Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.
greatest source of tax fraud, and tax return error, is the result of the
erroneous policy of distributing government welfare and other social program benefits
via the Form 1040 (or 1040A), especially when this takes the form of a
refundable tax credit – the Earned Income Tax Credit, the Additional Child Tax
Credit, and the American Opportunity Credit.
the best solution to the problem of tax fraud and error in this situation is to
remove the distribution of government benefits, and all refundable credits,
from the Tax Code.
Congress insists on continuing this erroneous practice I have an alternative to
forcing paid tax preparers to act as Social Workers and verify that clients qualify
for these government program benefit payments via excessive additional “due diligence”,
and forcing many legitimate low-income claimants to pay a tax return preparer
to apply for government benefits.
require that all taxpayers who claim the
Earned Income Tax Credit, whether or not refundable, have their tax returns
prepared at an IRS VITA (Volunteer Income Tax Assistance) site, where
returns are prepared free of charge for lower-income taxpayers.Tax preparers would not be permitted to
prepare, nor taxpayers to “self-prepare”, tax returns claiming the EITC.
of VITA centers would need to be expanded and staffing would include paid IRS
employees who, along with volunteer preparers, are specifically trained in
verifying EITC qualifications.Taxpayers
would be required to provide VITA preparers with all the appropriate
documentation that tax preparers are currently told to ask for.
VITA preparers are not required to do the same excessive due diligence as paid
tax preparers – which is wrong.
institutions must be required to report
on the Form 1098-T all cash payments made to the institution during the
calendar year for qualifying tuition and fees from all sources (payments
from the student or the student’s family, direct student loan or employee
benefit payments, and scholarships and grants), net any tuition and fee refunds,
without exception (which Congress has already required institutions to do), the Form 1098-T must include a second page
that lists the specific details of the charges and payments (as many
colleges actually already provide to students), and the Form 1098-T must also be required to be attached to the tax return.
recent discussion with my wealthiest client about 2017 tax planning reminded me
of a truly great tax strategy for charitable taxpayers with long-term capital
of giving cash to charity at year-end you can donate stock, bonds or mutual
fund shares that you have held for more than one year and which have increased
in value and save some money in the process.
method of giving to charity has many tax benefits -
1.You can claim a deduction on
Schedule A for the full market price of the investment on the date you make the
donation and reduce your net taxable income.
2.You don’t have to report the
increase in value as a capital gain on Schedule D.So you avoid the 15% or 20% federal capital
3.If your AGI is more than $200,000 if
single or $250,000 if married you avoid the 3.8% Obamacare Net Investment
Income Tax (NIIT) on the gain.
4.You also will probably avoid state
income tax on the gain.
5.Because the capital gain is not
reported on Schedule D you do not increase your Adjusted Gross Income (AGI) and
do not reduce or eliminate a variety of deductions and credits that are
affected by increased AGI.
6.Because the increase in value does
not increase your AGI, if you are a victim of the dreaded Alternative Minimum
Tax you will not reduce your AMT exemption.
client, whose AGI will already exceed $250,000 without adding the potential
capital gain and who generally is a victim of the dreaded AMT, wanted to donate
$100,000 to charity.Let us assume the
stock he is donating has increased in value by $40,000.By donating stock instead of cash he will
save at least –
or $28,000 in AMT for the deduction value of the gift (charitable contributions
are deductible when calculating AMT)
in capital gains tax
in NIIT surtax
or $2,800 in additional AMT because the AMT exemption is not reduced
in NJ state income tax
line – by using this strategy the taxpayer gets the full $26,000 or $28,000 tax
savings from making the contribution.If
he sold the stock first and donated the cash to the charity his net tax savings
would be only $13,332 or $15,132.The
net tax savings for donating cash instead of stock would be even less if the
resulting increase in AGI reduces other deductions or credits.
numbers would be different – perhaps greater tax savings - if the taxpayer was
not subject to the dreaded AMT and in the 33% or higher bracket and/or could
claim a deduction for the contribution on his state tax return.
of the amount of the donation and gain and the taxpayer’s federal tax bracket
(unless 15% or 10%) there will be some savings from donating stock instead of
cash to charity.Consider this example –
Center has pledged $5,000.00 to his church building fund.He also has 100 shares of Online Profits,
Inc. which he purchased in 1998 for $2,000.00 and is now worth $5,000.00.He decides to give the stock to the church to
satisfy his pledge.Art can deduct
$5,000.00 on his Schedule A.He does not
have to pay tax on the $3,000.00 appreciation in the value of the stock.
