and accurate information so that your return can be completed correctly and thoroughly. Remember that having a paid tax preparer complete your return does not absolve you of this responsibility or protect you from audits.”

We are not mind readers!

* The Tax Foundation was quick to point out the tax-related FUs in Tuesday’s debate in the post “Fact Checking the Tax Talk: Economic Policy Dominates Second Presidential Debate” at its TAX POLICY BLOG.

* Over at THE TAX LAWYER’S BLOG Pete Pappas gives us another blog list – “10 Interesting Tax Facts: Three Cheers to Tax Complexification!”

#10 comes as no surprise to residents of New Jersey – “Taxpayers spend more on taxes than they do for food, shelter and clothing combined”.

* I am glad that there are honest individuals like Pete Pappas, and my guest-blogger Michael Rozbruch, out there to provide honest and competent help resolving individual tax collection problems – an alternative to the scam artists who advertise they can resolve your IRS debt for “pennies on the dollar”. Check out their postings on the IRS Offer In Compromise program (click on their names above).

* Can you guess who Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG is talking about in his post “They Can’t Vote, But They Win Most Elections”? It seems to me that a lot of them vote in New Jersey, considering the same crooks are returned to office year after year.

* TAX GIRL Kelly does a good job of outlining the tax provisions of the Emergency Economic Stabilization Act, both the “mainstream" provisions as well as the items that were included solely to benefit a specific Congressperson and/or their supporters, in her post “You Get a Tax Perk! And You Get a Tax Perk!”.

The NATP has also compiled an excellent analysis of the Act. Click here to download.

* Kelly has also brought back her FIX THE TAX CODE FRIDAY series, asking “Should Congress have allowed taxpayers whose mortgage debt was forgiven to exempt that debt from income? And, should Congress have taken it a step further and exempted all forgiven debt including credit cards and personal loans from income?” This is a post that should be read more for the comments than for the actual body of the post.

Check out my Monday post here at TWTP to get an idea of my thinking on the subject.

* Always leave ‘em laughing – Yesterday I received the following official announcement:

“The government today announced that it is changing its national symbol to a condom because it more accurately reflects the government’s political stance. A condom allows for inflation, halts production, destroys the next generation, protects a bunch of pricks, and gives you a sense of security while you are actually being screwed. It doesn’t get more accurate than that!”

TTFN

MY ADVICE WAS BETTER THAN I THOUGHT!

My advice on choosing a bank, discussed in the post “Animal Farm”, turns out to be even better advice than I originally thought.

The small, one-branch bank is stronger than ever today, compared with giants like Wachovia and Washington Mutual. I have heard many radio ads, and have been told of a few mailings, from such banks bragging about their excellent condition.

This is because these small banks could not afford the risk of irresponsible “sub-prime” mortgages like the “big boys” – who, it turns out, could not afford them either. These banks have been prudent and sensible, requiring an appropriate down payment and acceptable credit rating from borrowers and not going "hog wild" with refinancing.

So I repeat my long-time advice on choosing a bank: Select the smallest bank in town – a one-brancher if you could find it.

{BTW – This is my 600th post since returning to Blogger.com a few years ago. In that time I have had 84,000+ “visits” and 119,000+ “page views”. Lately, if you don’t count Sunday, I have been averaging over 150 visits and over 200 page views per day.}

HEY, A POLITICIAN ACTUALLY RESPONDED TO MY LETTER!

Last month I wrote to various members of the House and Senate, including my own representative and senators, regarding a Federal Tax Amnesty Program, similar to the ones that have been so successful in the states. (See my post “Tax Amnesty”).

On Wednesday of this week I received a response from Congressman Albio Sires –

“Thank you for contacting me with your proposal for a federal tax amnesty. I appreciate hearing your views on this issue.

As you point out, Federation of Tax Administrators statistics suggest that through tax amnesty, individual states have sometimes collected hundreds of millions of dollars in a matter of months. One could therefore presume that a temporary nationwide amnesty would, in the immediate term, yield revenue on a far greater scale. Nevertheless, the Congressional Joint Committee on Taxation has expressed reservations about the prospect of an amnesty. The Committee released a report in a previous Congress concluding that amnesty would ultimately hinder tax collection and reduce net revenue. The reasoning is that individuals would become less likely to pay their taxes in future years, perhaps in expectation that the government would once again write off interest and penalty fees.

