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)

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

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.
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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".
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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

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 available.

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.

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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.

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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.
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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.
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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.
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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?
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TTFN

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!

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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.

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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

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?”
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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.

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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,

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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?

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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.

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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

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.

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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.”

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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

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

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My two cents -

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* A big two thumbs up to #s 2 and 3.

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* I have no problem with 1, 6, 7, 8, 10, and 13.

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* I think $5,000 is too much in #4, but I am glad to see that any increase would not be refundable.

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* I don’t think the repeal should be permanent, although I would support increasing the age re: #5.

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* I would rather see the creation of a “dividends paid deduction” re: #9.

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* 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.

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* I would rather see a total overhaul of the depreciation deduction re: #12.

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* Maybe 5 years re: #14.

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What thrills me most about this proposal is – NO REFUNDABLE CREDITS!

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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

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 -

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* 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.

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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.

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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.

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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.

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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.

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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.

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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”.

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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.

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TTFN

REASONS TO CELEBRATE

Americans have two reasons to celebrate today. ..

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First of all we can celebrate the fact that George W Bush is gone!

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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.
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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.

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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!

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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

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

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.

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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?

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* 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

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).

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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

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

WHAT TO DO!

An anonymous reader has made a good point in a comment to my posting “Tradition”.

After agreeing with my assessment of CPAs and Henry and Richard (“You have me convinced that going to H+R is a bad idea. . . I used them twice and both time was underwhelmed with their ability to advice me on lowering my tax liability”) the reader correctly points out –

“What your post (good though it was) did not deliver was any advice on how to actually find someone who could be relied upon to help me pay the lowest of tax each year without risking imprisonment.”

So after spending two posts telling you how not to choose a tax preparer here is my advice on how to find a preparer.

As with any other professional person – doctor, dentist, stockbroker, insurance broker – the best resource for finding a good tax pro is personal referral.

While you certainly should not solicit or accept actual tax advice from family, friends or co-workers, you can ask your family members and friends who they use, how long they have been going, how much they pay, and about their level of satisfaction with the service.

Your co-workers are also a good source, as you want to find someone who is experienced in preparing the 1040s of individuals in the same trade or profession as you. If you are a police officer, fire fighter, teacher, nurse, salesman, actor, writer, etc look for a preparer who is experienced with the returns of those in your field and familiar with the special deductions available to your particular profession.

If this does not yield a good result you should look for an EA (although having that designation is not a requirement for a good tax pro) and/or a member of one of the tax professsional associations like the National Association of Tax Professionals. You can be sure an EA is knowledgeable in the Tax Code and current on recent changes. NATP, and its many state chapters, offer members superior continuing education opportunities on federal and state income taxes, informative weekly, monthly and quarterly tax publications, and the availability of an excellent Research Department.

You can look for an EA in your area at the website of the National Association of Enrolled Agents. Click on “Find An Enrolled Agent” under “For Taxpayers” in the left margin. The National Association of Tax Professionals provides a directory of members at www.taxprofessionals.com.

A word of advice – while you do want to get some kind of idea as to what your returns will cost, do not make your very first question to a potential preparer, “How Much Do You Charge?”. While an important criteria, the cost of the return is not necessarily as important as the competence, knowledge, experience, ethics of and qualify of service provided by the preparer.

You do want to make sure the cost is “appropriate” for the service. You don’t want to pay gourmet restaurant prices for fast food service (as you do with H+R and others of that ilk) – or pay $400 for a return that should only cost $150 - but is inflated due to the excessive overhead costs of the preparing firm (you know what I mean). Similarly you do not want to choose a preparer only because he gives you the lowest “quote”.

An honest preparer will not be able to tell you the exact cost of your returns without actually knowing just what is involved. But he can give you a general idea of the range and provide you with a fee schedule or explain how his fees are determined (i.e. hourly rate, per Form/Schedule fee, or combination thereof). Obviously the more complicated the return the higher the fee – and the more organized and knowledgeable you are the lower the fee.

I have found over the years that whenever a potential client tells me “Oh, it’s a simple return” it never is!

You may also want to consider my fellow tax bloggers who practice in your area. While I do not use TWTP to solicit new business, many bloggers do. By reading a selection of their posts you can get an idea of their competence, experience and ethics.

So now you know both how not to and how to go about choosing a qualified, competent and ethical tax professional to help you navigate the maze that is the Tax Code and make sure you pay the absolute least amount of federal and state income tax possible.

Any more questions?

TTFN

BETTER LATE THAN LATER!

Russ Fox reports in TAXABLE TALK, as other bloggers have done recently, that “Tax Season May Start In Mid-February This Year”.

Russ points out -

“The IRS announced in Notice 2009-11 that investment companies and brokerage firms will be considered in compliance with the law if they furnish their 1099s by Tuesday, February 17, 2009. That's a postmark deadline so it's likely that many individuals won't receive their statements until the following week.

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Congress made the change in the law last year when they passed the Energy Improvement and Extension Act of 2008. This law extended the deadline for mailing out 1099-B's and "consolidated reporting statements" from January 31st to February 15th. The 15th is a Sunday, the 16th is President's Day, so the deadline this year is on the 17th.”

Last tax season Congress delayed the start of processing filed tax returns by waiting too long to pass the annual dreaded AMT fix (the AMT is dreaded - not the fix). This tax season we can’t even start to prepare many tax returns until late February because of Congress. What do they have against tax professionals?

To be honest – this deadline change will not really make the 2009 tax filing season any worse than past seasons. As Russ mentions, in the years since Congress allowed “qualified” dividends to be taxed at the special lower capital gains rates most brokerage firms have sent out one or more “corrected” Consolidated 1099 Statements – the final one sometimes as late as mid-March.

I do believe that several brokerage houses requested a special dispensation from the IRS to delay issued these statements until Feb 15th last year to avoid having to issue a corrected statement.

I have no idea why the software of these brokerages cannot compute the correct numbers in time to issue a correct statement the first time around by January 31st.

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To be honest I would rather firms would send out an original correct 1099 statement a few weeks late than have to hold off until March to begin work on an involved 1040 because of the “wait and see” if a corrected (or another corrected) 1099 statement will arrive.

BTW – thanks Russ for the mention of my “Tradition” advice in your post “Selecting a Professional Tax Preparer”.

RIGHT ON!

I want to bring your attention to a recent post from a fellow tax blogger, Chad Bordeaux of PERIODIC RAMBLINGS OF A CPA, which falls into the category of “I couldn’t have said it better myself”.

“President Elect Obama: Stop the Tax Code Lie” echoes what I have been saying for years.

