Saturday, January 31, 2009

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

FYI – this will be the last WHAT’S THE BUZZ post until I return from my “tax season hiatus”.

* Trish McIntire of OUR TAXING TIMES knows that brevity is the soul of wit. She comes right to the point in her post “The IRS Doesn't Email”. To repeat the entire post - “If you get an e-mail from the IRS, do not respond. It is a fraud.”

* Fellow twit, and fellow tax blogger, Chad Bordeaux brought to my attention at Twitter an early January post from TAX PROF Paul Caron titled “Dick Morris: Tyranny of the Tax Exempt”, in which Paul quotes an op-ed from the New York Post by Dick Morris.

Morris tells us that (the highlights are mine) –

Under Obama's plan, the majority of American voters would pay no federal income taxes, but would get money from the government instead. That is, these "refundable tax credits" are basically welfare checks - and Obama's plan would leave the most of us collecting, not paying. ...

Today, the bottom 50% of US taxpayers pays a total of $30.6 billion in federal income taxes on a combined income of about $1 trillion. So about 3% of all federal income-tax payments come from the poorest half of the country. (The top 1% pays 40%; the top 25% pay 85% of the federal income tax.)

Obama's plan -- he'd give all couples a $1,000 refundable tax credit and all single people $500 -- would funnel more than $50 billion to the lowest half of the country, thereby completely wiping out their total federal tax liability. In most cases, it would trigger a "refund" welfare check.

In one stroke, this would transform the majority of voters from taxpayers into tax eaters -- and leave an increasingly small minority to pay the bill. Whether or not this is good economics, it is very dangerous politics
.”

Not good at all!

* Bill Perez of WILLIAM’S TAX PLANNING BLOG at Ask.com asks “How Accurate is Tax Software Required to Be?” deals with the following questions concerning commercial tax preparation software – “Does the IRS require tax preparation software to be accurate? Does it test software to ensure the numbers are calculated appropriately? Or to phrase it bluntly, is your tax software reliable?

What does he find? It appears that “tax software does not undergo the sort of rigorous testing from the IRS that one might imagine”.

Another item of concern – “I found a 2007 audit of the Free File software alliance, the Treasury Inspector General for Tax Administration (the watchdog agency in charge of auditing the IRS) discovered that the IRS does not verify the accuracy Free File or other tax software programs.”

Bill’s bottom line, other than the implied be wary of the accuracy of tax preparation software, is that the "current tax code is a complicated mess that needs to be simplified so people know they are definitely paying the right amount of tax."

Right you are, Bill, on both your implied and stated bottom line! FYI, the above highlights are mine.

* While on the subject of the IRS “Free File” program, Jeff Schnepper has a great article on this program titled “Free Tax Filing Could Cost You” at MSN Money.

Jeff starts off the article with “The Internal Revenue Service's Free File program brings back words of wisdom I once received from my father: ‘Whenever you get something for free, be careful. You're probably not getting your money's worth’."

He ends with – “Personally, I'd like the IRS to develop its own free tax-preparation portal on its Web site. Remember, the agency's last name is ‘Service’." Me too!

* I think I have found the greatest thing since sliced bread – check out a seemingly great software package that promises to “quickly compute the tax basis for AT&T, the Baby Bells and the other companies that the Baby Bells merged into” in my post “Eureka” at the NJ TAX PRACTICE BLOG.

* In the process of answering a question on RALs in her post “Ask the taxgirl: Refund Anticipation Loan (RAL) Denials and Delays” TAX GIRL Kelly Phillips Erb reports that “According to Americans for Fairness in Lending, the average RAL lender fee is $100. The interest rates for a RAL ranges from 40% to 700% depending on the size of the refund.”

That sounds like usury to me!

* Kelly also provides a good overview of the alimony issue in “Ask the taxgirl: Is it Alimony?”. She makes an excellent point when she tells you, “hire a tax professional to review your settlement or divorce agreement and make sure it makes good tax sense (no matter which side you’re on)”.

* While at least BO did not nominate NJ Governor Jon “Mr Disappointment” Corzine for Secretary of Treasury, his actual nominees to posts in the Treasury Department are apparently not much better. Professor Linda Beale discusses them, including the appointment of former CEO of Henry and Richard as Deputy Commissioner of the IRS, in her post “The New Administration” at ataxingmatter.

BO, WTF were you thinking?!? The last person we would ever want in a position of authority at the IRS is anyone from H+R Block – especially a former CEO!!!

You know, now that I actually think about it, in my 37 years in “the business” I don’t think I have ever heard or read a story where a taxpayer actually had a good experience with Henry and Richard! Has anyone out there ever gotten truly competent service for a fair and reasonable fee without being pressured to purchase a usurious RAL or other unnecessary and expensive H+R product from Henry and Richard?

* Twit-follower Jim discusses in detail the non-tax provisions of BO’s economic stimulus package in “American Recovery & Reinvestment Plan Details” at the recently renamed BARGAINEERING (the blog formerly known as BLUEPRINT FOR FINANCIAL PROSPERITY).

* Right on, Sheryl of BUSINESS START-UP SUCCESS CLUB! Your post “
Should You Take a Home Office Deduction?” falls under the heading of “you took the words right out of my mouth”. I certainly agree with Sheryl when she says, “I wholeheartedly believe that you should take all the tax deductions that you qualify for”.

TTTA (Ta Ta Till April)

Thursday, January 29, 2009

AS THE CONGRESS TURNS

The Democrat's stimulus package, with some minor changes from its original form, passed in the House by a vote of 244 to 188. There were no Republican “yes” votes and 11 Democratic “no” votes (mostly conservative Democrats). The ball is now in the Senate’s court.

TAX PROF Paul Caron reports on “Tax Differences in House, Senate Stimulus Bills”.

TAXGIRL Kelly Phillips Erb has some interesting comments on the stimulus package in her post “Modified Version of Stimulus Bill Passes House”.

DON'T FORGET TO DEDUCT. . .

Don’t forget to deduct the following items, if applicable, on your 2008 Schedule A -

MEDICAL

(1) Travel to and from doctors, dentists, hospitals, therapists, etc. to receive medical care, and round-trip travel to visit a sick spouse or dependent if the visits are recommended by a doctor as part of the patient’s treatment. If you take a taxi, bus, train, or ambulance you can deduct the actual expense. If you drive you can deduct 19 cents per mile from Jan 1 thru June 31 and 27 cents per mile from July 1 thru Dec 31 for 2008 plus any parking fees and tolls.

(2) Health insurance premiums, whether you pay the premium directly or it is deducted from your payroll or pension check, unless the payroll deduction is part of a pre-tax Section 125 or cafeteria plan. This includes the amount deducted from Social Security and Railroad Retirement checks to pay for Medicare Part B premiums.

(3) Long-term care insurance premiums. The deduction is limited based on the taxpayer’s age. For 2008 the limits are: Age 40 or less = $310.00, Age 41-50 = $580.00, Age 51-60 = $1,150.00, Age 61-70 = $3,080.00, and Age 71 + older = $3,850.00). Each spouse is treated separately in determining the age-based limitation.

(4) Stop smoking programs and drugs prescribed to alleviate nicotine withdrawal.

(5) Amounts paid for a person who would otherwise qualify as a dependent but cannot be claimed as one on your 1040 because his/her income exceeds the limitation or because that person filed a joint return, and a person who was your dependent in the year the expenses were incurred but not in the year the expenses were actually paid.

(6) Contact lenses and hearing aids, as well as the cost of maintenance and upkeep, such as contact lens saline solution and enzyme cleaner and hearing aid batteries and repairs.

You can deduct medical expenses only to the extent that the total exceeds 7½% of your Adjusted Gross Income (AGI).

