EVERYBODY OUGHT TO HAVE AN IRA

In his classic Broadway musical comedy A FUNNY THING HAPPENED ON THE WAY TO THE FORUM. Steve Sondheim tells us that “Everybody Ought to Have a Maid”.  I agree.

I also believe that everybody ought to have an IRA.

Everybody with earned income, 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 IRAs 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 to the maximum annual allowable contribution. 

There are two types of IRAs – the “traditional” IRA and the ROTH IRA.  If you can have a ROTH IRA you should have a ROTH IRA and use it as your current savings account.

The maximum amount you can contribute to a ROTH IRA, a traditional IRA or a combination of ROTH and traditional accounts for 2018 is $5,500.   If you are age 50 or older you can contribute an additional $1,000.  A non-working spouse can open and contribute to an IRA, up to the maximum, as long as the other spouse has earned income. The combined contributions of working and non-working spouses are limited to the working spouse’s earned income.

Contributions to a ROTH IRA are never deductible on your federal or state income tax returns.  But earnings on money held in a ROTH IRA account can eventually be totally tax free to both you and your beneficiaries.

Here is what you need to know about a ROTH IRA -

* You can contribute to a Roth IRA at any age as long as you have earned income from a job or self-employment.   You do not have to stop making contributions at age 70½ if you still have earned income.

* The amount of your allowable contribution to a ROTH IRA is phased out and eventually eliminated based on your Adjusted Gross Income (AGI).  The AGI phase-out range for taxpayers making contributions to a ROTH IRA for 2018 is -

$120,000 - $135,000 = Single and Head of Household

$189,000 - $199,000 = Married Filing Joint and Qualifying Widow(er)

$0 - $10,000 = Married Filing Separate

* You can withdraw your contributions at any time without taxes or penalty.  All withdrawals are considered to come from contributions first.

* You must hold the Roth account for at least five years and be at least 59½ before you can withdraw earnings tax-free and penalty-free.  The 5-year period begins on the first day you make your first ROTH contribution.

* You never have to take any withdrawals from a ROTH IRA in your lifetime.  There are no annual required minimum distributions beginning at age 70½.

As long as you never touch the accumulated earnings on your ROTH IRA investment, and withdraw only your contributions, you can take money from this account at any time over the years without any tax cost.  And your accumulated earnings will grow to a nice retirement nest egg, or legacy for your beneficiaries, if invested wisely.

You have contributed $10,000 to a ROTH IRA, which has accumulated earnings of $2,000.  You need $5,000, or as much as $10,000, to pay for an extraordinary medical bill, or for needed home repairs, or to pay for your child’s college education.  You can take the $5,000 - $10,000 from your ROTH IRA account without any tax consequences.

Contributions to a “traditional” IRA may provide a current tax deduction.  If all of your traditional IRA contributions have been fully deductible then all subsequent withdrawals are fully taxable[R1] .  The amount you can deduct may be phased-out based on your “Modified” Adjusted Gross Income (MAGI) if you are an active participant in an employer-sponsored retirement plan such as a 401(k), a 403(b) or an SEP.    

Your “Modified” AGI for purposes of the deduction phase-out begins with “regular” AGI and adds back the-

• foreign income and housing exclusions and deduction,

• savings bond interest exclusion for higher education costs,

• adoption assistance benefits exclusion, and

• deduction for student loan interest.

For 2018, the amount of a contribution to a traditional IRA that can be claimed as a deduction on the tax return of a taxpayer who is an active participant in an employer retirement plan is phased out if Adjusted Gross Income (AGI) is -

• $ 63,000 - $73,000 for Single and Head of Household

• $101,000 - $121,000 for Married Filing Joint and Qualifying Widow(er)

• $0 - $10,000 for Married Filing Separate

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 $189,000 to $199,000.  

If your deduction is limited or totally phased out you can still contribute the maximum amount to an IRA account.  Part of the contribution will be “non-deductible”.  Non-deductible contributions create a “basis” in your IRA investments and part of your future withdrawals will be partially tax free as a “return of basis”.

You can also use IRAs to save for education, as well as excessive medical expenses and buying a home.  Exclusions to the premature withdrawal penalty exist for these types of expenses.

