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

* Have you seen my latest tax tips at MainStreet.com – “Open A ROTH IRA for Your Child” and “Plan a Deductible Summer Vacation”?

* It seems that many of my tax columns from MainStreet.com also showed up at Consumerist.com – where I am referred to as “Tax Cat’s Smarter Cousin”.

* Over at the CAFETAX blog Joseph Arsenault talks about the penalty for early withdrawal from annuity and retirement distributions issued before the age of 59 1/2 “Myth Busted 10% Penalty”.

His bottom line is the best advice that anyone can give regarding not just retirement distributions but any tax issue –

“Of course never make any assumptions before taking retirement distributions. Always consult with a professional about your unique situation.”

* COMPLETE PAYROLL INC reports that “President’s Budget Proposal Calls for Quarterly W-2 Reporting”.

Everything old is new again! I seem to recall that when I first began doing payroll back in the mid-1970s we had to list the name and earnings for each employee on the quarterly Form 941, with the total needing to reconcile to gross wages for the quarter reported on the form.

* The IRS tells us that “Kentucky Severe Storm and Flooding Victims Have Until June 30 to File Their Tax Returns” – similar to the recent relief for certain NJ residents that gave me some extra time to timely file federal and state returns.

* Roni Deutch reports on what to do if “you attended jury duty last year {or this year – rdf} and had an employer who continued to pay your salary but required you to forfeit fees that the court would have paid you for serving on the jury” in her post “Tax Deduction of the Week: Jury Pay Paid to an Employer” at her TAX HELP BLOG.

* Kay Bell discusses something else Congress is thinking about taxing in “Tax Proposed on Carry-on Bag Fees” at DON’T MESS WITH TAXES. The post also provides some insight as to why the airlines are charging for individual items like carry-ons, food, blankets and pillows instead of just raising the price of the ticket.

* Happy 3rd Birthday to the 21st CENTURY TAXATION blog. Here’s to many more!

TTFN

LEARNING FROM YOUR 1040 - PART TWO

Back in January or February when you were getting your tax “stuff” together to prepare your 2009 Form 1040, or to give to your tax professional, did you find that your recordkeeping was less than adequate, and that you had to make estimates of many of your potentially deductible expenses?

If you answered “yes” to this question you should resolve to be more efficient and effective in documenting your deductions for 2010.

You MUST keep good, contemporaneous records of all of your income and deductions in the manner prescribed by the IRS and the Tax Code. This is even more important with certain deductions that require special recordkeeping or additional information, such as business meals and entertainment, business use of "listed property" such as automobiles, cell phones and computers, gambling losses, and charitable donations.

Keep records during the year as if you are going to be audited by the IRS. In the rare case your return is selected for review you will be ready. If you are not audited you will at least be assured that you did not miss any deductions or credits to which you were entitled.

Even if you use a tax professional the more information you provide him/her at tax time the more accurate your return will be, and the easier it will be to properly prepare. And your preparation fee should be reduced.

I have developed a package of advice, information and forms, schedules and worksheets to help make sure that you pay the absolute least amount of federal and state income tax for 2001 - “Documenting 2010 Deductions”.

Click on the above link to learn more about this package.

TTFN

FROM THE MAILBAG

I received the following email from a reader:

“Sort of a comment ---

When are any of the tax pros going to start complaining about the lack of the passage of the expected increase in the ALTERNATIVE MINIMUM TAX EXEMPTION AMOUNT FOR 2010.

The year is almost half over and millions will be hit by it. Contacting senators and Congressional reps does NOTHING!!!!

Unless the tax pros start highlighting the fact that nothing has been done, nothing will get done!!!!!!!!!!!!

This is serious money to middle class taxpayers in high tax states such as NY, NJ and CA.

Thanks!!!!!!!!!

Sincerely,

Virginia Fogarty”

As a tax pro and tax blogger I have been complaining about the existence of the dreaded Alternative Minimum Tax for years now – but it is still with us.

While I certainly believe that the primary goal/motivation of any politician is getting re-elected and not properly administering the government, and that his/her loyalty to “the Party” certainly trumps any loyalty to constituents – I do not believe that contacting senators and representatives does nothing. It was a deluge of letters to Congress that caused the creation of the damned minimum tax in the first place.

Taxpayers should indeed continue to write to their representatives in Washington demanding for relief from the dreaded AMT.

It is not the specific responsibility of a tax professional to call to task the Congress any more than it is the responsibility of every citizen. Countless posts about abolishing the dreaded AMT by a multitude of blogging tax professionals have certainly not produced the intended result.

Congress is aware of the problem with the dreaded AMT. But their response, as one would expect, has been the lazy one of putting off real action by regularly passing a one or two year patch.

I do expect the cafones in Washington to pass another at least one-year patch for 2010, along with continuing the ridiculous policy of annual extensions of the popular “extender” tax benefits.

Fellow tax blogger Kay Bell has just written about the extenders in the post “Ways To Pay for Tax Extenders Grows” at DON’T MESS WITH TAXES.

Kay tells us –

“One thing Senators and Representatives they can agree on, though, is that they want the extenders done by the end of May.

“The official combined bill is now called the Promoting American Jobs and Closing Tax Loopholes Act and Ways and Means Committee Chair Sander M. Levin (D-Mich.) is aiming for a House vote on it next week.”

While her post does not say that the annual dreaded AMT patch is a part of the bill, and I did not find anything substantial on the contents of the bill in an online search, if it is not I do expect that Congress will pass the patch at sometime in the year. Hey, it is still early in the year. In the past the cafones have waited until the last minute to pass extenders.

Instead of passing the annual fixes they should take the time to fix the Tax Code itself.

To explain what Virginia is talking about – as of this writing the dreaded Alternative Minimum Tax exemptions for 2010 are:

• $33,750 for single and head of household filers,
• $45,000 for married people filing jointly and for qualifying widows or widowers, and
• $22,500 for married people filing separately.

The 2009 exemptions were:

• $46,700 for single and head of household filers,
• $70,950 for married people filing jointly and for qualifying widows or widowers, and
• $35,475 for married people filing separately.

At the current lower exemptions millions more taxpayer will become victims of this ridiculous tax – which is neither an alternative nor minimum. Someone said it should more appropriately be called the Mandatory Maximum Tax.

So, as a tax professional, a taxpayer, and a citizen I do call upon Congress to promptly deal with the dreaded Alternative Minimum Tax. I hope you will join me.

TTFN

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

* The Treasury Inspector General for Tax Administration (TIGTA) has discovered widespread noncompliance regarding Individual Retirement Accounts (IRA).

“In the report released today [A Service-wide Strategy Is Needed to Address Growing Noncompliance With Individual Retirement Account Contribution and Distribution Requirements (2010-40-043)], TIGTA found that 295,141 individuals made more than $1.5 billion in excess contributions to their IRAs in 2006 and 2007, resulting in an estimated loss of $94 million in excise tax and $17 million in income tax. In addition, TIGTA found that 255,498 individuals did not take the required minimum distributions totaling $348 million during that time, resulting in an estimated tax revenue loss of $174 million.”

I have been working on what will be a week-long post series on just about everything you need to know about IRAs, which should be up next week.

*Dennis Cauchon, writing in USA Today, tells us that “Tax Bills in 2009 at Lowest Level Since 1950”!

According to the item – “Amid complaints about high taxes and calls for a smaller government, Americans paid their lowest level of taxes last year since Harry Truman's presidency, a USA TODAY analysis of federal data found”.

Cauchon also tells us – “Taxes paid have fallen much faster than income in this recession. Personal income fell 2% last year. Taxes paid {excluding Social Security tax – rdf} dropped 23%.”

One of the main reasons (highlight is mine) – “Presidents Clinton and Bush pushed through a series of tax changes — credits, lower rates, higher exemptions — that slashed income taxes for poor and middle-class families. A drop in income now can trigger big tax breaks and sharply lower rates, sometimes falling to zero.”

And refundable credits, an open call for tax fraud, can often cause “non-taxpayers” to actually “make a profit” by filing a tax return.

* TAX GIRL Kelly Phillips Erb takes the words out of my mouth with the excellent advice in her answer to the question posed in her post “Ask the Taxgirl: Filing Late Tax Returns”.

* Trish McIntire talks about the difference between “may” and “can” when it comes to taxes in her post “Can or May? Casualty Losses” at OUR TAXING TIMES.

