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

 

Today's BUZZ is so meaty!

 

* Tax pros, PLEASE check out the December “issue” of THE TAX PROFESSIONAL and let me know your comments on my “Soapbox” editorial.

* On Thursday two of my articles appeared at MAINSTREET.COM -

ü 2014 Year-End Tax Strategies to Ensure a Smooth Filing: Part Two

ü 2015 IRS Standard Mileage Rates Announced: Get a Tax Deduction for Driving

* Also at MAINSTREET.COM - “You Won't Guess The Most - and the Least - Corrupt States in America” by Robert McGarvey.  Surprisingly, it’s not New Jersey!

 

“You knew New Jersey ranked near the top of the most corrupt states in America. Everybody knows that. But did you know that, hands down, the state with the most criminal corruption involving elected officials is Arizona?”

The least corrupt - Massachusetts and Vermont.

There is illegal corruption and “legal” corruption (NJ is high on list of both).  “Legal” corruption is defined as “the political gains in the form of campaign contributions or endorsements by a government official, in exchange for providing specific benefits to private individuals or groups, be it by explicit or implicit understanding.”

Click here for the actual report referenced in the article.

 

* Any takers for $1.00 tax guides from MY DOLLAR STORE?  They make great stocking stuffers for adults.

* There is a new timely post up at BOB’S BABBLINGS – it discusses using “Debit Cards vs Credit Cards” when it comes to online holiday shopping (actually online shopping at any time of the year).

* Jason Dinesen embarks on a series of posts to elaborate on the items he listed in his previous post “5 Things About EAs” with “We’ve Been Around Since 1884” followed by, perhaps the most important “thing”, “We Don’t Work for the IRS”.

“2014 marked the 130th anniversary of the Enrolled Agent designation, but the anniversary passed with little fanfare.”

The EA designation was created in legislation “informally called the ‘Horse Act’.”  Originally the Enrolled Agent acted as an agent on behalf of a citizen claims against the government for lost horses and other property damage during the Civil War.

Many, myself included, feel that the name Enrolled Agent should be changed.  Jason says –

“. . . it’s not the name that’s the problem, it’s the lack of recognition. Nearly 90% of the public has never heard of an EA.”

* Jon Swaner of WTHITV10 tells us to “Expect Rough 2015 Tax Season”.

* Need more proof that (1) refundable tax credits are a magnet for fraud and should be banned from the Tax Code, and (2) the Tax Code should not be used to distribute federal welfare payments?  Just read “IRS Urged to Crack Down on Improper EITC and ACTC Payments” by Michael Cohn at TAXPRO TODAY (highlights are mine – and fyi, ACTC stands for the Additional Child Tax Credit, which can be refundable) -

“Using IRS data, TIGTA estimated the potential ACTC improper payment rate for fiscal year 2013 is between 25.2 percent and 30.5 percent, with potential ACTC improper payments totaling between $5.9 billion and $7.1 billion. In addition, IRS enforcement data show the root causes of improper ACTC payments are similar to those of the EITC.

The IRS estimated that it paid $63 billion in refundable EITCs and $26.6 billion in refundable ACTCs for tax year 2012. The IRS also estimated that 24 percent of all EITC payments made in fiscal year 2013, or $14.5 billion, were paid in error.”

* E. Hans Lundsten and Joseph Marion, III explain how “Saving for College is Also Good for your Estate Plan” at JDSUPRA BUSINESS ADVISOR.

* Wednesday’s CCH daily TAX HEADLINES email newsletter reports “Coburn Releases Report “Decoding” the Tax Code” –

“Sen. Tom Coburn, R-Okla., on December 9 issued a new report highlighting over $900 billion of “giveaways” throughout the tax code. More than 165 tax expenditures worth over $900 billion in 2014 and more than $5 trillion over the next five years are revealed in “Tax Decoder,” a new report about the tax code.”

Click here for highlights of the report and here for the full 320 page report.

I will continue to refer to the members of Congress as idiots as long as they continue to act like idiots – but I will also acknowledge a Congressperson who actually says something smart (a rarity).  The CCH piece quotes Coburn as correctly stating –

“Ideally, Congress would throw out the entire tax code and start over, but at the very least the code should be made simpler, fairer and flatter.”

* I agree with Joe Kristan, who, in a response to my post on Donor-Advised Funds included in his Wednesday “TaxRoundup, 12/10/14: Extender bill lives, permanent charitable extender bill doesn’t. And: don’t just buy it; install it!” at the ROTH AND COMPANY TAX UPDATE BLOG, said -

“For at least 99.99% of taxpayers, these are far better than setting up a private foundation.”