In the post Chad explains, quite correctly, that (the highlights are mine) “a third of all taxpayers pay no income tax - projected to increase to 44% under President-Elect Obama's plan {according to a report from the Tax Foundation – rdf}. The reason for this disparity in what people believe and what is actually true dates back to the initial passing of the Earned Income Tax Credit in 1975, and its massive expansion in 1990 and 1993.

Touted as one of the top anti-poverty programs in the country, the Earned Income Tax Credit is no more than a massive government welfare and wealth redistribution system - kept on the down-low from most Americans. It is not obvious because it isn't called "welfare." It is called a "tax refund." I hate to tell Congress, but a refund is only a refund up to the amount that someone paid. Anything else, if NOT A REFUND, is welfare. Currently, taxpayers that paid no income tax (zero, zilch, nada) can receive a "refund" of up to $4,825. [Not a typo].

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I am not here to argue whether these people need the money or whether or not the poor should be helped or anything related. My issue is simple. The government needs to stop lying to the American public by funneling these massive welfare payments through the tax code. If the welfare is needed, open up the debate on whether or not welfare is needed and stop hiding it in the tax code.

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Also, the biggest area of tax fraud - by far - is related to the Earned Income Tax Credit. Approximately 1/3 of all returns containing an earned Income Tax Credit is flawed, resulting in billions of dollars in lost funds to the government (ultimately taxpayers). If someone wants these welfare payments, let them apply for welfare. Most of these people are already on food stamps and receive assistance already. Let the Department of Health & Human Services sort this out and let us actually see from a budgetary standpoint, the true cost of welfare in this country. What is the government hiding here?

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President-Elect Obama has promised a vast expansion in refundable tax credits such as the earned income tax credit. Personally, I think it is time we stopped the lie. I am not against people who need help getting help, but I am against lying to Americans to get it done.”

Bordeaux points out that “this lie has been going on during the Ford Era, the Reagan Era, the Bush I Era, the Clinton Era, and the Bush II Era. Obama did not start the lie”.

As I said in my post “Obama The Red Menace” (I was being facetious – and making a Broadway reference) –

“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.

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.”

I also said – “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 just don’t believe these concepts should not be incorporated into the Tax Code.

So what do you think?

TTFN

WHAT NOT TO DO!

Here is some advice on what not to do when looking for a tax professional-

* Do not use a tax preparer who guarantees you a bigger refund, or who guarantees a refund period. No tax preparer anywhere can guarantee you a refund if your individual facts and circumstances - your actual numbers - do not warrant a refund, unless he/she makes up deductions or exemptions or purposely does not report all your income. Either way that is tax fraud! The only claim or guarantee any legitimate tax preparer can make is that by using his/her services you will pay the absolute least amount of federal and state income taxes possible for your individual situation.

* Do not use a tax preparer who charges as his/her fee a percentage of your refund or of the amount of tax he/she has saved you. Chances are the person will illegally inflate your refund or savings to increase his/her fee. The fee for preparing a tax return should be based solely on the amount of time involved and/or the number of forms and schedules required.

* Do not use a tax preparer solely for the reason that he/she tells you that you can walk out of the office with a check in your hand. That person or firm is not selling competent and accurate tax preparation – they are selling usurious Refund Anticipation Loans, which you should avoid anyway. You want to use a tax preparer that is experienced and knowledgeable in tax law and not a loan shark.

* Do not use a tax preparer who will not sign your finished returns. All tax preparers are required by the IRS to sign all tax returns which they have been paid to prepare. If a person prepares your return and refuses to sign it you should refuse to pay him/her and take your “stuff” elsewhere.

* Do not use a “box” as a substitute for a tax preparer. I know I have said it before, but I cannot stress this strongly enough - no tax preparation software is a substitute for knowledge of the Tax Code. And no tax preparation software is a substitute for the services of a trained tax professional! As with any software program the rule is “garbage in - garbage out”. And when the IRS comes after you for errors on your tax return you can’t blame it on the software - the US Tax Court has on two separate occasions rejected the “Turbo-Tax Defense”.

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The IRS estimates that do-it-yourself software users spend an average of 10 to over 20 hours longer on a return than if they used a paid tax preparer, depending on complexity of the return. The bottom line is - if you don’t know what you are doing do not rely on a tax preparation software package to make up for your lack of tax knowledge. Using a real live tax professional will save you time, aggravation and money.

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* And finally (I know I basically just said this yesterday – but it bears repeating) do not use any of the “fast food” tax preparation chains. Period! You will, without a doubt, pay too much – and that may be the least of your problems!

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So now you know what not to do!

Oh yes, and do not ask me to prepare your return. I am not accepting any new clients.

TTFN

CARNIVAL TIME

It appears my posting on “The Most Important Advice You Will Receive This Tax Season” appeared in the TAXES category in Saturday’s “Carnival of Financial Planning - January 10 2009” Edition compiled by the Skilled Investor.

And my “2008 Tax Year In Review” post appeared in the “Carnival of Financial Planning - January 3 2009 Edition”.

Both posts appear in the January 11th “Carnival of Wealth, Money and Life” at DOLLAR FRUGAL (Staying Frugal One Dollar at a Time) under “Money”.

I thought that Blog Carnival hosts would email those who are included in the Carnival to let them know of their good fortune. Kay Bell always has with the Tax Carnival. With all the above Carnivals I didn’t learn of in inclusion from the host but from my own “wanderings”.

BTW – Nothing to do with Carnivals, but my Post Office contact was wrong. The basic 2008 federal income tax forms (1040, 1040A, 1040EZ) and the 1040 instruction book was available this morning at my local PO branch – and with better paper quality than the forms I had grabbed at the IRS! Wonnerful! Wonnerful!

TRADITION

It is time for the annual presentation of one of my favorite posts of all time – the one in which I tell you that when it comes to choosing a tax professional “Don’t Assume”!

Do you remember the old episode of tv’s ODD COUPLE when Felix explains to Oscar what happens when you assume? We all must know by now that when you assume you make an ass of u (you) and me!

1) Do not assume that because a person has the initials “CPA” after his name he is an expert when it comes to federal and state income taxes.

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The CPA designation means that a person took a very difficult test at the beginning of his/her career, possibly many, many years ago, only a small part of which dealt with federal income tax. It is no guarantee that he/she is current on federal and state tax law.

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Whenever I get a new client I ask to see the last three (3) years’ tax returns, to make sure I do not miss any carry-forwards and to see if there are any errors that I could correct on an amended return. In my 37 years of preparing tax returns I have found more mistakes on 1040s prepared by CPAs than by any other class of preparer, including the taxpayer himself.