She correctly points out -“There are a lot of IRS Code sections where the taxpayer gets a surprise. They have the government's permission to make a specific deduction (may) but once the rules are applied to the issue, they can't deduct much or anything.” Her post provides one example – casualty losses.

There are many examples where an item “may be deducted but it can't always help you on your taxes”. May I deduct the contribution of a used car to charity? Yes you may. But can I? To begin with - only if you itemize.

* Yesterday’s (May 11) second news item at the Small Business Taxes and Management uses a Tax Court example to make an excellent point - “Recordkeeping can spell the difference between securing a deduction and losing it”.

* Monday’s AccountantsWorld.com daily headline news email took me to an update from BNA on the Registered Preparer designation titled “IRS Says No Registered Preparer Designation Without Competency Test”.

According to the update –

+ Registered tax professionals “will not be given their registration papers with IRS until they have passed a test to determine their competency”. IRS Electronic Tax Administration Director David Williams stated, “People who come in [early] will have three years before they have to take the competency exam,” he said. “Once you pass the test, we propose to call you an IRS registered tax preparer. We will give folks a certificate that says that.”

+ “IRS is working now on setting the user fee.”

+ Williams said the competency exam “is expected to be available in May 2011”.

+ “It will be several years before a database is up and running that will allow taxpayers to check to see what tests their preparer has passed.”

TTFN

CLAIMING THE RESIDENTIAL ENERGY CREDIT

Quite a few clients included with their tax “stuff” this past season bills for the purchase and installation of storm windows and doors, a new roof, and new furnaces, boilers and air conditioners - expecting to receive the 30% Residential Energy Credit. However only a couple actually provided me with a Manufacturer’s Certification that verifies the item’s eligibility for the credit.

In my client letter I specifically stated – “If you purchased energy-efficient windows or exterior doors, insulation, a central air conditioner, a water heater, a natural gas, propane or oil furnace or boiler, or a pigmented metal roof in 2009 be sure to give me the receipt and the ‘manufacturer’s certification’”.

In almost all the cases where the eligibility of the item was in question – which was all cases where I was not provided a manufacturer’s certification – I went to the “Federal Tax Credits for Consumer Energy Efficiency” page at www.energystar.gov before claiming a credit.

This is a great resource. It provides the very specific requirements for eligibility of each individual item – i.e. Heating, Ventilating, Air Conditioning (HVAC), Insulation, Roofs (Metal and Asphalt), Water Heaters, Windows and Doors, etc. – as well as links to lists of specific manufacturers and products that qualify.

In several instances the client, while not providing a manufacturer’s certification, did send or give me a descriptive brochure on the item purchased, which listed the product’s specifications, and I was able to determine eligibility by matching the product specifications to the requirements listed on the website. Where I just received a copy of a bill I emailed the client with the specific requirements and asked them to verify that the item they purchased matched the requirements.

This credit is still available for 2010. If you are purchasing an item that qualifies for the credit be sure to get a manufacturer’s certification – and be sure to include it with the “stuff” you give your tax professional next year!

If you do not receive a certification, or, more better, prior to making the actual purchase, check out the specific requirements at the Energy Star web page and make sure what you are buying does qualify. When sending me, or your tax professional, your 2010 “stuff” include a note or print-out that indicates that the specifications of your purchase meets the IRS requirements.

FYI – installation costs are included in the amount eligible for the credit for:

• HVAC systems
• Biomass Stoves
• Water Heaters (including solar)
• Solar Panels
• Geothermal Heat Pumps
• Wind Energy Systems
• Fuel Cells

Installations costs for windows, doors, insulation, and roofs are not eligible for the credit.

TTFN

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

* Elizabeth P. Rosen provides an excellent post titled “Buying vs. Renting: Tax Benefits” at the US TAX CENTER blog.

She begins the post with the following –

“If you’re considering buying a home, ask yourself these questions first:

1. Are you financially prepared?
2. Can you commit to living in one place for at least 5 years?
3. Is it the right time to buy?
4. Are you psychologically prepared?”

If more Americans had asked themselves these questions, or reviewed Elizabeth’s “bad reasons to buy a house” at the end of the post, before buying a home our economy would not be in the mucking fess that it is today!

* I do not agree that one should “never say never” – and have posted about some tax-related “nevers” in the past.

The IRS HITMAN gives us his “Top 3 Thing You Should NEVER Do With Your Taxes”. I agree with all of them.

* The specific example discussed in the third item of a recent “A Little This-A . . .” post at my NJ TAX PRACTICE BLOG underscores important advice for taxpayers who receive a balance due notice from the NJ Division of Taxation, or, for that matter, the IRS or any other state tax authority –

“If you receive any kind of notice from the NJ Division of Taxation it is more likely than not that it is erroneous. Do not be scared or intimidated by the notice and automatically pay the balance requested. Check it out. Send a copy of the notice to your tax professional immediately.”

This falls under my list of tax “nevers” –

“3. NEVER assume that a notice you receive from the Internal Revenue Service or a state tax authority is correct. More often than not it is wrong. To repeat, when you get a letter or notice from “Sam” or any of your other “Uncles” give it to your tax professional immediately.”

* CNNMONEY.COM reports on “Health Care Law's Massive, Hidden Tax Change”.

“Section 9006 of the health care bill -- just a few lines buried in the 2,409-page document -- mandates that beginning in 2012 all companies will have to issue 1099 tax forms not just to contract workers but to any individual or corporation from which they buy more than $600 in goods or services in a tax year.”

We have never been required to issue 1099s to corporations in the past – and also never had to issue 1099s for purchases of goods. This creates a lot of additional work for small businesses.

* First there was “Cash for Clunkers” (the clunkers referred to were automobiles and not members of Congress). Now CNNMONEY.COM reports that “House Approves $6 Billion 'Cash for Caulkers'”.

But this is not law yet – “The Senate is expected to take up the legislation this summer and determine how to pay for the program, which is likely to be controversial.”

* Did you see my item on “Teens, Summer Jobs, and Taxes” at MAINSTREET.COM?

* While I truly believe that fellow tax blogger Joe Kristan of THE ROTH AND COMPANY TAX UPDATE BLOG is sincere in his objection to the new tax preparer regulation regime, I continue to be skeptical about the AICPA’s official opposition, as discussed in Joe’s post “Pushing Back at the IRS Preparer Regulation Plan”.

Joe tells us that the AICPA feels “regulation beyond assigning preparer ID numbers is not needed”.

The real reason that the AICPA is against creating a certified or licensed tax professional “credential” is that CPAs will then no longer “own” tax preparation – as they have told one of their own they feel they currently do. That is to say CPAs will no longer be erroneously thought by the public to be tax experts by virtue of their initials – and taxpayers will go to previously unenrolled but newly licensed tax preparers instead of CPAs for tax preparation.

The newly licensed preparers will have demonstrated via testing and required CPE in taxation that they are true tax experts, while possession of the CPA “credential” has absolutely nothing to do with one’s knowledge of or experience with federal individual income taxes.

TTFN

JUST ONE MORE THING . . . HE SAID COLUMBO-LIKE

Oops!

I forgot to mention in this morning’s post on Making Work Pay that you can find out if you did indeed get a $250.00 Economic Recovery Payment at the IRS website.

Click here.

MAKING WORK PAY MAKES MORE WORK

As I mentioned in my tax season review this year’s tax “gimmick” was BO’s “Making Work Pay” credit – a variation of Dubya’s economic “stimulus” rebate checks.

To his credit, no pun intended, BO did avoid the exorbitant expense and general debacle that was W’s rebate checks. However, like the checks, this credit caused great confusion.

The credit was based on 6.2% of earned income – W-2 wages and net earnings from self-employment – up to a maximum of $400.00, or $800.00 for a married couple filing jointly. The 6.2% rate is equal to the Social Security tax.

The original idea, put forth by the Democrats before Congress decided on the first set rebate checks, was a “payroll tax holiday”. The first, if $400.00 was the goal, $6,452 of wages paid to an employee during the year would be exempt from at least the employee share of Social Security tax. This would increase workers’ take-home pay by the intended $400.00. Doing it this way would result in minimal cost to the government. All the work would be done by the employer – and it would not impact the 1040 at all. All that needed to be done was to revise the quarterly Form 941.