* Tax Mama Eva Rosenberg deals with the question “How Old Do You Have to Be to File Taxes?” at EQUIFAX -

“Is there an age limit when it comes to paying taxes? No. Age has nothing to do with taxes; it’s all about income.”

I have dealt with this question from a different perspective over the years – “How Old Do You Have to Be to Stop Paying Taxes?”  The answer is the same.

As I have said many times before, you pay taxes if you have sufficient taxable income – whether you are 1 years old or 101 years old.  And you pay FICA tax (Social Security and Medicare) if you have earned income (W-2 or self-employment) – whether you are 1 years old or 101 years old.

* While we are still waiting for the idiots in the Senate to pass an extender bill, we hear from Laura Prabucki and William La Jeunesse of FOX NEWS POLITICS that “Congress Prepares to Extend Tax Breaks for Horse Owners, Film Industry and More” –

“While you might lose money betting on the tracks, some race horse owners are making millions -- and with the help of the U.S. tax code, they can write off the cost of their thoroughbreds.

That's just one of 55 tax "extenders," worth up to $44 billion, currently being debated by Congress.”

The House has extended for one year ALL of the “tax extenders”.  While we hear about the “extenders” that affect the 1040 – the deductions for educator expenses, tuition and fees, and state and local sales tax among them – the full list includes loopholes for specific business activities. 

I certainly agree that many of these specialized loopholes should not be in the Tax Code – including the 1040 deduction as mortgage interest for mortgage insurance premiums – and really should not be extended.  But at this point there is no time for the idiots to pick and choose, with those members whose pockets are lined by the recipients of the individual specialized loopholes wasting more time fighting to keep the loophole that they are paid to champion, regardless of its “appropriateness”.  Just vote them all in or all out and be done with it. 

TTFN

2015 STANDARD MILEAGE ALLOWANCE RATES

Let me join my fellow tax bloggers in reporting that the IRS has announced the 2015 standard mileage allowance rates.

 

See my MAINSTREET.COM article “2015 IRS Standard Mileage Rates Announced: Get a Tax Deduction for Driving” for the details.

 

TTFN

DONOR ADVISED FUNDS

Here is a year-end tax tip.

If you need an additional contribution deduction for 2014, but do not want to actually make the donation to the church or charity until 2015, or are not sure to whom you want to give, you can use a “Donor-Advised Fund”.

The Internal Revenue Service tells us -

“Generally, a donor advised fund is a separately identified fund or account that is maintained and operated by a section 501(c)(3) organization, which is called a sponsoring organization. Each account is composed of contributions made by individual donors. Once the donor makes the contribution, the organization has legal control over it. However, the donor, or the donor's representative, retains advisory privileges with respect to the distribution of funds and the investment of assets in the account.”

The National Philanthropic Trust, nation's largest independent provider of Donor-Advised Funds, puts it this way -

“An easy way to think about a donor-advised fund is like a charitable savings account: a donor contributes to the fund as frequently as they like and then recommends grants to their favorite charity when they are ready.”

And explains how it works -

“1 You make an irrevocable contribution of personal assets.

2. You immediately receive the maximum tax deduction that the IRS allows.

3. You name your donor-advised fund account, advisors, and any successors or charitable beneficiaries.

4. Your contribution is placed into a donor-advised fund account where it can be invested and grow tax free.

5. At any time afterward, you can recommend grants from your account to qualified charities.”

You can contribute $5,000 to a “Donor Advised Fund” today and get a $5,000 2014 tax deduction, but you do not have to send the money to the charity until 2015.

Most mutual fund houses offer a Donor-Advised Fund – for example the Fidelity Charitable Gift Fund, the Schwab Charitable, and the Vanguard Charitable Endowment Program.     .  

You can also establish a Donor-Advised Fund at a local community foundation.  The Council on Foundations' Community Foundation Locator can help you find community foundations in your area.

TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’ – TUESDAY EDITION

We in the tax profession are all sitting around waiting to hear when the idiots in Washington finally resolve the issue of the “tax extenders”.  Let us hope that this is the last year we have to wait until literally the last minute for these idiots to act – but I wouldn’t bet on it.

* Tax pros, PLEASE check out the December “issue” of THE TAX PROFESSIONAL and let me know your comments on my “Soapbox” editorial.

* My annual report on the “PNC Christmas Price Index” is now at MAINSTREET.COM.

* There is a new timely post up at BOB’S BABBLINGS – it discusses using “Debit Cards vs Credit Cards” when it comes to online holiday shopping (actually online shopping at any time of the year).