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Many, many, many years ago (late 1970s) I was a “para-professional” in the Small Business Services Department of one of the then “Big Eight” accounting firms (Deloitte Haskins + Sells). While reviewing the prior year’s federal and state tax returns of a client whose current returns I was preparing I found a very obvious error on the New York State tax return that caused the client to pay much more tax than necessary. Under the firm’s policy, the return, which had been originally prepared by a CPA, was reviewed by his “manager” (also a CPA), and signed-off on by the head of the department (a CPA) and a member of the Tax Department (a CPA). Not one of these CPAs picked up the obvious error!

Needless to say I prepared an amended state return for the client. I have no doubt that the firm charged the client for my time to fix their error!

A student in one of the tax planning/preparation courses I taught at local adult schools, also many, many years ago, asked me what was the difference between a tax return prepared by a CPA and one prepared by me (I am obviously not a CPA). My answer was “at least $100.00″ (that number needs to be substantially adjusted for inflation!).

As I have posted a couple of times lately, I am sick and tired of the media, and the unwashed masses, assuming that only a CPA can prepare tax returns. This is a huge misconception – and it must be dispelled ASAP! I wish every article or report appearing in the next 4 months would replace the phrase, “check with your CPA” with “check with your tax preparer”!

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FYI - the only initials that have any meaning when it comes to tax preparation are “EA” – Enrolled Agent (I am also not an “EA”). The name is misleading. An EA is not an agent of the Internal Revenue Service, but a private tax professional who is “enrolled” to act as a taxpayer’s “agent” in proceedings with the IRS and in tax court. To become an Enrolled Agent one must pass a difficult test that is 100% federal tax law. In order to maintain their enrolled status, EAs must have a mandatory number of continuing education credits in taxation each year.

2) Also do not assume that H+R Block (or other “fast food” tax preparation chains such as Jackson Hewitt or Liberty) will charge a reduced, or even reasonable, fee for preparing your tax return.

When my mentor and I got a hold of the H+R Block fee schedule back in the late 1980s we were in complete shock. Henry and Richard ain’t cheap! In my opinion they are very expensive, especially considering the value of the service provided. They charge gourmet restaurant prices for fast food service! Plus they will attempt to squeeze even more money out of you by trying to push you into a usurious “Refund Anticipation Loan” or to make your IRA contribution to a Block-sponsored high-fee, low-yield investment that is practically guaranteed to lose money.

It appears that H+R has to charge outrageous fees in order to pay the costs of the many legal settlements and court judgments they have been faced with over the years. A new settlement was announced just recently (see last Saturday’s WHAT’S THE BUZZ post).

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There are a multitude of reasons why you should not have your tax return prepared by representatives of Henry and Richard or other firms of their ilk. Their excessive fee is only one. Returns prepared by commercial chains, particularly H+R, are second to CPAs in terms of errors I have discovered on 1040s over the years. My mentor always said that he wished H+R Block would move next door to our office - we would make a fortune fixing their mistakes!

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A couple of years ago the Government Accountability Office (GAO) conducted a study which resulted in a report to Congress titled “Paid Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors”. The GAO sent undercover agents with two different tax scenarios to a total of 19 offices of 5 “fast-food” commercial tax chains, including H+R Block, in a metropolitan area. In only 2 instances was the correct refund calculated, but all 19 returns contained errors. A similar undercover operation was conducted last February and March by the office of the Treasury Inspector General for Tax Administration (TIGTA) with similar results.

To be perfectly fair, over the years I have come across CPAs who actually knew their “stuff” when it came to income taxes, and even some who charged somewhat reasonable fees. Several of my fellow tax bloggers have the initials CPA after their name, and, judging by their blogs, they certainly are very knowledgeable, quite savvy in fact, in federal income taxes. But in my experience these are the exception that proves the rule. And I am sure that there must be a couple of competent, professional and ethical H+R Block preparers out there somewhere – although you couldn’t prove it by me.

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While it may actually be possible that the best tax preparer, at the best price, for your particular situation is either a CPA or an H+R Block employee, this is only because of the education, experience, ability, temperament, and other factors that are specific to that individual preparer and nothing whatsoever to do with their designation or employer.

Any comments?

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

While you are reading this installment of WHAT’S THE BUZZ I will be at the New Jersey Chapter of the National Association of Tax Professionals annual NJ State Tax Seminar. I will report on the seminar at TWTP early next week.

* The Tax Foundation has been doing a series of posts over the past two weeks on individual state tax budgets at its TAX POLICY BLOG. Click here to find all the state posts in one place and look up your state.

* I have always wondered why blind taxpayers have been chosen for an additional exemption (the old days) or (now) additional itemized deduction and not individuals with other disabilities. I imagined the following scenario: A bill needed the vote of a particular Congressman to pass. That Congressman’s wife, or brother or child, was blind. Thus the vote was purchased.

Kay Bell’s post “Tax Considerations of Blind Filers” at DON’T MESS WITH TAXES led me to the 4/12/2005 item “When Did the Blind Get a Tax Break?” by Daniel Engbar at Slate.com which gives an informative history of the special tax break for the blind.

* Our favorite TAXGIRL Kelly Phillips Erb has announced her Third Annual “Tax Filing Horror Story Contest” in her post “Hate To File Taxes? Tell Me About It”.

“Have a horrible tax filing story? Car break down blocks from the post office? Ran out of paper in the printer? Dog ate your return?

Tell me your worst tax filing story - or simply complain about the thing you hate most about filing taxes - and win some great stuff.”

Ten (10) randomly-selected winners will receive a free “TurboTax Deluxe”. Disappointing prize – although Kelly has promised to possibly throw in some much more desireable TAXGIRL merchandise.

I certainly don’t want TurboTax (of absolutely no use to me) – but I may enter a story anyway.

Make sure to check out the stories in the comments section – I especially like the “horror story” from Eric (the highlights are mine) –

“I usually do them by hand. I hate that it takes 4+ hours to do it, filling in line by line.Last year I had a change of situation (early retirement w/401 K withdrawals using IRS rule 72T) and paid over $300.00 to a famous large tax preparing chain to do it for me. What I got was someone who just filled it out on a computer, reading instructions line by line and every so often shouting out “Oh Lordy!” when she came to a situation she never saw before. She had no more expertise than I did. Talk about frustrating. I’m going back to do it myself this year. What I observed last year in the storefront office last year was that this company is really no longer a tax preparation business but rather a loan company, because they were really pushing their refund anticipation loans to all the poor customers who came in & left the time I was there.”

