Tuesday, November 30, 2010

TAX HISTORY

While I am in Maryland visiting with my uncle here is a brief history of the US income tax:

1643: The colony of New Plymouth, Massachusetts levies the first recorded income tax in America.

1861: Congress passed the first income tax law as an emergency measure to fund the Civil War.

1872: Congress repeals the income tax law.

1894: As a response to complaints that excessive reliance on tariffs as a source of revenue resulted in an increase in the cost of imported goods, Congress again passed an income tax law.

1895: The US Supreme Court ruled that the income tax law was unconstitutional.

1913: In February the 16th Amendment, which states "Congress shall have the power to lay and collect tax on incomes, from whatever sources derived, without apportionment among the several states, and without regard to any census or enumeration", was ratified by the necessary 3/4 of the states. On October 3rd Congress passed the Revenue Act of 1913, which created the first permanent US income tax.

Under this act, the first $3000 of income for single persons and $4000 for married couples was exempt from taxation. A "normal" tax of 1% was applied to income above $3000 or $4000, and a "super" tax of from 1-6% was applied to income in excess of $20,000. Deductions were allowed for business expenses (including depreciation), interest paid on "personal indebtedness", all national, state, county, school and municipal taxes paid, casualty losses, and worthless debt. In the first year only 1 out of every 271 American citizens were taxed and $28 Million in revenue was raised.

1916: The Federal Estate Tax was enacted to help generate additional revenue to fund America's anticipated entry into the first World War.

1917: Congress raised tax rates in response to the increasing cost of the war and approved credit for dependents and deductions for charitable contributions.

1918: The maximum combined basic and super income tax rate reached 77%.

1922: For the first time preferential tax treatment was provided for capital gains.

1932: The tax law was amended to provide that US presidents were liable for federal income tax on their salaries. Franklin Roosevelt was the first president since Abraham Lincoln to pay federal income tax on his presidential salary.

1935: The Social Security tax, 1% on the first $3000 of wages, was enacted.

1941: Tax tables for low-income taxpayers were introduced, simplifying the calculation of tax liability.

1942-1945: New tax laws, in response to the cost of World War 2, created withholding on wages, more tax brackets for lower income taxpayers, the standard deduction, a personal exemption for dependents, a deduction for medical expenses, and increased tax rates. By the end of the war the maximum tax rate was 94%.

1953: The Bureau of Internal Revenue becomes the Internal Revenue Service. And Robert D Flach, who would eventually become the internet's WANDERING TAX PRO, is born.

1954: Congress completely revised the Tax Code, changing rates, redefining Adjusted Gross Income, and adding credits for retirement income and dividends and new itemized deductions.

1961: Taxpayers were required to provide their Social Security or other taxpayer identification number to banks and other financial institutions so they could report interest and dividend payments to the IRS.

1964: Tax rates were reduced from a range of from 20% to 94% to from 16% to 77%. The Income Averaging method of tax computation was introduced.

1970: Congress created a Minimum Tax so high-income individuals could not completely avoid paying taxes through the use of preferential tax shelters, loopholes and deductions.

1972: Robert D Flach, who would later become the internet's WANDERING TAX PRO, prepares his first Form 1040 as a paid preparer.

1974: Congress created the deductible Individual Retirement Account (IRA) for taxpayers not covered by employer pension plans.

1975: Low-income taxpayers were allowed to claim a refundable Earned Income Credit (EIC).

1979: Unemployment compensation was made partially taxable.

1981: Tax legislation reduced tax rates by 25% over 3 years, indexed tax brackets for inflation, and applied the same tax rates to earned and unearned income.

1984: For the first time recipients of Social Security and Railroad Retirement benefits were subject to tax on up to 50% of the benefits received, depending on the recipient's income.

1986: The largest revision of the Tax Code since 1954, the Tax Reform Act of 1986, was enacted. The law reduced the number of tax brackets from 14 to 2, decreased the maximum tax rate from 50% to 28%, repealed the dividend exclusion, Income Averaging, the itemized deduction for sales tax paid and the preferential treatment of long-term capital gains, introduced the passive activity rules, the Kiddie Tax, the deduction from gross income for health insurance premiums paid by self-employed individuals, and the 2% of AGI limitation on most miscellaneous itemized deductions, phased out the itemized deduction for personal (credit card, auto loan, etc.) interest, limited the deduction for business meals and entertainment to 80%, and replaced the additional personal exemption s for age 65 and blind with an increased standard deduction.

1987: For the first time taxpayers were required to list the Social Security number of dependent children, age 5 and over.

1990: The Revenue Reconciliation Act of 1990 added a third tax bracket (31%) and instituted the reduction of itemized deductions and phase-out of personal exemptions for high-income taxpayers.

1993: The Omnibus Budget Reconciliation Act added the 36% and 39.6% tax brackets, increased the maximum tax on Social Security benefits from 50% to 85%, and reduced the deduction for business meals and entertaining from 80% to 50%.

1998: In response to abusive treatment of taxpayers by the Internal Revenue Service, the IRS Reform and Restructuring Act of 1998 was enacted.

2001: Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001, the largest tax cut in over 20 years, with 85 major provisions. All provisions of this act will expire in 2011. And Robert D Flach begins publishing THE WANDERING TAX PRO blog.

2003: To stimulate the economy, Congress passed the Jobs and Growth Tax Relief Reconciliation Act of 2003, the third major tax bill in as many years, and the third largest tax cut in history.

CLICK HERE TO DOWNLOAD A COPY OF THE 30-PAGE SPECIAL REPORT "SUMMARY OF MAJOR ENACTED TAX LEGISLATION FROM 1981-2006" BY THE TAX POLICY CENTER.

TTFN

Monday, November 29, 2010

GUEST POSTS WELCOME!

Over the past few months I have received several comments/emails from fellow personal finance writers and bloggers asking if I would accept a guest post for publication at THE WANDERING TAX PRO.

Guest post submissions are always welcome. Just send me an email with the post in a word document attachment. Posts must be on a federal or state (NJ or NY) income tax topic. A favorite topic is “What is the Best Tax Advice You Have Ever Received”.

For the most part, unless the topic is time sensitive, I will “stockpile” the post for use when it best suits my publishing schedule. I will notify the author via email in advance when the post will appear.

The copyright of the guest author will be respected, and I will not reprint any guest posts in another format without the author’s express permission.

Of course, I reserve the right to accept or reject the submission.

So those of you who have emailed me or submitted a comment requesting permission to submit a guest post – submit away!

SPEAKING OF TAXES

I am off to the Baltimore area to visit my uncle for a few days.

I thought you might enjoy reading some of my favorite quotes, in no particular order, about the federal income tax:

The nation should have a tax system that looks like someone designed it on purpose.” - William Simon

"As a citizen, you have an obligation to the country's tax system, but you also have an obligation to yourself to know your rights under the law and possible tax deductions -- and to claim every one of them." – Former IRS Commissioner Donald Alexander

The only difference between death and taxes is that death doesn't get worse every time Congress meets.” - Unknown

"The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing." - Jean-Baptiste Colbert

When a new source of taxation is found it never means, in practice, that an old source is abandoned. It merely means that the politicians have two ways of milking the taxpayer where they had only one before.” - H.L. Mencken

“A person doesn't know how much he has to be thankful for until he has to pay taxes on it.” ~Author Unknown

"Congress thinks it is a lot easier to trim the taxpayers than expenses." – Author Unknown

"It is the legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by any means which the law permits." - US Tax Court

"Our tax code is so complicated, we've made it nearly impossible for even the Internal Revenue Service to understand." – Former Treasury Secretary Paul O’Neill

"The hardest thing in the world to understand is the income tax." Albert Einstein

"The United States is the only country where it takes more brains to figure your taxes than to earn the money to pay it." Former Florida Senator Edward J Gurney

"A friend is one who takes you to lunch even if you're not tax deductible." – Jack Benny

"If Patrick Henry thought that taxation without representation was bad, he should see how bad it is with representation." - Farmer's Almanac

"The tax code last year included 2.8 million words. The Holy Bible itself has only about 775,000 words. Obviously, God did not need to issue such copious instructions for living as we currently have for complying with tax laws." – Senator Orrin Hatch

"The taxing power of government must be used to provide revenues for legitimate government purposes. It must not be used to regulate the economy or bring about social change." – Ronald Reagan

"A tax loophole is something that benefits the other guy. If it benefits you it is tax reform." – Former Senator Russell B Long

"I'm proud to be paying taxes in the United States. The only thing is - I could be just as proud for half the money." – Arthur Godfrey

"The income tax has made liars out of more Americans than golf." – Will Rogers

TTFN

Friday, November 26, 2010

BLACK FRIDAY SUGGESTIONS

Today is BLACK FRIDAY. How about buying some of my products today?