TAXES

(7) Contributions to a state unemployment and disability fund which are withheld from your paycheck, as is the practice in California, New Jersey, New York, Rhode Island, Washington and West Virginia. These taxes are considered state income taxes for the purpose of electing to deduct state and local sales taxes. If you elect to deduct sales tax you cannot also deduct state unemployment and disability taxes.

(8) The portion of your annual maintenance fee assessment for a time-share condo, such as Disney Orlando and Marriott, which represents your share of the property’s real estate taxes. This amount should be identified on you’re annual billing statement.

(9) The amount of real estate taxes paid as an adjustment at the closing for the purchase or sale of a residence or vacation property. This is the estimated real estate tax liability from the date of closing to the next regular tax payment date on a purchase, or from the last regular tax payments to the date of closing on a sale.

(10) State and local personal property taxes, including auto registration and license fees, which are charged annually and based on the value of the car and not weight, model, year or horsepower. If the assessment is based on both value and weight or another criteria only that part of the fee attributable to value is deductible.

INTEREST

(11) Interest paid on money borrowed to purchase stocks and other investments, such as the “margin interest” charged by brokerages. The deduction is limited to net investment income (interest, dividends, royalties and net short-term capital gains less any investment expenses). Investment interest paid in excess of net investment income can be carried forward indefinitely.

(12) The unamortized points from a refinanced home residence mortgage or a vacation home purchase when the mortgage loan that generated the points is paid off early, is refinanced again (or for the first time if a vacation home) with a new lender, or the property is sold. Generally when you refinance a home residence mortgage or purchase a vacation property any points charged on the loan must be deducted, or amortized, over the life of the mortgage. When the mortgage is paid off early the balance of the points can be deducted in full in the year the loan is paid off.

(13) Late payment fees and charges on a mortgage loan. Sometimes these charges are included in the mortgage interest reported on Form 1098, and sometimes they are not. You should check your annual loan amortization statement.

CONTRIBUTIONS

(14) Out-of-pocket expenses connected with donations or volunteer service to a qualifying church or charity, such as the cost of the ingredients of home-made cookies or a cake donated to a church bake sale, or the cost and laundering of uniforms for a scoutmaster.

(15) Travel and transportation expenses incurred while performing a volunteer service for a qualifying church or charity. If you use your car you can deduct 14 cents per mile in lieu of actual expenses plus any parking fees and tolls.

MISCELLANEOUS

(16) The cost of looking for a job in your present line of work, including fees paid to employment agencies and consulting forms for securing a job, preparing a resume or career counseling, the cost of typing, printing and mailing resumes, telephone calls to set up interviews, newspapers and periodicals purchased for employment ads, and round-trip travel or transportation to job interviews, including lodging and meals (at 50%) if away from home overnight. If you drive you can deduct 50½ cents per mile from Jan 1 thru June 30 and 58.5 cents per mile from Jul1 1 thru Dec 31 for 2008. Expenses to look for work in a new trade or field are not deductible; neither are the costs of finding your first job after graduating from school. You do not have to actually get a new job to be able to deduct the expenses.

(17) Legal fees to collect or produce taxable income, to protect your job, or relating to tax advice. This includes legal fees paid to collect or in-crease alimony if the recipient, or reduce alimony if the payer, or incurred in fighting to keep your job or maintain your job or salary status. Legal fees related to both taxable and non-taxable income, such as Social Security benefits, must be allocated appropriately.

(18) Custodial and administrative fees for IRA, SEP and Keogh accounts, if billed and paid separately and not deducted from the account balance.

(19) The cost of education that is expressly required by an employer, by law, or by government regulation, or maintains or improves skills required in your current trade or business, including tuition, textbooks, registration fees, and supplies, round-trip transportation to the education (see #16 above for mileage allowance), meals (at 50%) and lodging while away from home, lab fees, student cards, insurance and degree costs, and writing expenses for term papers and dissertations (i.e. research and typing). You cannot deduct the cost of education if it is the mini-mum requirement for a trade or business, or prepares one for a new trade or business, even if the taxpayer does not intend to enter that trade or business.

(20) Expenses incurred in connection with the “determination, collection or refund of any tax” (income, estate, gift, property and other taxes imposed at the federal, state or local level). This includes fees paid to a tax professional for preparing or amending a federal, state or local income or estate tax return and for tax planning advice, plus round-trip mileage to meet with the tax pro, and seminars, workshops, software, books, reports, newsletters and publications that provide tax planning and preparation advice and information. The cost of the reports and newsletters published by Robert D Flach LLC is fully deductible as a miscellaneous deduction if you can itemize.

You can deduct the above “miscellaneous” expenses only to the extent that the total exceeds 2% of your Adjusted Gross Income (AGI).

TTFN

Wednesday, January 28, 2009

AS THE CONGRESS TURNS

Good news!

The CCH daily tax headline email newsletter reports this morning that -

The Senate Finance Committee on January 27 approved its portion of an $825 billion economic stimulus bill, the American Recovery and Reinvestment Bill of 2009, and potentially boosted the total cost to nearly $900 billion after agreeing to include a one-year patch for the {dreaded} alternative minimum tax (AMT).”

You can click here to check out a detailed press release on the provisions of the bill.
.
However, according to White House Press Secretary Robert Gibbs, “Obama supports the AMT patch, but believes it should be taken up separately from the economic recovery package, since it is directed at upper-middle-income taxpayers”.

Unfortunately my “tax-season hiatus” begins on Monday and I will not be able to report on the progress of the stimulus package. I will be posting once about every 20 days so I remain on the Alltop.com tax page – so I may use these posts to bring you updates.

ASK THE TAX PRO – AMENDING YOUR RETURN FROM SEPARATE TO JOINT

This question was first posed in a comment to my post on "Amending Your Return".
.
Q. My mother just found out that her 2007 e-file was rejected due to her name change in the same year (marriage). She filed "married, separately" but now wants to change it to filing jointly. What should she do, and what numbers should she include on the 1040x since she has no "original" tax return but he does?

A. First of all – I hope she has changed her name with the Social Security Administration. If not – she should do so immediately. Click
here.

Now on to the
Form 1040X. You cannot change from Married Filing Joint to Married Filing Separately after the initial April filing deadline has passed – but you can change from separate to joint. According to the 1040X instructions (the highlight is mine) –

If you and your spouse are changing from separate returns to a joint return, follow these steps.

1. Enter in Column A the amounts from your return as originally filed or as previously adjusted (either by you or the IRS)
{the information from the separate tax return of your step-father would go here – rdf}.

2. Combine the amounts from your spouse’s return as originally filed or as previously adjusted with any other changes you or your spouse are making to determine the amounts to enter in Column B. If your spouse did not file an original return, include your spouse’s income, deductions, credits, other taxes, etc., to determine the amounts to enter in Column B” {here is where your mother’s 2007 information would go – rdf}.

You would combine the amounts in Columns A and B and enter the totals in Column C. Column C should show income, deductions and credits as they would have appeared if they had originally filed a joint return.

Both your mother and step-father must sign the Form 1040X.

I would recommend they retain a tax professional to prepare the amended return.


FYI - This will be my last ASK THE TAX PRO post until May. Please do not submit any questions to be answered here until after the tax season. Any questions received will be stored away in "inventory" unread until May 2009!

TTFN

Tuesday, January 27, 2009

IT KEEPS TURNING!

This just in -

Senate Finance Committee Chairman Max Baucus (D-Mont.) has unveiled the Senate version of the tax provisions for inclusion in the
American Recovery and Reinvestment Act of 2009.

They include –

· Making Work Pay Credit: an individual tax credit in the amount of 6.2 % of earned income not to exceed $500 for single returns and $1,000 for joint returns in 2009 and 2010.

· Seniors, Disabled Veterans and SSI: a one-time payment of $300 to Social Security beneficiaries and SSI recipients receiving benefits from the Social Security Administration and Railroad Retirement beneficiaries.