Can you guess where Eric went last year?

* Speaking of TAXGIRL, Kelly answers an interesting question (actually one I have never heard before in 35+ years) from a reader presumably from Hawaii in her post “Ask the Taxgirl: Responsibility to Ensure Independent Contractor Files?”

* I don’t want this to become an “All-TAXGIRL” post – but Kelly was certainly on a roll this week! She provides good coverage to an oft-asked question in her post “Ask the Taxgirl: Girl Scout Cookies”. And she follows it with news that the IRS may really becoming “kinder and gentler” after all in “Delinquent Taxpayers Get Sympathy from an Unexpected Source”.

BTW, Kelly is the latest member in my Taxbloggers Group at Yahoo! Groups. Fellow taxbloggers are welcome to join – click here.

* Have you received a bill for P+I (penalty and interest) from your “Uncle Sam”? All is not lost. Check out taxguy Bruce’s post “How to Avoid IRS Penalties and Interest”.

I do take exception, however, with one piece of advice in the post. Be sure to read my comment.

* Bruce begins his tax season blogging hiatus earlier than I do. Friday was his final “live” post for “the duration” – “Episode #113”.

The post gives excellent advice – “the single most important thing for you is that I believe you need a tax professional in your corner”.

We look forward to the return of taxguy after the end of the tax season!

* Ever wonder why Henry and Richard charge so much? Here is one reason – an AccountantsWorld.com item reports that “H & R Block To Settle Marketing Case For $4.85. Million”. This is the latest in a long line of settlements made by H+R over the past few years. One excellent result of the settlement – “The agreement prohibits H & R Block from selling the so-called refund-anticipation loans as early tax refunds”, at least in California.

* Taking a cue from Joe Kristan and Russ Fox, who select an annual tax cheat of the year, Peter Pappas has introduced his own “Online Poll: Who’s the Worst Tax Cheat in American History” over at THE TAX LAWYER’S BLOG.

Peter offers five (5) nominees – only 1 historical. You should vote for your choice of the 5, and provide some alternatives as a comment.

* Peter also gives a good reason why he is against any kind of federal tax increase in his post “Tax Vox Proposal: Hire More IRS Agents to Close Tax Gap” –

“I hereby renew my vow never to favor a tax increase of any kind until two things occur:

1. The government eliminates or seriously curtails waste; and
2. It substantially closes the tax gap.

Analogy: What would you do if your 15 year old son asked you to raise his allowance from $50 per month to $100 per month if you knew that he flushed $20 dollars of his monthly stipend down the toilet?”

Well said, my friend!

* As you probably know by now, the “Housing Assistance Tax Act of 2008” messed up a bit the Section 121 exclusion of up to $250,000 or $500,000 in gain from the sale of a personal residence. William Perez at About.com discusses the new rules for “Modified Home Sale Exclusion for Non-Qualifying Use” that became effective January 1, 2009.

* Joe Kristan tells us “What to Really Watch Out For When Selecting a Preparer” over at the ROTH AND COMPANY TAX UPDATE BLOG.

BTW – Joe also reports that good old Chuck Rangel is the front-runner for his 2008 Taxpayer of the Year award in his post “Rangel Showing Real Leadership” {for a change – rdf}. Voting has ended and I expect Joe will announce the winner on Monday.

* Oi vey! The federal deficit is how much?!? The TAXVOX blog tells us at “CBO’s Rosy Scenario”.

TTFN

HERE COME THE TAX SEASON ADS

Well they have started – the tax season television ads I mean.

Once again Turbo Tax ads lie and tell you that using their tax preparation software is “easy”. Let’s face it – taxes ain’t easy. If they were there would not be 1 Million + professional preparers out there. To say that using a specific tax software package makes a complicated subject easy for the uninitiated is nonsense!

I suppose it could be easy, but that does not mean that it will be accurate or prepare a correct return with the least possible tax if you don’t know the tax law. Remember the basic rule of software - Garbage In–Garbage Out.

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I say it each year, actually several times a year – no software package is a substitute for knowledge of the Tax Code, and no tax software package is a substitute for a competent, experienced tax professional.

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The ads for Henry and Richard so far stress the fact that if you go to H+R Block you have “people”. Big deal. People like this you don’t need! I will take a competent, experienced, ethical “person” over H+R’s “people” any day.

One of Henry and Richard’s ads touts the “paystub RAL”. Bring your last paystub for 2008 to H+R and walk out with a check for $1,000!

No ethical preparer will suggest that he/she can tell if you will be getting a tax refund solely by looking at your final paystub. So you could end up owing money to Uncle Sam, your state, and Henry and Richard (in addition to their excessive fee) when the final return is prepared.

Refund Anticipation Loans (RALs) in general are bad – and paystub RALs are much worse. If you need money that bad take a cash advance from your credit card. It will probably be expensive, but I doubt it will be as expensive as getting a RAL from H+R, Jackson Hewitt, Liberty, or any of the other “fast food” chains.

Ignore all these tax season ads and seek out a real, competent, experienced, ethical tax professional who you will be able to ask questions face-to-face and, more important, have him/her ask you questions. You will certainly save time and aggravation, and you will be a lot more sure that the finished returns are done correctly and accurately, and that you are paying the least amount of federal and state tax possible under the law, than if you did them yourself using tax software.

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If you need to find a tax professional in your area you can go to www.taxprofessionals.com. Don’t come to me – I do not need any more 1040 clients.

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TTFN

A LITTLE THIS-A AND A LITTLE THAT-A – WITH THE EMPHASIS ON THE LATTA

A few items that I felt worth commenting on:

* I made my first tax forms run this morning – and was surprised to find all the 2008 federal tax forms and schedules available at the local IRS office! I do believe this is the earliest in January that they have been available in several years.

I did good this morning, stocking up on 1040As, Cs, Ds, and Es – though I will need to make several more trips in the next two weeks to get enough 1040s, Schedule As (there were not many available this morning) and the various “numbered” forms (i.e. 2106, 8606). I will also need more Ds and a large handful of D-1s – these are the Schedules I always run out of each year. For the less frequently used numbered forms I download what I need when I need it from the IRS website.

It looks like I will be limited to raiding IRS offices this year. While at the PO this morning I asked my contact if the tax forms had arrived yet and was told that he thinks the PO will not be getting tax forms for public distribution this year!

I didn’t see any NJ books at the IRS – I hope they will be forthcoming.

The word from New York is that IT-201 and IT-203 booklets, with forms and instructions, will no longer be mailed out to taxpayers. So I have to order my NYS tax forms and schedules from the NY Department of Taxation and Finance and pay for them – which includes a minimum $20 processing fee!