THE SCHEDULE C LETTER

ITEMIZED DEDUCTIONS: A COMPLETE GUIDE TO SCHEDULE A

TAX PROFESSIONALS FORMS, SCHEDULES AND WORKSHEETS

ANOTHER BROADWAY TRIVIA CONTEST!

While I have not received many responses to similar posts in the past – I thought I would try a Broadway Trivia Contest once again in lieu of BUZZ this holiday week-end.

The winner will receive a free copy of my THE 2010 edition of my special report “ITEMIZED DEDUCTIONS: A COMPLETE GUIDE TO SCHEDULE A”.

Rodgers and Hammerstein’s SOUTH PACIFIC was having a bit of trouble during its out of town try-outs. It appears the show was running a bit long. Thoughts were turned to how to trim a few minutes from the production.

Several suggestions were made to cut a little song from the 2nd Act. But Richard and Oscar would not have it – they were adamant in their support of this song. Their response was - if the song was cut they might as well close the show out of town. Since R+H were the producers the song remained.

What is that song?

You can provide your answer either via a comment to this post, or by sending an email, with BROADWAY TRIVIA CONTEST in the subject line, to rdftaxpro@yahoo.com.
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TTFN

Thursday, November 25, 2010

Wednesday, November 24, 2010

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

* As I usually begin each Wednesday BUZZ – be sure to check out Bruce the MISSOURI TAX GUY’s Sunday “Week In Perspective”. It is chock-a-block” with good stuff.
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* Bruce discusses the various options available if you owe your “Uncle Sam” and can’t pay in “Simple Solutions to IRS Tax Debt Problems”.And click on the “tax debt help” link at the end of the first paragraph for a detailed overview of the Offer In Compromise program.
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* Kelly Phillips Erb, everyone’s favorite TAX GIRL, suggests that “Snipes Saga Finally Over?”.
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ABC News is reporting that Wesley Snipes must now report to jail after his request for a new trial was denied by a federal judge.”
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Meanwhile fellow tax cheat Chuck Rangel is merely chastised by Congress and told to pay the IRS what he owes.
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* Kelly has announced her annual “12 Days of Charitable Giving 2010”, with a “twist”.
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This year, I’m asking readers to submit, via email to charity@taxgirl.com, the name of a charity that most deserves a boost this year. Ideally, it would be one that you have supported financially over the past year or that you plan to support before the year end. In addition to the name, I’ll need the city where the charity is located, what it does and why you support the charity (personal stories would be great). A link to the web site and the best way to make a donation would be terrific: the more information that you can provide, the better.”
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The deadline for nominations is November 30th at 11:59 pm.
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* Does the IRS have a check for you? IR-2010-113 reports that –
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The Internal Revenue Service is looking to return $164.6 million in undelivered refund checks. A total of 111,893 taxpayers are due one or more refund checks that could not be delivered because of mailing address errors.”
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Think you are one of the 111,893? “The best way for an individual to verify if she or he has a pending refund is going directly to IRS.gov and using the ‘Where’s My Refund?’ tool.”
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And the best way to avoid this kind of problem is to request that your refund be directly deposited to your checking or savings account.
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* TAX PROF Paul Caron treats us to “The 10 Highest State Income Tax Rates For 2011” from Forbes.
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New Jersey is #5 at 8.97%, which kicks in at $500,000 of income for both Married and Single filers. NJ is tied with New York and Vermont, both also with a top rate of 8.97%. NY also kicks in at $500,000, but Vermont kicks in at $379,150. NJ is a “gross” tax, while New York, and I expect also Vermont, follow the federal with regards to allowable losses and deductions. Hawaii and Oregon top the list with 11%.
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* The NATP’s TAXPRO WEEKLY email newsletter reports –
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A draft version of the 2010 Schedule SE is available on the IRS website. The revised form cleverly hides the deduction for a self-employed person’s health insurance as a subtraction to the Line 3 calculation. The deduction for health insurance for purposes of calculating self-employment tax is only permitted for 2010.”
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Click here to download the draft copy of the 2010 Schedule SE.
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* They say if it ain’t broke don’t fix it. Well the Form 1040X (Amended US Income Tax Return) wasn’t broke. It had remained virtually unchanged in format for as long as I can remember because it worked just fine as it was – a three column form where one would list the original information, the changes, and the corrected information. Well for some unknown reason the IRS (not Congress – I could understand it if it was Congress because they are idiots) changed the almost perfect 1040X in January of 2010 – making it a one-column form.
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Well now Trish McIntire tells us that the IRS has returned the 1040X back to its original format in her post “1040X Revised Again” at OUR TAXING TIMES.
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The IRS forms department apparently had nothing to do but sit around and twiddle their thumbs – they couldn’t work on the 2010 tax forms or instructions yet because of the irresponsibility of Congress – so they revisited the 1040X.Well for whatever reason – I am glad to have the old 1040X back again.
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Click here to the "new" old 1040X.
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* I join TAX PROF Paul Caron in welcoming a new blog to the “Tax Blogosphere” – TAX TIPS FOR POKER PLAYERS by tax attorney Brad Polizzano, aka TaxDood.
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According to Brad –
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With this blog, I intend to highlight the many tax issues a poker player should be aware of in order to properly report gambling earnings.”
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* Frequent TWTP commenter Peter Reilly discusses a few issues, including the regulation of tax preparers, in a post that is mainly about the Tax Court case concerning the crooks at Refunds Now Inc titled “Making A List And Checking It Twice” at PASSIVE ACTIVITIES AND OTHER OXYMORONS.
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The post includes the following comment on the idiocy of Refund Anticipation Loans (RALs) -
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Refund anticipation loans are a natural outgrowth of certain types of tax preparation businesses, once you get past the underlying financial irrationality. Somebody has, in effect, made a series of small non-interest bearing loans to the federal government. They then pay a usurious rate to get paid back a couple of weeks sooner. I think there is a sub-branch of microeconomics that studies phenomena like this. I'm sure it's not called stupinomics, but that would be a good name for it.”
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* I am sorry to hear that Dan Meyer is “Suspending Tick Marks”, a great blog on accounting and taxes (as I love to say – it has nothing to do with lyme disease).
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I thank Dan for his support of TWTP over the years, especially the inclusion in his “12 Blogs of Christmas” (which will be missed this year).
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Let’s hope that, as Dan says, it is only temporary and he returns to the “Tax Blogosphere” in mid-February of 2011. In the meantime I look forward to his comments on other tax blogs.
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Due to the holiday I doubt there will be enough BUZZ for a complete installment this coming Saturday – but we shall see.
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TTFN

Tuesday, November 23, 2010

DON'T ELIMINATE THESE DEDUCTIONS

Many of the tax reform proposals that are surfacing recommend eliminating the itemized deduction for local real estate and state and local income or sales taxes. Some also call for doing away with the deduction for mortgage interest; one wants to replace the deduction with a 15% credit.

I want to keep the deductions for state and local taxes and mortgage interest on acquisition debt.

We are well aware that a family living in New York, New Jersey or California with a combined annual income of $150,000 may just be getting by, or is barely comfortable, while a similar family residing elsewhere in the US can live like royalty on $150,000 per year. However the federal income tax system is geographically neutral - the tax rate schedules are the same no matter where in the US you live.

So it is possible that a family in middle America, with less actual dollars of earnings but a much higher disposable income and standard of living, is paying a smaller federal income tax than one with less disposable income, due to a much higher cost of living, in the Northeast.

The income is higher in certain regions of the country because the cost of living, including housing costs and state and local real estate, income and sales taxes, is much higher. The cost of a home is much higher in New Jersey than Kansas, and so are the state income taxes and local property taxes and corresponding mortgage interest.

The deductions for local real estate tax, state and local income or sales tax, and mortgage interest on acquisition debt are greater in New York, New Jersey, California, and other higher income states than in states with lower costs of living. The ability to claim these deductions helps to provide some degree of regional “equalization” and alleviate geographic tax “penalties”.