* Russ Fox of TAXABLE TALK speaks the truth in “Speaking of Efficiency” -

“I do know how we can improve the Tax Code: Force Congresscritters to do their own taxes.”

He explains –

“Imagine what would happen if every Congresscritter did their own tax returns by hand. The Tax Code would unanimously be shrunk four hours later.”

Sadly, he also speaks the truth when he says (highlight is mine) –

“Unfortunately, there’s no chance of meaningful reform with the current President. His goals appear to be to make things worse rather than better. It will be at least 2017 before meaningful tax reform will be on the table.”

BTW – Russ, enjoy your winter vacation. 

* I did it!  I (my post “It Ain't Necessarily So – H&R Block CEO Allegedly Cares About Efficient and Effective Tax Administration”, that is) made it into TAXPROF Paul Caron’s BUZZ-like “Weekly Tax Roundup”!

* Another Professor, Jim Maule of MAULED AGAIN, gives us a simple lesson in taxes in “Being Nice to a Sibling Can Be TaxCostly” -

“The lesson is simple. Taxpayers who are trying to avoid the rental deduction limitations must make certain that the days of personal use do not exceed the greater of 14 days or ten percent of fair rental days.”  

* Mark J. Perry debunks the myth that “the rich aren’t paying their fair share of taxes” in “Top 400 Taxpayers Paid Almost as Much in Federal Income Taxes in2010 as the Entire Bottom 50%” at AEIDEAS.

* Holiday time is usually a time for spending.  But don’t forget about saving.  You should make a New Year’s resolution to save more in 2015.

A November 2013 post by Jim Blankenship at GETTING YOUR FINANCIAL DUCKS IN A ROW tells how “Bloggers Are Encouraging Adding 1% More to Your Savings Rate”.  I am one of the bloggers.

* TAXGIRL Kelly Phillips Erb’s “12 Days Of Charitable Giving 2014 Starts Soon” –

“As I do every year, I’m asking readers to submit, via email to charity@taxgirl.com, the name of a charity that most deserves a boost this year for the 12 Days of Charitable Giving.”

I have submitted a charity to KPE for consideration.

TTFN

EVERYBODY OUGHT TO HAVE AN IRA

In his classic Broadway musical A FUNNY THING etc Steve Sondheim tells us that “Everybody Ought to Have a Maid”.  I certainly don’t disagree.

 

 

I also feel that everybody ought to have an IRA.

Everybody with earned income, and regardless of age, level of income or wealth, or coverage under an employer plan, should have an IRA as a form of secured savings.  This is because of the multiple benefits of an IRA account – the tax deferred, or tax free, accumulation of income, the possible tax deduction it can provide, and the fact that they are, in most cases, protected from general creditors to whom you may owe outstanding debts and during bankruptcy procedures.

You should, of course, first take as much advantage as possible within your budget of your employer’s 401(k), 403(b), 457, or whatever retirement plan, hopefully eventually to the maximum annual allowable contribution.

Some employers offer a ROTH option for contributions.  Employee contributions to a traditional 401(k), etc are “pre-tax” and reduce the amount of taxable federal and often state wages reported on Form W-2.  If you are in the 25% federal bracket this provides an immediate 25% “return on investment”.  With a ROTH 401(k) employee contributions are “after tax”, but distributions at retirement are totally tax free.  As with traditional 401(k) plans, ROTH 401(k)s require annual minimum distributions at age 70½, but you can avoid this by rolling your ROTH 401(k) into a ROTH IRA when you retire.

Younger employees just starting out should opt for the ROTH 401(k) if it is available.  Older employees, who are used to the “pre-tax” treatment of employee contributions, may want to consider contributing any annual inflation-based increases to the maximum amount allowed to a ROTH account.

But you should not stop there.  Once you have maxed out contributions to your employer plan you should contribute to an IRA – again hopefully eventually to the maximum allowable contribution.

Before I discuss IRAs further I refer you to POSITIVELY TAXES - JUST ABOUT EVERYTHING YOU ALWAYS WANTED TO KNOW ABOUT AN IRA from my DOLLAR STORE.   

For both 2014 and 2015 the maximum amount you can contribute to an IRA, either traditional or ROTH, is $5,500.  The additional “catch-up contribution” if age 50 or older is $1,000, also for both years.

Here is the other information you need to know for 2014 and 2015:

2014 -

The deduction for contributions to a traditional IRA by taxpayers who are active participants in an employer retirement plan is phased out for Single and Head of Household filers with AGI between $60,000 and $70,000 and for those who are Married Filing Joint and Qualifying Widow(er) with AGI of $96,000 to $116,000. 

The deduction on a joint return for a spouse that is not an active participant in an employer plan but who is married to one who is phases out at AGI of $181,000 to $191.000.