As far as reporting the activity within an IRA account – as I explained in a 2009 post – "What Happens In An IRA Stays In The IRA".   

Younger employees just starting out should definitely opt for the ROTH IRA.  Here are two suggestions for funding IRA contributions if you are starting your first full-time job –

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

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

Here is another good idea – If your son or daughter has a summer or after-school job you should consider opening up a ROTH IRA account for him or her.  Money you give your child for doing chores around the house doesn’t count, but earnings from babysitting or mowing lawns may qualify.

You can contribute 100% of your child’s earnings to the account, up to the $5,500 maximum. If your son earns $2,400 for the summer you can contribute $2,400 to a ROTH IRA for him. If he earns $6,000 you can contribute $5,500.

There is nothing in the Tax Code that says that the money deposited in an IRA for your son or daughter has to come from the child’s funds.  You can use your own money to fund the IRA contribution and let your child keep his earnings.

You can use a ROTH IRA to encourage your children to work or to save. If your son earns $5,000 in a part-time job, open a ROTH IRA for him.  Or, if your daughter agrees to put $2,500 of her salary from a summer job in a ROTH, match it and put in another $2,500 (assuming her total earnings for the year is at least $5,000).

If you put the maximum into a ROTH each year for your 16-year-old from 2018 through 2023, when he/she will turn 21, and no other contributions are ever made, the account could grow to a truly tidy sum (in 6 figures) by the time the child turns 65.  One caveat - there exists a potential problem with opening an IRA account for a child. Once the child reaches the “age of majority,” usually 18, he or she will have full access to all the funds and can “take the money and run.”

One last thing - the earlier in the year you contribute to your, or your children's, ROTH IRA, the more money you will accumulate tax-free at retirement.  So, if not already done, make your 2018 ROTH IRA contribution today, and make your 2019 contribution on January 2^nd of 2019.

If you have questions about the Act will affect your specific situation I suggest you consult your, or a, tax professional.  You can begin your search for a tax professional at "Find A Tax Professional".

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

A NEW ADDITION TO MY DOLLAR STORE!

I have made a new addition to my DOLLAR STORE - “Everybody Ought To Have An IRA”.

In his classic Broadway musical, A FUNNY THING HAPPENED etc. Steve Sondheim tells us that “Everybody Ought to Have a Maid”.  I don’t disagree.  I also believe that everybody ought to have an IRA.

This report is basically almost everything you always wanted to know about contributing to an IRA account but didn’t know who to ask.  It discusses the basics of an IRA, including the changes made by the SECURE Act, the traditional IRA and the ROTH IRA, the “backdoor” IRA, and opening a ROTH IRA for your child.  And it includes a worksheet to keep track of your IRA contributions.

As with everything else in my DOLLAR store the cost is only $1.00, sent as a pdf email attachment.  A print version sent via postal mail is also available for $2.00.

Send your check or money order for $1.00 or $2.00, payable to TAXES AND ACCOUNTING, INC, and your email or postal address to –

TAXES AND ACCOUNTING, INC

IRA REPORT

POST OFFICE BOX A

HAWLEY PA 18428

TTFN

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

My “tweet” from last week, a post to the #TrumpTODAY thread in response to the “Town Hall” meeting with Trump hosted by TODAY, was my most popular ever.  As of this writing it has gotten 78 “retweets” and 134 “favorites”! 

Here is what I tweeted –

“The most disturbing development in American politics in my lifetime is #DonaldTrump taken seriously as Presidential candidate. #TrumpTODAY”

Would you have “retweeted” or “favorite” it?

BTW – I wish this clock-changing thing was reversed.  I hate losing an hour during the tax filing season.

* Elaine Maag is dead wrong with her suggestion that “The IRS Could Improve EITC Compliance by Regulating Tax Preparers” at TAX VOX, the blog of the Tax Policy Center.

See my comment to her post for the real answer to reducing EITC tax fraud.  

* The IRS now issues a weekly “Tax Preparedness Series” of press releases.  The second in the series correctly reminds us that “Most Retirees Need to Take Required Retirement Plan Distributions by Dec. 31”. 