TTFN

Monday, November 22, 2010

ANOTHER DEFICIT REDUCTION REPORT

On the heels of the discussion draft issued by the co-chairmen of President Obama's National Commission on Fiscal Responsibility and Reform, the Bipartisan Policy Center’s Debt Reduction Task Force has issued “Restoring America’s Future” (click here for the full report or here for the Executive Summary), another comprehensive plan to solve debt crisis, create jobs, simplify taxes, and fix Social Security.

The Bipartisan Policy Center (BPC) is a non-profit organization that was established in 2007 by former Senate Majority Leaders Howard Baker, Tom Daschle, Bob Dole and George Mitchell to develop and promote solutions that can attract public support and political momentum in order to achieve real progress.

For purposes of this post I am only interested in the proposals for tax reform – and I look at the proposals from the point of view of making the Tax Code simpler and more fair.

In the introduction to the “Create a Simple, Pro-Growth Tax System” section the report discusses our current tax system –

The system is so complex that most taxpayers – even those with low incomes – now use either a professional tax preparer or tax software. The alternative minimum tax (AMT), initially designed to ensure that all high-income taxpayers paid some income tax, has become the poster child for the tax system’s failure, requiring Congress to enact annual and increasingly expensive temporary patches to prevent the AMT from ensnaring millions of middle class households (especially those with children) in a web of pointless complexity, high tax rates, and unfairness.”

The report proposes “a radically simplified income tax that will lower tax rates, broaden the base, and eliminate the need for millions of households to file tax returns”.

The proposals include –

* Replace the current graduated brackets of from 10% to 35% with two individual tax rates – 15% and 27%.

* Eliminate the Standard Deduction and all itemized deductions.

* Create a 15% credit for home mortgage interest on a principal residence of up to $25,000 and a 15% credit for charitable contributions, both “refundable”.

* Replace the personal exemption for children, Child Tax Credit, Earned Income Credit, Head of Household filing status, and Child and Dependent Care Credit with a universal credit of $1,600 per child, indexed to changes in the Consumer Price Index (CPI), and an earnings credit of 21.3% of the first $20,300 of earnings for each worker in the “tax unit” (I assume each spouse), also indexed to the CPI. If I read the report right I do believe the excess credits will be refundable in some manner.

*Eliminate or scale back all other “tax expenditures”.

* Limit combined individual and employer contributions to qualified retirement plans to 20% of annual earnings up to a maximum of $20,000 per year, indexed for inflation.

* Create a refundable savings credit for taxpayers in the 15% bracket.

* Eliminate the preferential rates on capital gains and dividends.

The two allowable credits discussed above, for mortgage interest and contributions, will not be provided to the taxpayer, but will go directly to the institutions. Mortgage lenders will apply for a tax credit, which will be passed through to homeowners as a 15% reduction in their home mortgage interest payments, and qualifying charities will apply to the IRS for a “matching grant” to supplement taxpayer contributions “so that for every $85 the taxpayer gives, the charity will receive another $15”.

The report also outlines curious rules so that the child credit discussed above is “automatic” and does not have to be requested each year.

The Task Force also calls for –

*A new “modest” 6.5% national Debt Reduction Sales Tax (DRST) to be phased-in over 2 years, and

* A temporary Social Security “payroll tax holiday” for all of 2011 that “excuses” employers and employees from paying the 12.4% Social Security tax (and presumable the appropriate portion of the “self-employment tax”). According to the report “the tax holiday will not impact the solvency of the {Social Security} Trust Funds, which will be reimbursed in full from general revenues at the same time that they would have received payments in the absence of the holiday”. The report suggests this will create between 2.5 and 7 Million new jobs.

While there is much worth discussing in the report I must continue to voice my strong opposition to any kind of “refundable credit” paid via a tax return.

I do somewhat like the concept of providing the benefit for mortgage interest via a reduction in the actual mortgage payment (much like I would have the benefit for education expenses provided via direct tuition grant), and am not totally against a “matching grant” approach to charitable contributions, and agree that they are worth looking into.

However the mechanics of it all is somewhat confusing. Would all mortgage holders apply for and receive a 15% federal “grant” for all first mortgages issued? How would it work with mortgages given or “taken back” by individual? And what about refinancing? Much of the “methodology” of the benefits provided in the report raise all kinds of “how to” questions.

Of the various proposals in the two reports I still think I would prefer to use the “zero base” option of BO’s Commission chairman as a starting point. I would initially eliminate all “tax expenditures” and add back to the Tax Code only those deductions that are absolutely appropriate - some kind of higher Standard Deduction, a higher personal exemption for dependents, and tax benefits for state income and real estate taxes, acquisition debt mortgage interest, charitable contributions, and perhaps employee business expenses. And I would provide any benefits for higher education, employment encouragement (EIC) and other items as direct payments or supplemental welfare checks (as discussed in Friday’s post).

So what do you think of this new report?

TTFN

Saturday, November 20, 2010

ITEMIZED DEDUCTIONS: A COMPLETE GUIDE TO SCHEDULE A

I have prepared a new comprehensive special report that discusses just about everything that is, and is not, deductible on the 2010 Schedule A.

In it I discuss –

 Deducting Medical Expenses,
 Deducting Taxes,
 Deducting Interest,
 Deducting Contributions,
 Deducting Casualty and Theft Losses, and
 Deducting Miscellaneous Deductions

It includes a special section on Keeping Track of Business Expenses and a baker’s dozen of forms, schedules and worksheets to help document and summarize and your 2010 itemized deductions.

I will also send you separately, via email, an update on changes to Schedule A for 2011 when the information becomes available.

Use this report to help prepare your year-end tax plan and to prepare your 2010 Form 1040 or get your 2010 “stuff” in order to give to your tax professional.

The cost is only $6.35, plus 1.98 postage and handling.

Order before the end of January and I will include a special report listing ONLINE TAX PLANNING AND PREPARATION RESOURCES.

Send your check or money order for $8.33, payable to TAXPRO SERVICES CORPORATION, and your name, postal address, and email address to –

TAXPRO SERVICES CORPORATION
ITEMIZED DEDUCTIONS
SUITE 304
72 VAN REIPEN AVENUE
JERSEY CITY NJ 07306-2806

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

* Joe Arsenault provides us with a “BlogRoll Beans ‘Almost’ Thanksgiving Addition” at CAFÉ TAX.

* TAX GIRL Kelly Phillips Erb brings us up-to-date on the “progress” of the much-needed tax legislation in the lame duck (aka lame arse) Congress in “Black Friday, Indeed, for Congress: Vote Looming

She tells us –

Democratic leaders met this week to talk turkey and decided on two things:

1. A vote on the Bush tax cuts won’t happen until after Thanksgiving; and
2. The Bush tax cuts will be extended for those making $250,000 or less.

And that’s all we have. That means there’s a lot, obviously, that we don’t know
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* Kay Bell touches on the same issue in “If Your First 2011 Paycheck is Smaller, Thank, er, Blame Congress” at DON’T MESS WITH TAXES.

Thanks to the irresponsibility of the cafones in Washington that Joe Kristan “affectionately” refers to as Congresscritters the 2011 withholding tables are still up in the air.

Kay explains why January paychecks will be smaller -

Why? Because the payroll withholding tables for 2011 that employers (or payroll companies that workplaces outsource the job to) are now based on what the law will be in January.

No, the IRS can't just take Congress' word that it will do it's job and make some final decisions on what the rates will be. Would you trust them to follow through, especially based on recent (and not so recent) history?

And the 2011 law means that there's no 10 percent income tax rate for anyone and highter tax rates for wealthier individuals.

The IRS does the work on these calculations in October or early November. The lead time is necessary to get the data to workplaces in time for them to implement them on Jan. 1.

But with the tax votes now pushed into December, expect to see your first 2011 paycheck withholding at the higher rates.

And that will mean a smaller paycheck (or two) when the coming year rolls in, even if Congress eventually extends all the tax cuts before Dec. 31
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* USA Today tells us that, as KPE predicted in a TAX GIRL post, “House Ethics Panel Votes to Censure N.Y. Democrat Rangel”.

So now, if the full House approves formal censure, Chuck will have to stand in front of Congress while it is announced to the world that he has been a bad boy. Big whoop!

And, oh yes, Chuck will have to pay the back taxes he cheated the government out of. It would seem to me that this should be a given in order to keep his seat.