Art were to sell the Online Profits, Inc. stock and give $5,000.00 cash to the
church he would have to report the sale of the stock on Schedule D and pay
$450.00 in federal tax, as well as state income tax, on the gain.Plus, the $3,000.00 gain would increase his
Adjusted Gross Income (AGI), which could reduce or altogether wipe out a
multitude of deductions and credits that are affected by AGI
order for this strategy to work –
·Any investment you donate to charity MUST
be long-term property - an investment you have held for more than one
year.If you donate stock that you held
for one year or less your deduction is limited to the cost basis, which in the
above Art Center example would be $2,000.00.
investment you donate MUST have
appreciated in value and would generate a capital gain if sold. Do not donate an investment that has gone down
in value - it is better to sell the stock, claim the loss on Schedule D, and
donate the cash to charity.
to provide the maximum tax savings you must be in the 25% or higher federal tax
bracket.If you are in the 10% or 15%
tax bracket the special long-term capital gain tax is 0%.
– I discuss the deduction for charitable contributions in detail in the
premiere issue of my newsletter ROBERT D FLACH’S 1040 INSIGHTS – which could be
yours for as little as $1.00.
you think this tax strategy would work for you consult your tax professional.
Here are my
initial thoughts on what has been released of the White House tax reform
the end of the Estate Tax (as long as it does not do away with the step-up in
basis for inherited assets).
the end of the dreaded Alternative Minimum Tax – which began as the lazy
reaction of Congress to a report that 155 individuals with Adjusted Gross
Income of more than $200,000 (over $1 Million in today’s dollars) paid “0” tax
on their 1967 tax returns. Instead of
closing the loopholes and fixing the Tax Code the reaction of Congress was to
provide a “quick fix” in the form of originally a “Minimum Tax”, which has
morphed into the dreaded AMT.
reducing the number of tax brackets.
doubling the Standard Deduction.
repealing the 3.8% NIIT surtax, created by the Affordable Care Act.
closing “loopholes” – but not doing away with all itemized deductions except
charitable contributions and mortgage interest.I like keeping the deduction for acquisition debt on a taxpayer’s
principal personal residence only (not home equity), but also the deduction
for real estate taxes on a taxpayer’s principal personal residence only as well
as the deduction for state and local income or sales taxes.I feel that the mortgage, property tax, and
state tax deductions help to “geographically equalize” taxpayers.I can explain more about this concept in a
subsequent post.And I believe that
certain “employee business expenses” should be allowed under certain
honest I do not know enough about the concept of a “border adjustment tax” to
form an educated opinion.
reducing the tax on corporations – but feel this can be done by creating a “dividend
paid” deduction for corporations, which would allow corporations to claim a tax
deduction for dividends paid to stockholders (combined with eliminating
corporate special loopholes – and taxing net book profit less dividends paid). Allowing a dividends paid deduction would
finally do away with the double-taxation of corporate dividends.As part of this new treatment I would have
individuals pay tax on all dividends at the appropriate ordinary income rates –
no more special treatment for “qualified” dividends.
wrong is capping the tax on “pass-through” self-employment income from
partnerships to general partners, and the self-employment income of Schedule C
filers, at 15%.This is unfair to
wage-earners.Net earnings from
self-employment should be taxed the same as wages.
support a cap equal to the top corporate rate on sub-S pass-through income,
providing that the current rules and guidelines regarding reasonable salaries
for sub-S shareholders are maintained.
however, think about considering taxing some of the excess net earnings from
self-employment for partners and Schedule C filers along similar guidelines as
those applied to salaries of sub-S shareholders.
forward to the actual details of the real tax reform plan that the Republicans
will introduce in Congress – hopefully soon.