Instead BO chose to make it an advance on a Form 1040 credit and issue it by FU-ing with the federal income tax withholding tables. As a result many retirees ended up being under-withheld, as pensions also use these tables to determine withholding. So did taxpayers with more than one job, married couples in general, and working dependents who did not qualify for the credit.

To be perfectly honest, I still don’t know how BO expected an additional $15.00 per week or so in take-home pay was going to save the economy.

The credit was calculated not on a worksheet in the instructions that would be kept with the taxpayer’s records but on a brand new tax form – Schedule M. Making more work for tax preparers and causing the death of more trees.

There has been much confusion regarding the MWP credit – both by taxpayers and the IRS. According to the Treasury Inspector General for Tax Administration – “TIGTA auditors analyzed 2010 filing season results as of the first week of March, 2010. As of that time, the IRS had paid some $24.2 million in erroneous Making Work Pay and Government Retiree Credits”.

Much of the confusion involved BO’s $250.00 “Economic Recovery Payment” send to Social Security and Railroad Retirement recipients. The MWP credit available to a taxpayer or couple is reduced by any ERP received.

John and Mary are both retired and receiving Social Security. Mary has a part time job in 2009, earning $10,000. Because the couple files a joint return they are entitled to a $620.00 MWP credit ($10,000 x 6.2%). However, because they each received a $250.00 ERP in May of 2009 the credit they will get is only $120.00 - $620.00 less $500.00.

A few of my clients had their requested refunds reduced by $250.00 – which was attributed to the MWP credit and the ERP. Any such reduced check should be followed by a notice explaining the reduction. If your refund is reduced review the explanatory notice carefully – or, more better, send the notice to your tax professional immediately. As with any other notice from the IRS, more often then not it is wrong.

TTFN

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

* The IRS HITMAN provides a list of celebrities who owe Uncle Sam in "The IRS-Hitman Celebrity Hit List”

* I have come across a new, to me at least, tax blog via a “tweet”. FreeTaxPro.com provides free tax advice. A recent example is “Tax Aspects of Providing Foster Care”.

* I just heard that “The Internal Revenue Service will host a special nationwide Open House on Saturday May 15 to help small businesses and individuals solve tax problems”.

According to the Service, “Approximately 200 IRS offices, at least one in every state, will be open May 15 from 9 a.m. to 2 p.m. local time. IRS staff will be available on site or by telephone to help taxpayers work through their problems and walk out with solutions.”

Click here to read the IRS press release and find the locations of the participating IRS offices.

* Kay Bell tells us that the “Estate Tax is Still Dead, But Dual Options for Heirs Being Considered” at DON’T MESS WITH TAXES.

* And speaking of Kay - be sure to check out her “Tax Carnival #70: May Day”. Nothing from me this time, but I will be sure to be included in the next one.

* The April 30th issue of THE KIPLINGER TAX LETTER closes with some good news. According to the Kiplinger Washington Editors – “Recent talk about imposing a value-added-tax is just that: Talk”.

Kiplinger thinks that “there’s no way Congress will pass it in the next few years”.

I assume you have guessed that I am against a VAT in the US.

* BTW, Brian O’Connell discusses the VAT in detail at “What a Value-Added Tax Means” over at MAINSTREET.COM.

* And speaking of MAINSTREET.COM – check out my tax tip “Get Tax Credits for Summer Camps”.

* Dr Jean Murray has begun a series of posts on Starting A Business over at JEAN’S BUSINESS LAW/TAXES: US BLOG. She begins with “First Step in Starting a Business - Select Your Business Name”.

* The NEW YORK TIMES reports on an interesting tax deduction in “Tax Break for Erotica? A Museum Favors It”.

TTFN

SOME NEW JERSEY ITEMS

+ Each year the State of New Jersey usually sends out the green NJ Homestead Rebate application to seniors and the disabled in May. This will not be happen this year. Here is the word from the NJ Division of Taxation -

“The proposed State Budget for FY 2011 contains modifications to the Homestead Rebate Program. In years past, rebate applications were sent to senior and disabled homeowners in May. However, until the proposed modifications to the Rebate Program become State Law, no rebate applications will be sent out or accepted by the Division of Taxation. To repeat, THE DIVISION DOES NOT EXPECT TO SEND OUT REBATE APPLICATIONS IN MAY.

The Governor has proposed that 2009 rebates be paid in quarterly installments as credits on the homeowner’s property tax bill. Homeowners would receive the first quarterly credit in May of 2011. Tenants would no longer receive the rebate.

Under the proposal, eligibility requirements and rebate amounts for the 2009 homeowner rebate remain the same as last year. The eligibility criteria used last year for the 2008 homeowner rebate are as follows:

* Domicile (permanent legal residence) is in New Jersey.

* Own and occupy a home in New Jersey that was the applicant’s principal residence on October 1, 2008.

* The home must be subject to local property taxes, and 2008 property taxes must have been paid. However, the State Budget mandates that the 2008 rebate be calculated using 2006 property taxes.

* New Jersey gross income for 2008 does not exceed certain limits. For homeowners age 65 or older and/or disabled on December 31, 2008, the income limit was $150,000 or less. For homeowners under age 65 and not disabled on December 31, 2008, the income limit was $75,000 or less.

Information about the proposed changes to the Homestead Rebate Program is contained in the Governor’s FY 2011 Budget in Brief. AGAIN, as a result of the proposed changes, rebate applications for homeowners will not be mailed in May as they had in past years.”

+ Thankfully the federal and state income tax return filing deadline for residents of Atlantic, Bergen, Cape May, Essex, Gloucester, Mercer, Middlesex, Monmouth, Morris, Passaic, Somerset and Union counties in New Jersey has been extended from April 15th to May 11th because of recent flooding.

.

I have several GD extensions for residents of these counties, and, while none of them were directly affected by the flooding, it is nice to have the extra time so as to avoid penalty and interest on extended returns which will have a balance due to Sam or Chris. However it does create another deadline for me to deal with.

.

Obviously extended returns for residents of these counties with an anticipated balance due will be given priority over returns with anticipated refunds, regardless of when the returns actually arrived in my hand.

Here is the official word from the NJ Division of Taxation -

“Taxpayers affected by the storms now have until May 11, 2010 to file their New Jersey tax returns such as individual income tax, corporation business tax, sales tax, inheritance tax, estate tax, partnership and other business taxes administered by the Division of Taxation and to submit payments for any return and/or payment, including estimated payments which have either an original or extended due date occurring on or after March 12, 2010 and on or before May 11, 2010.

.

If the IRS further extends the filing deadline for federal tax purposes, the deadline for New Jersey returns and payments will also be extended.”

TTFN

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

* TAXGIRL Kelly Phillips Erb wants to know your thoughts on a federal tax amnesty program in her latest “Fix the Tax Code Friday” entry.

I strongly support a federal amnesty. Check out my post “Tax Amnesty” from September 2008.

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*Speaking of amnesty programs, Kay Bell provides a “Tax Amnesty Alert: Massachusetts, Nevada and Pennsylvania” over at DON’T MESS WITH TAXES.

* And the “yellow rose of taxes” also brings us up-to-date on the status of the expired “extenders” in “Extenders Outlook from W&M Chair”.

Kay tells us that the goal, according to Ways and Means Chairman Sander Levin (successor to tax cheat Chuck Rangel), “is to complete work on extenders by the Memorial Day break”.

The need to annually, or every other year, renew a tax benefit is ridiculous. It is a continued reminder of the utter laziness of Congress. If a deduction is appropriate it should be permanent. If Congress changes its mind about the need for the deduction in the future it can always repeal it.

* Trish McIntire discusses a recent tax “simplification” proposal in her post “Tax Simplification – My. . . Eye” at OUR TAXING TIMES.

Her bottom line on the bill –

“If you want to simplify the tax code, simplify the confusing theory and not the forms. All you are doing is using smoke and mirrors to cover the increase in confusion you will be causing.”

* No BUZZ would be complete without an item from Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG.

In “Taking Your Money and Giving It To Me = Tax Cut!” Joe points out that most of BO’s “tax cuts” were “tax subsidies for preferred constituencies”. As he explains, “That's the government grabbing your wallet, taking $20 out of it, giving five bucks to a bum, and then bragging about its generosity”.