I recall fondly back during my first years as an apprentice tax preparer when I would drive to a federal warehouse in Newark with a suitcase and fill it up with federal tax forms and schedules!

* In case you haven’t noticed it – my sitemeter has exceeded the 100,000 mark! I had hoped to reach this milestone by the end of 2008 – but fell a couple of thousand short.

This means that I have had over 100,000 individual visitors to TWTP since I signed up for the sitemeter service shortly after returning to Blogger.com as my host in December of 2006.

Congratulations to me!

* There was a discussion on the radio this morning about the government coming in and limiting the dollar amount of salary and bonus that can be paid to corporate top management. Just thought I would add my 2 cents.

As a general rule I do not think that the government should have any say in the amount of executive compensation that can be paid. What I do think is that the IRS should possibly be allowed to do what they do with the owners of closely-held corporations – determine that a payment is “excessive compensation” and reclassify a portion as dividends, thus making a part of the payment subject to “double taxation”. Why should this concept apply only to private companies?

The IRS is not saying that the corporation cannot pay the individual what it deems appropriate, only that any payments that are considered to be excessive within the context of the individual facts and circumstances will be taxed more heavily.

I also firmly believe -

(1) It should be legislated that top-level executive compensation above a certain minimum standard, which is indexed for inflation, must be approved by at least a 60% majority vote of all stockholders at an annual meeting, either via proxy or in person, and that any bonus or other excess compensation be made only out of corporate earnings and profits.

(2) In a situation where the government provides taxpayers’ money to a corporation (such as with the current bail-outs) either as a loan, the purchase of an equity interest, or a flat out gift it has the right, and the obligation, to protect its “investment” by limiting top-level executive compensation. Uncle Sam must be able to say, “Here is $10 Billion to keep your business from going under. You can use the money for a, b, and c, but you damn well cannot give a penny of it as salary or bonus to your CEO or other corporate officers!”

* The conversation also covered whether the government should bail-out any industry for any reason, in light of the recent announcement that Larry Flynt is going to Washington to ask Congress to bail out the porn industry.

For one, I agree with TAXGIRL Kelly Phillips Erb when she says in today’s post “It’s rare that I find myself in Larry Flynt’s corner but today I do. I get the absurdity of it all - which is exactly the conversation that he’s trying to start.” I do believe that LF has his tongue in his cheek with this action – although if Congress is stupid enough to give the porn industry money (other than what they have already given as individual consumers of the product) he will certainly take the money and run.

Kelly goes on to echo my sentiments – “The string of bailouts at the expense of taxpayers. . . is making us weary. The numbers are starting to blur. What’s $5 billion anymore? We don’t even blink at those kind of numbers now that Congress is handing out $700 billion ‘virtually no strings attached’ checks - remember, that’s our money. Ours.”

I do not believe any corporation or industry should be bailed-out for any reason. Period! Unless, perhaps, it can be shown that direct government action or requirements caused the corporation or industry’s losses. If a business or industry chooses greed over common sense and prudence then they deserve to go under. That is capitalism. Only then will business and industry in general learn any lessons. The old phrase from the 50’s “What’s Good for General Motors is Good for the USA” be damned!

I do like Kelly’s final word on the subject of bailing out the porn industry – “So maybe we should spend it on things that make us happy - the folks at AIG certainly did.”

* In the AS THE CONGRESS TURNS category – the CCH daily headline email newsletter reports today that “Senate Democrats Outline 2009 Legislative Agenda”.

The Democrats pledged that “middle-class tax relief would come in the form of increased college tuition tax credits and elder care credits, tax breaks for the purchase of college textbooks and, to enhance savings, an increase in the allowable IRA contributions”.

On the environmental front, “Democrats plan to invest heavily in renewable energy and energy efficiency through tax credits aimed at business owners”.

There will also be “a heavy emphasis on affordable health care, with promises to lower costs, protect existing coverage and extend coverage to the some 46 million Americans who have none”.

I can’t find much to argue about in these lofty goals. We will just have to wait and see what Congress will do in the next few months.

Your comments on any of the above items are welcome!

TAXPAYER ADVOCATE ISSUES REPORT TO CONGRESS

National Taxpayer Advocate Nina E. Olson released her annual report to Congress yesterday, stating that the complexity of the Tax Code is the most serious problem facing taxpayers.

Last January’s report listed “the frequency and magnitude of late-year changes to the tax code” – i.e the irresponsibility of Congress - as the most serious problem facing taxpayers.

In discussing tax complexity the report estimates that U.S. taxpayers spend $193 billion a year complying with income tax requirements, an amount that equals 14 percent of the total amount of income taxes collected. One count shows the number of words in the Tax Code has reached 3.7 million, and over the past eight years, changes to the tax code have been made at a rate of more than one a day – including more than 500 changes in 2008 alone. Individual taxpayers now find the tax rules so overwhelming that about 62% pay a preparer to do the job and another 22% purchase tax software.

Here is one example cited in the report of how complex the current tax system is. The Tax Code provides tax breaks to encourage taxpayers to save for education and retirement. However, the number of such tax incentives has grown to at least 27 and the eligibility requirements, definitions of common terms, income-level thresholds, phase-out ranges and inflation adjustments vary among the provisions. This complexity undermines the intent of the incentives, as taxpayers can only respond to incentives if they know they exist and understand them.

The report includes a series of legislative recommendations #1 of which is to repeal the dreaded Alternative Minimum Tax (AMT). Other recommendations include streamlining education and retirement savings tax incentives, simplifying the family status provisions of the tax code, simplifying the rules under which workers are classified as employees or independent contractors, reducing sunset and phase-out provisions, and revising the overall penalty structure

Nina also wants to “place self-employed taxpayers on an equal footing with their wage-earning counterparts” by allowing the Self-Employed Health Insurance Deduction to reduce net earnings from self-employment - and therefore reduce self-employment tax, and to allow the mileage deduction for charitable travel to be adjusted annually by the IRS, as is currently the case with the standard mileage allowance for business, medical and moving travel. As it now stands Congress sets the charitable standard mileage allowance, and has not raised it in several years (current rate = 14 cents per mile).

She continues to call for Congress to regulate “unenrolled” tax. The report notes that 62 percent of taxpayers use preparers, yet anyone can now be a “preparer” – with no training, no licensing and no oversight required.

I wholeheartedly agree with all of the above listed legislative recommendations. I also support registration of unenrolled tax preparers - I am just against requiring all unenrolled tax preparers - regardless of years of experience - to take a test to be registered, as is called for in current pending legislation.