The AGI phase-out range for taxpayers making contributions to a Roth IRA is $114,000 to $129,000 for Single and Head of Household filers and $181,000 to $191,000 for Married Filing Joint and Qualifying Widow(er). 

2015 –

The deduction for contributions to a traditional IRA by taxpayers who are active participants in an employer retirement plan is phased out for Single and Head of Household filers with Adjusted Gross Income (AGI) between $61,000 and $71,000 and for those who are Married Filing Joint and Qualifying Widow(er) with AGI of $98,000 to $118,000.  The phase-out range for a married taxpayer filing a separate return who is covered by an employer plan is $0 - $10,000.

The deduction on a joint return for a spouse that is not an active participant in an employer plan but who is married to one who is phases out at AGI of $183,000 to $193.000.

The AGI phase-out range for taxpayers making contributions to a Roth IRA is $116,000 to $131,000 for Single and Head of Household filers and $183,000 to $193,000 for Married Filing Joint and Qualifying Widow(er).  The phase-out range for a married taxpayer filing a separate return who is covered by an employer plan is $0 - $10,000.

Ideally you should contribute to a ROTH IRA – so your contributions will grow tax-free (and not just tax deferred) and will not be subject to RMD rules at age 70½.  FYI - accumulations in a ROTH IRA can be passed on totally tax-free to beneficiaries when you go to your final audit.

However, depending on your financial situation, the tax-deductibility of all or part of traditional IRA contributions may be more beneficial.

My post “ADVICE FOR A NEW GRADUATE STARTING OUT IN HIS/HER FIRST FULL-TIME JOB” from this summer provides two suggestions for funding IRA contributions if you are just starting out –

ü If you have any cash from graduation gifts left over open a ROTH IRA account and use this money to fund your 2014 contribution.  

ü Take an empty coffee can, or other form of “piggy bank”, and put it in your bedroom.  Beginning with the first week of January 2015, put $10, $20, or $50 in this “bank” each week.  On January 2nd of 2016 take the money that has accumulated in this “bank” and contribute it to your ROTH IRA for tax year 2016.  Continue this practice for 2016 and subsequent years. 

If you cannot contribute to either a ROTH or a deductible IRA, based on income and other limitations, you should still contribute to a non-deductible IRA.  Doing so will create a “basis” in your IRA investments and part of eventual withdrawals will be partially tax free as a “return of basis”.

If your income is too high to be able to contribute directly to a ROTH IRA you can use a special tax trick to make a “back door” contribution.  Make the contribution to a non-deductible traditional IRA account and then turn around and convert the account to a ROTH IRA.  This is also discussed in the POSITIVELY TAXES report referenced above.

While you should certainly consider contributing to Section 529 plans and Coverdell Education Savings Accounts, you can also use IRAs to save for education, as well as excessive medical expenses and buying a home, as exclusions to the premature withdrawal penalty exist for these types of expenses, and withdrawals from a ROTH IRA are always tax and penalty free to the extent of your contributions.

TTFN

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

* Tax pros, have you seen the December “issue” of THE TAX PROFESSIONAL yet?  Please check it out.  And PLEASE let me know your comments on my “Soapbox” editorial.

* One down, two to go.  It looks like the bulk of the “tax extenders” will be extended through December 31, 2014 – so these breaks will probably be available on the 2014 tax return.  So says POLITICOPro Kelsey Snell in “House Votes to Renew ‘Tax Extender’ Breaks” –

“The House voted overwhelmingly on Wednesday to renew more than 50 expired tax breaks for individuals and businesses through the end of this year, with the Senate looking increasingly likely to follow suit.”

The post tells us -

“The majority of members who spoke in favor of the bill said they would vote for the extension because it was the only option, not because it was a good one.”

And quoted Rep. Sander Levin of Michigan, the top Democrat on the Ways and Means Committee -

“To not act would disrupt the coming tax-filing season for millions of American workers and businesses, which have relied on Congress to extend these provisions and will, in a matter of weeks, begin filing their 2014 tax returns.  As a result I will support this measure.”

Hey Sander, you and your fellow idiots in Congress have already disrupted the coming tax-filing season for millions of American workers and businesses by once again waiting to the last minute to deal with this issue.

The only real “extender” that matters to individuals during the last month of the year is the ability to make tax-free distributions from individual retirement plans by individuals age 70-1/2 and older for charitable purposes.  Although I expect most of the retired taxpayers who would benefit from this have already received their 2014 RMD.

And perhaps the increased Section 179 numbers could cause businesses to go out and purchase new equipment in the last weeks of 2014.