* They like me! They really like me! Or so says Cate Newton in the following email –

“I’m writing to inform you that THE WANDERING TAX PRO has been featured on Guide to Online MBA’s Top Personal Finance Blogs list found here. We’ve gone through and hand-picked a list of our favorite personal finance blogs and outlined the unique reasons why we like them. We chose to add your blog to our list because it lots of advice, tips and resources on tax items, as well as tax information specific to the state of New Jersey.”

I am included under “The Ins and Outs of Taxes” category.

* And while I am tootin’ my own horn, Tax-Mama style, let me refer you to my tax tip at MainStreet.com titled “Hold On To Those Tax Records”.

TTFN

LEARNING FROM YOUR 1040 - PART ONE

The tax season is over - to which I once again exclaim a hearty Thank God! You have sent in your return with check, or are eagerly awaiting your refund.

Now is the time to look back and learn from this year’s 1040 filing so that you can make next year’s process less taxing.

Did you get too big a refund? You should revise your withholding at work so that less is withheld.

While everyone loves, and hopes for, a big refund, from a strictly financial standpoint when it comes to your tax return it really is better to give than to receive.

Getting a refund, especially a large one, means that you made an interest-free loan to the government. If you want to loan money to Uncle Sam buy Savings Bonds or Treasury Bills.

Interest rates on deposit accounts these days are truly pitiful, and I certainly sympathize with clients who use tax withholding as a kind of “forced savings” or “vacation club”. I also know that if many of my clients got an extra $100 in their paycheck each week it would be gone before the next one arrived. But there are alternatives.

If you belong to credit union at work have the additional amount of your pay directly deposited to your account. Credit unions often pay more than banks. Or you can increase your employee contribution to a pension or thrift savings plan. This way the extra $100 never finds its way into your hands.

You can have the additional money directly deposited to a ROTH, if you qualify, or traditional IRA account.

Another good idea is to use the increased in take home pay to pay down a credit card balance. With finance charge rates as high as 20+% this is truly a good return on your investment.

Did you have a large balance due on your 2009 Form 1040 (or 1040A)? You should revise your withholding at work so that more is withheld.

While it is ok to owe your “uncles”, as long as you have the money set aside, there comes a point when you may be penalized for owing too much. The IRS and the states could charge you a penalty for “underpayment of estimated tax”.

On the federal level you could be subject to a penalty for underpayment if you owe at least $1,000.00. To avoid the penalty you must have either 90% of the current year total tax liability (Line 60 on the 2009 Form 1040), or 100% of the prior year’s total tax, paid in during the year either via withholding or quarterly estimated tax payments. If your 2008 AGI was over $150,000 - $75,000 if filing separately – you must have 110% of the 2008 total tax paid in for 2009 to be covered under the “safe harbor”. The state may have different safe harbor rules.

The penalty for underpayment of estimated tax is calculated on a quarterly basis. Withholding is considered to be made evenly throughout the year – even if more is withheld at the end of the year. If your total federal income tax withholding for the year is $10,000 it is assumed by the IRS that $2,500 was withheld each quarter, even if $5,000 was actually withheld from January through September and $5,000 from October through December.

So, if the total tax liability on your 2009 Form 1040 was $10,000, the safe thing to do is make sure that for 2010 you have $10,000 in federal income tax withheld from your various sources of income.

To change your withholding you must fill out a new Form W-4 and give it to your employer. To have less withheld you increase the number of withholding exemptions (i.e. go from Married-1 to Married-3). To have more withheld you would decrease the number. If you are married you can have more withheld by claiming “Married but withheld at higher Single rate”.

You can try to avoid or reduce the penalty for underpayment, if charged, you can “annualize” your income to show that a larger portion was received late in the year. If you sold an investment or property for a huge gain in October your penalty would be calculated on one calendar quarter.

If you choose to pay quarterly estimated taxes you can download the 2010 Form 1040-ES at the IRS website.

The IRS website also has a W-4 Calculator. And you can go to www.paycheckcity.com and use the free Salary Paycheck Calculator or Hourly Paycheck Calculator to review various withholding scenarios.

If you got a refund from Sam but owed your state you may be able to file a separate state Form W-4 to change only the state withholding.

More lessons to follow.

TTFN

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

As I said in a previous post I missed the wit and wisdom of my tax blogging colleagues during my filing season hiatus. It was good to get back to my internet wanderings.
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* Joe Kristan provides another example that the “Turbo-Tax Defense” – aka the “Geithner Defense” does not work in Tax Court in “Garbage In – Garbage Out” at the ROTH AND COMPANY TAX UPDATE BLOG.

The bottom line, as Joe puts it – “just because TurboTax lets you put capital losses on Schedule C doesn't make it right”.

* Trish McIntire reminds us that “You have one week left to take advantage of the First Time Homebuyer's Credit. Then it is gone - hopefully, forever gone.” in her post “Last Chance – Final Week” at OUR TAXING TIMES.

As usual, Trish makes some good points in her post –

- “There have always been people who have cheated on their taxes but now there seems to be a cottage industry in tax fraud. The frauds which gain the most attention, and are the most lucrative, are based in the credits. Inflating Sch A deductions could get a taxpayer more of their own money back, but the refundable credits let you tap into other people's money for a big take.”

- “If Congress insists on using the tax system to social engineer, they need to approach new credits and deductions from a cheater's point of view. Then ask what needs to be built into the law to deflect some of the fraud.”

- “Even if there is little chance of fraud, Congress needs to think a law through. Not just benefits and administration but who is it going to hurt. Collateral damage should not be a tax term. If you doubt me, ask all the people who got hurt by the Making Work Pay Credit.”

* Professor Nellen ended the tax season with two interesting posts on April 14 and 15 – “Time to Demand a Simpler Income Tax System” and “Signs of Tax System Problems - Serious Ones!” at 21st CENTURY TAXATION.

I agree with her when she says –

“. . . the federal income tax will only get simpler if we honestly demand it of lawmakers. They have no incentive to do it on their own. I think the public has come to expect and perhaps admire politicians with campaign promises of new tax breaks. Such breaks just complicate the system and usually are not needed. A lower rate without the special tax breaks would be a lot easier and save us a lot of time and money preparing returns and keeping records.”

* Jean Murray provides a brief overview of the Value Added Tax (VAT) in “Is a European-Type Value Added Tax Coming to US?” at Jean's Business Law / Taxes: U.S. Blog.

FYI – I am against a VAT.

TTFN

2010: THAT WAS THE TAX SEASON THAT WAS! - PART TWO

Turn-round time was a few days during the first two weeks of the tax season. Returns received from February 14th on were generally completed within two weeks, expanding to three weeks as the month ended. But those received in March had an average 4-week turnaround time. I did, at least at first, attempt to maintain a FIFO – first-in, first-out – system of preparing returns, but things got hectic in March and I did not keep good track of when returns were received. I need to work on developing a better system for next year. I did manage to again stay “on top” of “red files” (needed more information), completing the returns as the missing information was received.

I strictly enforced my “read my lips – no new clients” policy.

Because of the season-end problems I had to extend more returns than usual. This included a number of returns received in early March that under normal circumstances would have been completed on time. Once again all returns received in February were completed.

However, as planned, while April 15 and 16 were totally 1040 free (I do not work on April 15th) I did begin on the GD extensions on April 17th and worked through the 24th, getting, I am pleased to say, a good number completed and in the mail. As of this writing I have 34 GDEs in the box, 6 of which are for clients who have either not sent me anything at all yet or who are waiting for additional info from a 3rd party.

I began my post-season recuperative visit to the Jersey shore on Sunday, and will be away through Thursday.

As for the great “Garden State” of New Jersey . . .

I am required by state law to submit all my full-year resident NJ-1040s “electronically”, unless the client chooses to “opt-out” by signing a form. As I do not used flawed tax preparation software, and am not a federal ERO (electronic return originator) my only option is to submit my returns via the free online NJWebFile system offered by at the NJ Division of Taxation.

NJ state tax law changed slightly for 2009. Taxpayers with NJ Gross Income between $150,000 and $250,000 had to limit their property tax deduction to $5,000 – half the usual maximum. Those with incomes over $250,000 got no deduction, although they could claim a $50.00 property tax credit.

In the past, while there were various situations where I could not use NJWebFIle, there was never any income limitation to cause me to file manually. At the beginning of February while entering the information for a married couple with NJ income in excess of $150K I received an error message that said I could not continue to use NJWebFile for the client because their gross income was over $150,000.