As an aside - do you find it a coincidence that the largest tax breaks in the skimpy details released would benefit idiot Trump and his family "bigly"?
past tax season I got the following email from a client –
“I was just informed that I am able to write
off my union dues which were $370 for the year.”
client was correct.Union dues are
deductible on Schedule A as a “Miscellaneous Expense”.But the client did not actually get a tax
deduction for union dues on her 2016 tax return.
because a legitimate expense you incurred during the year is “deductible” does
not mean that you can actually deduct the item and receive a tax benefit.
look at this particular “deductible” item – my client’s union dues.
you must itemize – have more “itemizeable” deductions than the Standard
Deduction you are allowed based on your filing status.
are situations where you either must itemize or it is beneficial to itemize,
even if your total allowable deductions are not more than the Standard
Deduction – but these are truly rare.And there are certain items that can be deducted either directly against
a category of income reported on Page 1 of the 1040 – expenses related to
self-employment income on Schedule C or EZ, expenses related to rental income
on Schedule E, and direct expenses related to the sale of investments on
Schedule D – or “above the line” as an “Adjustment to Income”.But in this case union dues are an itemized
deduction claimed on Schedule A.
classic example of the need to itemize to claim a deduction comes from another
of my clients many years ago.When
sending me her tax “stuff” a client expressed great joy in her note because she
donated her used car to charity so she would get a big tax deduction – as the
charity to whom she gave the car had advertised.She was truly disappointed when I told her
she got no tax benefit for her gift because she could not itemize (she rented
an apartment, so had no deductions for property tax and mortgage interest, and
had truly minimal other deductions – and the market value of the used car
donated did not push her “over the top”).
in the case of most Miscellaneous Expenses – job-related expenses such as union
dues, investment expenses, and tax preparation fees - you must first reduce the
total by 2% of your Adjusted Gross Income before you get any tax benefit.If your AGI is $100,000 and your total
expenses are $1,500 you get no tax deduction – 2% of $100,000 is $2,000, which
is more than $1,500.If your allowable
expenses total $2,125 your tax deduction, for which you will receive an actual
tax benefit, is only $125.
third, if you are a victim of the dreaded Alternative Minimum Tax you get no,
or a limited, tax benefit from Miscellaneous Expenses.Miscellaneous itemized deductions subject to
the 2% of AGI limitation are not deductible in calculating AMT.
the example at hand, the taxpayer could itemize but did not have total
allowable Miscellaneous Expenses, including the union dues, in excess of 2% of
AGI.So, while “deductible”, she could
not actually deduct, and receive any tax benefit, from her union dues.
many cases the “deductibility” of an item depends on the specific facts and
circumstances of the individual taxpayer.As I have said many times before, the answer to the question “Can I
deduct X, Y, or Z” is almost always “it depends”.
deductions that you assume based on “common knowledge” are fully deductible may
be limited due to “facts and circumstances”.Just because you receive a Form 1098 reporting $12,459 in mortgage
interest for the year does not mean you can deduct $12,459 on Schedule A.I believe many taxpayers do not deduct the
correct amount of allowable mortgage interest.Your actual mortgage interest deduction is limited based on the amount
of the loan and how the money borrowed was used.For complete details check out my MORTGAGE INTEREST GUIDE.
just because someone tells you, or you hear or read somewhere, that an item is
“deductible” does not mean you can actually deduct it on your tax return.As usual check with your tax professional
before doing anything.
Another tax filing season down – 4 more to go till I can say I
have prepared 1040s for 50 tax seasons.
Another successful year – I ended the season with only 22 GDEs
(the “E” is for “extension” – you can guess what the “GD” is).This is lower than the 24 from last tax
season, which at the time was the least amount of GDEs since I took over my
mentor’s practice in 1999.
13 were because the client’s package, or all the needed
information, was received well after my deadline for timely filing of March 18th
- many received in April (actually one package arrived in my PO box on April 19th).Only2
were “red-filed” – I needed more information to complete the return.And 7 were requested by clients who did not
send me any 2016 tax info yet.I expect
that there is one more from a client who had not contacted me at all yet – they
usually submit their own GDE application and send me their “stuff” in the
Not a single GDE was due to my workload!Every single return received in my hands by
March 18th was completed and returned to the client, as were several
received after that date.