Most RMD-takers wait until the end of the year to take the distribution to maximize the tax-deferred accrual of earnings.  And this year many are waiting to take their RMD to see if the idiots in Congress are going to extend the “tax extenders” in time to make the direct tax-free transfer from an IRA account to a church or charity, which would satisfy one’s RMD obligation.

* FYI, the first entry in the IRS “Tax Preparedness Series” was “Employees Should Take Time to Check Withholding”.   

* Jason Dinesen makes a discovery of interest to tax preparers and small business corporations in “Corporate Tax Status Determined By Federal Law, Not State Law” at DINESEN TAX TIMES (highlight is mine) -

“So according to the IRS, if a corporation loses its corporate status at the state level but continues to operate as a corporation, it should continue to file corporate tax returns.”

The highlighted “but continues to operate as a corporation” is the important condition.  Often a corporation just stops operating – basically going out of business – and the state revokes the corporate charter for not filing reports and returns, such as a required Annual Report.  In such a case I believe the revocation of the corporate charter would mean a termination of the corporation, and no more federal 1120 or 1120S returns would be required.

Often a state will inadvertently revoke an active corporation’s charter because it believes an Annual Report was not filed, and the corporation must pay often excessive fees to be reinstated, even if the revocation resulted from the state’s FU.

* Here is a TWTP from last December that bears repeating/re-reading – “Everybody Ought to Have an IRA”.  

* Anne Tergesen of the WALL STREET JOURNAL identifies “A Tax Deduction That’s Often Overlooked”.

I believe this is the first time that I have seen anyone write about this deduction. However it is truly a rare deduction – one that I have only claimed two or three times in 40+ years.  It is even more obscure now because of the $5 Million + estate tax exemption.

However if it does apply it can be a real tax-saver.  As Anne points out –

“Unlike many other such deductions, it can be claimed in full because it’s exempt from a rule that requires you to add up your deductions and claim only the amounts that exceed 2% of adjusted gross income, says IRA expert Ed Slott.”

So if you inherited an IRA or 401(k) account from a very, very wealthy relative you should check it out.

* Jean Murray implores, “Don't Make These 5 Small Business Money Mistakes” at ABOUT.COM.

* And, also at ABOUT.COM, William Perez provides a real education in “Employee Stock Purchase Plans”.

* Paul Neiffer reports “File & Suspend Will Be No More” at FARM CPA TODAY.  He is talking about a strategy for maximizing Social Security benefits used by married couples.  The brief post links to two other articles you should read with more detailed information on the subject.

* Jim Blankenship also addresses this issue in "The Death of File & Suspend and Restricted Application” at GETTING YOUR FINANCIAL DUCKS IN A ROW.

* Some tax reform nostalgia from Scott Greenberg at the TAX POLICY BLOG of the Tax Foundation – “The Bush Tax Reform Panel, Ten Years Later”.

I remember writing about the panel’s recommendations at the time – but TWTP was at a different host then and I cannot access these posts to provide a link.

TTFN

BO’S SOTU TAX PROPOSALS

BO has released some of the tax proposals he will be presenting in tomorrow night’s State of the Union Address.

Before I look at his specific proposals let me explain what, in my opinion, the idiots in Congress should, but I expect never will, do (although it has been suggested by several legitimate sources, other than me,  during the Dubya an BO presidencies).

Our current Tax Code should be totally shredded and we should start from scratch.  “Everything is taxable, except.”  And “nothing is deductible, except”.  Only those “excepts” that are appropriate and necessary should be added back.

All “industry-specific” individual and business “loopholes” should be permanently closed.

Government welfare and other benefit programs should no longer be distributed via the 1040, and there should most definitely be no “refundable” tax credits.  And, most definitely, there would be no dreaded Alternative Minimum Tax.

When looking at what “tax expenditures” are appropriate and necessary we should consider only those items that encourage saving, investment, and general economic growth.

That said, let me now take a look at BO’s proposals.  I have used the recent post of Kelly Phillips Erb, FORBES.COM’s TaxGirl, titled “President's New Tax Proposal Would Hit Wealthy, Benefit Middle Class”, and “Obama Proposes New Tax Hikes on Wealthy to Aid Middle Class” by Richard Rubin and Margaret Talev at BLOOMBRG.COM, among other recent blog posts and articles, as my sources.