The article points out that Rangel “failed to disclose assets and income in reports to Congress and failed to report and pay taxes to the IRS on rental income from his Caribbean vacation villa for 17 years”.

Kelly quotes the reaction of Rep. Michael McCaul (R-TX) in her post -

Failure to pay taxes for 17 years. What is that?

According to Blake Chisam, the House ethics panel's prosecutor, “No other House lawmaker has been found guilty of as many counts of rule-breaking by an ethics panel”.

Rangel is a crook and should be thrown out on his arse and forbidden from running for office again!

The moral of this story is that it is ok for Congresscritters to behave unethically, and even illegally, because even if they get caught they will not have to pay any consequences other than brief public embarrassment.

And, as an aside, nobody should be allowed to be elected to Congress for 40 years. There must be some kind of term limits for all elected officials.

* Rambling Beancounter Donna Bordeaux gives us a good overview of the “Small Business Health Care Tax Credit”, one of the currently effective provisions of the convoluted “health care reform” bill, at her firm’s blog.

One problem with this credit is that is does not cover the small business owner. Among the many things that Congress does not understand is the fact that many small business owners cannot afford to provide insurance for themselves or their families, let alone their employees.

TTFN

Friday, November 19, 2010

RESTATING MY THOUGHTS ON "TAX EXPENDITURES"

As expected the proposal to start from “ground zero” by doing away with all “tax expenditures” currently in the Tax Code from the discussion draft issued by the co-chairmen of President Obama's National Commission on Fiscal Responsibility and Reform has not been universally praised. Taxpayers are all for simplifying the Code and raising taxes on others, but do not want to give up any of the benefits they are getting. And Congresscritters, who care more about themselves and getting reelected than in properly running the government, will fight any efforts to put an end to their pet tax deductions, credits and loopholes as long as the money keeps flowing in from lobbyists.

The release of the draft has resulted in increased discussion of the issue of “tax expenditures”, a topic of concern for a while now. I have been talking about the problems for years, and most recently Mortimer Caplin, the IRS Commissioner during the terms of Presidents Kennedy and Johnson commented on the situation, as reported in “Former Commissioner Blasts IRS’s Social Mission”, which I highlighted in a recent BUZZ installment.

The article pointed out that Caplin “believes the Internal Revenue Service is currently facing a tougher task than it did back when he was commissioner as a result of the additional roles handed it by Congress through the enactment of new social programs”.

The item further states –

However, IRS responsibilities today revolve not only around tax collecting, but also include policing social and economic policies with limited resources. The passage of the health care bill add exponentially to an already packed list of administering homebuyer credits, economic stimulus disbursements, and work pay credits, among others, he noted.”

Former Commissioner Caplin, correctly, pointed out –

Even the Earned Income Tax Credit could have been handled by Health and Human Services. What has happened is that there are a tremendous amount of fraud and deficiencies associated with the program. This has produced a great loss of revenue, because the Service has to focus attention on the wrong returns. Rather than looking at high-income returns, with, say, foreign investments, they have to examine the EITC. Their mission has been watered down.”

And most important –

And instead of having an annual appropriation, which gets examined yearly, the programs get into the Tax Code but never get out. Congress has to be more selective. They’re leaning more on giving credits than on appropriations.

It’s more difficult to amend the Internal Revenue Code than cut an appropriation. Congress should not be in the habit of just automatically adding another credit to the code
.”

What better way to begin the process of rewriting the Tax Code then to start with no deductions or credits and add back only those that are appropriate and necessary?

I am not saying that we should totally do away with the benefits provided by the Earned Income Credit, the various education tax credits and deductions, and other such “expenditures” that are currently complicating the Tax Code. What I am saying, and what has been said by many others, is that these are social programs and should not be administered via the Tax Code.

Here is what I suggested in my post “There Has Got To Be A Better Way” from August of 2009 -

Why, then, could not the U.S. Department of Education automatically apply the American Opportunity Credit, or the HOPE or Lifetime Learning Credit, towards the price of tuition, with the possibility of any remaining available credit being applied at the college book store? Then the government would be assured that the money is actually spent on continuing education. If the student “drops out” the unused portion of the “government subsidy” would be returned to the Department of Education.

And why, then, could not the First Time Homebuyer Credit be applied to the purchase of a qualifying home at the actual closing? Then the government would be sure that a primary personal residence was actually being purchased by a ‘first-time’ homebuyer. A ‘Statement of Qualification’ could be added to the papers filed with the purchase on which the purchaser(s) would certify, under penalty of perjury, that he/she/they qualify for the $8,000 payment.

If there are credits to be provided to cover health insurance premium purchases in any upcoming Health Care Reform bill, why not have the U.S. Department of Health and Human Services credit the amount to the price of the actual premiums? Then the government would be sure that the money is actually spent on health care coverage.

Perhaps the amount of Retirement Savings Credit allowed could be actually deposited by the government into the individual’s IRA or other retirement savings account. Then the money would actually add to and help to grow retirement savings.

And in the case of the Earned Income Credit, why not just provide the qualifying individual or family with a supplemental welfare check, perhaps through the SSI system?

Doing things in this way would be beneficial in many ways.

(1) It would be easier for the government to verify that the recipient of the subsidy or hand-out actually qualified for the money, greatly reducing fraud. And tax preparers would no longer need to take on the added responsibility of having to verify if a person qualified for government funds.

(2) The qualifying individual(s) would get the money at the “point of purchase”, when it is really needed, and not have to go “out of pocket” up front and wait to be reimbursed when they file their tax return.

(3) We would be able to actually measure the true income tax burden of individuals. No longer would about half of the American population either pay absolutely no federal income tax or actually make a profit from filing a tax return. These people would still be receiving government hand-outs, but it would not be tied into the income tax system so they would actually be paying federal income tax.

(4) We could measure the true cost of education, housing, health, welfare, etc programs in the federal budget because the various subsidies would be properly allocated to the appropriate departments and not be reported as a part of net income collected via income tax.

(5) The Tax Code would be much less complicated, the cost to the public for preparing a tax return would be reduced, and the IRS would have much less to process and to audit
.”

What inspired the post in which the above appeared was the “Cash for Clunkers” program. This was a targeted benefit program that was not run through the Tax Code. It had no affect whatsoever on the Form 1040. The money was applied to the qualified purchase at the point of purchase. While I have not done any special review of the program or its results it appears that it was as successful and went as smoothly as one would hope for a government-run benefit program.

TTFN

Thursday, November 18, 2010

NATEL DAY

Today is the 57th anniversary of my birth.

Too busy celebrating to post!

TTFN

Wednesday, November 17, 2010

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

I just want to begin by expressing my thanks to Peter Reilly of the blog PASSIVE ACTIVITIES AND OTHER OXYMORONS for his many substantive, helpful and interesting comments to my TWTP posts. I do urge my readers to be sure to check out the comments to my TWTP.

* Must I remind you again to check out the MISSOURI TAX GUY’s “Week in Perspective”?

* If at first you don’t succeed . . . According to a Senate Finance Committee press release “Baucus to Introduce Bill to Repeal Form 1099 Income Reporting Requirements for Small Businesses”.

Good luck!

* Janet Novack tells us that, although there is no increase in Social Security benefits or the basic Medicare Part B premium, “Higher Income Seniors Hit with Medicare Doctor and Drug Premium Hikes For 2011” in her TAXING MATTERS blog at Forbes.com.

* And Janet talks about “Names You Need To Know in 2011: Tax Expenditures” in another post.

What are “tax expenditures” – “the term covers dozens of special provisions—everything from the earned income, child, college and research and development tax credits; to the deductions for mortgage interest, charitable contributions and state and local taxes; to the exclusion of employer provided health insurance from the taxable income on your W-2; to the special lower rate for long term capital gains.”

The article provides several sources that agree with me (that many of them do not belong being administered in the Tax Code) on the subject –

“. . . the Peterson-Pew Commission on Budget Reform released a report proposing that Congress get control of tax expenditures by treating them as “entitlements”, incorporating them in the annual budget process and subjecting them to proposed spending caps.”

And, as a matter of policy, many of them don’t work very well or can’t be effectively administered by the IRS, they make the tax system more complex, and are unfair, so there’s ample good-government grounds to scale them back.” Len Burman (a Treasury official during the Clinton Administration, and now the Daniel Patrick Moynihan Professor of Public Affairs at the Maxwell School of Syracuse University).