Please know that I share your concern for the financial well-being of out nation’s workers and your interest in ensuring that the Internal Revenue Service operates as fairly and efficiently as possible. Be assured that I will keep your suggestions in mind should this issue come before the full House of Representatives for a vote.”

The concerns expressed by the JCOT regarding reduced payment in anticipation of a future amnesty have not proven to be a problem with the various state programs.

The IRS collection activity would not cease or slack off once the initial program has completed in anticipation of future amnesties. If anything the Service should be more aggressive in its collection efforts after the amnesty period ends (although not by using outside collection agencies).

Besides, as I stated in my letter -

“The legislation creating the Federal Tax Amnesty Program would state that the federal government would not be able to institute another Amnesty for at least ten (10) years after the end of the current amnesty period.”

Perhaps this period of prohibition should be longer – 15 or 20 years.

And finally, amnesty is aimed less at tax cheats and more at honest Americans who have been so overwhelmed by the accrual of interest and penalties that they walk away from their tax debt altogether. It is a variation on the current Offer In Compromise program.

Federal tax amnesty would also motivate non-filers if increased penalties for not taking advantage of the amnesty and more aggressive IRS activity in identifying non-filers were included in the legislation.

You can see a copy of the letter, which you can also adopt to send to your representatives, here.

I must point out that of all the elected officials in Washington to whom I have written in recent years, in both houses and on both sides, Congressman Sires is the only one who has sent me a personal and responsive reply. The only other time I got any other kind of reply was when I wrote to “W” during his first term with a tax proposal and received a general pro-forma letter of “thanks for your input – we appreciate hearing from the public” from a lower-level flunky. Thanks to the Congressman for being responsive to his constituents.

BTW – Still working away on the GD extensions!

TTFN

{Some people are addicted to drugs, some to alcohol, others to sex. It seems I am somewhat addicted to blogging – I just can’t stop “cold turkey”, even for only a week – except, of course, during the tax season. Oh well. Now if only I could make some money from it! - TWTP}

OI VEY!

Unfortunately that is it for “best of the best” for now.

Silly me – if I am too busy to post because of finishing up my GD extensions what makes me think that the fellow tax professionals I asked to fill in for me were not also too similarly occupied to guest post!

Actually what I should have done was ask Personal Finance bloggers to guest post on the best tax advice they have received. An idea for a future continuation of the series.

Oh well.

Anyway - let’s recap the advice we were given.

TAXGUY Bruce -

· The appropriate tax advice is dependent on the special “facts and circumstances” of each particular situation. You must evaluate each deduction, credit, technique or strategy considered in the context of your own special individual facts and circumstances (in other words – different strokes for different folks);

· if you have dependent children look into Section 529 plans;

· consider an IRA to increase your current savings for retirement; and

· consult a professional tax preparer, if not to actually prepare your return than at least for some advice and guidance.

OUR TAXING TIMES Trish –

· make sure to keep a copy of your return and all the corresponding back-up documentation.

TAX RESOLUTION UNIVERSITY’s Michael –

· the best advice for resolving your problems with the IRS is to get help from a qualified tax professional.

A special thanks to Bruce, Trish and Michael for taking the time during this busy period to help me out.

Now – back to the GD extensions.

TTFN

BEST OF THE BEST – MICHAEL ROZBRUCH

{Today’s entry is from Michael Rozbruch CEO of Tax Resolution Services in Los Angeles, CA. Michael, a Certified Tax Resolution Specialist (CTRS) and a CPA, has 30 years of general business experience, mostly in the financial arena, with the last ten years involved in helping individuals and businesses solve their IRS collection related problems. He writes the TAX RESOLUTION UNIVERSITY blog. His “best advice” is for the taxpayer who owes “Sam” money}

MY BEST TAX ADVICE FOR THE TAXPAYER WHO NEEDS IRS DEBT RELIEF

If you are in trouble with the IRS, know that going to an audit on your own, without professional expert representation on your side, is like going to court without a lawyer. The IRS is the most brutal collection agency on the planet – so don’t take any chances when it comes to settling your tax problems.

I know it’s scary when the government contacts you to conduct a tax audit. Then you look at your annual income and the amount you owe… and your tax problem can seem insurmountable—but trust me, it isn’t. There’s a solution to every problem.

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The first step is realizing that your tax problems aren’t going away till you do something about them.