* Establish a Tax Credit for Two-Income Families 

It’s deja vu all over again.  Or everything old is new again.  This is certainly not new – just a return of the “Schedule W” from the 1970s.  {Aside - as I recall (please correct me if I am wrong) the Schedule W was one of the rare tax benefits that was introduced after the beginning of the tax filing season and made retroactive to the prior year – so we actually had to prepare amended returns for some clients to claim this benefit}.

This is an admirable partial "fix” to the “marriage tax penalty” that currently exists in the Tax Code because of the way the tax tables are written.  As KPE explains, it provides –

“. . . a tax credit of up to $500 for families with two working spouses. The credit would be equal to 5% of the first $10,000 of earnings for the lower-earning spouse in a married couple, and the maximum credit would be available to families with incomes up to $120,000, with a partial credit available up to $210,000.”

My solution to the “marriage tax penalty” is to create one filing status and one tax table – but allowing married couples to file one tax return which separately reports and taxes the individual net taxable income of each spouse.

However anything that reduces the marriage tax penalty is good – and I would not oppose this new credit.  Thankfully it would not be “refundable”.

* Increase the Child Care Credit 

BO would increase the maximum Child and Dependent Care Credit to $3,000 (half of the first $6,000 of child care costs) per child for children under 5.  The maximum credit could be claimed by families making up to $120,000.  Again, also thankfully, the credit would not be “refundable”.

But he would repeal Flexible Spending Accounts for child care, which let people set aside up to $5,000 a year before taxes.

Again I do not necessarily oppose an increase in the Child and Dependent Care Credit – though I probably would not support doing away with Dependent Care FSAs.

However, if there must be an income limitation, and I do not think there should be one (I generally oppose AGI limitations on deductions and credits) I feel $120,000 is too low.  My clients for the most part live in New Jersey, with some in New York.  In the northeast $120,000 in income is not a lot.  While families in Kansas, or even in parts of my new home state of Pennsylvania, with income of $120,000 may be living large, those with similar incomes in NJ, NY and several other states are just getting by.

* Expand the Earned Income Tax Credit (EITC)

KPE tells us that, “despite heavy criticisms of the EITC (which has become a magnet for tax fraud)” -

“The President’s proposal would double the EITC for workers without qualifying children, increase the income level at which the credit phases out, and make the credit available to workers age 21 and older.”

The increased credit would, I expect, be refundable.

I am the biggest critic of the Earned Income Tax Credit.  The EITC is federal welfare and does not belong in the Tax Code!  Period!  Exclamation Point!

I oppose any expansion or enhancement of the Earned Income Tax Credit – or any “refundable” tax credit.

That is not to say that the government should not assist, encourage, or reward the “working poor”.  But it should be done through the current Aid to Families with Dependent Children program.

Revamp Education Benefits

According to KPE -

“The President’s plan would consolidate existing education tax benefits. . . The move would . . . allow more students up to $2,500 in tax breaks each year over five years.  Specifically, the Lifetime Learning Credit and the tuition and fees deduction would be eliminated and replaced by an expanded American Opportunity Credit (AOC).  The refundable piece of the AOC would also be increased.”

BO would also “eliminate tax on student loan debt forgiveness under Pay-As-You-Earn (PAYE) and other income-based repayment plans” and “repeal of the student loan interest deduction for new borrowers”.

If education benefits must remain in the Code (and I do not believe they should) then consolidating existing education benefits into one expanded AOC is a good idea.  But, obviously, none of the credit should be “refundable”. 

And I would allow the credit to be claimed over six (6) calendar tax years.  Education is measured on a “fiscal” year – a student incurs undergraduate degree costs during five (5) calendar years.

I would not oppose eliminating tax on forgiven student loan debt.  But, while I would certainly prefer direct subsidies for student loan interest, I do not think I would support eliminating the student loan deduction on only some payees.

BO is also proposing “America's College Promise”, which would provide “the first two years of community college free for everybody” who maintains a minimum 2.5 GPA.   