* Joe Arsenault discusses some “Roth Conversion Planning Ideas” at CAFETAX.

* Beans, beans, good for your heart. And, in this case, also good for your head - when they are “BlogRoll Beans”, presented by the previously mentioned Joe Arsenault.

One of the items in this edition of the Beans tells you what John Grisham, Mick Jagger, Janet Jackson, Bob Newhart, and J.P. Morgan have in common. And, oh yeah, TWTP is also represented. Thanks, Joe!

* Joe Kristen brings us up-to-date on the soap opera of tax cheat Chuck Rangel in his post “Sorry Charlie” at the ROTH AND COMPANY TAX UPDATE BLOG.

The fact that this crook was easily re-elected (with, did I read correctly, 80% of the vote!) says a lot about the intelligence, or lack thereof, of the cafones in his constituency.

I thank God regularly that Rangel is no longer chairman of the House Ways and Means Committee.

I agree with Joe that the crook’s punishment will be minimal. Congress tried to impeach Bill Clinton for having done what many of them also did, but did not get caught at, yet they won’t impeach a member for actually breaking the law and cheating the American taxpayer.

* Wait – breaking good news! According to “House Ethics Panel: Rep. Rangel Violated Rules” from yahoo news –

Rep. Charles Rangel, once one of the most influential House members, was convicted Tuesday on 11 counts of breaking ethics rules and now faces punishment.”

Right on!

* A “tweet” from NATP reports “The U.S. Railroad Retirement Board (RRB) has announced that the Tier I & II taxable wage bases and tax rates will remain the same in 2011.”

TTFN

Tuesday, November 16, 2010

REALITY SUCKS

How many of you joined me in cheering out loud when the murder victim in Sunday’s CSI MIAMI was a character based on one of the skanks from THE JERSEY SHORE?

I used to refer to the sluts and skanks of both sexes that appear on steaming piles of excrement like THE JERSEY SHORE as arseholes. But I must apologize. In reality the arsehole performs a very important function in the workings of the human body. The brain dead idiots from these so-called "reality" shows contribute absolutely nothing to society. And the shows on which they appear have no redeeming social value - other then to show just how stupid uneducated louts can be.

CASE IN POINT

I am constantly reminding you that the Adjusted Gross Income (AGI) is the most important number on your tax return.

By reducing one’s AGI one can often increase a multitude of deductions and credits and reduce taxable Social Security or Railroad Retirement benefits. Here is an excellent case in point.

This past week-end was dedicated to figuring out “Where the Fakawi” and to catching up on lots of little 1040-related tasks – such as amending returns.

With one client additional information regarding annual dividend reinvestment sent to me after April 15th allowed me to properly calculate the cost basis of mutual fund shares sold in 2009. As a result a net capital loss claimed on the 2009 Schedule D, and carried over to Page 1 of the 1040, was increased by $545.00.

By increasing the capital loss I reduced the Adjusted Gross Income. And by reducing AGI I increased -

• the allowable Miscellaneous deductions from Schedule A (re: the 2% of AGI exclusion),

• total Itemized Deductions (re: the 1% “read my lips” reduction of total deductions, aka PEASE),

• the Making Work Pay Credit (the credit was reduced via AGI “phase-out”), and

• the American Opportunity Credit (the credit was reduced via AGI “phase-out”)

By reducing the AGI by $545.00 I got the client an additional refund of $219.00 on the Form 1040X (hey – better in the client’s pocket). The client was in the 25% tax bracket, but the reduced AGI yielded a “return” of a little over 40%!

So now do you believe that one’s Adjusted Gross Income is the most important number on the tax return?

TTFN

Monday, November 15, 2010

WHAT ABOUT THE GIFT TAX?

There has been lots of talk about the federal Estate Tax lately, what with its disappearance for 2010 and reappearance at pre-Bush levels in 2011. But what about its cousin – the federal Gift Tax?
.
The Gift Tax is a “spin-off” of the Estate Tax. Its purpose is to make sure that individuals do not give away all of their assets before death to avoid paying Estate Tax.

First some background -

The Gift Tax is imposed on the “giver” (or “donor”) – the person making the gift – and not on the person receiving the gift (the “donee”).

A gift has no affect on federal or state income taxes. Over the years I have been asked many times something along the lines of, “I read somewhere that I can give my son a gift of $XX,000 each year. If I do this will it help reduce my income tax?”. The answer is always “no”. You cannot deduct a gift on your 1040, and the recipient of a gift does not have to report the gift as taxable income on his/her 1040.

For 2010 and 2011 there is an annual Gift Tax exclusion of $13,000 and a “lifetime exclusion” of $1 Million. These are two separate exclusions – one has nothing to do with the other.

You can give $13,000 to as many individuals you want – relatives, friends or even strangers – in 2010, and 2011, with no gift, or future estate, tax consequences. This $13,000 does not affect the $1 Million lifetime exclusion. A married couple can gift $26,000.

If you make gifts to one individual that total more than $13,000 in one year you still do not necessarily have to pay any current gift tax. You can apply the excess gift to your $1 Million lifetime gift tax exclusion amount. You can give up to a total of $1 Million in gifts that exceed the annual exclusion limit during your lifetime before you will owe any gift tax.

If you gave your son $15,000 in 2010 then $2,000 of this gift will reduce the $1 Million, so you have a remaining lifetime exclusion of $998,000.

The Gift Tax is reported on Form 709. If you do gift more than $13,000 to an individual during the year you should file a Form 709 to show the application of the excess toward your $1 Million lifetime exclusion.

The following items are not considered to be taxable gifts, and do not count toward the $13,000 per year annual exclusion or reduce the $1 Million lifetime exclusion amount –

* the support of a member of your household,

* gifts made to a spouse,

* college tuition paid directly to the educational institution for another person, and

* medical expenses paid directly to the provider (doctor, dentist, hospital, therapist, etc) on behalf of another person.

The Gift Tax also does not apply to gifts to political organizations or campaigns or to gifts to church and charity

The lifetime Gift Tax exclusion amount is supposed to be the same as the federal Estate Tax exemption, but under the “Economic Growth and Tax Relief Reconciliation Act of 2001” this amount was for some reason “frozen” at $1 Million. So, even though the federal Estate Tax exemption had grown to $3.5 Million for 2009, the lifetime exclusion for Gift Tax purposes remained only $1 Million. And even though the federal Estate Tax totally disappeared, for one year only, in 2010, the federal Gift Tax is still in place for 2010.

This makes absolutely no sense. The only reason for the existence of the Gift Tax is so individuals do not avoid the Estate Tax by giving away their assets prior to death. So the lifetime exclusion for the Gift Tax should always be exactly the same as the Estate Tax exemption. The Gift Tax amount should not have been frozen at $1 Million.

Without an Estate Tax there is no need for a Gift Tax. So why, if the Estate Tax is gone, is the gift tax still around for 2010? I expect that Congress knew that the Estate Tax would return in 2011 (it would not be permanently repealed by Congress in the interim) so it did not want taxpayers to escape future estate tax by giving away the store in 2010.

I would hope that when the federal Estate Tax is finally either repealed or reformed there is consistent treatment of the Gift Tax. If the Estate Tax is repealed there should be no Gift Tax. If the Estate Tax is reformed, the lifetime exclusion under the Gift Tax should be the same as the exemption under the Estate Tax.

TTFN

Saturday, November 13, 2010

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

* TAX PROF Paul Caron brings us some IRS statistics on 2010 returns in his appropriately named post “2010 Tax Filing Season Statistics”.

* Joe Kristan reports that a variation on the TURBO TAX Defense has again failed in Tax Court in “'TurboTax Defense’ Not Golden for AU” at the ROTH AND COMPANY TAX UPDATE BLOG.

The Moral? Unless you are bucking for a cabinet position, don't bother to blame the software.”

* And Joe weighs in on the discussion of the draft report on tax reform that I blogged about on Thursday in “Zero Option”.

* Joe has a BUZZ Trifecta! I include his post “Waterloo, Iowa Preparer Gets 30 Months for Earned Income Tax Credit Fraud” for the moral –

The Moral? Refundable tax credits like the EIC are a massive temptation to cheat.”

* Daniel Stoica, to whom I owe a big thank-you for “re-tweeting” my tweets, provides us with “Tax Information for Veterans with Disabilities” in honor of Veterans Day at his blog.