Let’s hope this is promptly passed by the Senate and signed by BO.

For a list of the “extenders” that are extended in the House bill click here.

* My rant “Oops, They Did It Again” is referenced in this weeks “In The Blogs” post themed “Start Your Engines” at TAXPRO TODAY.

* Jason Dinesen lists “5 Things You Didn’t Know About Enrolled Agents” at DINESEN TAX TIMES.

Jason’s item #2 concerns perhaps the biggest public misconception about the Enrolled Agent – “We don’t work for the IRS”.  The poor name of this designation often leads the uninformed public to believe that EAs are “agents” of the IRS, which is certainly not true.

I disagree with item #5 – “In the tax world, we are 100% equal to CPAs and attorneys”.

In the tax world Enrolled Agents are far superior to CPAs and attorneys.  While Jason correctly states, “There are 3 groups of licensed professionals who have unlimited practice rights when handling tax matters for taxpayers: CPAs, attorneys … and Enrolled Agents”, of the 3 designations only the EA has passed a test on “knowledge of the tax code and IRS procedures”.  Therefore EAs have demonstrated knowledge and competence in matters related to the preparation of 1040s, while CPAs and attorneys have not.

* Jason also begins a series of posts on a long-term project he has been working on regarding the history of marriage in the tax code with “A Brief History of Marriage in the Tax Code: Introduction”.

At the end of the post he makes a statement that I have certainly found to be true - “. . .getting married does not always mean big savings at tax time”.

* My previous free online monthly newsletter THE LAKE REGION SOMETHING, which I gave up about a year ago, has “morphed” into BOB’S BABBLINGS -  “A weekly blog of ramblings on entertainment, popular culture, travel, and other ‘stuff’ - anything but taxes - from the internet's Wandering Tax Pro, now enjoying a more relaxed life in the Lake Region of Northeast PA after spending most of his life in Hudson County NJ.”

Please check it out and let me know what you think of it.

BTW – I have fixed my blogger.com settings for BOB’S BABBLINGS so it is now accessible by the public.  Sorry for the FU – and for delaying your ability to check out this new blog.

* Manasa Nadig provides a basic primer on “Learning The Mechanics Of A Foreign Tax Credit!” at THE BUZZ ABOUT TAXES (great blog title).

I have found calculating the Foreign Tax Credit on Form 1116 to be a real PITA.  And if you are a victim of the dreaded AMT you may have to calculate it twice!  I wish the IRS would increase the numbers for the below referenced exemption from having to file a Form 1116 to perhaps $1000 and $2000.

“Your qualified foreign taxes for the tax year are not more than $300 ($600 if married filing a joint return).” 

* Tony Nitti is right when he says “Sorry Mr. Ryan, But Corporate-Only Tax Reform Doesn't Work” at his FORBES.COM blog.

And he is also right when he says –

“When as simple a task as passing an extenders package leads to infighting, revenge tactics, and claims of betrayal within Congress, you know we’re a long, long way from comprehensive tax reform becoming a reality.”

While I will never giving up calling for true substantive tax reform, I do not hold out any hope for it becoming a reality as long as the idiots in Congress continue to remain idiots – and any change to this situation is also a long way from becoming a reality.

Tony does a good job of explaining the differences between Democrats and Republicans when it comes to 1040 tax reform.  Based on the below description of the Republican position it appears I am Republican, at least when it comes to taxes –

“Republicans, on the other hand, would prefer to take a flamethrower to the current system.”

My parents would be happy!

 

THE FINAL WORD -

 

My first vote as a PA resident was for President.  I walked into the polling place and, having recognized that I was a new voter, the Republican "challenger" came up to me and announced -

 

"Here is PA the Republicans pay $20.00 for each vote."

 

As you may know, I moved to PA from Hudson County NJ, where it is pretty much illegal to vote anything but Democrat.

 

I responded to the Republican challenger -

 

"Where I came from the Democrats would pay $25.00 for a vote."

 

This is, very seriously, a true story.

TTFN

IT AIN’T NECESSARILY SO – H&R BLOCK CEO ALLEGEDLY CARES ABOUT EFFICIENT AND EFFECTIVE TAX ADMINISTRATION

While I usually don’t follow the actions of Henry and Richard, other than to laugh gleefully at their many local government and court admonishments and penalty assessments for royally screwing their clients, the title of this post, which I came across via a “tweet” caught my eye –

“H&R Block CEO Asks IRS To Make It Harder To Self-Prepare Tax Returns And Why That's A Good Idea”

The post is by Leslie Book, author of the FORBES.COM blog “Procedurally Taxing” 

(We seek to explain, explore and expose issues involving federal tax procedure).