Now this is something I could really support.  However there are no details on how this would be administered, nor how it would be paid for, yet.

This is also nothing new.  Tuition-free community college was first proposed by Harry Truman in 1947.   

Boost, and Limit, IRA Options 

Once again from KPE -

“Every employer with more than 10 employees that does not currently offer a retirement plan would be required to automatically enroll their workers in an IRA – called an ‘auto-IRA’.”

Tax credits would be given to employers to help with the implementation and administration costs.

And

“The proposal would also demand that employers who offer retirement plans permit part-time employees who have worked at least 500 hours per year for 3 years or more to make voluntary contributions to the plan.”

And

“The President’s plan would also bar contributions to and accruals of additional benefits in tax-preferred retirement plans and IRAs once balances have reached $3.4 million.”

I support anything that would encourage retirement savings.  As I said in a post this past December “Everybody Ought to Have an IRA”.  But I would need to know more of the mechanics of these required employer-sponsored IRAs. 

Would contributions come from the employer or the employee?  I doubt very much the government could, or should, require individuals, or employers, to make contributions to an IRA.  At most I think that employers would be required to offer employees the opportunity to make voluntary contributions to an IRA via payroll withholding.

And I would support allowing permanent part-time employees to make voluntary contributions to an employer-sponsored plan, without a required employer match.

But I definitely do not support limiting retirement savings, or any kind of savings, or the accrual of benefits within retirement plans.    

No real surprise from BO with any of his proposals - he does not want “tax reform” or “tax simplification”.  He wants to continue complicating the Tax Code further by expanding “tax expenditures” that do not belong Code in the first place. 

How will BO pay for this “middle class tax relief”?  I’ll tell you tomorrow (which means that the normal Tuesday BUZZ will be pushed to Wednesday).

TTFN

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

Did you hear about the terrorist that hijacked an airplane full of lawyers?  He threatened to release one every hour if his demands weren't met.

* In honor or Memorial Day ACCOUNTING TODAY has a slide show of “Tax Tips for the Armed Forces”.

* And, also for Memorial Day, Kay Bell takes a look at state gas taxes in “Memorial Day motorists expected to jam highways”.

It turns out that my new home state of PA has the highest state gas tax – 68.7 cents per gallon – and my former home state of NJ is the second lowest (Alaska is lowest at 30.65 cents per gallon) at 32.9 cents.  This is the one time when NJ is not the, or among the, highest taxed state, and the only time PA tops the list with the highest tax.

* New tax blogger Chris A Johnson, EA, a long-time supporter of and commenter to TWTP, discusses “Paying Your Past Due Taxes and Prioritizing Payments” at CAJ TAX SOLUTIONS.

Some good advice from Chris.  I especially agree with what he has to say about owing both federal and state taxes -

“What if you owe both past due state and federal taxes? I recommend you apply any extra funds you have toward your state tax debt first (with a couple exceptions), provided you’ve already paid enough on your federal tax debt to prevent wage garnishment or bank account levy.  The majority of states charge higher interest rates on past due taxes than the IRS does (currently 3% annually).” 

In the case of current taxes due, if a client, for example, has balances due on both the federal and NJ state 2016 returns, owe both Uncles Sam and Chris (Christie – for whom I have lost all respect and confidence in his judgment), and cannot pay in full both balances with the filing of the returns, I always recommend paying the NJ state balance, hopefully in full, first and maintaining a balance due to Sam.

What if you owe both past due state and federal taxes? I recommend you apply any extra funds you have toward your state tax debt first (with a couple exceptions), provided you’ve already paid enough on your federal tax debt to prevent wage garnishment or bank account levy.  The majority of states charge higher interest rates on past due taxes than the IRS does (currently 3% annually). 

* Sarah Brenner lists “3 Five-Year Rules for Roth IRAs You Need to Know” at THE SLOTT REPORT.

* As I have said many times before, regardless of what you think about the IRS or its recent lack of taxpayer service it has an excellent website chock-a-block with helpful information.

Case in point – the “Self-Employed Individuals Tax Center”.

* Great minds do think alike.  A great response from Joe Kristan, author of the ROTH AND COMPANY TAX UPDATE BLOG, to a Keith Fogg post referenced “TaxRoundup, 5/23/16: Prairie Meadows fights the odds. And much more Monday goodness!”.