· Temporary Suspension of Taxation of Unemployment Benefits: federal income tax temporarily suspended on the first $2,400 of unemployment benefits per recipient.

· Expansion of the Earned Income Tax Credit: an increased credit for three or more children and additional marriage penalty relief for married couples.

· Expansion of the Refundable Child Tax Credit: increased eligibility for the refundable child tax credit in 2009 and 2010 by lowering the threshold to $6,000.

· American Opportunity Tax Credit: a $2,500 higher education tax credit that is available for the first four years of college

· Computers as qualified education expenses in 529 Education Plans: computers and computer technology to qualify as qualified education expenses

· Homeownership Tax Credit: modifies the $7,500 tax credit for home purchases that occur after 2008 and before July 1, 2009.

Hey – where’s the dreaded AMT fix?

I will provide more information as it becomes ava
ilable.

AS THE CONGRESS TURNS

Over at THE TAX LAWYER’S BLOG Peter Pappas asks the question “House Approves Stimulus Bill, But Where is AMT Fix?”.

The answer is nowhere!

The House Ways and Means Committee has approved the tax portion of the stimulus package without the annual AMT fix.

Peter quotes USATaxNews.com quoting Senator Chuck Grassley, ranking Republican on the Senate Finance Committee, responding to this omission –

It makes no sense to give tax cuts with one hand and take them away with another. I’ll fight to have the alternative minimum tax patch for 2009 included in the Senate version of the stimulus bill, so that millions of middle-class Americans won’t have their tax cuts taken away before they ever receive them.”

We had hoped that Congress would take care of the annual dreaded AMT fix (the AMT is dreaded – not the fix) early in the year – not as good as doing away with the damned thing altogether, but better than waiting till the last minute to pass a patch again (see an earlier “As the Congress Turns").

COMMENTS, I GET COMMENTS

It seems to me that comments to blog posts, which on occasion contain some excellent points or additional information on a subject, often get “lost in the shuffle”.

Below are some comments to recent posts at THE WANDERING TAX PRO that I feel deserve a wide audience -

Here is what “Indie Tax Pro” had to say about my comments on Henry and Richard (the highlight is mine) -

Ha I love the reference to ‘fast food’ tax chains! I got my career started at H & R Block, and some of my co-workers were like me - Accounting majors just looking for that first job to put on their resume, but hoping to work at real accounting firms after graduation. But so many of the others were just very unprofessional; they did sloppy jobs on the returns and really had no idea what they were doing. And their prices WERE ridiculous considering half of the people on my shift couldn't do basic math.

.
Although Block takes advantage of poor people, they're still nothing compared to Jackson Hewitt and Liberty - loan sharks preying on the uneducated. And you're absolutely right about the tax software, it's extremely faulty and although honest mistakes can be made such as the slip of just one digit, the TaxCut excuse unfortunately doesn't hold up in court
.”

On the subject of Henry and Richard, Trish (actually fellow tax blogger Trish McIntire of OUR TAXING TIMES) provides more information on their recent tv ads that tell you to bring your last pay stub in to get an advance of $1,000 –

Actually the pre-season money Block is offering is even worse than you explained. That type of program was ended in 2007 when the banks involved realized how much money they lost with the pay stub loans.
.
What Block is offering now is a credit card that is loaded with up to $1000 (less the annual fee.) While a paystub and prior year returns are needed, much of the decision is based on their credit rating. I have not seen the fine print this year, but last year it was a pre-paid type card with a 9% interest. If it was paid back by the date in the paperwork, the rate stayed the same but if it wasn't the rate went to 26%. Since this was a pre-paid card, you had to not only pay back the advance but also bring the card back to a fully prepaid level. If you had received $1000 advance and used all of that, you would pay back $2000 to keep the lower interest rate. Then you could be subject to a bunch of little fees for just using the card
.”

The sneaky bastards!

And here “Anonymous” (a most prolific commenter – I see his responses on blogs everywhere!) discusses another problem with the Earned Income Credit -

Any other problems with the EITC aside, my complaint about it is that it is unfairly age-discriminatory -- single people must be at least age 25 to qualify, even if they met the income requirements at an earlier age.

.
If a person no longer qualifies to be claimed as a dependent by someone else (which would still keep parent-supported college students from getting it), they should be equally EITC-eligible, regardless of whether they are age 19, 24, 25, 45, whatever.

.
An independent single 24-year-old who earns $10,000 this year is not any less poor than an independent single 25-year-old who earns $10,000 this year.

.
As long as the EITC continues to exist, this ought to be fixed
.”

To respond – While Anon does make a good point, I expect that the Congress did not want to provide the benefit to college students whose earned income is low because they are full-time students or to those just starting out in the workforce and therefore not earning much.

If you have read a post at TWTP, or elsewhere, that you found interesting or helpful why not return every so often to see if there are any comments. I sometimes get comments to posts many, many months after they have been published.

And please, if you have something to say about or add to one of my posts please comment away!

A word of warning – comments are not to be used for the sole purpose of “tooting your own horn”, although you may do so in the context of a genuine comment, or selling a product. I suggest you check out my post “Comments on Comments”.

So – any comments?

.
TTFN

Monday, January 26, 2009

TWO GREAT WEBSITES

This week's posts will also feature some examples of the excellent "e-cards" on taxes available from someecards. Check them out!
,
Dealing with the Internal Revenue Service or the New Jersey Division of Taxation on a tax issue can be truly frustrating, even for the most experienced of tax professionals.
.
However both of these agencies have excellent websites with lots of information and resources for both the taxpayer and the tax professional.

* Both www.irs.gov and www.state.nj.us/treasury/taxation are “open” 24 hours a day 7 days a week.

* Both allow you to review and download current and past year tax forms, instructions and publications . The NJ site has NJ-1040s going back to 1992 and the IRS site has the basic 1040 and some Schedules as far back as 1980. Click here for IRS and here for NJ.

* The NJ site allows you to file your current NJ-1040 online for free – in most situations via NJWebFile. This is what I use to satisfy my “electronic filing” requirement as a preparer of state resident tax returns. Unfortunately taxpayers with net profits, or loss, from business (federal Schedule C filers), distributive share of partnership income, or loss, and/or pro rata share of S corporation income (those who receive K-1s) cannot use NJWebFile. Click here for a complete list of who cannot use this free online system to file a 2008 NJ-1040.

While the IRS has a “Free File” program for lower-income taxpayers, these programs, including the new Fill In Forms option, are all run by outside vendors. You cannot file your federal income tax return free online directly through the IRS yet.

* Both sites allow you to make tax payments electronically. You can authorize an electronic funds withdrawal, use a credit or debit card or, with federal taxes, enroll in the U.S. Treasury’s Electronic Federal Tax Payment System.

* The IRS site lets you check the status of your tax refund. Whether you opted for direct deposit of your federal refund or are expecting a check, you can check the status of your refund through “Where’s my Refund?”. You can also check the amount of your 2008 economic “stimulus” rebate check, information you will need when preparing your 2008 federal income tax return.

While there is currently no online inquiry system for NJ state income tax refunds (you must check the status of a NJ state income tax refund via telephone) you can check on the amount of your NJ Homestead Rebate for 2005 through 2007 (the 2007 rebate was issued in 2008). Homeowners who itemize will need this information for the federal Form 1040.

* The IRS site has a “Withholding Calculator” to help you determine the right amount of withholding on your W-4. It also has a “Sales Tax Deduction Calculator” to help determine the amount you can claim as a deduction on Schedule A if you opt to deduct state and local sales tax instead of state and local income tax.

* The IRS site also lets you search Publication 78, Cumulative List of Organizations, to find out if an organization is exempt from federal taxation and, if so, how much of your contributions to that organization are tax deductible.

* Both sites provide lots of information on applicable tax law, dealing with the agencies, and how to do “stuff”. NJ has an excellent “How Do I” page.