Leslie starts out by telling us –

“Last week, William Cobb, the President and CEO of H&R Block, wrote to the Commissioner asking that the IRS implement changes to tax forms to make it more difficult for taxpayers to prepare their own returns claiming the earned income tax credit (EITC).”

My response to this is definitely the cynical response to which Leslie refers – “Cobb wants more taxpayers to come to the preparer behemoth”.

H&R Block only cares about H&R Block’s bottom line.  Cobb and his company could care less about what is good for the American taxpayer, evidenced by the many, many legal actions which I mentioned above, or what is good for the IRS and tax administration.

It is like the recent AICPA lawsuit to stop the IRS new voluntary AFSP program.  The AICPA cares only about its CPA members and their bottom lines, and could care less about the taxpaying public.  They filed the lawsuit for strictly selfish reasons, to reduce competition, but “cloaked” it in an alleged concern for taxpayers.

So here H&R makes a recommendation for strictly selfish reasons, but cloaks it in a concern for the IRS and proper tax administration.

What are we talking about?  The IRS wrote to the Commissioner of the IRS to say –

“. . . the IRS will see immediate benefits if it seizes the opportunity to require all EITC taxpayers, including the more than 40% of taxpayers who self-prepare their returns, to submit additional eligibility information to the IRS.”

As Leslie points out –

“Would Cobb’s proposal be good for Block? Of course, as placing more obstacles in the way of self-preparing returns makes it more likely that taxpayers will seek assistance from someone else.” 

Presumably in many cases the “someone else” will be Henry and Richard.

The basis of Leslie’s post is that just because this recommendation will put more money in the already loaded pockets of Henry and Richard does not necessarily mean it is a bad idea.

Here is what is a good idea for proper efficient and effective tax administration -  remove the Earned Income Credit, and all other government social welfare and other benefit programs, from the Tax Code.

Refundable tax credits, like those generated by the Earned Income Credit, the additional Child Tax Credit, and the earlier First Time Homebuyer Credit, are magnets for tax fraud.  Over the years it has been estimated that from 1/4 to 1/3 of all Earned Income Credit applications are erroneous or fraudulent.

I was interested to read that, according to Leslie –

“. . . the IRS’s ill-fated efforts to regulate unlicensed preparers through a mandatory education and testing program {the now-dead RTRP program that was shot down in Loving v IRS – rdf} stems in part from former Commissioner Shulman’s efforts to tackle refundable credit compliance problems.”

The correct way to tackle refundable credit compliance problems is to ban refundable tax credits!

Let me once again tell you what should be done, and why it should be done - 

The benefits provided by the Earned Income Tax Credit and the refundable Child Tax Credit should be distributed via existing federal welfare programs for Aid to Families with Dependent Children. The benefits provided by the education tax credits and deduction for tuition and fees should be distributed via existing federal programs for providing direct student financial aid. The benefits provided by the energy credit and other such personal and business credits should be distributed via Cash-For-Clunkers-like direct discount or rebate programs funded by the budget of the appropriate Cabinet department.

Distributing the benefits in this manner is much better than the current method for many reasons:

1. It would be easier for the government to verify that the recipient of the subsidy, discount or rebate actually qualified for the money, greatly reducing fraud. And tax preparers would no longer need to take on the added responsibility of becoming Social Workers and have to verify that a person qualifies for government benefits.

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

3. We would be able to calculate the true income tax burden of individuals. Many of the infamous “47%” would still be receiving government benefits, but it would not be done through the income tax system, so they would actually be paying federal income tax.

4. We could measure the true cost of education, housing, health, energy and welfare programs in the federal budget because benefit payments would be properly allocated to the appropriate departments.

My only “selfish” reason for making this recommendation is to reduce the agita and aggravation involved in preparing 1040s. 

But wait - what about the recommendation from Henry and Richard?

If we assume (and, unfortunately, it is a good assumption) that the Earned Income Credit will be around for a while, the Form 8867 (currently titled "Paid Preparer's Earned Income Credit Checklist") should be renamed "Claimant's Earned Income Credit Checklist" and completed, and separately signed, by the taxpayer(s) claiming the credit and NOT the tax preparer.  And the tax preparer should NOT have to view public and private records and independently verify and confirm that the claimant is entitled to the credit.

If that is what Mr Cobb has recommended to the IRS then it is a good idea.

Please - what do you think about all this?

TTFN



  

TAKING ADVANTAGE OF THE 0% TAX RATE

In my MainStreet.com article “2014 Year-End Tax Planning Strategies to Ensure a Smooth Filing” I suggest -

“If you will fall within the 10% or 15% brackets you may want to generate additional long-term capital gains to take full advantage of the 0% federal rate.”