The State of New Jersey was too lazy, or more properly too cheap, to pay someone to revise the NJWebFile software to reflect the change in the state law. I thought that NJ wanted everyone to file electronically to cut costs. What idiots!

Another new item on the New Jersey state front for 2009 was adding a payroll deduction for “Family Leave Insurance” contributions, similar to the SUI and SDI withholding. As with the SUI and SDI there is a per worker maximum contribution.

For many years now NJ workers who pay more than the maximum SUI or SDI due to multiple employers can receive a refund of the excess contributions as part of their NJ-1040 via Form 2450. The maximum NJ Family Leave Insurance contribution for 2009 was $26.01. However the Form 2450 was not revised to include excess FLI contributions. Employees who have paid too much into the FLI fund because they had more than one employer during the year must file a special form separately with the Department of Labor to get a refund of the overpayment.

Because the amount of potential excess FLI contribution is relatively small I expect that 99% of those who overpay will not take the time to get and submit the necessary separate form. It is hardly worth the effort to get a $3.00 to $10.00 check from Trenton. It certainly does not make sense to pay me, or any tax pro, to prepare this form – the fee would eat up all of the potential refund. But if the refund request were a part of the Form 2450 just about everyone who overpaid would get their money back.

I do seriously believe that the DFBs in Trenton did this purposely – so they could keep the excess contributions in the state Treasury to use for continued political pork. A $3.00 - $6.00 refund may not seem much to the individual worker, but multiply this by the tens if not hundreds of thousands of workers who have overpaid and it adds up.

And, oh yes, this tax season the NJ Division of Taxation decided not to make copies of the NJ-1040 package, with instructions, forms and a payment voucher, available at local Post Offices or the IRS office. Oh course this was the year that I was forced to file more manual returns than usual. I have to purchase blank NYS forms from Albany, and will probably soon also have to purchase blank NJ forms from Trenton.

TTFN

2010: THAT WAS THE TAX SEASON THAT WAS! - PART ONE

Once again – THANK GOD IT’S OVER!

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This was my 39th tax filing season.
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It seems that each tax season in the past few years has had a “gimmick”. Like the telephone excise tax refund and the two George W “stimulus” rebates. This season’s “gimmick” was BO’s “Making Work Pay” credit, with its accompanying unintended problems resulting from screwing around with the withholding tables.

I did see several occasions where retirees and dependents were under-withheld due to the FU – although not to the extent that it would cause the assessment of underpayment penalties (which I can get abated anyway if assessed because of the FU).

This “gimmick” apparently caused much confusion among taxpayers - and apparently at the IRS also. A few of my clients have told me that their 2009 refund was reduced by $250 and attributed to the MWP Schedule M. I have yet to investigate the individual returns to see where the IRS, or possibly I, went wrong.

On occasion I have found a “theme” in a particular tax season. One year when I still had the storefront office it seemed that every third person in the door had won something in the lottery or a raffle. A few years ago just about every homeowner refinanced a mortgage at least once during the year. I also noticed a “theme” this season – death.

Between January 2009 and the end of the season last week the Grim Reaper took far too many of my clients, several of them personal friends as well. I “inherited” close to 75% of my current clientele from my mentor - who had been in practice about a dozen years before I did my first 1040 for pay - and many of these clients had been with JP for 30-40 years before continuing on with me at his retirement. So I do have many elderly clients. But not all of the passings were due to advanced age. Several were victims of cancer.

My family did not escape GR’s touch. As many of you are aware my mother passed last April (after the tax season ended) and my father went to his final audit on New Year’s Day 2010 (before the tax season began).

GR took a lot of good people in 2009 and early 2010. I hope he balanced the scales a bit by also taking some not-so-good ones as well.

And each year something goes awry that forces me to take valuable time away from 1040 preparation. This year it was my GDMFPOS computer – on two occasions. In mid-season the thing was so damned slow as to be inoperable – but was fixed by a long-time friend and client. And then during the heavy rains at the end of March both the phone, which is through the internet via VONAGE, and internet access went down. I was eventually able to get the phone working again – which indicates that my actual connection was working – but still could not access the internet.

While it is a known fact that I am proud to do all my returns by hand – I have never in 39 seasons used tax software to prepare a 1040 – I still heavily rely on the computer in my practice. The internet is invaluable – to download federal and state forms, to research stock basis and other preparation issues, to email clients with questions, to receive faxes (I get my faxes via email and special software), to submit NJ returns online via NJWebFile, and so on. I could do none of this at my home office during the last three weeks of the season – the absolute worst possible time – and had to rely on the public computer at Global Mail for an hour at least every other day to get some of the more important stuff done.

Of course I did not want to enter the personal financial information necessary for online filing of NJ returns via NJWebFile on a public computer. So all NJ-1040s prepared in the past 4 weeks have been done “the old-fashioned way” – by hand. But all of them were not done manually due to the inability to access the internet – more on this later.

I finally scheduled COMCAST to come to my home/office to get me back online last. I thought I would have to sacrifice my VONAGE telephone service - I would rather have no phone and internet access than no internet access and a working phone – but the service person was able to fix it so I continue to have both.

I also lost some 1040 preparation time this season due to my daily week-day tax tip column at MainStreet.com. The internet inaccessibility also caused this to take more time during the last weeks. Next year I plan to write and submit just about all of my column entries in January – before the season actually begins.

I didn’t have many home-buyers – either “first-time” or “long-time” – claiming the $8,000 or $6,500 credit this season. There have only been 2 so far – one a 2009 purchase and one a 2010 purchase – both “long-time” homeowners.

I did have many clients who were able to claim BO’s new American Opportunity Credit for college tuition. Several were able to get a bigger tax benefit than had been available in the past - $2,500 maximum “in pocket” instead of $2,000 – and some whose income had always exceeded the AGI phase-out or elimination limits for either a credit or deduction were able to finally get some tax relief. A few benefited from the “refundable” portion and others were able to use books and materials to increase the credit amount.

A few clients took advantage of the special sales tax deduction on new car purchases – either as an additional standard deduction or an itemized deduction in addition to state and local income taxes.

I also had several clients who, whether on purpose or just by luck, took good advantage of the 0% tax rate on long-term capital gains on the sale of investments, real estate and, in one case, a business. These clients paid absolutely no federal income tax on $20,000+ to $50,000+ of capital gains! I don’t know how much longer this special rate will be around.

I had some real surprise “early birds” this season – pleasant surprises indeed. But at the same time many clients continued to be forced to wait until mid-March to send me their “stuff” due to late mailing of brokerage-related 1099s and, still common, corrected brokerage 1099s.

To be continued . . .

TTFN

I'M BACK!

THANK GOD IT’S OVER!

The tax filing season is over and I took a few days much-needed and well-deserved rest. Now I am working away on the GD extensions, and back at my computer eager to resume posting to THE WANDERING TAX PRO.

I have missed the wit and wisdom of Kay, Kelly, Mary, Monica, Stacey, Bruce, Jim, Joe, etc, and am glad to be back to wandering the web. I promise to have a WHAT’S THE BUZZ entry up soon.

I am a bit late in my return to blogging because for the past 4+ weeks I have been unable to access the internet on my office computer. COMCAST came this morning and fixed me – so here I am.

I hope you followed my daily week-day tax tips column at MainStreet.com during the tax season hiatus. That series has ended, but I will continue to contribute tax-related items to MainStreet.com during the “normal” year, and will let you know when these items appear.

And did you see my interview at Bizymoms.com?

Before I embark on my annual review of the filing season I want to voice my agreement with the editorial in last Friday’s USA TODAY.

Titled “When 47% Don’t Pay Income Tax, It’s Not Healthy for USA”, the editorial responded to a report by the Tax Policy Center which estimated that 47% of Americans are “non-taxpayers”, at least when it comes to the federal income tax. This is up from the approximately 38% during the Bush years.

USA TODAY rightfully points out that “the fact that 47% pay no income tax is nonetheless disturbing – not for what it says about the nonpayers but for what it says about the nation’s broken tax system and how hard it will be to fix it”.

The editorial tells us that the fault does not lie with the non-payers. “The people who pay no income tax aren’t freeloaders or evaders; virtually all are simply doing what the law allows. That there are so many of them is the result of decades of deliberate, bipartisan tax policy.”