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I’ve helped thousands of people solve their tax problems and I know the IRS inside and out. My best advice for resolving your problems with the IRS is to get help from a qualified tax professional, because expert representation can make a significant difference in the audit process.

Working with the IRS is a complicated process that often leaves tax payers too frustrated or intimidated to effectively or comfortably to negotiate a settlement on their won. Additionally, people who go through negotiations with the IRS without proper representation can end up owing more money to the IRS (in additional accruing penalties and interest) than when they started the process.

But most importantly, an expert tax relief professional will protect you during the process by knowing your rights as a taxpayer, which can reduce your tax dangers and the amount you owe. Here are some things to consider:

- Knowledge is power and the key to gaining a new lease on your financial life. For example, hundreds of thousands (potentially millions) of taxpayers fail to file legally required tax returns every year. The act of not filing usually contributes to more significant problems with the passing of time. Not to mention it is a misdemeanor in this country not to file a legally required return when it is due. Even if you haven’t filed one year - it is still considered delinquent. But regardless of what you have heard, you have the right to file your original tax return, no matter how late it’s filed. Our average client has four to eleven years of unfiled tax returns.

- If you owe taxes, the IRS or a state taxing authority can make your life miserable by filing a federal tax lien against you. Can you live on $168 a week? This is the amount you will have to live on if the IRS garnishes your paycheck.

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- One in six Americans has a tax problem. If you are one of them, you should know that more than 50% of the referrals to the Criminal Investigation Division are from the Revenue Agent you are about to sit across the table from!

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- The IRS is the most brutal collection agency on the planet. Going to an audit on your own, without professional expert representation on your side, is like a boxer going into a fight without boxing gloves.

At the initial meeting, you will be asked about 50 very innocent sounding interview questions—and how you answer them will dictate your fate for the rest of the audit.

So before you enter the ring with the IRS, know that you should answer all these questions as truthfully as possible. You don’t want to take any chances with the IRS. That’s why you need an expert in your corner to fight for your rights!

-The IRS selects returns for audits that have the greatest potential for additional tax to be collected. A tax relief professional can help you obtain a “No Change” letter (if appropriate) or make certain, that if there is additional tax to be assessed, that it is the lowest amount under law.

So if you have IRS problems, know that there is hope and you can turn your financial life around! Get professional help and don’t lose another night’s sleep wondering when the tax collector’s going to come after you.

{Thanks, Michael – TWTP}

BEST OF THE BEST – TRISH MCINTIRE

{Today’s entry is from Trish McIntire of McIntire Income Tax Center in Arkansas City, Kansas. Trish, an Enrolled Agent, has been preparing taxes for almost 20 years and self-employed for 4 years. She writes the blog OUR TAXING TIMES which comments on the US tax system and the business of doing taxes}

THE BIGGEST TAX MISTAKE

The biggest income tax mistake has nothing to do with underreported income or missed deductions. It can happen whether you prepare your return yourself or have someone do it for you. The problem arises with e-filed and paper returns. On the surface, the mistake may seem trivial but it has been responsible for increased taxes, major inconveniences and delayed dreams. The biggest income tax mistake is not keeping a copy of the return and supporting schedules and documents.

It would seem a matter of common sense to safeguard a copy of the filed return. The IRS recommends keeping return and documentation used to prepare the return for 3 years from the due date of the return or the date it was actually filed if later. I tell my clients 5 years. But do you know where your 2006 return is? If you needed a copy of that return today, could you find it?

What happens to the return?

· The taxpayer doesn't make a copy. Or if the return is filed online doesn't print a copy for their record.
· She saves a computer copy but can't find it due to a computer problem. Or they can't remember the file name or where they put it.
· A copy of the return is saved but not the W-2s and supporting documents.
· They move and can't find the return. Or it gets thrown out by mistake.
· They paid someone to do the return but was never given a copy of the return.
· They assumed the preparer would always be there if they needed a copy and they go out of business, move or suffer a data loss.

What is the big deal? Why do I consider this the biggest income tax mistake? First, because not having a copy of the return can hurt you if there ever is a question about the return. It is up to you to prove that income was reported or that you are entitled to the deductions. And a copy of the original return is the first step. If the original return ever needs amended, the changes are based on what was originally reported. Even if there is never a tax problem, your tax return is your basic financial statement. Buying a house, the bank will want a copy of your tax returns for several years. College and University financial aid is based on information from your tax return.