Do you think Congress will listen?

BOGITMO!

Tax time is almost here. To celebrate the ROBERT D FLACH TAX PLANNING INSTITUTE is offering a special BOGITMO sale!

BUY ONE of my special tax planning and preparation reports or compilations and GIT MORE at half price!

Here are the titles you have to choose from –

DEDUCTING CONTRIBUTIONS

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DEDUCTING MEDICAL EXPENSES ON YOUR 2008 FOR 1040 or

DEDUCTING MEDICAL EXPENSES ON YOUR 2008 FORM NJ-1040

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MY BEST TAX ADVICE

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SCHEDULE C TAX FORMS AND WORKSHEETS

Plus with every order of $4.00 or more you will receive as a free gift THE BOOK OF TAX LISTS – a special report of tax related lists.

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You can have the reports send in print form via postal mail or via email as a “pdf” attachment (note Schedule C Tax Forms and Worksheets sent by email only).

And a reminder for fellow tax professionals – I also have available an extensive set of TAX PROFESSIONAL FORMS, SCHEDULES AND WORKSHEETS (sent via email only) for only $5.00. Click here and here for more info.

Click here to order your reports.

ASK THE TAX PRO - UNUSED FLEXIBLE SPENDING ACCOUNT CONTRIBUTIONS

Q. What happens to money left behind in the FSA? I lost track of time and left $1000 behind in my FSA account. Ok, so I lose and it's a forfeit. Any chance I can deduct the monies left behind?

A. You cannot claim a “loss” or miscellaneous itemized deduction for unused, or forfeited, FSA monies.

The monies you contributed to your FSA, including the $1,000 that was forfeited, have already been deducted on your tax return. The total amount of wages that are paid into a Flexible Spending Account reduces the taxable federal wages reported in Box 1 of your Form W-2.

If you contributed $5,000 of your wages to the FSA then your “take home pay” and your federal taxable wages (and possibly state taxable wages) are reduced by $5,000. If your gross wages are $100,000 the W-2 will show $95,000. If you only submitted $4,000 in expenses then you have indeed suffered an economic loss of $1,000 – but it is income that was not taxed.

All is not lost. Under the new rules for Flexible Spending Accounts you have until March 15th of 2009 to submit expenses against FSA monies contributed for tax year 2008 – if your plan so permits. This applies to both medical expense and dependent care FSAs.

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So there is still time to use the $1,000 balance in your 2008 account!

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TTFN

THIS JUST IN

An update on this morning’s post –

In her post “Obama Proposes Tax Cuts: What’s In It For You?” TAXGIRL Kelly Phillips Erb tells us –

“The tax cuts that are being considered would equal $500 a year for working individuals and $1,000 for working couples. The cuts would be in the form of a payroll tax credit. That’s good news for workers because it’s an immediate benefit - no wait for IRS checks. Employers will make the adjustment during the year by reducing federal tax withholding; workers not subject to withholding will likely be able to apply for a refund at the end of the tax year. And yes, there will likely be phaseouts and caps - meaning at an as yet unmentioned income level, the credits would be reduced or not apply. Whispers are that the income level cap will be around $200,000 but don’t hold me to it.”

Way to go BO! Finally – a way to put money immediately in the hands of Americans without using tax rebate checks! It is similar to the “payroll tax holiday” that had been proposed, and about which I posted, in the past.

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This method is simple and inexpensive. The cost to the government is minimal, as the money will be distributed by employers in the form of increased take-home pay. There will be some additional work for the IRS, as I expect the Form 941 for at least the 1st Quarter of 2009 will need to he adjusted, but certainly not the excessive burden caused by last year’s rebate check program.

I trust that self-employed individuals will be allowed a similar $500 credit on the 2009 Form 1040 – so that they can reduce their quarterly estimated tax payment for the first quarter by $500.

It is touted as a “payroll tax credit”. My question is - Is it a credit against federal income tax or against actual payroll tax (FICA and self-employment tax)? I will be interested to see just how the mechanics of this credit will work, both now and on the 2009 Form 1040.

As Kelly points out, “Don’t get too excited just yet. These are just proposed cuts.” But I expect that BO will not have a major problem getting his “stimulus” package passed.

What do you think of this idea?

WHAT TO EXPECT TAXWISE IN 2009

What can we expect in the tax arena for 2009?

We already know that individuals age 70½ and older will not have to take a “Required Minimum Distribution” from their pension plan or account (401k, 403b, 457, IRA, Keogh) in 2009 (although there is nothing stopping them from doing so if they wish). For more detailed information check out TAXGIRL Kelly Phillips Erb’s post “Retirement Account Rules Tweaked for 2009”

Since Barack Obama will be our next President let’s look at his campaign’s tax proposals.

The Democratic tax plank called for elimination of all income taxes for seniors making less than $50,000 per year, expanding existing refundable credits and creating new ones, directing the IRS to send pre-filled tax forms to 40 million workers who take the standard deduction and have a bank account and have them simply sign and return it with any tax due, and reverse the Bush tax cuts on the ‘wealthy”. Obama as a candidate also called for increasing the current special tax rate on capital gains and qualified dividends.

A Washington Post article titled “Obama Tax Cuts Likely Soon: Senior Adviser Says Middle Class Needs 'Some Relief Now'” reports that Obama “Senior Aide” David Axelrod told the Sunday morning political talk shows at the end of 2008 that BO’s economic “stimulus” package will include an immediate tax cut for “middle-class” families. The parameters of “middle class” in this context were not identified, although the $250,000 figure that Obama used during the campaign was mentioned elsewhere.

Axelrod expects that the stimulus plan will be ready soon after BO’s Jan. 20 inauguration, so tax “relief” for the target could begin early in 2009.

The article states that the President-Elect “is considering immediate tax cuts of $1,000 for couples and $500 for individuals, which would be delivered through reduced tax withholding from paychecks”. Permanent tax cuts for the “middle class” (here is where the $250,000 figure was evoked) will be included in next year’s budget proposal, but just exactly what these cuts will look like is not yet known. Chances are here is where the $50,000 exclusion for seniors and refundable tax credits might show up.

When asked if BO will reverse the Bush tax cuts on the “wealthiest” Axelrod replied, "Whether it expires or whether we repeal it a little bit early, we'll determine later, but it's going to go." This is, I believe, the first we have heard about the cuts just “expiring” at the end of 2010. I doubt if 2009 tax legislation will see an increase in the top brackets.

Considering the state of the economy I also do not think that BO will increase taxes on capital gains (if there indeed are any capital gains in 2009) or dividends.