I have no absolutely no problem with my clients, or any other American, taking full advantage of all the exclusions, deductions, credits, and loopholes in the current Tax Code, and gladly assist them in doing so. My problem is with the cafones in Washington who write the Code.

I agree with the editorial when it says - “It’s not healthy for society if somewhere between a third half of all potential tax filers don’t help share the cost of most of government, from defense to highways to national parks. Everyone above the poverty level should have at least a minimal stake in financing the nation.”

I have been saying for some time now that we should replace the dreaded Alternative Minimum Tax with a true “Minimum Tax” – every American citizen above the age of 18 who is not a full-time student should pay a minimum tax of $100.00.

USA TODAY hits the nail on the head when it observes – “The fact that so many people have no income tax liability is a reflection of a leaky, dysfunctional tax system. The code is absurdly complex. . . It’s riddled with loopholes and excessive social engineering. It’s undermined by spending programs that masquerade as tax credits. It even fails at its basic function of raising revenue, taking in barely $1.00 for every $2.00 the government spends.”

Please check out my post “THERE HAS GOT TO BE A BETTER WAY!” for a detailed review of my thoughts on the matter.

TTFN

THANK GOD IT'S OVER!

TAX SEASON'S OVER!
MY FACE IT HAS A BIG SMILE.
AND SO IT'S OFF TO THE SHORE,
1040S NO MORE.
AT LEAST FOR A WHILE.

Coming Soon - the return of the Wandering Tax Pro!

TTFN

CHECK IT OUT!

Just want to take a moment to tell you to check out my interview at BizyMoms.com.

And I hope you have been following my column of daily tax tips at MainStreet.com.

TTFN

BECOME A SPONSOR!

You can help to keep THE WANDERING TAX PRO alive and well by becoming a “sponsor” of this blog.

I will link to your website via a description (like “DISCOUNT CHECK PRINTING” or “BEST INSURANCE RATES”) or title (like “AMAZON” or “ENTERPRISE RENT-A-CAR”) – your choice - in a special highlighted “Web Roll” listing at the top of the right hand margin. It will be highly visible every time someone visits a post – either current or achieved. The “Roll” will be introduced by “Please show your support of and appreciation for the advice and information provided at TWTP by visiting our sponsors”.

The cost is $25.00 for six months or $50.00 for a full year, payable in advance via check to Taxpro Services Corporation. I do not accept PAYPAL or credit cards.

All potential sponsors must be approved in advance. I reserve the right not to accept your site as a sponsor if I feel it is not “appropriate”.

If you are interested in becoming a sponsor, please email rdftaxpro@yahoo.com (put TWTP SPONSOR in the Subject line) with the link you would like to include in the Sponsor Web Roll and the description or name you would like in the listing. I will review your site to be sure it is “appropriate” and let you know via return email if you have been accepted. Upon acceptance you must remit full payment via check or money order.

FYI – even though I take a “hiatus” from posting during the tax filing season, this time of year the blog has more traffic than when I am actually posting! So now is the time to become a sponsor.

TTFN

THE TWELVE DAYS OF TAX SEASON!

Now it is time for what you have been waiting a year for - the February 1st tradition here at THE WANDERING TAX PRO of posting “The Twelve Days of Tax Season” -

On the first day of tax season my client gave to me a Closing Statement for the purchase of a home.

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On the second day of tax season my client gave to me 2 W-2 forms.
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On the third day of tax season my client gave to me 3 mortgage statements.

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On the fourth day of tax season my client gave to me 4 Salvation Army receipts.

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On the fifth day of tax season my client gave to me 5 Form K-1s.

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On the sixth day of tax season my client gave to me 6 1099s for dividends.

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On the seventh day of tax season my client gave to me 7 cancelled checks.
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On the eighth day of tax season my client gave to me 8 useless items.

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On the ninth day of tax season my client gave to me 9 medical bills.

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On the tenth day of tax season my client gave to me 10 stock sale confirms.

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On the eleventh day of tax season my client gave to me 11 employee business expenses.

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On the twelfth day of tax season my client got from me a finished tax return, 11 employee business expenses, 10 stock sale confirms, 9 medical bills, 8 useless items, 7 cancelled checks, 6 1099s for dividends, 5 Form K-1s, 4 Salvation Army receipts, 3 mortgage statements, 2 W-2 forms, and a Closing Statement for the purchase of a home. And my bill.

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And, of course, on the thirteenth day of tax season the client gave to me a corrected Consolidated 1099 from Wells Fargo Advisors!

JUST ONE MORE THING . . .

He said, Columbo-like.

Just so you know, I will not be responding to, or even reading, emails from non-clients regarding my blogs during the tax season – whether they be comments on posts or appropriate, or inappropriate, tax questions. If you have a question that you need answered in order to complete your tax return DON’T ASK ME.

All emails will be “inventoried” unread in a “pending” file and reviewed after April 15th.

Thanks!

SO LONG, FAREWELL, AUF WIEDERSEHEN, GOOD NIGHT!

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Joy to the world - tax season’s here.
I’ll soon be flush with cash!
Let every client be organized,
and give me all I need, and give me all I need,
and give me all I need to prepare their returns!
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My 39th tax season will officially begin tomorrow - the floodgates will soon be open!
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As is my custom, due to the demands of the filing season I will be taking my annual “tax season hiatus” from posting to THE WANDERING TAX PRO and the NJ TAX PRACTICE BLOG and INTERNET GUIDE TO IRS SCHEDULE E. Between now and April 15th I barely have time to relieve myself let alone blog! However, in order to maintain my spot on Alltop’s Tax page I will be posting every 20 days or so. I most likely will be doing “re-runs” – unless there is breaking tax news to report.
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I realize that I am abandoning you at a time when you may need me the most – but I need to make a living!
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I find it a bit amusing that the period of time when TWTP gets the most “hits” is during the tax filing season when I am not posting.
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My clients should visit the WHERE THE FAKAWI Page on my tax practice website to keep up-to-date on my progress during the season and to learn of any changes or additions to my tax season policies and procedures.
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“Talk” to you when it is all over!
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TTFA
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BTW – be sure to stop by tomorrow for the annual posting of my TWELVE DAYS OF TAX SEASON!

OUTRAGEOUS!

Does anyone else find it a bit outrageous that H+R Block, as per their ads, charges $68.00 to prepare a Form 1040EZ, truly the simplest of all tax returns, and the corresponding basic state tax return? And God knows how much else for a usurious Refund Anticipation Loan (RAL)!

An H+R employee spends at most 15 minutes entering the necessary information into the computer. In this situation the “preparer” is truly a data entry clerk and not a real "tax preparer".

The 1040EZ is so EZ you don’t have to be much smarter than a 5th grader to be able to complete it.

Hey, as I have always said – Henry and his brother ain’t cheap!

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

This is the last BUZZ until after the end of the tax filing season!

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You can continue to get daily tax tips from my column at MAINSTREET.COM.

* Did you catch Kay Bell’s “Tax Twitter Tuesday - 1.26.10” at DON’T MESS WITH TAXES? The first T3 of 2010!

* Kudos to Joe Kristan for his comments in “We're Government, We Can Do This, Don't You Try It!” at the ROTH AND COMPANY TAX UPDATE BLOG.

* Professor Nellen continues the cry “AMT Must Go” over at 2ist CENTURY TAXATION.

“Clearly the individual AMT is out of control. When the AMT was broadened by the Tax Reform Act of 1986, it was not done so to reach the middle class. But the failure to adjust the exemption amounts and rate brackets for inflation have caused the AMT to just become a penalty. Also, the addition of more favorable tax deductions and credits for individuals means the AMT is more likely to kick in.

I've written about the need to repeal this tax before. I'm not the only one that has called for its repeal. The Joint Committee on Taxation, the AICPA and ABA have done the same. There should be only one minimum tax - the one we currently call the regular tax. If Congress believes that deductions and credits are allowing people to pay less than the minimum, then be more transparent about it all and just reduce or eliminate some of these numerous tax breaks that also are a source of complexity in the law.”

Right on, sister!

* The Professor also makes a very good point in her post “State of the Union Speech Includes Tax and Budget Deception”.

As she points out a tax credit = additional government spending. Instead of writing a check the government is netting the cost against tax collections – same “bottom line”.