Keeping a copy of your tax return isn't hard. It just requires you to work out a system and then follow through. You can get a transcript of the return as filed. Use Form 4506-T to file a request. It is free and will take about 2 weeks. If you need a real copy of the original return, file form 4506. It cost $39 and could take as long as 60 days. It is just easier to keep a copy of your tax return yourself.

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{Thanks, Trish - TWTP)

BEST OF THE BEST – BRUCE MCFARLAND

{Today’s entry is from Bruce McFarland of L & R Tax Preparation, in Grandview, Missouri. Bruce, who has been preparing 1040s professionally since 1999, writes the TAXGUY blog}

Bruce, aka “taxguy”, here. I have been in the tax preparation field for a long time and I am asked a lot about my best advice for taxpayers. As we’ll see here this week everyone has their own idea as to what is “best advice”. To me this is a trick question.

Let me explain:

John and Mary, both factory laborers, come in to have their taxes done. A simple return, no children, they rent, nothing out of the ordinary of any kind. If John and Mary ask, “What advice do you have for us to lower our tax debt?” I am not going to come up with much. Looking at withholdings and IRA’s are among the few things I might point out to them. I might suggest buying a home, (depending on their personalities) I might even joke with them about having children for the purpose of the additional exemption, along with EIC, and child care expenses.

Andrew and Brandi come in and ask me the same question. They’ll not get the same answer as John and Mary. You see Andrew and Brandi own a home, they both work (he is a self-employed carpenter and she is an Data processor for an accounting firm), they have two children, one just starting college and the other 10 years behind, both living at home. Brandi has a 401(k) with her employer; Andrew has an IRA (maxed out every year). As you can see the advice I gave to John and Mary would not apply with Andrew and Brandi.

What I might discuss with Andrew and Brandi would be more detailed. Among the things suggested would be an IRA for Brandi, 529 plans for the children, charitable donations of various types. Maybe even a home upgrade for more taxes and interest to deduct. I might even suggest playing the stock market. For these two there are a lot of possibilities. However, Andrew and Brandi’s answer is not going to help John and Mary.

My point is tax advice is not easy, nor can the advice I give one be equally as important to another. Each tax return is personal and equally unique to the individual or couple it belongs to.

I enjoy talking taxes with people on a merely educational or learning basis, but specific advice is generally a bit harder to deal with. It can be misunderstood by one or more people because of their individual situation. And that can be disastrous.

I have learned that a lot of people read our blogs for the advice given. That is great, yet I propose that you, the reader, examine this a bit more closely. Is it advice you’re getting or information?

I suggest that you are reading information and that if it pertains to your specific situation you are getting some advice. My blog is written for informational purposes (or so I like to think), along with my opinions, so that readers can get a feel for me as a person and a preparer. But mostly I am trying to inform the average taxpayer as to what is out there.

With all that said, I do have some advice I’d like to share that is general but won’t pertain to everyone (except the last one):

For those with children, I like suggesting a Section 529 plan. This is a college savings plan for your children. While contributions are not deductible on the federal return (they may be on your state return) the earnings in the account accrues tax free if the money is used for college. If your child doesn’t go to college it can be passed on to another qualifying family member. Anyone (check the rules in your state) can contribute to the plan. This has been called “the best way to save for college”.

IRA’s are big with me. I suggest these on top of 401(k)s and other savings accounts. Growing up I heard that one should save 15% above their 401(k) contributions; IRA’s are good for this. (Depending on your income - meaning if you’re making over $250,000.00, maxing out the limit on an IRA is not going to help you much towards saving 15%.)

Continuing education is another big thing I like to advise clients. To me an investment in ones future is priceless. Depending on the situation there are several places on the return where you can get a tax benefit.

Finally, and this is no doubt in my opinion, my best advice for every taxpayer out there - consult a professional tax preparer. If you’re insistent on doing your own return that is fine. Make an appointment with a professional tax preparer anyway. Visit with them and bring your questions. Take good notes on the answers. Tell them everything honestly. Pick their brains for the knowledge they have. Most of you will find that the hour or two you pay for will be well worth the expense. Not to mention a possible write-off.

And remember what Albert Einstein said - “Not everything that counts can be counted, and not everything that can be counted counts”.

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{Thanks, Bruce! - TWTP}

WHAT'S THE BUZZ - MORE BUZZ

Since I will not be “wandering” the net for at least a week, and therefore will not be posting a BUZZ entry next Saturday, I wanted to provide you with a few additional BUZZ items that I came across after publishing yesterday’s entry.