While the initial “stimulus” package passed in 2009 will probably not contain any substantial tax changes, other than the $500 and $1,000 tax cut discussed above, I do think there will be a major tax bill by mid-year.

I would hope that any 2009 legislation will address once and for all the issue of the dreaded Alternative Minimum Tax by completely doing away with the abomination, as the Democrats attempted to do with Chuck Rangel’s mis-named “mother of all tax reforms” back in the fall of 2007. If nothing else the very least Congress should do is to enact a permanent “fix” instead of having to vote in a one-year temporary patch at the end of each year.

Along the same lines Congress should also eliminate the need for an “extender” of certain tax breaks every year or so. The concept of having to constantly vote to extend targeted tax breaks is ridiculous. I am talking about the adjustments to income for educator expenses and qualified tuition and fees, the option to deduct state and local sales tax instead of state and local income tax, the ability to make a tax-free direct transfer from a pension account to a charity, and other temporary tax breaks that are included in the annual, or semi-annual, “extender” bill. If Congress thinks these tax breaks are a good idea they should make them permanent.

While the tax portion of the 2008 Democratic Platform did include some token introductory comments on the complexity of the Tax Code, don’t look for any tax simplification moves in 2009. If anything the Tax Code will become even more complicated. If the first “Bail Out” bill is any indication, the bill introduced in early 2009 will probably also include a sh_tload of extraneous pork.

No matter what happens 2009 will be an “interesting” year for taxes - to say the least.

So what do you think BO and Congress will do to the Tax Code in 2009?

TTFN

THE FIRST TAX CARNIVAL OF 2009!

The first Tax Carnival of 2009 is now up at DON’T MESS WITH TAXES – “Tax Carnival #45: Happy New Tax Year!” Kay was almost a day late, but certainly not a dollar short.

My post on 2008 – THE TAX YEAR IN REVIEW ends the carnival.

While I have your attention – be sure to go to the ROTH AND COMPANY TAX UPDATE BLOG and vote for the “2008 TAXPAYER OF THE YEAR”. I will tell you who I voted for after the winner has been announced!

IT’S THAT TIME OF YEAR AGAIN

It is time for me to point you to my “suite” of year-beginning posts. In these posts I tell you how to start the year off right and how to get ready for your annual tax appointment.

As you would expect, the various amounts for exemptions, standard deductions, etc in these posts apply to tax year in which they were written. You can find the appropriate 2008 amounts on the WHAT’S NEW FOR 2008 Page of my website www.robertdflach.net.

STARTING THE YEAR OFF RIGHT –

You should be very careful about item #5. I only recommend this if you have sufficient financial discipline. While this is solid tax advice – it could have disastrous results.

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If you’ve changed your name in 2008 (for example due to marriage or divorce) remember mismatched names and SSNs on your tax return can delay your refund. Click here to find out what to do.
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GETTING READY TO PREPARE YOUR RETURN –

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The deadline for sending out certain information returns has been pushed back beginning this year. The real deadline is Feb. 15. The affected forms are:

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* 1099-B (Proceeds from Broker and Barter Exchange Transactions)
* 1099-S (proceeds from Real Estate Transactions), and
* 1099-MISC (Miscellaneous Income). For the 1099-MISC, the 2/15 date applies only if any substitute payments in lieu of dividends and tax-exempt interest, or payments to attorneys are reported on the form. Otherwise, the usual deadlines apply.

A reminder for taxpayers who have brokerage accounts - Because of the rules and rates for “qualified” dividends that have been in effect since 2004, you should again this year receive at least one “Corrected” 1099 statement. Wait a few weeks after receiving the original 1099 information before giving your “stuff” to your preparer.

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A bank may issue one Form 1099-INT for all the accounts – savings, money market and CDs – that belong to the same name and Social Security number. There may be 6 or 7 accounts listed on a 1099-INT. It is important to verify each account listed on the form to make sure all of them belong to you. One of my clients received a 1099-INT last year with someone else’s account, that earned $300+ interest, included in the listing! Had he not carefully checked the form he would have paid close to $100.00 in unnecessary federal and state income tax. If you find an error on a Form 1099-INT go to the bank immediately and request a corrected form.

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Another reminder – According to Internal Revenue Service Revenue Ruling 69-184 you cannot be both a partner in and an employee of the same partnership. A partner cannot receive a salary from the partnership, and should not be given a W-2. If you are a partner who received “guaranteed payments” in 2007 but you receive a 2007 Form W-2 from the partnership you should go to the partnership’s accounting firm, tell them that they FU-ed. Check out my January 2006 post “EMPLOYEE OR PARTNER – THAT IS THE QUESTION”.

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WHAT TO GIVE YOUR TAX PREPARER- PART I and PART II -

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FYI there is a new online location for my WHAT I NEED Page

If you received an economic “stimulus” rebate check in 2008 the IRS will be sending you a notice that indicates the amount received. Make sure to include this notice in the “stuff” you give your tax professional. He/she needs to know how much of a rebate you got.

Retired Policemen and Firefighters need to provide your tax pro with the amount withheld from your pension for the year for health insurance premiums. This was new for 2007 and still applies for 2008.

If you purchased a personal residence in 2009 give your preparer a copy of both sides of the Closing/Settlement Statement. You may be entitled to a special refundable tax credit of up to $7,500 (actually a loan from IRS).

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As you are gathering your “stuff” to hand over to your preparer it is a good time to review the new stricter documentation rules for cash contributions that started with 2007 donations. Check out my post “NEW RULES FOR CASH CONTRIBUTIONS.”

SOME ADVICE FOR PREPARING YOUR TAX RETURN

This advice, for 2007 and 2006 returns, still applies to your 2008 Form 1040.

Any questions?

TTFN

WHAT’S THE BUZZ? TELL ME WHAT’S A HAPPENNIN’ – SPECIAL SUNDAY EDITION

Here are some BUZZ items that either I missed or came out too late to be included in yesterday’s regular weekly edition -

* Peter Pappas tells us that the best advice a tax pro can give a client in labor during the last hours of the year is “PUSH!” in his post “Great Tax Planning Advice: ‘Push!’” at THE TAX LAWYER’S BLOG.

I pity the poor parents whose children greeted the world in the first seconds of 2009 – look at how much money they lost!

This post shows that you should not only consult your tax pro regarding specific tax issues - but with life issues as well (i.e. when to marry, when to have kids)!

* Howard Gleckman announces “TaxVox’s Lump of Coal Award: The Ten Worst Ideas of 2008” at the Tax Policy Center’s blog.