So once again my filing season ran smoothly.There were no car, equipment, computer, or
other issues.The weather did impact the
season on one occasion – for the first time since I moved to NE Pennsylvania
the snowfall was much more here than in NJ.A 30+ inch blizzard in mid-March literally buried my car and I could go
nowhere for almost 2 weeks.I have
always said that I welcomed a huge snow storm in March so I could catch-up
without interruption – and I got my wish this season.
I had no issues with late-issued corrected Consolidated 1099 Tax
Statements from brokerage houses this year.The returns of several clients who usually had to wait until late March
to send me their “stuff” were done earlier than usual.And more cost basis information was provided,
to both taxpayers and the IRS, for long-term transactions.
The IRS did much better processing returns this year.I have not heard of any excessive refund
delays or other processing FUs so far.NJ announced in January that no refund, regardless of how submitted,
would be issued until March 1st, due to additional identity
verification - and I advised February filers with refunds of this fact.
Despite an advertised slight delay in the date the IRS would
begin processing returns (Monday, Jan. 23, 2017) the season officially began
for me, as it always has, on February 1st.I can could on the fingers of one hand the
number of returns I have prepared before February 1st in the past 45
Thanks to the PATH Act (nothing to do with the subway from NJ to
NYC) the IRS was required to hold tax refunds until Feb. 15 for taxpayers who
claimed the Earned Income Tax Credit or the Additional Child Tax Credit.This did not affect my clients – as I have a
truly minimal number of clients who claim these government welfare benefits.
While I continue to oppose the excessive additional
“due-diligence” requirements for tax professionals preparing tax returns of
clients requesting an Earned Income Credit, and beginning with this season the
American Opportunity Credit and the Child Tax Credit, and the existence of IRS
Form 8867, I was happy that the form was reduced to 2 pages this season and
wasted less of my time to prepare.
I did absolutely nothing new, different, or additional this season
regarding EITC, AOTC, and CTC claims than I
have done in past years.The Form 8867
was only a minor time-wasting inconvenience this season.My biggest issue with this form was having to
remember to include it for taxpayers claiming the Child Tax Credit.
Most of my clients have been with me for decades, often before
the birth of their applicable dependents, so I am well aware of their
situation.And I have always asked
clients for college Bursar’s or other financial statements in addition to the
Form 1098-T to verify the correct amount of qualified tuition, fees and
expenses when claiming tuition tax benefits.While Congress, doing something right for a change, did require colleges
to properly complete the Form 1098-T beginning with tax year 2016 returns, the
IRS gave in to whining from the schools and continued to allow the 2016 Form
1098-T to be as useful as tits on a bull.
As most of you know I no longer accept ANY new clients.If I did I would refuse to accept clients who
would be requesting an Earned Income Credit.
The Obamacare “shared responsibility penalty” was not an issue
for me this season.Nor was the advance
premium tax credit reconciliation.There
was only one client who would have been subject to this penalty – but the IRS
announced that it would not delay processing of returns that were “silent” on
full-year health insurance coverage (did not check the box to verify full-year
coverage and did not include Form 8965), so I completed the return without
checking the box and without completing Form 8965.The IRS may ask for this form later in the year
– and I will deal with the issue it that occurs.I continue to believe it is wrong to require
a taxpayer to pay someone to assess an IRS penalty.
Forms 1095-A, B, and C arrived earlier this season, though the
late receipt of Form 1095-B or C would not hold up my preparation of a
return.Information on W-2s and Social
Security statements and client representations are enough for me to indicate
full-year health insurance coverage.