Let me elaborate on that advice.

First - yes, that is a “zero percent” tax rate - $1,000.00 taxed at a “0”% tax rate is $0.00 in tax!

The Jobs and Growth Tax Relief Reconciliation Act of 2003 originally reduced the tax rates on long-term capital gains, including capital gain distributions, and “qualified” dividends to 5% and 15%. It called for a 0% tax rate on such income for those in the 10% and 15% brackets for 2008 only. The Tax Increase Prevention and Reconciliation Act of 2005 extended the lower capital gain and dividend tax rates, including the 0% rate, through tax year 2010.  The American Taxpayer Relief Act of 2012 made the lower capital gains rates permanent, and added a new 20% rate for those in the new 39.6% bracket.    

The 0% tax rate applies to Adjusted Net Capital Gains (ANCG), which is –

 

* net long-term capital gains (property held more than one year) less net short-term capital losses (property held one year or less), whether from transactions by the taxpayer himself/herself or passed through to the taxpayer on a Form K-1,

* capital gain distributions from mutual funds, and

* “qualified” dividends.

Net long-term capital gains do not include gains from collectibles, taxed at ordinary income rates up to a maximum of 28%, and “Section 1250” depreciation recapture, taxed at ordinary income rates up to a maximum of 25%.

While ANCG is taxed separately at the special capital gain tax rate for both “regular” income tax and the dreaded Alternative Minimum Tax (AMT), it is important to remember that it is included in Adjusted Gross Income (AGI) as well as Alternative Minimum Taxable Income (AMTI), and can therefore impact items of income, deduction and credit that are affected by AGI as well as cause you to become a victim of the dreaded Alternative Minimum Tax (AMT). 

So in reality income separately taxed at a 0% tax rate may actually increase your tax liability.  And $1,000 taxed at a 0% tax rate may not be $0.00 in additional tax.

For 2014 the 15% tax bracket ends at $36,900 for Single filers and married couples filing separately, $49,400 for Head of Household, and $73,800 for joint filers. If your net taxable income less ANCG is less than the above amount that applies to your filing status you will benefit from the 0% tax rate.

Let us assume that you are single and your net taxable income is $35,000. All of the ANCG income included in the $35,000 will be tax-free on the federal level.  

But what if your net taxable income is $38,000 and your ANCG is $5,000.  The first $1,100 would be tax-free (taxed at 0%) and the remaining $3,900 would be taxed at 15%.

When you prepare your “preliminary” 2014 tax return and add up realized and “paper” capital gains and losses to date as part of the year-end planning process, make a note of your anticipated net taxable income and Adjusted Net Capital Gains.  If have ANCG, and you are “over the top” and within the 25% tax bracket, during the last weeks of 2014 attempt to reduce income and increase deductions to bring you within the 15% bracket, so at least some of your ANCG will be taxed at the 0% rate.

If your projected net taxable income puts you within the 15% bracket, and you have “paper” long-term capital gains in your investment portfolio, consider selling stock or mutual fund shares to generate additional long-term gain to maximize your benefit from the 0% tax rate.    

You can sell the stock or fund shares on Monday and turn around and buy them back on Wednesday. The “wash sale” rules only apply to the sale of stock or mutual fund shares that results in a loss - it does not apply if the sale results in a gain.

Before deciding to sell anything you must first consider how the additional income will impact income, deductions, and credits that are affected by increased AGI, and how it will affect your eligibility for, or the calculation of, the dreaded AMT.

 

And remember – while the additional income will be tax free on the federal return you will be paying state and local income tax on the gains.

 

You should discuss this strategy when meeting with your tax professional to map out year-end tax moves.

Any questions?

TTFN  

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’ – TUESDAY EDITION

* It’s here!  The December “issue” of THE TAX PROFESSIONAL, that is.  Tax pros - check it out.  And PLEASE let me know your comments on my “Soapbox” editorial.

* Michael Kitces provides a detailed post on “Understanding the Mechanics Of The 0% Long-Term Capital Gains Tax Rate: How To Harvest Capital Gains For A Free Step-Up In Basis!” at NERD’S EYE VIEW.

Good year-end planning advice for taxpayers who can take advantage of this special capital gains rate.

* My previous free online monthly newsletter THE LAKE REGION SOMETHING, which I gave up about a year ago, has “morphed” into BOB’S BABBLINGS -  “A weekly blog of ramblings on entertainment, popular culture, travel, and other ‘stuff’ - anything but taxes - from the internet's Wandering Tax Pro, now enjoying a more relaxed life in the Lake Region of Northeast PA after spending most of his life in Hudson County NJ.”