* “Blowing Up the Tax Code” by Jeanne Sahadi at CNNMONEY.COM discusses the draft report on tax reform. It has an excellent bottom line -

Taxes are going up one way or the other. The question is will those higher taxes be levied in a system that is widely considered to be outdated, overly complex and highly inefficient, or in a system that is simpler and smarter?

* Trish McIntire throws some cold water on those of us who are hopeful for a serious discussion of tax reform resulting from the recently released draft report of the co-chairmen of the President’s commission in “Not Going to Happen” at OUR TAXING TIMES. The sad thing is she is most likely correct.

We don't have the politicians who can pull it off right now. Congress is full of men and women who are more interested in grandstanding and partisanship than solving the country's problems.”

I do agree with Trish that to get real reform passed – “We would need old school politicians who understand compromise not officials who are more interested in making points for their party than helping all Americans.”

Unfortunately, as I have shown here at TWTP, the cafones currently in Washington are idiots.

* The JOURNAL OF ACCOUNTANCY tells us that “New Rules Require Rental Property Owners to Issue 1099s” to those who they pay $600 or more for services beginning with tax year 2011.

Another ridiculous poorly thought out requirement by the idiots in Congress who probably don’t know they voted for it. Hopefully this will be repealed when Congress finally gets around to repealing the new 1099 requirements for 2012, as it says it wants to.

* Now don’t forget to check out the MISSOURI TAX GUY’s “Week In Perspective” tomorrow morning for items I missed here at the BUZZ!

TTFN

Friday, November 12, 2010

ANOTHER ONLINE DEBATE

It seems my announcement of THE SCHEDULE C LETTER has re-opened the online debate of “Should a Sole Proprietor Incorporate, or A One-Person LLC Elect To Be Taxed As A Corporation, For No Other Reason Than to Reduce the Chance of an IRS Audit?”

Here are the comments, the first from me, to the post “To C Or Not To C, That Is The Question” by Russ Fox at his blog TAXABLE TALK.

“Russ-

Thanks for mentioning my new THE SCHEDULE C LETTER, and for the recommendation.

I do agree that all sole proprietorships should register with the state as a one-person LLC for the limited liability protection – but I definitely do not believe that they should all, if possible, file as a corporation.

From my newsletter’s sample issue -

An LLC can elect to be taxed as a corporation - but if you want to be taxed as a corporation you should, in my opinion, actually incorporate the business activity.

There exist situations where it may be “more better” to operate your business as a corporation. The decision to incorporate takes very serious study and consideration. I suggest you consult with a tax professional – and not a lawyer – before making such an important decision. It is very important that you review the tax consequences of dissolving the corporation as well. Like a marriage – a corporation me be relatively inexpensive to get into, but very expensive to get out of!


And –

Do not overreact and incorporate your sole proprietorship, or elect to tax your one-person LLC as a corporation, solely for the reason of avoiding an audit.

The advice that one should incorporate solely to avoid an audit seems to me to be saying, ‘If you want to cheat on your taxes you can incorporate and the IRS will not audit you’. It is not good tax or financial advice. Be wary of so-called professionals who give this advice – they may be more interested in boosting their fees than in providing you with good advice.

I have said time and again that an IRS audit is not something that should be avoided at all costs. Tax returns should be prepared, and decisions about choosing a business entity should be made, in such a manner as to generate the absolute least amount of federal, state and local taxes (income and payroll) within the parameters of federal and state laws. If you will pay less tax (income and payroll), fees and other costs by filing a Schedule C you should do so, honestly and ethically, and not worry about being audited.

If your return is prepared correctly, and you document all items of income and deduction properly upfront, then an audit is nothing more than an inconvenience
.’

I might also add that filing as a corporation has the potential for a lot of unnecessary agita for a small business sole proprietor.

Thanks again for the plug and for your confidence in my competence as a tax advisor.”

TWTP”

Russ replied –

“I don’t have much to add to what you wrote. I strongly believe that entity formation has three components: tax, legal, and the goals of the owner(s). What is correct for one person may not be correct for a second person. Anyone starting a new business needs to consult both a tax professional and an attorney.”

To which I responded –

“Russ-

I do agree – but consult the tax professional first, and discuss what the lawyer had to say with the tax professional before taking any action.”

Russ does make a good point – “What is correct for one person may not be correct for a second person”. To say that all sole proprietors should either incorporate or, if an LLC, elect to file as a corporation PERIOD is, as I said above, very bad advice.

Does incorporating, or filing as a corporation, reduce the likelihood of an IRS audit? Yes. But this is only one aspect of the decision, and a very minor one at that. Are all Schedule Cs audited, or will they be? Of course not!

Operating or filing as a corporation has the potential for much more unnecessary agita and increased costs (taxes and, especially, professional fees) and paperwork than any audit!

So what do my fellow tax professionals and tax bloggers think?

TTFN

Thursday, November 11, 2010

MORE ON THE DRAFT REPORT ON TAX REFORM

The President's Economic Recovery Advisory Board (PERAB) “Report on Tax Reform Options” gave us nothing new in the way of tax reform proposals. All it really did was affirm that the current Tax Code is complicated and convoluted – although it could have been used as a starting point for serious discussion and debate on the issue of tax reform.

PERAB was established by President Obama in March of 2009 “to ensure the availability of independent, nonpartisan information, analysis, and advice as he formulates and implements his plans for economic recovery and enhancing the strength and competitiveness of the Nation’s economy”. Its Chairman was Paul A. Volcker. The first task was “to consider ideas on tax simplification, better enforcement of tax law, and reforming corporate taxes and to present the pros and cons of potential tax options.”

The Board’s report was forgotten as soon as it was issued, and, like the report of Dubya’s tax reform panel, sent off to gather dust in the National Archives.

The National Commission on Fiscal Responsibility and Reform co-chairmans’ draft report (see my previous post) discusses real options for genuine tax reform and simplification. Howard Gleckman, writing for the Tax Policy Center’s TAX VOX blog, calls the draft report, which also deals with reducing the federal deficit, “tough, specific, credible, and even creative”.

President Obama created the Commission on Feb. 18, 2010 to “identify policies to improve the fiscal situation in the medium term and to achieve fiscal sustainability over the long run”. Its Co-Chairmen are Alan Simpson, former Republican Senator from Wyoming and Erskine Bowles, Chief of Staff under Clinton. Number 2 of its “Five-Part Plan” is to “pass tax reform that dramatically reduces rates, simplifies the code, broadens the base, and reduces the deficit”.

Let us hope that (1) the Commission’s members support the co-chairs’ draft report, and (2) when presented it is taken seriously and results in action by Congress.

Hey – I can dream, can’t I!

A few more thoughts I forgot to include in my initial reaction post on the draft report –

I would support a continuation of preferential tax rates for long-term capital gains. If there is a Dividend Paid deduction for corporations then dividends will no longer be “double-taxed” and there would no longer be a need for special tax rates for qualified dividends.

When “adding-back” tax benefits Congress needs to look at the reporting requirements with an eye toward reducing individual taxpayer burden.

For example - if, as suggested, the deduction for mortgage interest is limited to acquisition debt of up to $500,000 for one primary principal residence then the Act needs to create three specific mortgage products – the purchase mortgage, the improvement home equity loan, and the “unrelated” home equity loan. Since only acquisition debt – money borrowed to buy, build, or “substantially improve” a personal residence – on one primary personal residence (at a time) would be allowed, only interest on the purchase mortgage and improvement home equity loan for that one primary personal residence would be deductible.

An applicant would have to document to the lendor, via submission of initial proposals and progress reports, that the money from an improvement home equity loan was indeed used to “substantially improve” the residence. While each individual product could be separately refinanced, only a purchase mortgage and improvement home equity loan would be able to be combined via refinance.

The Form 1098 would separately identify interest and points for acquisition debt mortgage loans (purchase debt and improvement equity) and indicate whether the amounts were for a “primary personal residence” and the average principal balance on the loan for its period of existence in the calendar year. Interest on residences that are rented would still be deductible under current rules on Schedule E. No Form 1098 would be issued for “unrelated” home equity debt, as interest on this type of debt would not be deductible.