* And both sites are excellently indexed by category of taxpayer. Both index by INDIVIDUALS and BUSINESS and the IRS site also has sections for CHARITIES AND NON-PROFITS, GOVERNMENT ENTITIES, AND RETIREMENT PLANS COMMUNITY. Both sites have a special section for TAX PROFESSIONALS.

New Jersey also has an excellent portal for businesses – the NJ Business Gateway Registry Services. While NJ is one of the most expensive states in which to have a business, and consistently lands on the bottom of the list of “business-friendly” states (as it nickels and dimes its small businesses almost to death) – the state does make it extremely easy to form, register and make changes to a business (so you can be nickeled and dimed), to make state tax and other payments and file required reports, and to dissolve a business (when you have had enough with NJ rules, regulations, taxes and fees and decide to give up).

So check out the IRS and NJ Division of Taxation websites and take full advantage of all that they have to offer.

TTFN

Saturday, January 24, 2009

KAY BELL DOES IT AGAIN!

Kay Bell brings the Wandering Tax Pro and the taxguy together again in her post “Are You a Good or Bad Tax Client?” at DON’T MESS WITH TAXES.

Kay starts off the post by telling us – “There are lots of stories each tax season about how taxpayers can find a reputable, qualified tax preparer. . . But there's a flip side to this coin. How do tax professionals find good clients?
.
The post goes on to list a handful of the gripes we tax professionals (taxguy and I, some fellow twits we all share) have about how some of our clients behave. Believe me, Kay only scratches the surface.
.
She does make some good points. For example, “if you and I were better clients, we'd not only make our tax advisors' jobs easier, we'd likely end up with a better tax result”.

Her bottom line is also something all clients should take to heart – “A little bit of planning and preparation on your part will enable your tax pro to do a better, and bigger tax-saving, job for you”.

Check out the post when you get a chance!

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

* Let’s start the BUZZ off with an excellent article by Thursday Bram at Investopedia titled “Refund Anticipation Loans: Ripoff Or Royal Screwjob?”. If you ask me – both!

* Kay Bell reports in her post “
California Tax Refunds on Hold” at DON’T MESS WITH TAXES that “the state's controller says that if lawmakers don't come up with a way to cover California's $42 billion budget deficit, on Feb. 1 he will put a 30-day hold on tax refunds and some other payments”.

* Another reason not to rely on tax software, such as Turbo Tax, if you don’t know what you are doing. Kay Bell reports in her post “Geithner -- and TurboTax -- Grilled Again” that “Geithner acknowledged that he had used TurboTax”.

The “Turbo Tax Defense” doesn’t work in Tax Court – but apparently it works in Congress.

* Kay Bell also writes on taxes for Bankrate.com. She has begun a daily series of tax tips. Friday’s tip – “Second Chance for Economic Stimulus Check” - included the observations and insights of two of her fellow tax bloggers – Bruce the taxguy and yours truly.

* Fellow twit Cindy Morus gives us “Top 10+ Ways to Jumpstart your New Year’s Finances!” over at MEND YOUR MONEY. The list includes - “Set up an appointment with your tax professional early”. Only not too early – make sure you have all your “stuff” before you see your tax pro!

While it is not on the list, an earlier post from Cindy suggests that you “Update Your Beneficiaries”.

* If you missed the online-radio interview with Kristine McKinley of EBIZ TAX TIPS conducted by the “eBay Selling Coach” you can click here to listen.

Also appearing on an online radio program this week was TAXGIRL Kelly Phillips Erb discussing Small Biz Taxes. Click here to listen.

* Peter Pappas of THE TAX LAWYER’S BLOG suggests that we “Repeal the Corporate Income Tax and Bring Those Jobs Back Home”. Be sure to read my comment.

* June Walker provides an excellent and creative answer to a question from a psychiatrist who was confused by the Turbo Tax software treatment of psychological software he purchased in her also excellently titled post, “
Software Cannot Replace Experience”. The highlights below are mine.

Dear Dr. Mark,
.
You see, I've been feeling really depressed. Suicidal actually. I bought this software program Mind-Mend. Says it has taken 20+years of psychiatric experience and rolled it up into this software program. There are 10 steps to avoiding stress. One step says do 15 minutes of meditation each day. Another step has me stand on my head for 10 minutes so that my circulation increases. My gym instructor says I should not stand on my head because of an old army injury. I am confused, what should I do?
.
As a doctor you might tell me that stress and suicidal tendencies call for different levels of treatment as well as different levels of urgency and that I should speak with a professional. You might also say that there is no way that 20 years personal experience could be put into a software program and have the same success rate as weekly visits with a therapist when treating something as complex as suicide.
.
This is my round-about of saying what I have said on this blog many times before: A software program written for the simple world of employees cannot replace a tax pro experienced with indie tax situations
.”

* Professor James Maule has some interesting comments on depreciation in his post “Just Because It Didn't Work the First 50 Times Doesn't Mean It Will Work Next Time” at MAULED AGAIN.

The depreciation provisions . . . have contributed to the current economic mess by allowing taxpayers to compute taxable income as though their economic position declined when in fact it remained the same or improved”.

Jim agrees with what I discussed at TWTP in my post “Here is Something to Think About”. He discusses the idea in more detail in “Instead of More Favorable Depreciation Deductions, Eliminate Them?
.

Goose the Tax Dog (I am assuming Goose is the name of the Dog) also adds his 2 cents on the topic in his post “Real Estate Depreciation” at THE TAX STUDENT.

I would be interested to hear your comments on what I propose in this post.

* TAXGIRL Kelly Phillips Erb points out that it seems that somewhere someone from the press is giving out bad information on BO’s stimulus package in her post “Ask the taxgirl: Don’t Look for a Second Rebate Check in the Mail!”.

Read my, and Kelly’s, lips – THERE WILL NOT BE ANOTHER “STIMULUS” REBATE CHECK! While he didn’t take my advice regarding refundable credits, at least BO listened to me about rebates.

* Right on Prof Daniel Shaviro of START MAKING SENSE – “Happiest word in the English language {is} ‘Ex", when placed with a dash in front of the words ‘President George W. Bush’.”

* A great Q+A post from Gina Gwozdz at TAX TIPS BLOG on “
1099 vs W2?” She makes the excellent point – “Your employer does not get to decide if they can pay you as a W-2 employee or a 1099 contractor. The law determines your classification.”

* Trish McIntyre of OUR TAXING TIMES provides the word on the economic “stimulus” rebate you did or didn’t receive last year in her post “Stimulus Rebate-Taxable This Year?”. The answer, of course, is NO – for both federal and state returns.

Trish points out that you could get an additional rebate added to the refund, or subtracted from the balance due, on your 2008 Form 1040 or 1040A – “For example, the full stimulus rebate a married couple with one child could receive was $1500. A child born in 2008 qualifies the couple for an extra $300.”

The 2008 “stimulus” rebate election year bribe caused tons and tons of confusion last year, completely overwhelming the IRS – and I expect the confusion to continue to apply to 2008 tax returns. As was the case with the last rebate check, there will be millions of errors on 2008 federal returns.

* I came across an interesting bit of information in my “wanderings” on Thursday - “The Association of Chartered Certified Accountants, the global body for professional accountants, views the U.S. tax regime as one of the world's most complex, according to Chas Roy-Chowdhury, London-based head of taxation.”

* In item from Freep.com (Detroit Free Press) titled “Tax Rebate Impact on Economy is Weak” we learn “Two University of Michigan economics professors have some advice for President Barack Obama about how not to design his economic stimulus package. Their advice: Don't make tax rebates a big part of it.”

The professors confirm what I have been saying all along – “Onetime payments from the government are a weak economic stimulus”.

