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.
seems appropriate on Halloween to discuss one of the scariest items involved
with 1040 preparation.
have said it before and I will say it again.I HATE K-1s.Specifically, the
K-1s, always late, for limited partnership investments.
almost all cases, unless there is a substantial investment, the financial tax
benefits of these type of investments, if there are any, are wiped out by the
cost of the additional work to actually prepare the investor’s individual tax
very seriously believe that brokers receive a higher commission for selling
these investments, and often brokerage houses instruct their brokers to sell
specific limited partnership investments to clients.I also firmly believe that there are
alternative mutual fund investments that provide the same, or perhaps better,
all we had to deal with were items in boxes 1 through 10 and 12 – business income,
interest, dividends, capital gains, and the Section 179 deduction – it would be
ok.The instructions on Page 2 of the
Form K-1 clearly indicate what line on series 1040 forms and schedules on which
to enter these numbers. The problem with
these GD forms concerns the items of “other income” and “other deductions”.
example, under “other income” the referenced internal supplemental statements
reference Internal Revenue Code Sections 475, 988, and 1256, cancellation of
debt, other portfolio income, and other income (not specifically identified). For most of these items the instructions say “See
the Partner’s Instructions”.
income” is interest, dividends, royalties, and capital gains.Sometimes the “other income” boxes detail specifically
references “interest, dividends, and capital gains”.Why is this income not included in the boxes
in the first 10 that specifically identify interest, dividends, royalties, and
long and short-term capital gains?Are
these items reported on Form 1040 Schedules, B, D or E, or are they merely “other
income” reported on Form 1040 Line 21?Or do they go elsewhere?
deductions” refers to Internal Revenue Code Sections 59(e)(2) and 743,
pass-thru deductions, royalty deductions, and, again not specifically
identified, other deductions.Again, we
are told to “See the Partner’s Instructions”.While I would expect “royalty deductions” are entered on Page 1 of
Schedule E, where do the rest of these deductions go?
course, the taxpayer investor has absolutely no idea what these things mean –
nor do they, for the most part, give a rat’s hind quarters.They just give the multiple K-1s to their tax
preparer, often as they arrive (usually after April 15th) and expect
us to figure it out.
“framework” for tax “reform” talks of doing away with business “loopholes”.The answer to fixing the dreaded limited
partnership K-1 would be to do away with all the “loopholes” and Internal
Revenue Code Sections that create the confusing and convoluted components of “other
income” and “other deductions” identified above, and have ONE net income item
for either “ordinary business income(loss)” or “net rental income(loss)” to
report all “non-portfolio” income and deductions, include all portfolio income
from all sources in the appropriate boxes 5 through 10, and limit “other
deductions” to the traditional Section 179 deduction, charitable contributions,
investment interest, and miscellaneous “portfolio” expenses.I hope this is part of what the “framework”
is talking about.
would be interested in hearing from other tax pros about the dreaded limited
partnership investment K-1.
We are all, taxpayers and tax professionals
alike, anxiously awaiting the actual specific details of the “cocktail napkin
scribblings” that is the Republican “framework” for tax “reform”, which is
expected to be released in early November.
* It is that time of the year for year-end
tax planning again.The November issue
of ROBERT D FLACH’S 1040 INSIGHTS includes details on year-end planning
techniques and strategies, details on what’s new in taxes for 2017, and some worksheets
to help with your year-end plan.I will
send you a copy of this issue as a pdf email attachment for only $3.00.
Send your check or money order for $3.00
payable to TAXES AND ACCOUNTING, INC to Taxes and Accounting, Inc, 1040
Insights Tax Planning Issue, PO Box A, Hawley PA 18428.
THE FINAL WORD
It is vitally important that every American
read this remarkable speech from one of the sadly too few true patriots in
politics today. Click here.
Let’s get one thing perfectly clear.
Arrogant idiot Donald T Rump does not want
tax reform, or anything else on the so-called "agenda". He wants a
legislative victory – any legislation regardless of its content or merit –
simply so he can say “Look what I did”.
Trump has no political beliefs. His one and
only true belief is "Trump is good and Trump is great".