ANOTHER PRESIDENTIAL PANEL REPORT ON TAX REFORM

In “Obama's Debt Panel Releases Three Tax Reform Options” Paul Caron, the TAX PROF, tells us:

The co-chairmen of President Obama's National Commission on Fiscal Responsibility and Reform today released a discussion draft in advance of its final report to be issued on December 1. The report presents three tax reform options:

Option 1: The Zero Plan

* Consolidate the tax code into three individual rates and one corporate rate
* Eliminate the AMT, Pease, and PEP
* Eliminate all $1.1 trillion of tax expenditures
* Dedicate a portion of savings to deficit reduction and apply the rest to reduce all marginal tax rates
* Add back in any desired tax expenditures, and pay for them by increasing one or all of the rates from their zero expenditure low

Option 2: Wyden-Gregg Style Reform Individual Tax Reform

Individual Tax Reform-
* Repeal AMT, PEP, and Pease
* Establish 3 rates – 15%, 25% and 35%
* Triple standard deduction to $30,000 ($15,000 for individuals)
* Repeal state & local tax deduction, cafeteria plans, and miscellaneous itemized deductions
* Limit mortgage deduction to exclude 2nd residences, home equity loans, and mortgages over $500,000
* Limit charitable deduction with floor at 2% of AGI
* Cap income tax exclusion for employer-provided healthcare at the amount of the actuarial value of FEHBP standard option
* Modify and repeal several other tax expenditures
* Dedicate portion of savings to deficit reduction
Corporate tax reform -
* Reduce corporate tax rate to 26%
* Permanently extend the research credit

* Eliminate and modify several business tax expenditures, including:
Domestic production deduction
LIFO method of accounting
Energy tax preferences for the oil and gas industry
Depreciation rules
* International tax reform including a territorial system

Option 3: Tax Reform Trigger

* Call on Finance and Ways & Means Committees and Treasury to develop and enact comprehensive tax reform by end of 2012
* Put in place across-the-board “haircut” for itemized deductions, employer health exclusion, and general business credits that would take effect in 2013 if reform is not yet enacted
* Haircut would limit proportion of deductions and exclusions individuals could take to around 85% in 2015. Similarly, corporations would only take some proportion of their general business credits
* Set haircut to increase over time until tax reform is enacted.

I must admit – finally some progress on real tax reform. All three Options have some good items. Here are my initial “top of my head” reactions -

Option 1 is perhaps the best starting point – scrap all deductions and start from scratch to decide which tax benefits are appropriate and worth adding back. I assume that the specific elimination of PEP and Pease translates to the elimination of all phase-outs.

The creation of 3 individual tax rates and 1 corporate rate, included in Options 1 and 2, sounds good to me.

I also like the increased standard deduction and reduced mortgage interest deduction in Option 2.

Under Option 1 I would add back an increased standard deduction, increased personal exemptions for dependents only, and itemized deductions for –

• medical expenses (I would consider eliminating pre-tax treatment of FSAs but also eliminating or reducing the 7½% exclusion for medical expenses),

• real estate taxes and state and local taxes (these taxes help to provide some needed “regional equalization”),

• mortgage interest on acquisition debt (up to $500,000) for one principal personal residence only,

• charitable contributions (no limitation- other than the current 50% of AGI),

• casualty loss in Presidentially-declared areas (with perhaps the same exclusions) and

• miscellaneous employee business expenses.

Income from gambling winnings and legal settlements would be reported net of losses and legal fees (you would not have to itemize to claim the deductions).

I would not allow any tax credits. An increased Personal Exemption for dependents would replace the Child Tax Credit. The benefits provided by the Earned Income Credit, the Education Credits and the Retirement Savings Credits would be administered as separate specific entitlement programs and direct aide through the appropriate federal agencies - outside of the Tax Code.
.
I would have a minimum tax! Every individual whose positive gross income exceeded a filing threshold would be required to pay a minimum tax of $100. Every tax return would have a minimum tax liability of $100 ($200 on a joint return).
.
On the business side I would –

• eliminate all current corporate tax benefits and loopholes (except perhaps for research and development),

• allow for a “Dividends Paid” deduction,

• eliminate the deduction for depreciation of real property, wherever currently allowed (corporation, partnership, and Schedules C, E, and F), and

• provide for some kind of Section 179-like expensing.

Option 3 is basically the same as Option 1 – start from scratch and have Congress rewrite the Tax Code with a deadline and consequences for not meeting it.

I do see many problems in the process.

By just saying “add back in any desired tax expenditures, and pay for them by increasing one or all of the rates from their zero expenditure low” without limitations or restrictions we all know that the supporters of every single existing “tax expenditure”, as well as proposed new ones, will fund a lobby to throw money at Congress to keep or add their particular benefit. And individual Congresscritters will negotiate back and forth – “I’ll support your tax break if you support mine”. Before you know it we will end up with the same mucking fess we have now!

There must at least be some limitation placed on the total dollar amount of “add-backs” allowed, and serious criteria for what type of benefit can be added back.

And because 2012 is an election year I expect that nothing substantial can be done till 2013, if it is not done in 2011. So, unless it can be done in 2011, I would extend any deadline for passage of reform until 2013, to become effective in full (no “phase-in” as with 1986) January 1, 2014. Congress should extend the existing Tax Code as of December 31, 2010 (with the 2009 “extenders”), through the end of 2013.

The estate tax should be an entirely different issue that is dealt with separately from the income tax.

Once the Tax Code is rewritten the resulting Tax Act must include a provision that it cannot be changed again, in any form and by any vote, for at least five, or maybe better, ten years. There must also be some kind of prohibition or severe limitation on “temporary” tax laws that require “extending” every, or every-other, year.

To make me totally happy the resulting new Tax Code must have no AMT, no phase-outs or eliminations based on income, uniform definitions, and no “tax expenditures” for social programs that should be administered through specific government agencies other than the IRS.

So what to you think?

TTFN

Wednesday, November 10, 2010

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

* My first slide show at MAINSTREET.COM! Check out “Financial Loopholes to Take Advantage of Now”.

* Russ Fox, the other RF, discusses my upcoming newsletter THE SCHEDULE C LETTER (recommending its purchase) and the issue of whether a business should actually file a Schedule C in his post “To C Or Not To C, That Is The Question” at TAXABLE TALK. Be sure to read the comments to this post.

Thanks, Russ, for the plug and the recommendation.

* Did you check out THE MISSOURI TAX GUY’s weekly Sunday “Week In Perspective” like I told you to in Saturday’s BUZZ? What are you waiting for?

Unfortunately I will not be meeting Bruce in St Louis in August of 2011, as, so far, I will not be attending the annual NATP national conference to be held there.

One DIY item that should be left to a professional is definitely preparing your tax return!

And the QE2 discussed in the post mentioned does not refer to the Cunard ocean liner, on which I crossed the Atlantic many times in the past.

* Kelly Phillips Erb, everyone’s favorite TAX GIRL, deals with an interesting, and timely, question in her post “Ask the taxgirl: Politicians and Job Hunting Expenses".

This is a question that I had looked up myself a few years ago, as I have a client who ran for local office in his township.

* Professor Annette Nellen attempts to initiate a discussion with her post “Expensing of Business Assets - New Treasury Report” at 21st CENTURY TAXATION, which discusses BO’s proposal, as explained in the Treasury report “The Case for Temporary 100 Percent Expensing: Encouraging Business to Expand Now By Lowering the Cost of Investment”.

I have a suggestion for a related revenue offset – do away with the deduction for depreciation of real property. Check out my 2007 post “Here is Something to Think About”. Of course I propose that this be a permanent change. Annette, and the rest of you, what do you think about this?

* Tonya Moreno reports on “Major State Tax Initiative Results - The results of major state tax-related elections for 2010” at ABOUT.COM: TAX PLANNING: US.

* Also from ABOUT.COM – at WILLIAM’S TAX PLANNING BLOG – Bill Perez offers some “Year End Tax Planning Tips if You Think Tax Rates Might Go Up in 2011”. He gives us some things to think about if Congress sits on its arse and does nothing to at least temporarily extend the “Bush” tax cuts. I would wait until December – to see what, if anything, the cafones in Washington will do – before acting Bill’s suggestions.

* Speaking on this subject – Kelly Phillips Erb, writing for WALLETPOP, suggests “5 Ways the Election Could Affect Your Taxes”. For the most part I would agree with much of her predictions, and would echo her bottom line warning –

My best advice is to pay attention and plan accordingly. Don’t make any big financial moves on what you think might happen.”

* Some good advice from the IRS, via NORWALKPLUS.COM in “Keeping Good Records Now Reduces Stress at Tax Time”.