* Market Watch reports that “Mutual fund investors, facing large losses due to the market downturn, may also be hit this year with a high tax bill as redemptions create capital gains for their funds” in its article “Fund Outflows Mean Tax Hit For Investors”.

“As spooked investors pull their cash from stock funds -- more than $110 billion so far this year, according to TrimTabs Investment Research -- managers are forced to sell assets to pay them out. Often, the quickest way to raise cash is by selling high-valued stock, which creates capital gains liabilities for the fund that investors must pay at year's end.”

When a mutual fund sells any of its investments at a profit this gain is passed along to the fund’s shareholders, usually at year end, as a “capital gain distribution”. This distribution is taxed as a long-term capital gain at the lower capital gain rates.

This may not be too bad – these gains may be offset by other stock market and mutual fund losses for the year. And, as they are taxed at the special lower rate some of the distribution may be taxed at the 0% rate – which means “0” tax.

* TAX PROF Paul Caron provides links to the Republican Vice Presidential candidates 2006 and 2007 returns in his post “Gov. Palin Releases Tax Returns and Financial Disclosure Forms”. The post also includes updated info on the issue of her per diem reimbursements.

* Make sure to go to DON’T MESS WITH TAXES on Monday. Kay should have the monthly Tax Carnival up by midday, and I do believe I am included. And be sure to check out the first in a series of guest posts on MY BEST TAX ADVICE here at THE WANDERING TAX PRO.

TTFN

BEFORE I GO INTO LOCKDOWN

As I will be “going into hiding” for the next 7 days or so I wanted to provide some comments on Friday’s Emergency Economic Stabilization Act of 2008 before I begin “lock-down”.

In its analysis of the tax aspects of the bill CCH calls it “one of the largest tax bills in recent years” and points out that “The new law makes almost 300 changes to the Internal Revenue Code”.

The impact on 1040 (and 1040A) filers is not much more than what I reported in my post “SOME OF THE INDIVIDUAL TAX BENEFITS IN THE BAILOUT BILL”.

In addition-

* As had been in the bill from the beginning, the exclusion from federal taxable income of mortgage debt forgiveness of up to $2 Million ($1 Million for married filing separately) on a principal residence, originated in the Mortgage Forgiveness Debt Relief Act, is extended from 2009 through 2012.

* Brokers are required to report the adjusted basis of publicly traded securities, and identify the gain or loss as short-term or long-term, in addition to the gross proceeds, on Form 1099-B. Hurray! This provision benefits us tax preparers as well as the IRS, who can now match gains and losses reported on Schedule D. Unfortunately it will not take effect for a while. It begins with stock acquired in 2011, mutual fund shares acquired in 2012, and “other securities” acquired in 2013. Too bad it did not begin with all investments acquired in 2009.

* The residential energy property credit is extended beyond 2009. I will provide more details on this aspect of the Act after I have finished the GD extensions.

* Individuals and businesses who were/are affected by midwestern, Hurricane Ike and certain other national disasters are provided a multitude of “relief”. More on this later.

* Employers can now give employees who commute to work by bicycle up to $20.00 per month as a tax-free “transportation fringe benefit” beginning in 2009. The reason for this is somewhat confusing – I expect it was needed to win a specific vote.

The Act also contains tons of “stuff” related to corporations and businesses.

BEST OF THE BEST

No, this post is not about a 1989 martial arts movie starring Eric Roberts and James Earl Jones.

As the October 15th final deadline for filing the GD extensions fast approaches I really need to, like Winsocki, “buckle down” (I know I am dating myself here) and get ‘em done. Plus I have two of the very few corporate returns that I still do (long-time personal friends – how can I say “no”) that I want to get done by the 15th. I can no longer afford to “put off till tomorrow…”!

This means no more blogging – and no more “wandering” around the web – until I have a clean desk, at least GD extension-wise.

To fill the “pages” of THE WANDERING TAX PRO during my absence I have asked some of the blog-o-sphere’s best tax bloggers, practicing tax professionals all, to fill in for me for the week of Monday, October 6 through Friday, October 10. I have taken a cue from my special report MY BEST TAX ADVICE and asked them to each write a post on that very topic – to provide you with their Best Tax Advice.

