A few minutes into the introductory remarks someone sat in the empty seat next to me (which, the way we were seated in semicircle around a round table, was actually behind me), but I took no particular notice of the person.
About an hour into the presentation on the dreaded Alternative Minimum Tax there was a tap on my shoulder. I turned around and the person seated next to me said in a low voice, “Robert Flach?”. He took off his glasses and I looked at him closely to see if I recognized him. After a few seconds we both said, at the same time, “Jackie”, as his identity hit me.
Jack was one of the college students that worked with my mentor, James P Gill, during the tax filing season way back at the beginnings of my career. I began with Jim in February of 1972 and he joined “the firm” a couple of years later. He stayed with us for several seasons, and had come back on occasion to visit and help out after settling in to full time employment elsewhere.
The last time I had seen Jack was about 20 years ago when I ran into him and his then young (and now college graduate) son at the Hudson Mall.
He had recognized my neat handwriting, and the fact that I used a ruler to write straight, as I was making notes on the presentation!
Who would have thought!
This year’s conference consisted of a full day of presentations by one speaker, Alice Orzechowski, a CPA, CMA (Certified Management Account – not Country Music Award winner) and EA, with a brief annual meeting (and election of Board Members; I was running and lost – I knew I should have voted for myself) in between topics. Over the course of the day Alice covered the dreaded Alternative Minimum Tax, discussing case studies and tax planning strategies, the Minimum Tax Credit, Form 1041, Settlement (Closing) Statements, and real estate transactions.
I few items of note that deserve mentioning –
* Throughout her presentations Alice referred to specific applications that tax preparation software will do automatically and those that it will not do, requiring the user to enter some special information or make special calculations, and discussed the various problems she had encountered in the past with tax software and specific calculations, instances where the software did not produce the correct answer and in one situation actually made a math error.
All the more reason why the “uninformed” should not rely on tax software as a substitute for knowledge of the Tax Code or a tax professional, and why tax pros using software should not automatically accept what a program spits out as being correct without careful checking and verification.
* Under Internal Revenue Code Section 1.266-1(b)(1) a taxpayer can elect to “capitalize” (add to cost basis) real estate taxes paid on a vacant lot instead of claiming a deduction on Schedule A. This election can be made on an annual basis, capitalizing the expense one year and deducting it in another. In order to make the election the taxpayer must attach a statement to this effect to the appropriate Form 1040.
Taxes of any kind, state income or sales, personal property, and real estate, are not deductible under the dreaded Alternative Minimum Tax. A taxpayer with a vacant lot on which he/she pays real estate tax should elect to capitalize the tax in a year in which he/she falls victim to the dreaded AMT.
If the tax were claimed as an itemized deduction it would provide absolutely no tax benefit, as it would not be deductible under AMT – the deduction would be totally lost. By capitalizing the payment the expense can be claimed and a tax benefit realized when the lot is eventually sold.
As with any option in such a situation you should calculate the regular and AMT federal income tax and the state (and local if applicable) income tax both ways, with and without the current deduction, and compare the net combined federal, state and local tax liabilities.
* Alice reminded us that taxpayers should take into consideration the AMT when determining who gets to claim a dependent child in negotiating a divorce settlement – as personal exemptions are not allowed under the dreaded AMT.
Often times divorced parents will alternate claiming a dependent, the custodial parent claiming the exemption one year, and the non-custodial claiming the exemption the next. If one parent is a victim of AMT one year but not the next this should be taken into consideration when deciding who will get the exemption for a particular year.
This just goes to point up that it is very important when negotiating a divorce agreement that you choose an attorney who is well versed in tax law as well as divorce law, or have a tax professional consult with you and your attorney as part of the ongoing process. Using a well-qualified and experienced divorce attorney who knows everything there is to know about divorce law but diddly-squat about tax law, and not also using the services of a tax professional, could end up being very expensive.
* Certain closing costs paid on the purchase of a rental property that are deemed to be “expenses in obtaining a mortgage” can be amortized over the life of the original mortgage. These expenses are generally listed under Section 800 on the Closing/Settlement Statement and can include lender’s title insurance reported on Line 1101 of the Statement.
Just like with points paid on the purchase of such a property, any “unamortized” closing costs can be deducted in full on Schedule E in the year that you refinance the mortgage with a new lender.
You have $1,500 in qualifying “expenses in obtaining a mortgage” on the purchase of a rental property that you have been deducting over the 30-year term of the mortgage at $50 per year. Four years down the road you refinance the mortgage. The original mortgage was with Wachovia and you refinance with Chase. You had previously deducted $150 in amortization on Schedule E. In the year you refinance you can deduct the remaining $1,350 on Schedule E, plus the applicable amortization of the costs of obtaining the refinanced mortgage.
As usual the NJ-NATP conference was well done. I especially look forward to the chapter’s annual New Jersey State Seminar in January.
PS – To any tax professionals out there who are reading this, if you are not already a member of the National Association of Tax Professionals you should be! If you decide to join please mention my name as a “referral” and I will get a gift from NATP.