Republicans who refuse to vocally denounce
Trump because they believe he wants what they want are as delusional as he is!
If you want to talk about tax
loopholes that disproportionately benefit the “wealthy” let’s take a look at
the deduction for depreciation of real property. See my post "A Controversial Tax Reform Idea".
Those in the higher brackets – 28% to
39.6% - get, at some point (the deduction may not be currently allowed but
“suspended” to be deducted in the year of sale), an ordinary income deduction
for a truly phantom expense – depreciation of real estate.This deduction is merely a “loan” that must
be paid back – referred to as “recapture” - when the property is sold.But it is paid back at a maximum rate of
25%.So, the net benefit is 3% to 14.5%
on a non-existent expense.
As a general rule - to which, as with
any rule, there are certainly exceptions – real estate does not
“depreciate”.It “appreciates”.My father sold the home he purchased for
$13,000 in the 1950s for $75,000 in the 2000s – and the sale price was too low.
Real estate is an investment, just
like stocks, bonds, mutual funds, etc.You invest in rental real estate because you expect the building to
increase in value over time, often more so than stocks and mutual funds, and
because it generates “dividends” in the form of net “in pocket” rental income.
The deduction for depreciation of real
estate is like allowing those who purchase stock to depreciate the purchase
price of the stock as a deduction against the dividends paid out.
Being a phantom expense, the deduction
for depreciation of real estate distorts the true economic reality of the
investment activity.An activity
producing a positive cash profit becomes a deductible tax loss.
A good example is the truly huuuuuuge
loss reported on the one tax return of arrogant idiot Donald T Rump that we
have actually seen, almost a billion dollars, that caused him to avoid income
taxes that year and potentially on several carryback or carryforward years, has
been explained by many as the result of the deduction for depreciation on real
If the cocktail napkin scribblings
that is the “framework” for tax reform truly wants to do away with tax
loopholes that benefit the wealthy it should include the deduction for
depreciation of real property on the list.
is not a time for “patience” — Donald
Trump is not fit for office. It is evident that there is zero reason to
believe “he can be a good president.”
by the nature of Mr. Trump’s relationship with Vladimir Putin and Russia, his willingness to exploit the office of the
Presidency for his personal gain and treat the government like a family
enterprise, his conduct during Charlottesville, his decision to pull out of
the Paris climate accords, or his seeming determination to take the nation to
war, he has violated the Constitution, the office of the Presidency, and the
trust of the public. He is a clear and present danger to the United States of
Senator Bob Corker, Chair of the Senate Foreign Relations Committee, referred
to the Trump White House as a day care center, and observed that this president
has put us “on the path to World War III.” This comes following reports that
Trump’s own Secretary of State referred to him as a “moron” and that Chief of
Staff John Kelly and Secretary of Defense James Mattis have an agreement not to
leave Trump home alone for fear of what he could do. And we have seen other Republican
Senators, including Senators Sasse and Flake, express their own profound
Trump has lost the trust of the members of his own administration and leading
members of his own party, surely it is time to act.
accounting of his record to date leads to the same conclusion. He is turning
his back on Lady Liberty by holding immigrant children hostage. He is actively
sabotaging the Affordable Care Act — a law he is constitutionally obligated to
faithfully execute — while seeking to strip away health care coverage that will
leave millions of Americans to choose between life and bankruptcy. He is
repealing clean air protections and unleashing polluters, even as increasingly
catastrophic natural disasters supercharged by our warming planet ravaged the
country throughout the summer — from hurricanes Harvey, Irma, and Maria, to the
wildfires that have raged across California, Oregon, Washington, Idaho, and
Montana. He has threatened to reduce aid for millions of American citizens in
Puerto Rico who are struggling to survive without drinkable water or
electricity — a move that would be a total dereliction of his duty. And every
day, Americans are left bracing for a Twitter screed that could set off a
nuclear war. These actions represent systemic attacks on our nation’s future.
They endanger every single one of your constituents. That’s why you have a duty
to speak out.