Please check it out and let me know what you think of it.

* Daisy Barton from ACCOUNTING-DEGREE.ORG emailed me a new infographic on “How Business Structure Affects Taxes”. 

 

* Looking for "stocking stuffers"?  How about a tax guide from My Dollar Store.

* A Thanksgiving morning “tweet” led me to “The 403(b) and 457(b): A One-Two Punch for Retirement”, a 2012 post at GETTING YOUR FINANCIAL DUCKS IN A ROW by Sterling Raskie.

Sterling tells us –

“There is a select group of people that may have access to both the 403(b) and the 457(b). For these chosen few, there is an opportunity to save even more money.”

Many of my NJ clients, who were firefighters, police officers, teachers, and municipal employees, had access, and contributed to, both a 403(b) and a 457(b).

* Sterling also gives us a current post on “An Exception to the RMD Rule”.   

He ends the post with a statement that really should end all tax posts, and he gets it right (tax professional, not CPA).  –

“As always, before employing any strategy, consider talking to a competent financial or tax professional to ensure you’re making the right decision.”

I would, however, change “consider talking to” to “consult”.  Don’t just consider it – do it!  And I would not say “or”.  You may also want to consult a financial professional, but you should always consult your tax professional. 

* Jim Blankenship, Sterling’s partner (or boss?) at GETTING YOUR FINANCIAL DUCKS IN A ROW, gets his 2 cents about retirement accounts in with a list of “Five Things You Need to Know About Retirement Plans”.

I especially like the first “thing” –

“Each dollar you defer is worth more than a dollar.”

And I agree with Jim’s #5 – “Don’t Take A Loan”.

* Tony Nitti explains “The Four Tax Breaks (And Two Senators) That Killed the Tax Extender Deal” at FORBES.COM. 

It seemed that “at long last, a deal had been struck to extend all 55 expiring provisions. More notable, however, was the indication that while the majority of provisions would be extended for two years — retroactively for 2014 and through December 31, 2015.”

However -

“Any optimism was quickly quelled, however, by a statement that President Obama would veto the deal, despite the fact that the lead writer of the bill was a Democrat- Senate Majority Leader Harry Reid (D-NV).”

Why would BO veto the extender bill, a rare example of actual cooperation among the idiots in Congress?

“Nowhere in the legislation, however, was any discussion of what to do about the EIC and CTC once the enhancements made to each credit expired at the end of 2017.”

This shows that BO is not at all interested in true, substantive tax reform.  He wants to keep the Tax Code complicated by maintaining refundable tax credits, which are a magnet for extensive fraud.  Don’t expect any real tax reform legislation to pass during the balance of BO’s term.

Tony’s analysis indicates that with politics, as with almost everything else, timing is everything –

“Oddly enough, if the President’s speech on immigration reform had been only a week later, we may have gotten a deal done that made everyone happy, with the R&D Credit, the enhanced Section 179 deduction, and the EIC and CTC being made permanent.”

* Chuck Rubin warns that a “Stamps.com Date is Not Proof of Mailing Date” a RUBIN ON TAX.

While I don’t advocate paying for registered mail, although it couldn’t hurt to so do, it is clear that if you are mailing a tax document on the actual due date you should personally take the envelope to the post office and purchase the postage at the window, or, if it is already stamped, personally hand the envelope to a postal clerk at the window and watch him/her affix the postmark stamp.  

* The 1040 GEEK tackles 25 “Questions and Answers on the Individual Shared Responsibility Provision” of “Obamacare”.

TTFN

OOPS - THEY DID IT AGAIN!

Well, it is December.  And the idiots in Congress have not yet dealt with the issue of the “tax extenders”.

At this point the issue is not whether or not the “tax extenders” should be extended.  The issue is that, because of the inaction of the idiots we have elected to federal office, the IRS printing of 2014 tax forms and instruction is delayed, as is the updating of the Service’s software systems.  The result will be a delay in ability of the IRS to process 2014 tax returns – which, thanks to Congress, has now become the norm and not the exception.

And the issue is the total folly of passing temporary tax benefits.

As I recall, historically, when the idiots in Congress were more responsible (or, more appropriate, less irresponsible), by October the IRS was able to issue the final tax forms and corresponding instructions for the year, and all necessary adjustments to the IRS systems had been implemented.

This is just another in a long list of examples of the fact that the idiots in Washington have absolutely no concern for the proper administration of the government, or for the American public.

Since we have sent most of the same idiots back to Congress this past election do not expect this fact to change any time soon.

TTFN