On the state side – I continued to be extremely pleased with New
York’s new “enhanced” online Form IT-201 and IT-203 “fill-in” (but manually
filed) forms.The “enhancement”
automatically did the math and actually calculated the tax – saving valuable time.I used the new enhanced process for all of
the New York returns I prepared – and continued to add to my invoice a $5.00
“New York State Tax Preparer Extortion Fee Surcharge” for all clients with NY
I also continued to use NJWebFile to electronically submit
NJ-1040s directly to Trenton free of charge whenever possible (unless
specifically forbidden by the client’s request).However there are still too many situations
where this option is not available.When
I had to manually prepare the return for the client to mail I used the online
“Fill-In” Form 1040, which did some math but did not automatically calculate
the tax (I wish NJ would initiate a system similar to the NYS “enhanced”
process).I did not encounter any
issues with NJ returns – yet.But it is
The delayed filing deadline – April 18 instead of April 15 again
this year – really did not add much work time to my season.I stopped working on 1040s April 14, and
actually completed most of the GDE forms that afternoon.As you may know, I never work on 1040s (or
1040As) on the actual filing deadline day (click here to see a post from fellow
tax-blogger Peter Reilly explaining why).
As is my custom I took time off after the 18th to
recover at the Jersey shore.As you read
this I am back at my desk working on GDEs at a more leisurely pace.
So another tax filing season is added to the history books.Let’s hope the next 4 seasons continue to be
similarly smooth-running and problem-free.
I end with my usual question for fellow tax pros – did I miss
TTF also calculates TFD for each
state.For my home state of PA it is the
same day – April 23rd.For my
former home state of NJ it is May 13- #49 on the list.CT is #50 at May 21st.So once again it has been proven that moving
from NJ to PA was indeed a good move.
* During the last days of the filing season
Russ Fox provided his annual listing of the top ten “Bozo Tax Tips” – “strategies
that you really, really, really shouldn’t try” - at TAXABLE TALK.
The most important tip for everyone to read
is #3 – “Let Your IRS Notice Age Like Fine Wine!”.I say this time and time again, as Russ
suggests in the post, “it’s something that bears repeating”.If you receive a letter or notice from the
IRS or a state tax agency GIVE IT TO YOUR TAX PREPARER IMMEDIATELY!
Perhaps the biggest bozo in the group is
featured in #6 – “Publicize Your Tax Crimes on Social Media!”.A typical example of how stupid young people
are today, and how the irresponsible use of “social media” encourages and
publicizes their stupidity.
A good reminder from Commissioner Koskinen
- "I think it’s important to remind
people that the IRS does tax administration, not tax policy. Policy decisions
are the domain of the Administration and Congress."If you think taxes are complicated and unfair
the IRS is not to blame – the idiots in Congress are.
And I add my voice to that of IRS employees
– “Everyone at the IRS would be delighted
if you could make the tax code simpler.”I do not believe a simpler tax system would hurt the tax preparation
business – at least not my business.
* Kelly Phillips Erb published an
impressive blog post series on "Taxes from A to Z".At the end of the Z post you can find links
to all the entries in this series.
I have a better question – why is the
self-employment health insurance deduction an “adjustment to income” on the
1040 and not a business deduction on the Schedule C?Deducting it on Schedule C would be make the
deduction more equal to how it is treated if the business owner organized as a
one-person corporation and would ultimately reduce the amount of self-employment
tax, as the deduction as an employee benefit on a corporate return ultimately
reduces the amount of FICA tax.
FYI – it was allowed as a Schedule C
deduction for one tax year in recent history.
You couldn’t prove this by me – I had no
more GDEs this year than last year.
Some good news – the average refund is up
* I realize you have already filed your
2016 tax returns (unless you requested a GD extension).But if you discover anything in the above
blog posts and online articles that you could have claimed on your return to
reduce your tax liability all is not lost.I explain in my vintage post “Amending Your Return”.This post is a decade old – so add ten years
to the years referenced in the discussion.
THE LAST WORD
My opinion of the idiot in the White House
(I realize there are currently several idiots in the White House – but then I
use this description I mean the head idiot – Tronald Dump) has not changed.I
continue to oppose and denounce Trump as a dangerous mentally unstable
narcissist.For the sake of the
country and the world he must be removed from office ASAP.
Check out this editorial from the Los
Angeles Times on “Our Dishonest President” – the first in a series of
editorials on “The Trouble With Trump”.