Some statistics from the article - ”The U-M economists found that only 20% of U.S. households mostly spent their tax rebates, while about 48% used their rebate mostly to pay debt and roughly 32% mostly saved their rebate checks.”

* Always leave ‘em laughing – you will find some good parenting advice from BUSINESS PUNDIT in the post “
Always Check Your Child’s Homework Before it Gets Turned In”.

TTFN

Friday, January 23, 2009

KAY BELL'S TAX TIPS

In addition to writing the blog DON’T MESS WITH TAXES, Kay Bell, the yellow rose of taxes, also writes on federal income taxes for BankRate.com. She is currently penning a series of daily tax tips.

Today’s tip is “Second Chance for Economic Stimulus Check” and discusses last year’s election year bribe rebate check and the refundable Recovery Rebate Credit on the 2008 Form 1040 and 1040A.

The tip includes and observations and insights of two of Kay’s fellow tax bloggers – Bruce MacFarland, the taxguy, and “a tax accountant in Jersey City, N.J” who writes a blog titled THE WANDERING TAX PRO.

Good job, Kay!

BRIDE OF KEEPING TRACK OF BUSINESS MILEAGE

Yesterday I discussed one alternative for keeping track of business mileage. Today I would like to take a look at another IRS-approved method. That method is called “sampling”.

Instead of keeping a log of all business miles for the entire year you can use “sampling” to determine your total business miles.
.
According to IRS Publication 463 (Travel, Entertainment, Gift, and Car Expenses) – “You can keep an adequate record for parts of a tax year and use that record to prove the amount of business or investment use for the entire year. You must demonstrate by other evidence that the periods for which an adequate record is kept are representative of the use throughout the tax year.”
.
The sticky part here is “You must demonstrate by other evidence that the periods for which an adequate record is kept are representative of the use throughout the tax year.” How to do this is not clear.

The Publication gives the following example of “sampling” –

You use your car to visit the offices of clients, meet with suppliers and other subcontractors, and pick up and deliver items to clients. There is no other business use of the car, but you and your family use the car for personal purposes. You keep adequate records during the first week of each month that show that 75% of the use of the car is for business. Invoices and bills show that your business use continues at the same rate during the later weeks of each month. Your weekly records are representative of the use of the car each month and are sufficient evidence to support the percentage of business use for the year.”

I am not quite sure how “invoices and bills show that your business continues at the same rate during the later weeks of each month”. My only comment is that if gas usage does not materially change during the “later weeks of each month” one can assume the same amount of overall driving could mean the same amount of business miles.

An item in an issue of the newsletter TAX HOTLINE (now called BOTTOM LINE WEALTH) from last summer gave the following example for “sampling” – “If you record that business mileage in the first three months of the year is 2,500 miles, you can base your annual deduction on 10,000 miles (2,500 x 4), even though you have specific mileage records for only 2,500 miles.” .

This specific example would not really work for me. The first three months of the year contain two full months of the tax filing season. I do a lot more business driving during the tax season than I do for the balance of the year – so in my case the first three months of the year are not “representative of the use throughout the tax year”.

While “sampling” is an acceptable method for the lazy, for a person whose business mileage is relatively consistent throughout the year, or for someone who has lost his records for a large part of the year – I still recommend keeping a mileage log for the entire year (see yesterday’s post). This way you will know your actual total business miles for the year and will not short change yourself.

Does anyone out there have any suggestions for how to “demonstrate by other evidence that the periods for which an adequate record is kept are representative of the use throughout the tax year”?

TTFN

Thursday, January 22, 2009

AS THE CONGRESS TURNS

I reported on the Democrat’s “stimulus” package, but missed the Republican version - the Economic Recovery and Middle-Class Tax Relief Act (HR 470) – which was introduced on January 13.

According to a post by Congressman Scott Garrett at THE RIDGEWOOD BLOG tax provisions contained in the Republican proposal include:

1. 5% across the board reduction to individual income tax rates
2. Repeal the Alternative Minimum Tax for individuals
3. No increase in capital gains and dividends tax rates for individuals
4. Increase the child tax credit from $1,000 to $5,000, but it is not refundable
5. Permanently repeal the 70.5 distribution requirement on IRAs
6. Increase the tax deduction for student loans from $2,500 to $3,750 and increase income limits up to $75,000 for individuals and $150,000 for families with no phase out
7. Increase the tax deduction for qualified higher education expenses from $4,000 to $6,000 and increase income limits up to $75,000 for individuals and $150,000 for families with no phase out
8. Temporarily make all withdrawals from IRAs not subject to taxation or penalties for 2009
9. Reduce the corporate income tax rate to 25%
10. Reduce the alternative capital gains rate for corporations to 15%
11. Index capital gains for inflation
12. Repeal limitations on expensing allowance (Sec. 179) of depreciable business assets
13. Make the R&D tax credit permanent
14. Extend the two-year “carryback” period for net operating losses to seven years
.
My two cents -
.
* A big two thumbs up to #s 2 and 3.
.
* I have no problem with 1, 6, 7, 8, 10, and 13.
.
* I think $5,000 is too much in #4, but I am glad to see that any increase would not be refundable.
.
* I don’t think the repeal should be permanent, although I would support increasing the age re: #5.
.
* I would rather see the creation of a “dividends paid deduction” re: #9.
.
* I am not quite sure how #11 would work. I would strongly favor the $3,000 maximum net capital loss deduction be increased and perhaps indexed for inflation.
.
* I would rather see a total overhaul of the depreciation deduction re: #12.
.
* Maybe 5 years re: #14.
.
What thrills me most about this proposal is – NO REFUNDABLE CREDITS!
.
So what do you think?

KEEPING TRACK OF BUSINESS MILEAGE

An exchange with a fellow tax preparer last week “inspired” today’s post.

We were discussing keeping track of business mileage, and it came up that most of us tax pros, and probably most other business persons, make multiple trips to the same locations on a regular basis – in my case to Office Depot for supplies, to my mail drop (which is also a client), to the bank, and to various business clients.

I was reminded of a practice many, many, many years ago when I was a “para-professional” (official title was “Business Services Associate”) in the Small Business Department of Deloitte, Haskins + Sells – one of the then “big eight” international CPA firms. We had to record the mileage to and from our client’s offices on our time report. The firm would reimburse us for business miles – and would turn around and bill the client for the mileage. But rather than have to count the miles for each individual trip the firm provided employees with a chart that listed the round-trip mileage from our office to each of the firm’s clients. If Client A indicated 20 miles each time I would go to Client A I would record 20 miles on my report.

I expect that the mileage was clocked on the first visit from the office to the client, and that mileage was used as the standard for every trip from then on. If a client moved the standard would be changed accordingly.

My colleague mentioned that she had heard of clients who looked up the mileage between the addresses of their office and the business location in Yahoo or Google, and used that figure instead of actually clocking the mileage. I felt this could short change the driver. Isn’t the mileage provided on these online services more “as the crow flies” than actual driving miles? I think it is much “more better” to do as I think DH+S did – on your first round-trip to a location to which you will be making multiple stops record the exact mileage from your odometer. You can then use the same miles each time you make a round-trip from your office to the location.

There is a downside to using a pre-determined mileage figure. In reality each individual round-trip to a location is not always exactly the same number of miles.

On one trip excessive traffic may cause me to take an alternate route to save time – i.e. get off a major highway and take back roads, which is more actual miles but less travel time. Or road construction or an accident may force me to take a detour that ends up being more miles. On another trip I may stop to buy office supplies or visit the Post Office to mail business packages on the way to or from a client, which would add a couple of miles to that specific trip.

I realize that we are not talking about thousands of miles lost – but if you do a lot of client visits the added miles could add up.