There is no moral reason to remain
silent about this. Constitutional experts like Noah
Feldman have already laid out clear legal and historical foundations for
impeachment. Founding Father Alexander Hamilton, a co-author of the
Federalist Papers — and an immigrant himself — argued that “high crimes and
misdemeanors” could be defined as “abuse or violation of some public trust.”
This president has clearly already exceeded these standards. Congress has
impeached past presidents for far less.
we know that Republicans do not seem prepared to pursue impeachment even as
members in their own ranks openly question Trump’s fitness for office, we are
all working hard to ensure Democrats will take back the House and Senate in
Trump’s total lack of fitness for office,
the question of impeachment becomes a very real issue should we succeed in our
midterm goal. That makes it imperative for every Governor of every state, and
every mayor of every city, to acknowledge where they stand. This question
affects the lives of every single American. They deserve to hear whether or not
our party is willing to do what is necessary to protect them and their
families. This is not an academic exercise. The very stability of the Republic is at stake.
by way of this letter, I am asking you today to make public your position on
the impeachment of Donald Trump, and to urge your federal representatives to
remove him from office at once. Every day he remains in reach of the nuclear
codes is another day for him to menace the citizens you serve and protect. Your
constituents deserve to know they are represented by people in every level of
government who have the patriotism and political courage to stand up and take
action when it is so desperately needed. This is not a time to give in to
an establishment that insists on acting the way the establishment always does,
with “patience” or “caution.” It is an unprecedented moment, and it calls for
extraordinary measures. We cannot remain fixated on what is politically smart.
We have to do what is morally right.
reform has become a hot political topic.Reduce taxes on the middle class, or increase taxes on the “wealthy”
simply because they can afford it.
see a great need for substantive tax reform not to reduce, or for some
taxpayers increase, the actual amount of taxes paid – but to simplify the Tax
Code and make it more fair.
ever said taxes are fair.There are many
inequities in the US Tax Code, some purposeful and some unintended.
the biggest inequities concerns how the Code treats some aspects of “gross
income” and expenses related to generating this income.I speak specifically of the taxation of
gambling winnings and legal settlements.
have gambling winnings you must report, in most cases (how to report some
winnings is a topic for another post), the gross
winnings as income on Page 1 of the Form 1040.This is the amount that is reported on Form W-2G.So gross winnings are included in Adjusted
Gross Income (AGI).But gambling losses,
to the extent of winnings reported, are deducted as a Miscellaneous Deduction
on Schedule A if you are able to itemize
(although not subject to the 2% of
the gross amount of legal settlements,
except for settlements for physical injuries or sickness (any damages or
settlement you receive to compensate you for your medical expenses, lost wages,
and pain, suffering, and emotional distress is not included in income), is
included as income on Page 1 of Form 1040.The legal fees, often as much as 1/3 of the settlement, and other related
are also deducted as a Miscellaneous Deduction on Schedule A if you are able to itemize (in this
case the deduction is subject to the 2% of AGI exclusion).
taxpayer can have $5,000 in gross winnings from gambling activities for the
year, but $6,000 in gambling losses.So,
the taxpayer’s gambling activity for the year has resulted in a loss.The taxpayer ended up with no money “in
pocket’ from gambling.
the taxpayer is able to itemize without taking into effect the allowed gambling
losses, the Schedule A deduction for $5,000 in gambling losses results in net
taxable income of 0 – so, in effect but not necessarily in reality, he/she does
not pay federal income tax on the winnings.But if the taxpayer is not able to itemize, even with the gambling loss
deduction, or if he/she is only able to itemize because of the gambling loss
deduction (without the deduction his itemizable deductions do not exceed the
applicable Standard Deduction), he/she will be paying federal income tax on up
to $5,000 of income that was not actually received – in the 25% tax bracket $0
in net gambling income could cost the taxpayer at least $1,250.
with a taxable legal settlement, the need to deduct legal fees as a
miscellaneous itemized deduction subject to the 2% of AGI exclusion could
result in federal income tax being paid on more than the actual “in pocket”
course, a large portion of the inequity comes from the fact that various items
of income are increased and deductions and credits are reduced or eliminated
based on one’s AGI.And the fact that
most itemized miscellaneous deductions are not allowed in calculating the
dreaded Alternative Minimum Tax (AMT).