I do agree with most, especially #6 (“Patching, but not fixing, the AMT”) and #7 (“The TARP. A $750 billion blank check”). I also agree that “Fred Thompson’s plan to allow people to pick their own tax system” is a bad idea. My complaint is about the ability to choose – I thought the alternative tax system that one could chose “instead of” the current mucking fess was worth looking into as a “stand alone” tax system.

My pick for the worst tax idea of 2008 would probably be Obama’s proposal to direct the IRS to send pre-filled tax forms to 40 million workers who take the standard deduction and have a bank account with the income and tax liability already calculated; recipients would simply have to sign and return it with any pre-calculated tax due. I am not being selfish – this idea is bad for all parties involved, including the government. Check out my reasons at “A Very Bad Idea”.

* Speaking of the worst ideas of 2008, Dan Meyer at TICK MARKS tells us that banks beneficiaries of the bail out either cannot or will not answer the question “Where Da Tax Bailout Dollars Go?". Check out the various responses to the question from different banks.

As Dan points out, “the old adage of ‘haste makes waste’ was proved again”. Or, as I like to put it, another example of Congress reacting instead of responding to an issue.

* TAX PROF Paul Caron tells us that Chuck Rangel is in trouble again in his post “Rangel Sought $10 Million Contribution From AIG, Then Approved Subpart F Exception Benefiting AIG”. The post title tells it all.

* Russ Fox provides us with a good example of how the IRS is diligent in collecting outstanding balances in his post “Do I Owe 5¢ Or Am I Owed 4¢?” at TAXABLE TALK. Apparently no balance due is too small for the IRS to chase – every nickel counts!

* Jim of BLUEPRINT FOR FINANCIAL PROSPERITY calls our attention to “Obama’s American Recovery and Reinvestment Plan: Economic Recovery Plan Details”, which were discussed in a radio address yesterday. The plan includes – “and provide tax breaks to American workers”. You can watch the 4-minute address or download a text copy at Jim’s post.

TTFN

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

* Bob Williams provides some “Holiday Cheer” at TAXVOX, the blog of the Tax Policy Center. Check out his version of “My Favorite Things” from THE SOUND OF MUSIC.

* TAXGIRL Kelly Phillips Erb discusses the new rules for RMDs (required minimum distributions from pension accounts and plans) for 2009 in her post “Retirement Account Rules Tweaked for 2009".

* Kelly also continues her series on state taxes with “State Tax Primer from A to W: Arkansas”.

* While it is too late for this post from Kelly to do any good for 2008 now, she prefaces her “23 Ways to Cut Your 2008 Business Income Tax Bill” with the most excellent advice that applies any time of the year – “The best course of action is to always check with your tax professional for more information”.

Her #23 is also “timeless” (the highlight is mine) – “Hire a tax professional. This is simply one of the best investments that you can make. Yeah, it sounds self-serving, but I’m totally serious. It may not save you money immediately - but it will in the long run.”

* An article from the home page of Mail.com tells us that “Time Running Out for Honda Hybrid Tax Credits”. Hey look, the author of the article is Kay Bell!

* Gina deals with a surprisingly common misconception in answering a question about a traditional to ROTH conversion in her post “IRA to Roth Rollover” at the TAX TIPS BLOG.

* According to the Tax Foundation’s TAX POLICY BLOG “WSJ Columnist Cites Our State & Local Tax Studies, Urges Obama Not to Repeat New Jersey's Mistakes”.

The post tells us that a Wall Street Journal columnist urges President-Elect Obama to make a specific New Year's resolution: "I will not allow America to become New Jersey."

Great advice! As many sources, including the Tax Foundation, continually point out the Garden State is among the most highly taxed, if not actually #1, states in the US. The columnist rightfully calls New Jersey "the perfect bad example".

*The IRS has issued Fact Sheet 2008-27 highlighting recent tax law changes made by the Heartland Disaster Tax Relief Act of 2008 for victims of the severe storms, flooding, and tornadoes that occurred in Arkansas, Illinois, Indiana, Iowa, Kansas, Michigan, Missouri, Minnesota, Nebraska, and Wisconsin (the Midwestern disaster area) where the government declared a disaster during the period beginning May 20, 2008, and ending July 31, 2008.

* Russ Fox of TAXABLE TALK has announced the winner of the “2008 Tax Offender of the Year”. As Russ puts it, “To be considered for the Tax Offender of the Year award, you must do more than cheat on your taxes. It has to be special; it really needs to be a Bozo-like action or actions.” No, the winner is not the guy who hired the hit man to kill his IRS auditor. Check it out.

* Sorry I missed this Christmas item in last week’s BUZZ. Last week I told you about Peter Pappas’ tax-related version of “Twas the The Night Before Christmas”. Here, from TAX PROF Paul Caron, is “'Twas the Night Before Christmas, Legal Version”.

* The Yellow Rose of Taxes, Kay Bell, discusses how your date of birth affects your tax return in her post “The Jan. 1 Effect on Your Taxes”. One of the items she points out is that, “You are considered 65 on the day before your 65th birthday. So if your 65th birthday is today, Jan. 1, 2009, in the eyes of the IRS you were age 65 in 2008.”

* Bruce the taxguy starts 2009 off. And I end this week’s BUZZ, with “New Stuff at the IRS”. I am looking forward to being able to access the “My IRS Account” pages of my clients. Now when will the IRS provide free online filing of 1040s and 1040As at their website, as NJ does with NJWebFile? That is what they will have to do to get me to file federal tax returns “electronically”.

TTFN

THE MOST IMPORTANT ADVICE YOU WILL RECEIVE THIS TAX SEASON!

During the next three and 1/2 months – the traditional tax filing season – you will be bombarded with free tax advice from the various media. My clients are constantly including cut-out articles from newspapers and magazines with the tax “stuff” they give me.

You will also no doubt be getting unsolicited tax advice from your brother-in-law, your cousin Manny, your auto mechanic, your insurance broker, and various and sundry neighbors and co-workers.

It is very important that you understand that the value of any tax advice, strategy or technique depends on the specific “facts and circumstances” of your individual situation. Some advice may apply to you and some may not.

It is also very important that you understand when it comes to federal and state income taxes your brother-in-law, cousin, auto mechanic, insurance broker, neighbors and co-workers most likely don’t know their arse from a hole in the ground!

Because of this it is vital that before you act on any free advice you read about in a newspaper or magazine, see mentioned on tv or the radio, or receive from a friend, relative or co-worker you consult a competent tax professional.

You will not receive any more important tax advice than this during the coming season - or at any time during the year!

TTFN

HAPPY NEW YEAR ! ! !

WELCOME TO 2009 ! ! !