The bottom line is that clocking each and every individual business trip is the best and most accurate way to record your true business mileage. This is not difficult – you just have to get into the habit. You can use a simple pocket date book to keep track of business trips. Enter the location, business purpose and miles driven. For example - “Office Depot (Union City) to purchase office supplies 4 miles” or “Business Client, LLC (Watchung) to do payroll and accounts payable 56 miles” or “Wachovia (Union City) to make deposit for client 3 miles”.

If you are the lazy type – or forget to set the odometer – you can always use a standard mile amount – the “DH+S method”. But remember - you still have to keep a record of the date, location, and business purpose for each trip in some kind of log or record book.

TTFN

Wednesday, January 21, 2009

HOW TO ALLOCATE THE 1ST TIME HOME BUYER CREDIT AMONG NON-RELATED OWNERS

In the Housing and Economic Recovery Act of 2008 Congress created a special refundable “credit” for first-time home buyers. Here is a review of the credit -
.
* The credit is available to first-time home buyers only. A first-time home buyer is a buyer who has not owned a principal residence during the three-year period prior to the purchase. Ownership of a vacation home or rental property not used as a principal residence does not disqualify a buyer as a first-time home buyer.

* The maximum credit amount is $7,500.

* The credit is available for homes purchased on or after April 9, 2008 and before July 1, 2009.

* Single taxpayers with Modified Adjusted Gross Income (MAGI) of up to $75,000 and married couples with MAGI of up to $150,000 qualify for the full tax credit. The amount of credit is phased-out as MAGI goes from $75,001 to $95,000 for singles and $150,001 to $170,000 for married couples.

* The tax credit is not really a “credit” – it is actually an interest-free loan that must be repaid over a 15-year period. Be advised - one of the items that will probably be in BO's economic stimulus package is a repeal of the requirement to pay back the credit - so it may end up really being a credit after all.
.
The maximum credit of $7,500 is per property and not per person. When two or more unrelated individuals purchase a qualifying property the $7,500 must allocated between all of the owners.
.
IRS Notice 2009-12 provides guidance on just how to allocate the credit. According to the notice taxpayers can allocate the credit in any manner they see fit among the eligible purchasers.
.
The purchasers can allocate the credit all to one buyer (i.e. property purchased as personal residence by Taxpayers A, B, and C – they decide that Taxpayer A gets a $7,500 credit and Taxpayers B and C get no credit), or they can allocate the credit based on down payment, on ownership percentages, on MAGIs, or any other manner they agree upon. The amount of credit each taxpayer claims is the amount that particular taxpayer will have to repay during the recapture period.
.
Please note that no credit can be allocated to a taxpayer who is not eligible, such as a taxpayer who has owned a principal residence during the past 3 years.
.
Any amount that is allocated to a taxpayer who has an MAGI within the phase-out range or higher will be reduced under the method set forth in the Act. As a result purchasers may choose to allocate nothing to an individual with MAGI of more than $75,000 (if single). If all purchasers fall within the phase-out range the credit can be allocated to the purchaser(s) with the lowest MAGI.
.
The unrelated purchasers can allocate the credit so as to maximize the combined amount (to make sure they get the full $7,500) – or to maximize the “refundable” amount. Or they can allocate the credit so that a purchaser (or purchasers) with a balance due are “off the hook”.
.
As with any other situation when money is involved there is the potential for disaster. Unrelated purchasers should be very careful when determining how to allocate the credit. In my 37 years in “the business” I have often seen disputes over money destroy life-long friendships and family relationships.
.
TTFN

Tuesday, January 20, 2009

REASONS TO CELEBRATE

Americans have two reasons to celebrate today. ..
.
First of all we can celebrate the fact that George W Bush is gone!
.
Dubya has been the worst President in at least my lifetime (yes I was around during the Nixon years - I have been here since Eisenhower) and I doubt many are sorry to see him go.
.
While playwright David Mamet says he did not write his political satire NOVEMBER about George W one wonders. In the play the President has been abandoned by his party in his run for reelection. He asks his top advisor why and is told “You fu--ed up the country!”. Sounds like W to me.
.
I am not along in my opinion - it is worldwide! Or so says this article from comcast.net.

The second reason to celebrate is the fact that America has progressed so far in my lifetime that a black man can be elected President.

There is a “Kennedy-esque” (John and not, thankfully, Teddy) feeling in the country as we embark on what can perhaps be called a new era of “Camelot”.

While I did not vote for BO I certainly give him my full support in the difficult task of undoing what George W and his cronies have done to us in the past 8 years and bringing respect and honor back to the office of the President.

Good luck and Godspeed, Barack!

.
Now if only you would forget about refundable credits.

DID YOU KNOW?

Did you know that the definition of a “dependent attending college” for purposes of the extra exemption on the NJ-1040 is slightly different then the general federal rule?

For federal income tax purposes as long as you are under age 24 and a full time student you may qualify as a dependent, and may be subject to the “kiddie tax” on excess investment income.

The federal rules further state that to qualify the student must be “enrolled” full-time in school (not an online or correspondence school) during some part of any five (5) months of the calendar year. Private Letter Ruling 9838027 allowed the month of August to be counted when the student registered on August 28 but did not actually begin to attend classes until September 2.

For NJ state income tax purposes you can claim as a dependent “each dependent child who qualifies as your dependent for Federal income tax purposes”. However the requirements to claim an additional exemption as a “Dependent Attending College” the following requirements must be met –

* Student must be under age 22 years of age for the entire tax year.
* Student must attend full-time. “Full time” is determined by the institution.
* Student must spend at least some part of each of five (5) calendar months of the tax year at school.
* The educational institution must maintain a regular faculty and curriculum and have a body of students in attendance.

The extra exemption is not allowed for 22 or 23 year old full-time students, although such students who otherwise qualify could be claimed as dependents on the NJ-1040.

There also seems to be a difference in the determination of a month that qualifies toward the 5 month test. For federal and state dependency purposes as long as the student is enrolled during the month it counts toward the required 5. However for the additional exemption on the NJ-1040 the student must actually “spend time” at the school, which appears to mean attending classes. For this purpose the student who registered in August but began classes in September would only have 4 qualifying months.

TTFN

Monday, January 19, 2009

HAIL TO THE TAX CODE!

I just got the word from Kay Bell of DON’T MESS WITH TAXES that “Tax Carnival #46: Inauguration Day” is here! Hail to the Tax Code! Or do you prefer “To Hell with the Tax Code”?

My post on “What Not To Do” when looking for a tax preparer is included.

AS THE CONGRESS TURNS

Tax-challenged House Ways and Means Chairman Charlie Rangel, recently elected “2008 Taxpayer of the Year” (by a large majority) at the ROTH AND COMPANY TAX UPDATE BLOG, has released details of the tax provisions of the American Recovery and Reinvestment Plan.

According to the press release, “This groundbreaking plan will provide critical tax, health and job-training benefits to American families, incentives for businesses to grow and create jobs and assistance for those who have lost their jobs or are economically disadvantaged”.

The tax provisions that provide “recovery” for individuals include –

* A refundable “Making Work Pay” credit of up to $500 for singles and $1,000 for joint taxpayers based on 6.2% of “earned income” (note that 6.2% is the Social Security withholding tax rate). The credit will phase-out as AGI exceeds $75,000 for singles and $150,000 for joint filers. The money is distributed via a reduction in income tax withholding or by claiming a credit on their federal income tax returns (I expect to cover self-employed individuals). This credit applies for 2009 and 2010.

* An increase in the Earned Income Credit to 45% (from 40%) of a family’s first $12,570 of earned income for families with three (3) or more children and increase the beginning point of the phase-out range for all married couples (regardless of number of children).

* Elimination the current $8,500 “floor” on the refundable portion of the Child Tax Credit for 2009 and 2010. Currently the credit is refundable to the extent of 15% of a taxpayer’s earned income in excess of $8,500. Under this bill the $8,500 would become “0”.