* And Chad Bordeaux makes an excellent point in a BEANCOUNTER RAMBLINGS post that asks the question “Did President Obama Actually Cut Taxes?”.

“I also don’t think that sending a check to someone that doesn’t pay any tax can be called a ‘tax cut’ either. How can you cut zero? There is nothing there to cut.”

A refundable credit is not a reduction in tax – it is a welfare or benefit payment!

TTFN

TAX ISSUES IN THE STATE OF THE UNION ADDRESS

For those of you who missed the State of the Union Address Kelly Phillips Erb posts the text of the speech at TAX GIRL (click here).

So what did BO have to say in terms of taxes last night?

"I've proposed a fee on the biggest banks. Now, I know Wall Street isn't keen on this idea. But if these firms can afford to hand out big bonuses again, they can afford a modest fee to pay back the taxpayers who rescued them in their time of need."

Any fee will most likely be just passed along to bank customers. How about making bonuses in excess of a certain reasonable amount, or not paid out of current earnings and profits, non-deductible?

“I'm also proposing a new small business tax credit -- one that will go to over one million small businesses who hire new workers or raise wages. While we're at it, let's also eliminate all capital gains taxes on small business investment, and provide a tax incentive for all large businesses and all small businesses to invest in new plants and equipment."

I have no objection to a “jobs credit”.

As for the comment “eliminate all capital gains taxes on small business investment” – this certainly raises a lot of questions. Do I understand BO correctly? Does he want to make the capital gains tax rate “0” regardless of level of income? Will this apply only to capital gains from “small business investment”? How will “small business investment” be defined? I thought BO wanted to increase the capital gains tax rate.

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I certainly support lower rates for capital gains for all. As for eliminating the ta on certain capital gains - I actually have never given this idea any thought before.

“To make college more affordable, this bill will finally end the unwarranted taxpayer subsidies that go to banks for student loans. Instead, let's take that money and give families a $10,000 tax credit for four years of college and increase Pell Grants. And let's tell another one million students that when they graduate, they will be required to pay only 10 percent of their income on student loans, and all of their debt will be forgiven after 20 years -- and forgiven after 10 years if they choose a career in public service, because in the United States of America, no one should go broke because they chose to go to college."

Doesn’t the American Opportunity Credit already give taxpayers a $10,000 credit for four years of college (within AGI income limitations, of course)? The maximum credit it $2,500 and it is available for four years of college. I suppose he is talking about making it permanent.

I am against any debt forgiveness for student loan borrowings. Don’t charge any interest on the debt for the first 10 years if you want – but don’t forgive the debt altogether. Although I would consider some kind of debt forgiveness or other special treatment for those who enter “public service” and stay there for a required number of years.

“To help working families, we will extend our middle-class tax cuts. But at a time of record deficits, we will not continue tax cuts for oil companies, investment fund managers, and those making over $250,000 a year. We just can’t afford it.”

So it appears that BO will support extending, or making permanent, the “Bush tax cuts” for those with income (AGI?) of less than $250,001, but will not do so for those with income (AGI?) of over $250,000. I am not against extending the “Bush tax cuts” for those under $250,001, or over $250,000 for that fact. Of course I would certainly prefer a total overhaul of the tax system to simplify the mucking fess – but I expect this is not to be - at least until the economy has been stabilized.

TTFN

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

Don’t forget to check out my daily tax tips column at MAINSTREET.COM.

* Also check out my NJ TAX PRACTICE BLOG post on “The IRS Answers Questions on Tax Preparer Regulation”.

* Check out the “Obama Tax Man” video over at ACCOUNTINGBLOCK.

* Russ Fox tells us in his post “Payroll Tax Companies & Registration of Tax Professionals” at TAXABLE TALK that, according to the IRS FAQ Page mentioned above, “California CTEC practitioners will have to take the new exam. It also appears that California isn’t going to be dropping the CTEC requirements, so tax practitioners who are not CPAs, EAs, or attorneys in California will have dual requirements.”

A CPA, whose initial competency test has minimal, if any, questions on 1040 preparation, does not have to take an exam in order to prepare federal income tax returns, but a tax professional licensed to prepare tax returns by the State of California, who has already taken a competency test in taxation, does. Real smart!

I must point out that I have no idea what is on the CTEC exam, but it certainly has more questions on the federal 1040 than the CPA exam.

* Speaking of the IRS FAQ Page – Joe Kristan has an interesting comment on one of the Q+As in his ROTH AND COMPANY TAX UPDATE BLOG post “Unanswered FAQ: Why Did They Hire H&R Block CEO To Write Them?” -

“What is the required percentage to pass the competency test?

This has not been determined. Stay tuned to the IRS.gov Tax Professionals page for information on this issue. {IRS answer}

Well above that required of Congresscritters, Treasury Secretaries and IRS Commissioners. {Joe’s response}”

* Joseph Henchman of the Tax Foundation weighs in on the subject of regulating tax professionals in the post “IRS Proposes Licensing Tax Preparers” at the TAX POLICY BLOG. One can’t argue with his bottom line -

“The tax code is big, complex, and ever-changing. That is the problem, since it doesn't need be. No paid preparer knows every nook and cranny of tax law and if we truly graded people for competency, no one could pass. National Taxpayer Advocate Nina Olson, despite supporting the new regulations and optimistically assuming that they'll be minimal and one-time for each preparer, reveals that much of the complexity is due to each year's new credits, exemptions, and changing rules, and that we need tax reform.

Those pushing for more regulation and more centralization of tax preparation should instead focus their efforts on tax simplification.”

* Stacie Clifford Kitts gives us a rerun of a “blast from the past” with her post “Seven Things Your Accountant Should Have Told You – a Good Post From the Past” at STACIE'S MORE TAX TIPS.

Seven good “things” – especially the last.

* Kay Bell reports on a really bad idea, for all parties involved (both IRS and taxpayers alike), in her post “Let the IRS Do Your Taxes for You”.

It sounds like a variation on BO’s ridiculous proposal for a “post card” tax return (check out my post “A Very Bad Idea”), which apparently is still floating around.

* And Kay gives good advice to those who choose to split the direct deposit of their federal refund to more than one account via Form 8888 in “Triple-Check Multiple Deposit Directions” at her EYE ON THE IRS blog at bankrate.com.

* TAX GIRL Kelly Phillips Erb has an interesting take on the recent action of Congress regarding donations to hurricane relief for Haiti in “Congress Wants You to Give to Haiti. But Just Haiti” that is certainly worth reading. To be honest, she makes a very good point.

TTFN

A TALE OF VALUE

As the tax filing season is fast approaching (I consider February 1st to be the beginning), and recent posts have discussed choosing a tax professional, I just want to make it perfectly clear that, as I said in my annual January mailing to clients, READ MY LIPS – NO NEW CLIENTS!

I do not write THE WANDERING TAX PRO in the hopes of soliciting new 1040 clients.

While I will write a column or articles for your newsletter, magazine or website, for a fee of course, I will not prepare your 1040 or 1040A – or your 706, 990, 1041, 1065, 1120, or 1120-S for that matter.

When I comment on the tax preparation industry here at TWTP I do it to present the truth as I see it based on 38 years of experience, and dispel common myths and misconceptions to help you to be able to make a proper and educated choice when seeking a professional to prepare your income tax returns. I also feel the need to defend my fellow qualified and competent “unenrolled” preparers from outrageous statements made by offending bloggers.

I obviously do not believe that price should be the only consideration when choosing a tax preparer – just as it should not be the only consideration when choosing just about anything. Although in today’s economy price is undoubtedly a serious consideration.

What you should consider when making your choice is the relative value. What are you getting for the price you pay and just what are you paying for anyway?

Let me tell a story about John Q and Mary Public and their lawn.

John and Mary have a large front lawn. Being a busy man, John Q does not want to take the time to mow the lawn himself. Besides, he hates the task. So John and Mary must hire someone to mow their lawn.

Tom mows lawns. He does not plant trees or bushes or anything else. He just mows lawns. He does it by himself with his own equipment. He does not have any helpers or assistants. He has been mowing lawns for a long time now, and does an excellent job. He pays attention to details, like edging and spotting, and when he leaves the lawn is picture perfect, as has been attested by his many clients. He does not advertise much, relying on “word of mouth” from satisfied customers. While Tom may recommend specific products to his clients, like grass seed or weed killer and the like, he does not sell these items himself. He also provides advice on lawn maintenance. Henry will charge $50.00 to mow John and Mary’s lawn.