You may not be thinking about your tax return right now, but now is a great time to start planning for next year and to make sure your records are organized. Maintaining good records can make filing your return a lot easier and it will help you remember transactions you made during the year.”

TTFN

Tuesday, November 9, 2010

AT LEAST IT WAS IN "PLAIN ENGLISH"!

I recently reported on new legislation requiring that government notices and correspondence be written in “plain English” that is “easily understandable”. This includes IRS notices.

One of my few remaining corporate clients recently received a CP134B notice from the IRS identified as “FTD/Estimated Payments Discrepancy Notice – Balance Due”. Let us see if this notice is written in “plain English” and is “easily understandable”.

The notice began with a heading “Why We Are Writing You” which explained –

We found that the amount credited to your account as Total Federal Tax Deposits differs from the amount reported on your tax return for the above tax period. You now have an outstanding balance on your account of $123.45

The notice went on to identify “Payments or Credits Applied” and provide a “Calculation of Balance Due”.

So far this seems “easily understandable”. The notice clearly, and in “plain English”, explains its purpose and the calculation formula is also easy to follow.

However there was a very serious problem with the notice. A notice can be crystal clear in its wording and structure – but what if it’s actual content makes absolutely no sense?

The statement quoted above to describe “Why We Are Writing You”, in the context of the tax return to which it referred, is a total lie.

The “Payments or Credits Applied” listed the correct date and amount of the payment made by the taxpayer.

The “Calculation of Balance Due” showed the correct amount of “Total Tax Due on Return”. It next correctly identified the “Total Estimated Tax Payments” as “0”. The third line in this section also correctly identified “Other Payments and Credits” as the amount previously identified under “Payments or Credits Applied”. This payment amount was exactly the same as the amount identified as “Total Tax Due on Return”.

The calculation went on to again correctly identify the “Unpaid” amount as “0”. The total amount due on the return was paid in full.

The next line is identified as “Penalty on unpaid balance” and shows the $123.45 that was mentioned in the earlier explanation. Even if the penalty on the unpaid balance was 100%, 100% of “0”, the amount identified as “Unpaid”, is “0”. How can a penalty on a “0” balance due be $123.45?

This notice makes absolutely no sense. In going back to “Why We Are Writing You” – the amount credited to the taxpayer’s account as "Total Federal Tax Deposits", correctly identified on the notice, is exactly the same as the amount reported on the return!

So now IRS notices report total nonsense in “plain English”! Is this progress?

TTFN

Monday, November 8, 2010

MORE ON THE NATP YEAR-END TAX UPDATE

As promised, here are some items of interest that was discussed at last week’s NATP year-end tax-update class -

• Student loan interest reported on a Form 1098-E under the dependent student’s Social Security number can be claimed as an adjustment to income, subject to the statutory limitations, on the parents Form 1040 if the parents actually paid the interest and they are legally responsible for the loan – i.e. they co-signed the loan. Be ready to send the IRS proof of legal responsibility if questioned down the road.

• For 2010 the Adoption Credit is refundable. If the credit is from an adoption initiated in 2010, and not the result of a prior year’s carryover, copies of documenting paperwork must be sent in with the return, much the same as the documentation required for those claiming the Homebuyer’s Credit.

• Non-prescribed “over the counter” medicines can no longer be paid through an employer-sponsored medical expense Flexible Spending Account beginning in 2011. So if there is money left in your FSA stock up before year-end. Such items were never deductible as a medical expense on Schedule A.

• Cell phones are no longer considered “listed property” for purposes of the special record-keeping.

• And here is a bit of info that has apparently been passed along to NATP from a reliable insider source - the IRS is looking more closely at self-prepared tax returns generated by Turbo Tax software. It seems the Service is aware of the many failings of the Turbo Tax 1040 preparation software. Just another reason to forget about preparing your return yourself using a software package and seek the services of a competent tax professional.
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We talked about the new requirements for small businesses and landlords to send a Form 1099-MISC to everyone to whom they pay more than $600 during the year. One excellent comment - if these requirements remain it will mean that hundreds of thousands, if not millions, of individual taxpayers will be applying for Employer Identification Numbers.
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Currently sole proprietors, one-person LLC owners, and landlords who do not have employees don't need to get a separate EIN for their business or rental. These taxpayers could use their Social Security Numbers for bank accounts. However I, and my fellow tax pro participants, doubt if these taxpayers, faced withing having to send out a multitude of 1099-MISC forms, will want to make their Social Security Number public knowledge by including it on these 1099s. So they will need to get an Employer Identification Number to use instead.
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I am sure the idiots in Congress did not take this into consideration when passing the ridiculous new requirements.
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During a discussion of “who is a tax preparer” in regard to the new tax pro regulation regime the instructor gave the following scenario –

She has a client whose only income is from self-employment. He has no investment income or activity and does not itemize. Each month the client brings in his business checkbook, account statement and other related information to the instructor’s office and an employee of the instructor’s firm inputs the necessary information into Quickbooks. This employee also reconciles the client’s business checking account. In January the employee prints out a profit and loss report for the business from Quickbooks. The instructor “imports” this P+L to her tax preparation software and the software spits out the 1040 and Schedules C and SE.

In this scenario who is a tax preparer – the instructor, the employee, or both.

If you ask me the answer is neither - the return was prepared by the software!

The text explained that included in the definition of a tax preparer is –

A non-signing tax return preparer who renders advice (written or oral) to a taxpayer (or to another tax return preparer) on a position that is directly relevant to the determination of the existence, characterization, or amount of an entry on a return that constitutes a substantial portion of the return." And -
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"A person who furnishes to a taxpayer, or another preparer, sufficient information and advice so that completion of the return is largely a mechanical or clerical matter.”

Let us also look as some “scenarios” from the IRS FAQ page on the subject -

“* I am a tax return preparer, and I have a PTIN. My firm employs a bookkeeper. She gathers client receipts and invoices, and organizes and records all information for me. Although I use the information that our bookkeeper has compiled, I prepare my clients’ tax returns and make all substantive determinations that go into computing the tax liability. Does my bookkeeper need to have a PTIN? (posted 9/28/10)

No, she is not a tax return preparer, and is not required to have a PTIN.

* I am a tax return preparer, and I have a PTIN. Every tax filing season I hire two paid interns from the accounting program at a local college to help me during the busy season. The interns perform data entry from the tax organizer that my clients fill out, and assemble the documentation that the clients have submitted. Where clients have submitted incomplete information, or more information is needed, the interns may call clients to gather information missing from the tax organizer, but they are not allowed to provide advice or answer tax law questions. I prepare and sign all my clients’ returns. Do my interns need to have a PTIN? (posted 9/28/10)

No, the interns are not tax return preparers, and are not required to have a PTIN.

* I am a tax return preparer, and I have a PTIN. I have an administrative assistant in the office who also performs data entry during tax filing season. At times, clients call and provide him with information, which he records in the system. Using the data he has entered, I meet with my clients and provide advice as needed. I then prepare and sign their returns. Is my administrative assistant required to have a PTIN? (posted 9/28/10)

No, the administrative assistant is not a tax return preparer, and is not required to have a PTIN.”

I am sure that there is more to the scenario in question than the instructor presented. I expect that the instructor reviews the P+L statement before importing it, and makes any adjustments for items such as Section 179 expensing, discussing the report with the client if she has any questions. I also expect that she determines the amount of contribution that the client could make to a SEP self-employed retirement plan and discusses this with him. And she would also ask him for the amount of health insurance premiums he paid for himself and his family, and other questions to see if there are any additional items to report or deduct. And I am sure she at least double-checks the return that is “spit out”.

In any case it is my belief that simply preparing an internal financial statement does not constitute preparing a “substantial” portion of the tax return – and therefore the employee of the instructor’s firm that does the Quickbooks input is not a tax preparer.

An internal financial statement, such as the P+L discussed above, whether prepared by the client or by an employee of the preparer, is merely a piece of documentation that is used by a tax pro to prepare the return. It is the same as a Form W-2, 1099, or K-1. It is the same as if the client simply provided a handwritten sheet of paper with his business income and expenses for the year – only a more formal presentation.

The P+L is not the Schedule C – several adjustments may need to be made in transferring the information from the P+L to the Schedule C – and being able to generate a P+L from a GL software package does not mean one knows how to prepare a Schedule C. So in this case the instructor, who actually “prepares” and signs the return, is the only tax preparer.

What do you think?

TTFN