* A partially refundable “American Opportunity” education tax credit of up to $2,500 of the cost of qualified tuition, fees and books determined as 100% of the first $2,000 and 25% of the next $2,000 paid during the year. 40% of the credit will be refundable. The credit will phase-out as AGI exceeds $80,000 for singles and $160,000 for joint filers. The credit applies for 2009 and 2010. I expect this credit would replace the existing education tax credits and the above-the-line deduction for tuition and fees.

* Eliminate the obligation to repay the First-Time Home Buyer Credit on home purchases made after January 1, 2009. The credit would have to be recaptured if the home is sold within three (3) years of purchase.

* Increase and extend through 2010 the residential energy credits that were recently extended for tax year 2009.

The bill would also extend the 50% bonus depreciation and increased Section 179 expensing limit and phase-out threshold through tax year 2009 and extend the net operating loss carryback period from two (2) to five (5) years for 2008 and 2009.

Just a reminder – more refundable tax credits = increased tax fraud.

So what do you think?

TO ITEMIZE OR NOT TO ITEMIZE

It does not pay to itemize unless the total amount of your allowable deductions exceeds the standard deduction that applies to your filing status, plus any additions for age or blindness.

For 2008 The Standard Deduction amounts are:

· $ 5,450.00 for Single
· $10,900.00 for Married Filing Joint Return and Qualifying Widow(er)
· $ 8,000.00 for Head of Household
· $ 5,450.00 for Married Filing Separate Return

The additional standard deduction amounts for age 65 and older and/or blind are:

· $1,350.00 for Single and Head of Household
· $1,050.00 for for Married (Joint and Separate) and Qualifying Widow(er)

The standard deduction for a dependent is the greater of $900.00 or the sum of $300.00 and the dependent's earned income, not to exceed $5,450.00 (plus $1,350.00 if age 65 or blind).

For the first time taxpayers who do not itemize can deduct as an additional standard deduction up to $500 ($1,000 if Married Filing Joint) for Real Estate Taxes paid on the 2008 Form 1040 (or 1040A). You would indicate that you are including this additional amount in your Standard Deduction by checking Box 39c on Form 1040 or Box 23c on Form 1040A.

So if you are a married couple filing a joint return and the total of your allowable itemized deductions for 2008 are $10,500 you are better off my claiming the standard deduction. However be sure you are aware of all the “itemizeable” deductions to which you are entitled before making the decision. Various online resources provide information on what you can and cannot deduct. For example there is “Itemized Deductions: Lower Your Taxes by Claiming Tax Deductions” from William Perez at about.com. I have written two special reports that discuss medical and charitable deductions – click here. You may want to review the issue with your tax professional.

Even if you are not normally able to itemize you should keep good records of all your “itemizeable” deductions during the year. You never know if a special situation will push you “over the top”.

There are situations where even if your total allowable deductions do not exceed your standard deduction you may still elect to itemize.

If you are a victim of the dreaded Alternative Minimum Tax (AMT) the standard deduction is not allowed. However, you can deduct medical expenses in excess of 10% of your AGI, mortgage and home equity interest on borrowings used to buy, build or improve your primary or qualified second home, charitable contributions, casualty and theft losses, gambling losses, and certain other Schedule A items in calculating the Alternative Minimum Tax, but you must itemize under “regular” income tax to be able to do so.

Itemizing with less than the standard deduction could, in certain instances, provide a tax-savings on your state income tax return.

In the case of a married couple filing separate returns, if one spouse itemizes on his or her separate return, the other spouse must also itemize.

TTFN

Saturday, January 17, 2009

NO LONGER MYSTIFIED

Just a quick note to let you know that my post on “The Most Important Advice You Will Receive This Tax Season” is in Raag Vamdatt’s “Financial Planning Demystified Carnival” Issue 17.

Check it out!

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

* It is great when this kind of advice comes from a non-tax personal finance blog. In her post “Should You Trust Your Broker” at OUT OF DEBT CHRISTIAN (Restoring Your Finances and Your Faith) Kathryn advices, “Talk with your tax accountant before making any moves with your money. The broker may THINK he knows tax law but things could have changed. It is best to talk with the tax expert before making decisions that affect your taxes.” Remember - a stock broker is just a salesman who makes his/her living by selling. No sale - no income.

* Fellow twit, and fellow tax blogger, Michael Rozbruch “turned me on” to an article from the Washington Post titled, “Don’t Wait for Obama to Cut Your Taxes”. It provides some good advice and resources.

* The TAXGIRL does not take week-ends off (actually none of “us” do this time of the year). Last Saturday she provided a good answer to a common question in “Ask the taxgirl: 1099 for Closed Business”.

* Kelly answers another oft asked question in “Ask the taxgirl: Running As Fast As I Can”. Her correct answer points up another inequity in the Tax Code – another instance where the taxpayer must bend over. Income is reported on Page 1, increasing AGI, but related deductions claimed on Schedule A (lost to non-itemizers) as “miscellaneous” subject to the 2% of AGI exclusion. To be fair only excess hobby income should be reported on Page 1.
.
And an aside about runners - I have never seen a runner with a smile on his/her face. They all look like they are in pain. Isn't walking, or riding a bike, a much better and safer form of exercise?
.
* Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG reports that “House Ways and Means Committee Chairman Charles Rangel has held on for a convincing victory in our 2008 Taxpayer of the Year voting”.

* From the “I couldn’t have said it better” file – Kay Bell said it all when she pointed out “From the get-go, the lack of oversight in administering the Troubled Asset Relief Program (TARP) has made every bailout handout a very unfunny, and egregiously costly, joke. And since Congress opened up the bailout door so wide, then who's to stop any legal business form seeking relief?” in her post “Next In Bailout Line: Porn” at DON’T MESS WITH TAXES.

* Kay has also provides a good basic overview of the many educational tax benefits that are available in her post “Rags, Riches and College Costs

* TAXPROF Paul Caron quotes from the Wall Street Journal to tell us “Obama Plans to Keep Estate Tax” -

President-elect Barack Obama and congressional leaders plan to move soon to block the estate tax from disappearing in 2010.

Under the Obama plan detailed during the campaign, the estate tax would be locked in permanently at the rate and exemption levels that took effect this year. That would exempt estates of $3.5 million -- $7 million for couples -- from any taxation
.”

*Jeff Rose provides a good answer to ”Reader Question #4- Can I Take a Tax Loss on My Kids 529 Plans?” over at GOOD FINANCIAL CENTS (Helping you make “cents” of your investments).

Jeff smartly ends his answer with, “be sure to speak with your tax advisor just to make sure”.

* An AccountantsWorld.com article reports “Americans Failing Taxes 101”.

A survey by of all people The Tax Institute at H&R Block indicates that “most can't answer even the most basic tax questions correctly . . . the majority doesn't know a credit from a deduction”. Duh! Hey – it seems that many Americans have something in common with H+R Block tax preparers!

*WebCPA reports that “IRS May Expand Enforcement During Tax Processing” and pay closer attention to returns claiming the Child and Dependent Care Credit and Earned Income Credit while in the course of the initial processing of returns.

* The weekly NATP member email newsletter reports-

The IRS has announced that victims of the severe storms and flooding on December 10, 2008, in the city and county of Honolulu, have more time to make tax payments and file returns. As a result, the IRS is postponing certain deadlines for taxpayers who reside or have a business in the disaster area until February 9, 2009. The postponement applies to return filing, tax payment, and certain other time-sensitive acts otherwise due between December 10, 2008, and February 9, 2009.”

* We have a winner – actually two. Peter Pappas of THE TAX LAWYER’S BLOG reports the results of his online poll in “Worst Tax Cheat Poll Results Final: Kiss Your Sister, We Have a Tie”.