a taxpayer may be able to wipe out gambling winnings with fully deductible
gambling losses, the fact that gross winnings are included in AGI could result
in more of the taxpayer’s Social Security or Railroad Retirement benefits (the
amount of benefits taxed is determined by a formula that is based on AGI) being
taxed – many frequent gamblers in the casinos of Atlantic City for example are
senior citizens – or could reduce or totally eliminate allowable tax deductions
or credits.So again, the taxpayer is in
reality paying federal income tax on $0 in net income.
same is possible with a taxable legal settlement – except for settlements for discrimination
claims, the related legal fees allowed as an “adjustment to income” which
reduces AGI.And, while there may be no
excess tax under “regular” income tax rules there may be AMT.Allowable gambling losses from Schedule A are
fully deductible in calculating the dreaded AMT – but because legal fees are a
miscellaneous deduction subject to the 2% of AGI limitation they are not deductible in calculating AMT.So, tax is paid on the full amount of the
gross settlement at a flat 26% or 28%.When adding the federal and state tax to the legal fees the taxpayer may
end up with only 1/3 or less of the actual award “in pocket”.
while in many cases net and not gross gambling winnings are taxed under AMT,
the fact that gross winnings are included in AGI, and therefore Alternative
Minimum Taxable Income (AMTI), could reduce the AMT exemption, resulting in AMT
tax on gambling winnings even if the net is 0.$5,000 in gross winnings can reduce the AMT exemption by $1,250 and
result in an additional $325 or $350 in AMT.
AMT issue would go away if tax legislation repeals this tax.And changing the way Social Security and
Railroad Retirement benefits are taxed and no longer allowing AMT to affect tax
deductions and credits would also help to remove inequities.But the best way to do away with the
unfairness of the tax treatment of these two types of income would be allowing
taxpayers to net gambling losses against gambling wins (still not allowing the
deduction of more losses than wins) and net legal fees against gross
settlements – either directly by entering the net amount on Page 1 or by
allowing the deductions as an adjustment to income reducing AGI – would certainly
fix the problem.
what do you think?
I will post on other inequities in the current Tax Code in future posts.
Paul makes reference to my special
designation for extensions.
The post has an excellent discussion of the
importance of recordkeeping (highlights are mine) -
records are for YOUR benefit. Here’s why – the courts interpret the internal
revenue code to mean that ALL your income is taxable. Any adjustments,
deductions, or tax credits you might receive are bestowed upon you through
legislative grace. It is the taxpayer’s
responsibility to prove they are entitled to any adjustment, deduction, or
people seem to believe it is the other way around – that they are entitled to
claim adjustments, deductions, and credits and the IRS must prove they are not
entitled to claim them. It absolutely does not work that way. If you are audited and you cannot
document your qualification for a deduction or credit the IRS will disallow it
and charge you additional taxes, interest, and possibly penalties. Keep
IRS announced today that California wildfire victims have until January 31,
2018 to file various tax returns (including tax returns on extension due this
coming Monday, October 16th). California’s Franchise Tax Board (the state
income tax agency) immediately followed suit.”
* It appears I missed this post first time
around, but “found” it via a reprint at TAX VOX.From Janet Novack’s “Tax Reform Week” series
at FORBES.COM a guest post from Eugene Steuerle, co-founder of the Tax Policy
Center, that discusses “How To Design Tax Reform: 8 Lessons From 1986”.
* As I
have said before, while I would NEVER recommend that ANYONE use Henry and
Richard to prepare their tax returns, I do find the information on the H+R blog
and website to be accurate and helpful.Case in point – “FAFSA Tax Return Requirements”.
* Over at GETTING YOUR FINANCIAL DUCKS IN A
ROW Sterling Raskie reminds taxpayers age 70½ to “Remember Your RMD” -
getting close to the end of the year and that means many individuals need to
take their required minimum distributions (RMDs). It also means that there will
be individuals who must begin taking their required minimum distributions as
they will have reached the magic age of 70 ½.”
* FREE! FREE! FREE! New tax e-newsletter -
TAX TOPICS.Check it out!
THE FINAL WORD
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