In honor of this series I am cutting the price of MY BEST TAX ADVICE in half. For only $1.00 I will send you, as a “pdf” email attachment, MY BEST TAX ADVICE and, as a free gift, DON’T FORGET TO DEDUCT. Just send $1.00 to BEST TAX ADVICE SPECIAL, Robert D Flach LLC, PMB 411, 72 Van Reipen Avenue, Jersey City NJ 07306-2806. Like an extended 1040, your order must be postmarked by October 15th to get the 50% discount.

You are in for a real treat next week – as you will be getting the BEST OF THE BEST!

Be sure to be here Monday morning for the first guest post in the series.

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

* If I may be permitted a moment of self-promotion – I hope you all read my guest post on “Mistakes Made When Choosing a Paid Tax Preparer” over at Bruce’s TAXGUY blog.

I start the week off on the series of posts by fellow bloggers on the topic with my 2 cents worth (should that be adjusted for inflation?). Peter Pappas of THE TAX LAWYER’S BLOG follows on Wednesday with excellent advice in his entry “5 Worst Things You Can Do if You Get an IRS Collection Notice”. The week ends on Friday with “Finding a Tax Preparer” by personal finance blogger LIVING ALMOST LARGE.

I am glad that LAL thinks she is tax-savvy enough to rely on Turbo Tax to correctly do her tax return – but I still believe she is taking a big risk. And if she stays away from CPA firms she will certainly pay much less than $800 for a competent tax professional.

BTW, Bruce has informed me that my article on blogging “Why Blog” from last Winter’s issue of the National Association of Tax Professionals TAXPRO QUARTERLY JOURNAL inspired him to first consider writing a tax blog. I am glad to have been someone’s inspiration!

* TAX PROF Paul Caron provides an interesting take on the recently released listing of real estate taxes by state in “Property Taxes: High in Blue States, Low in Red States”.

The listing has three categories - Median Real Estate Tax, Real Estate Tax as Percentage of Home Value, and Real Estate Tax as Percentage of Income.

It comes as no surprise that New Jersey is first on two of the lists - Median Real Estate Tax and Real Estate Tax as Percentage of Income - with the highest real estate taxes in the nation. NJ is #5 on the list of Real Estate Tax as Percentage of Home Value.

* Russ Fox of TAXABLE TALK does a great job reporting on tax cheats who get caught. In his post “They Should Have Known Better” he tells of several tax cheats who, well, should have known better.

One of the cheaters mentioned in the post is an embezzler who was convicted of tax evasion for failing to pay about $82,000 in income tax on the money he embezzled. Russ points out the fact that “tax must be paid even when the source of your income is stealing”.

He also brings to our attention the “alleged” tax improprieties of race car driver and DANCING WITH THE STARS winner Helio Castroneves in “Racing to ClubFed”.

* The Tax Foundation reports on the tax-related errors made in last Friday’s debate in the post “McCain and Obama Both Play Loose with Facts on Tax Issues in Debate” at its TAX POLICY BLOG.

The post states that (highlight is mine) - “The Tax Foundation will be doing the same fact checking on tax issues after each of the presidential debates, as well as (the) vice-presidential debate {see “Vice-Presidential Debate: Plenty of Errors in Tax Policy Rhetoric” for Biden and Palin’s FUs – rdf}. Unfortunately, this type of analysis is necessary because throughout this presidential campaign, honesty and true straight-talk on tax issues from either side have been mostly nonexistent.”

So be sure to go to the TAX POLICY BLOG after each of the upcoming debates.

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While on the subject, here is something from the “I couldn’t have said it better myself” file – this comment from TAX GIRL Kelly, “It would be great if all of the candidates could stop with the phony stats and accusations and focus on the real issues. Is that really too much to ask?”

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* Unlike the commenter from StangNet I was not surprised that the “Top Federal Income Tax Rate Was Once Over 90 Percent” as the Tax Foundation reports in this post. It was 91% for tax year 1963.

When I started doing tax returns (my first 1040 was the 1971 model) the top tax rate was 70% - but the “maximum tax” on “earned income" (i.e. W-2 wages) was 50%. Yes, we had both a minimum tax and a maximum tax.

* Capital losses are on everyone’s mind these days, considering the current financial “situation”. Last week TAX GIRL Kelly gave us a primer on the tax treatment of “traditional” capital gains and losses. This week Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG tells us how to deduct losses in an IRA in his post “Is There a Tax Benefit for an IRA Wipeout”.