* It appears that BO’s proposed economic “stimulus” package will include some individual tax breaks - Among them, according to the press release by Charles Rangel for the House Ways & Means Committee, the following:

· refundable tax credit of $500 per worker/$1000 per couple (up to $200,000 income)
· expansion of EITC
· expansion of child tax credit
· simplification of education credits and making the credit partially refundable
· turning the $7,500 loan for first time home buyers during 2008 into a subsidy (no repayment requirement)
· increased expensing for businesses
· increased bonus depreciation for businesses
· increased (5-year) carryback of net operating losses for businesses
· "prospective" repeal of Treasury's illegal section 382 ruling (Notice 2008-83).
· annual one-year AMT fix {I added this to list – rdf}

More and expanded refundable credits – great! The mouths of tax-fraud scammers are most certainly watering.

I will provide more information when available.

TTFN

Friday, January 16, 2009

SELF EMPLOYMENT TAX VS FICA TAX

It seems that Tim Geithner, BO’s choice for Secretary of the Treasury, has replaced Joe the Plumber as the most talked-about taxpayer (or in this case – tax non-payer) of the moment. Geithner’s situation has brought attention to the issue of the Self-Employment Tax.

All workers are required to pay into the Social Security system – unless you work for the government or some non-profit organizations. Employees have FICA (Social Security and Medicare) Tax withheld from their wages. Employers must match the amount withheld. Individuals with “net earnings from self-employment” pay the Self-Employment Tax – which is actually FICA Tax. However they must pay “both halves” of the FICA tax (the equivalent of the employee’s share and the employer’s share).
.
Where a W-2 employee pays 7.65% of wages (up to the statutory maximum – at which point they pay 1.45% on the excess earnings) a self-employed individual pays 15.3% (up to the same maximum – at which point they pay 2.9% on the excess).

In reality self-employed individuals actually pay only 14.13% on “net earnings from self-employment”, as the 15.3% is only applied to 92.35% of their net Schedule E (or K-1) earnings. Plus they are allowed an “above-the-line” deduction for ½ of their Self-Employment Tax – so the actual effective tax rate depends on their federal income tax rate. taking into account the 50% self-employment tax adjustment to income, the “effective” cost of your self-employment tax is –

* 15% Bracket = 13.07%
* 25% Bracket = 12.36%
* 28% Bracket = 12.15%

The “Fix The Tax Code Friday” topic at Kelly Phillips Erb’s TAXGIRL blog today is “Fix the Tax Code Friday: SE Tax”. She asks the question – “Should self-employed persons be allowed to opt out of paying self employment tax (and thus, collecting Social Security benefits and the like)?”.

In my comment on the question submitted at TAXGIRL I said that “My answer is yes – but only if “normal” W-2 employees were similarly able to “opt out” of Social Security. As long as one class of worker is required to participate it should be mandatory for all classes.

I also support private Social Security accounts – not invested in the stock market, but in the money market or Treasury securities market.”

If I was able to invest all the money that I paid into the Social Security system over the years, and all future payments, in a 5% money market account or bank CD I would have a lot more money at retirement than I will be collecting from Social Security.

In addition – if I apply for Social Security and get my first check and then drop dead the next day, all the money I paid into the system will not go to my beneficiaries but to other SS recipients. All the money will be lost! If I had instead invested the money in a private account the balance would pass on to my sister and other relatives.

My comment goes on to say – “The self-employment tax calculation should be corrected to bring it in line with the treatment allowed a one-man corporation. In a one man corporation all employee benefits provided to the owner, like health insurance and pension contributions, reduce {the money available to pay} the owner’s salary. FICA tax is only assessed on the actual salary.

With a self-employed individual, the SE tax is imposed on net profit of the business before deducting the self-employed health insurance premiums and pension contributions for the self-employed person and the ½ of SE tax.

Owner health insurance premiums and pension contributions should be Schedule C deductions and not adjustments to income.”

In the case of two self-employed individuals with the exact same income and expenses – one filing Schedule C and one incorporated – the Schedule C filer will pay a lot more in Self-Employment Tax than the incorporated business owner will pay in employee and employer FICA tax. Is that fair?

So how would you answer Kelly’s question – and what do you think of my suggestions?

MORE HELP IN CHOOSING A TAX PRO

In yesterday’s post “What To Do” I talked about how to go about choosing a tax professional.

One criteria I mentioned was that you should look for a tax pro who is experienced in preparing returns for taxpayers who are in the same trade or profession. Police officers, fire fighters, doctors, nurses, teachers, outside salesmen, actors, etc should look for preparers who are familiar with the specific tax deductions and benefits that are unique to police officers, fire fighters, doctors, etc.

Similarly, if you have your own business you should seek a pro experienced in the intricacies of your type of business. Are you a service business? Do you have a retail operation? Do you manufacture a product?

I also suggested that perhaps you should look at the various tax bloggers as possible “candidates”. From their posts you should be able to get an idea of their knowledge, expertise, ethics, individual “specialities”, and availability.

In today’s world you do not need to find a tax pro located in your neighborhood. While most of the clients I have today started out that way, with either me or my mentor, as they move around the state and around the nation they continue to mail their tax “stuff” to me each season because of the relationship that has built up over the years. I have 1040 clients all over the US.

I remember during my early years as an apprentice we would get a package each year from the Netherlands. One of my mentor’s clients had retired there but still sent us the “stuff” for her US tax return.

With the economy in recession and layoffs increasing, millions of Americans are turning to the Internet to earn extra income, some even replacing their full-time jobs with businesses created solely online. The web has seen a huge increase in bloggers, eBay sellers, affiliate marketers, service providers and other online businesses in the last year.

Such an online business is unique. Individuals with such a business need to find a tax professional familiar with PayPal, shopping carts, eBay reports and other items that are unique to these online businesses. This type of business is relatively new, and most local tax preparers, however competent and experienced with general business taxation, are not very familiar with its ins and outs.

The result is that many online business owners are not getting the advice they seek, and many are overpaying their taxes simply because they, and many preparers, don’t know what expenses they can deduct and other strategies they can use to minimize their taxes.

If I may be allowed to make a recommendation: My fellow taxblogger Kristine McKinley of Lees Summit MO - a CPA, a Certified Financial Planner, the founding principal of Beacon Financial Advisors, LLC and author of the blog EBIZ TAX TIPS, offers tax advice for U.S. taxpayers who have income earned from online businesses such as eBay, blogging, affiliate marketing, etc.

Kristine has been providing tax preparation and advice to individuals and small business owners for 15 years. She can provide online business owners with help in understanding the tax rules regarding online income, and provide answers to questions such as:

* How do I report my online or 1099 income?
* What expenses can I deduct?
* What is the best business structure for my company?
* Do I need to make estimated tax payments?
* How can I minimize the taxes I pay on my online income?

You can contact Kristine at
kristine@internetbiztaxtips.com. Tell her The Wandering Tax Pro sent you!

TTFN

Thursday, January 15, 2009

AS THE CONGRESS TURNS

Today’s daily CCH Tax Newsletter reports in “Stimulus Package Negotiations Nearing Completion” that Congress is considering adding the annual one-year dreaded AMT patch to the next “stimulus” package.

Senate Finance Committee member Charles E. Schumer, D-N.Y., told reporters on January 14 that adding a one-year patch for the alternative minimum tax (AMT) to the stimulus package is still under consideration . . . Baucus acknowledged the same a day earlier, telling reporters that the AMT patch is ‘still on the table’.”

On one hand it would be good to get it over with early in the year – so we do not have to wait until the last minute as in past years.

But passing a one-year patch so early in the year means that Congress will probably not be dealing with the issue of repealing the mucking fess altogether in 2009.

Knowing Congress I suppose I should be happy to get what I can. Extending the annual fix process now is better than nothing – and better than dragging it out all year again. Hopefully Congress will seriously address the issue of repeal in 2010, which now appears will be the big year for Tax Code overhaul.

TTFN