Arthur is a landscape architect. He has the appropriate licenses and credentials needed to “practice” as a landscape architect. He designs yards and landscapes, plants trees, flowers, and bushes, and maintains elaborate landscapes. He also provides lawn mowing services, although he usually has one of his many helpers do the actual mowing. He has a large office and warehouse where he keeps all his equipment and supplies. He advertises all over town in all kinds of media. Because of the large potential for liability resulting from his landscape design services he has expensive liability insurance. Arthur’s company does a competent and serviceable job mowing lawns, although it does not pay as much close attention to detail as Tom does. Arthur will charge $100.00 to mow John and Mary’s lawn.

Henry and his brother Robert have a chain business that offers lawn mowing services. They are more interested in quantity than quality. They hire high school and college kids and, it has been rumored, illegal aliens to mow the lawns, with the emphasis on getting it done quickly. Henry and Robert advertise all over creation. They also instruct their employees to push Henry’s Fine Grass Seed and Robert’s Great Weed Killer, and various other probably unnecessary but certainly expensive products on their lawn mowing clients, as they make just as much money, if not more, selling these products then they do mowing lawns. The work done by Henry’s mowers is erratic and inconsistent, with minimum attention to detail. Henry and Robert will charge $84.75 to mow John and Mary’s lawn.

So who do you think John and Mary should choose to mow their lawn?

TTFN

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

Don’t forget to check out my daily tax tips column at MAINSTREET.COM.

* Joe Kristan provides another example of why the very first tax tip in my series of columns for MainStreet.com is perhaps the best tax advice anyone can ever give you in his post “Buy Insurance From an Insurance Guy; Buy Your Tax Advice From a Tax Advisor” at the ROTH AND COMPANY TAX UPDATE BLOG.

* TAX GIRL Kelly Phillips Erb has been running trivia contests all week. I like this question –

“Assuming that you read out loud at the same speed as you count (on average), how many days would it take to read the entire Tax Code out loud without stopping?”

The answer - 43 days!

* The weekly NATP email newsletter gives us the word on claiming the First Time Homebuyer Credit on the 2009 Form 1040. Wisely, for a change, Congress required documentation to be included with the return to show that a purchase actually took place.

“All eligible homebuyers must include with their 2009 tax returns one of the following documents in order to receive the credit:

• A copy of the settlement statement showing all parties' names and signatures, property address, sales price, and date of purchase. Normally, this is the properly executed Form HUD-1, Settlement Statement.

• For mobile home purchasers who are unable to get a settlement statement, a copy of the executed retail sales contract showing all parties' names and signatures, property address, purchase price, and date of purchase.

• For a newly constructed home where a settlement statement is not available, a copy of the certificate of occupancy showing the owner’s name, property address, and date of the certificate.

In addition, the new law allows a long-time resident of the same main home to claim the homebuyer credit if they purchase a new principal residence. To qualify, eligible taxpayers must show that they lived in their old homes for a five-consecutive-year period during the eight-year period ending on the purchase date of the new home. The IRS has stepped up compliance checks involving the homebuyer credit, and it encouraged homebuyers claiming this part of the credit to avoid refund delays by attaching documentation covering the five-consecutive-year period:

• Form 1098, Mortgage Interest Statement, or substitute mortgage interest statements,
• Property tax records, or
• Homeowner’s insurance records.

Returns claiming the first-time homebuyer credit cannot be e-filed.”

* The newsletter also reports that, as expected -

“Recipients of social security benefits, railroad retirement benefits, or veterans’ benefits were eligible to receive a one-time Economic Recovery payment of $250 in 2009. The receipt of this payment will not be reported on the respective information forms (SSA-1099, RRB-1099, etc.) received by taxpayers. The IRS is not able to assist taxpayers with determining whether they received the payment or the amount. If this information is needed, the taxpayer must contact the agency that made the payment to them.”

So we tax pros must rely on our clients’ memories. Oi vey!

TTFN

RETROACTIVE DEDUCTION FOR HAITI CONTRIBUTIONS

I realize that I have been “scooped” by my tax blogger brethren (and sistern) on this topic.

As the Washington Post has reported -

“Taxpayers will be able to write off charitable donations to Haiti earthquake relief efforts when they file their 2009 taxes this spring, under a bill that received final congressional approval Thursday.

The Senate passed the bill on a voice vote Thursday, sending it to President Barack Obama for his expected signature.

The bill was passed by the House on a voice vote Wednesday, meaning no member of Congress opposed it.”

Taxpayers will have the option of deducting donations of cash or property to charities providing relief to the victims of the earthquake in Haiti made between January 12, the date of the earthquake, and February 28th on either their 2009 or 2010 income tax returns.

.

Obviously you should claim the deduction on the return that provides the greatest tax benefit – although it is too early in the year to really be able to make that decision. So if there is doubt I would suggest claiming the deduction on the 2009 return.

The bill (HR 4462) states that a phone bill with the date, name of charity, and amount of the donation will be acceptable as appropriate documentation of a deduction.

It is very important to remember that you get no tax benefit for making a charitable contribution to Haiti earthquake relief, or to any other qualified charitable organization, unless you can itemize on Schedule A. Nothing in the 2-page bill says that this deduction is allowed if you do not itemize.

And, of course, you must give the cash or property to a qualified charitable organization, like the Red Cross. You will get no deduction for sending a check to a specific individual or family in Haiti.

Two items of concern.

(1) If you do give be sure that it is to a reputable charitable organization – like, as I said, the Red Cross or the organization that is running tonight’s multi-channel telethon. As is usually the case in such a situation, there will be a lot of scams springing up.

(2) From a tax administration point of view – I am concerned that taxpayers who can itemize will, either on purpose or inadvertently, claim the same deduction on both 2009 and 2010 returns.

COMMENTS FROM THE EMAILBAG -AND ELSEWHERE

I was surprised at the lack of comments to my POPPYCOCK post. I did, however, hear from fellow tax professional, the ol’ Mountain Biking Tax Pro himself, Tom K -

“Sorry, but I have all that stuff, including 'errors & omissions insurance' through CNA Surety.

2 main reasons I see that MOST CPAs and Tax Attorneys charge higher. One is the same reason the green block people, the Statue company, and that other one do.

#1 is store front rentals, I can drive you around my neck of the woods and show you a dozen or more CPAs/tax attorneys who have 1200/2000+ sq. ft. offices in high priced office buildings/strip malls, all of which I know personally rent for $2 to 3 thousand a month, if not more.

The other reason is 'prestige/ego'. Which I don't really blame the individuals themselves as much as I blame the industry. Once you get them 'letters' behind your name, there is a certain amount of 'prestige' that you have to front (staff, high priced office, restaurant lunches, etc.) in order to fit in with the other high-class peers...”.

I do believe that having initials after one’s name causes such a person to charge twice as much for half the service.

As Tom has proven – when the offending blogger “assumed” he only made an ass of himself!

Tom also commented on my mention of Mary O’Keeffe’s post on “Who Should Be Tested” -

“I saw you posted on Mary’s post about who she thinks should be tested.

I have said that from the get go in several comments to you in mid '09 and on a blog I half started back in June/July of '09 {click here for Tom’s archieved blog post – rdf}.

Ain't goin' happen though, I know it, you know it, Mary knows it. Nice thoughts but that would be the last thing IRS would ever require...

Keep up the good work”

Thanks, Tom, for being a regular visitor and a regular commentor.

Before I go I wanted to quote a comment not directed to me, but to TAX GIRL Kelly Phillips Erb in response to her “Fix the Tax Code Friday” question on the registration of tax preparers (the highlight is gleefully mine) -

“My problem with this is who is going to be required to do this. If you are an accountant (CPA) you’re exempt from this requirement, as are many others along that line. As a tax preparer some of the worst returns I’ve had to amend for people have come from these CPA’s. They do not know tax laws - they understand accounting and bookkeeping but that doesn’t make them knowledgeable about taxes.

As a preparer I believe something like this is needed, but I think that ALL people who do taxes should be required to be tested, not just preparers. In many firms one person prepares the taxes but since they aren’t signing them, the CPA is, they will not be required to pass a test, so a large group will still not be required to show any knowledge of tax law or current tax rules.”

Right on!

TTFN