Joe tells us “There is a way to get a tax benefit from some IRAs. Unfortunately, it's hard to get, and it will be useless to many taxpayers”. His bottom line – “There's no such thing as a good loss, but IRA losses may be the worst”.

* Joe also brought to my attention a Government Accountability Office study that says “53% of returns reporting real estate income are wrong, to the extent of $12.4 billion in income”

According to Joe's post, “the GAO says that unsubstantiated rental expenses are the biggest single source of errors. Other common errors include deducting expenses that should be capitalized; running personal expenses through the schedule E, and leaving income off. The GAO says that unsubstantiated rental expenses are the biggest single source of errors. Other common errors include deducting expenses that should be capitalized; running personal expenses through the schedule E, and leaving income off.”

As someone who has been in the tax business for over 35 years, and seen all kinds of returns from both individual taxpayers and other tax preparers, I have absolutely no doubt the GAO report is correct.

* This post just made it in time for inclusion in the weekly BUZZ – actually because I knew about it in advance and “held the presses” until it was up. I am talking about TAX GUY Bruce’s “A Saturday Post”.

The post reviews the issue of the Dependency Exemption under the relatively new rules (changed a few years back when Congress wanted to create a “uniform” definition of a child in the Tax Code that ended up being anything but “uniform”) as it applies to an apparently real-life scenario submitted by one of Bruce’s readers. His “bottom line” is an excellent point – “To make a truly informed determination it is necessary to know all the facts and circumstances of the individual situation”.

* Always leave them laughing. My Space, Face Book, Twitter – all this “social network” nonsense is truly Greek to me. I have no desire to join – or to be someone’s online “friend”. Why would I want to put my personal life out there for the world to see and risk identity theft and who knows what else? Anyway, I came across a related parody of “the national anthem” - Frank Sinatra’s MY WAY – on the American Comedy Network site.

TTFN

SOME OF THE INDIVIDUAL TAX BENEFITS IN THE BAILOUT BILL

I have done a quick review of the 18 page Senate Finance Committee summary of the various tax benefits tacked on to the bailout bill.

Here are the more important individual income tax changes and extensions:

Perhaps most important - for 2008 the dreaded AMT exemption amounts are increased to $46,200 for single and $69,950 for joint filers (up from the 2007 amounts), and personal credits will be allowed against AMT. Changes are also made to refundable AMT credit.

The following popular tax breaks have been extended through the end of 2009 –

* The option to deduct state and local sales tax instead of state and local income tax.
* The above-the-line “adjustment to income” for qualified tuition and fees.
* The above-the-line “adjustment to Income” for up to $250 in educator expenses.
* The additional Standard Deduction of $500 for single and $1,000 for joint filers for real estate taxes paid.
* The ability to make tax-free transfers directly from an IRA to a qualified charity.

The earnings threshold for the refundable Child Tax Credit for 2008 is lowered from $12,050 to $8.500.

In addition there are a multitude of special tax benefits related to those living or working in disaster areas.

I will provide a more detailed analysis of the tax provisions that affect 1040 (and 1040A) filers when I get a chance.

WE ARE NOW OFFICIALLY BAILED OUT!

They did it – finally! Passed the tax “extenders”, including the annual dreaded AMT “fix”, that is.

These provisions were part of the “Emergency Economic Stabilization Act of 2008” which has just passed the House by a vote of 263-171 and has already been signed into law by George W.

In order to get the bill passed in the House it was apparently necessary to include, as TAX GIRL Kelly Phillips Erb put it, “Everything but the Kitchen Sink”. Including a provision regarding chicken shit (see “Brother, Can You Spare a Tax Credit?” at the Tax Policy Center’s blog TAXVOX), “wooden Practice Arrows Used by Children, which are defined as arrows measuring 5/16 of an inch or less and unsuited for use with a bow with a peak draw weight of 30 pounds or more” (see “Getting Shafted by Arrow Tax Break” by Kay Bell at DON’T MESS WITH TAXES – did you know that Congress had passed the “Archery Excise Tax Simplification Act” in 2003?), and a long list of other extraneous “stuff” thrown in to apparently make the bill appeal to enough specific Congresspersons to gain passage.

To be honest I am glad that the Senate tacked on at least the extender and AMT provisions. Who knows when Congress would have gotten around to passing them on their own? At least now, for the first time in years, the IRS can “go to press” with truly final 2008 tax forms and instructions and not have to deal with “after-the-fact” changes. The only Congressional-provided problem that the IRS will have to deal with during the upcoming tax-filing season is the millions of errors that will occur on tax returns related to the economic “stimulus” rebates.

And I am extremely “pleased as punch” to report that one of the extraneous provisions of the bill will require broker reporting of customer’s basis in securities transactions!

As for the actual “don’t call it a” bail-out, I am not informed enough to make an educated decision, but I do believe something needed to be done promptly, and, as many trusted economic minds agreed that it was a good thing, I guess it “couldn’t hurt”.

Speaking of “trusted economic minds” - yesterday’s Star-Ledger included a feature in which “financial experts from Buffett to Trump offer their wisdom” on the bailout. Trump a “financial expert”? Trump having “wisdom”? I would take hair styling advice from “the Donald” before I would listen to his financial “expertise”. Of course his comments made no sense. The question asked was not about him, so why bother to answer intelligently.

As soon as I get a chance to review the Act in detail I will let you know how it affects 2008 Form 1040s (and 1040As).

TTFN

AS THE CONGRESS TURNS

It appears that the “don’t call it a bail-out” bill has passed the Senate – combined with the extension of expiring tax breaks, the annual AMT “fix”, and some other “stuff”.

I haven’t had time to read it through. That will have to wait as I am off to Ocean Grove this morning to take my mother to a doctor’s appointment.

In the meantime I suggest you read Joe Kristan’s ("Saving the Economy One Tax Preparer At a Time"), Kelly Phillips Erb’s ("Everything But the Kitchen Sink"), and Kay Bell’s ("Tax Breaks Sweeten Bailout Bill") take on the subject.

TTFN

HORN TOOTIN'

Mike of THE FINANCIAL BLOGGER has just informed me that the “Money Hacks Carnival #32 – Have You Ever Edition” is now up. Lots of good “stuff”.

My Savings Bond post appears under the category “Have you ever tried to beat your brother-in-law’s investment return?

And FIRE FINANCE (feel the Financial Independence and Retire Early!) has released its rankings of personal finance blogs for September 2008, based on traffic data for August 2008. I am ranked #76 by Fire Finance, and am #54 on the list under the Sitemeter rankings. Once again I am beat out by DON’T MESS WITH TAXES, the only other tax blog I found on the list.

Before I go I just want to bring you a quote from a news article that adds to the comments in my post “Once Again Kay Bell Is Right On The Money!”

"The larger issue is the House and Senate just don't talk to one another and work out an understanding," Senate Finance Committee Chairman Max Baucus said. "They're in their little world and we're in our little world, instead of just sitting down like adults, both sides --House and Senate, and working out solutions."

ASK THE TAX PRO - CHILD CARE BENEFITS

Here is a question I recently received from a client -

Q. Are any tax advantages to me for signing up for dependent care benefits in 2009 for my son, who will be 14 in November 2008?

A. Here is how I read the tax law in this situation -

To qualify for a tax benefit for child and dependent care expenses, the expenses incurred must be for the care of a “qualifying person”. A qualifying person includes your qualifying child who is your dependent and who was under age 13 when the care was provided, or a person who was physically or mentally not able to care for himself or herself, lived with you for more than half the year, and was your dependent.

You may be able to exclude from taxable income amounts your employer paid directly to either you or your care provider for the care of your qualifying person while you work.

When completing Part III of the Form 2441 you are asked to enter on Line 18 the “qualified expenses incurred in year XXXX for the care of the qualified person(s)”. Payments made for a child who is age 13 or older (and not disabled) when the care was provided are not qualified expenses for the care of a qualified person, as the child is not a “qualified person” due to the age.

Therefore the amount that would be entered on Line 18 would be “0” – and “0” of dependent care benefits would be excluded from taxable income. Any dependent care benefits paid through an employer plan would be includible in taxable wages.

The only way that a dependent child age 13 or older would qualify for a tax benefit from dependent care expenses is if the child was physically or mentally not able to care for himself or herself.

I would expect that the employer Dependent Care Benefit plan would be written such that it would not provide benefits for a dependent who would not qualify for the tax credit.

For more information check out IRS Publication 503.

Readers – as with any answer, advice or information I provide here at THE WANDERING TAX PRO, if you think I am wrong, or have made a error, or have a different interpretation of the tax law in question please let me know by posting a comment.

TTFN