Joe quotes from Keith’s “Return Preparer Shenanigans” - “Based on clinic clients for almost a decade, I would like regulation that removes bad preparers from the system and particularly from preparing returns with refundable credits.”

Joe’s answer to Keith, which would be my answer also, is “How about getting rid of the refundable credits, then?”

Forced regulation of tax return preparers is not the way to reduce the massive tax fraud that accompanies such bad ideas as refundable credits.  The answer is to fix the mucking fess that is our US Tax Code and, as Joe suggests, get rid of refundable credits!

* CNBS’s ADVISOR INSIGHT gives us a slide show of “Best Ways to Spend that IRS Refund Check”.

I highly recommend the first two –

·   “Pay down debt” – Paying off high-interest credit cards should be a priority (as long as you don’t just go out and build-up the balances again).  If you are paying 20+% in finance charges on your balance it is like getting a 20+% return on your investment – much, much better than you can do by putting the money in the bank or even the stock market.

·   “Fund your retirement” – Check out my post “Everybody Ought To Have An IRA”.  If you do not have an IRA open one with at least part of your refund.  Preferably a ROTH account, if you qualify.  But a traditional IRA, either deductible or non-deductible, is also a good idea.

* Bill Perez deals with the oft-asked question “Can One Spouse Claim Another Spouse as a Dependent?” at ABOUT.COM.

Bill provides the correct short answer -

“A person cannot claim his or her spouse as a dependent on their tax return. The IRS makes this clear in Publication 501, Exemptions, Standard Deduction, and Filing Information, where they write, ‘Your spouse is never considered your dependent.’"

He again correctly, explains that one spouse does, in effect, claim the other spouse as a dependent because the primary tax benefit of a dependent (although there are many other potential tax benefits) is claiming a “personal exemption” for that person – and on a joint return the earning spouse gets a deduction for the personal exemption of the non-earning spouse.

Bill then goes on to say –

“If all of the following conditions are true, then one person can claim the personal exemption for his or her spouse without filing a joint return:

•You are filing a separate return (that is, you are not filing a joint return with your spouse);

•Your spouse has zero gross income for the year;

•Your spouse does not file a tax return for the year; and

•Your spouse is not a dependent of another person, regardless of whether the other person actually claims your spouse as a dependent.”

To be honest, in my 45 years of preparing 1040s I have never come across, or even heard, of a situation where a spouse files a separate return but claims the personal exemption for his non-filing spouse.  Why would a spouse in such a situation chose to file a separate return and not a joint return – as there are many restrictions involved with a separate return, and may tax benefits are not available on a separate return.

I would be very interested in hearing from fellow tax professionals on this issue – have you ever prepared a separate return for a married spouse and claimed the personal exemption for the other spouse?

* TaxGirl Kelly Phillips Erb provides some good news in “TIGTA Announces Significant Arrests In Massive IRS Phone Scam” at FORBES.COM –

“Today, J. Russell George, Treasury Inspector General for Tax Administration (TIGTA), announced the arrests of five individuals made in what has been characterized as an ‘ongoing investigation’ into the scams. The five individuals were arrested in Miami, FL, without incident, and charged with wire fraud and conspiracy to commit wire fraud. According to the court documents, the five suspects are responsible for almost $2 million in schemes that defrauded more than 1,500 victims.”

These phone scams are serious problems.  As Kelly reports-

“Scammers are still targeting taxpayers. Nearly 6,400 victims have collectively paid over $36.5 million to scammers posing as Internal Revenue Service (IRS) officials since October of 2013. Over that same time period, the Treasury Inspector General for Tax Administration (TIGTA) has received reports of roughly 1.2 million calls made to taxpayers demanding that they send cash to resolve outstanding tax liabilities. The average amount of money lost in the scam is $5,700.”

NEVER, NEVER, NEVER respond to a phone call from anyone alleging to be from the IRS.  If you receive a call tell the person calling to put it in writing and hang up.  If you get a message on your machine ignore it.

* Speaking of tax-related phone scams, Kay Bell warns us about a new one in “New telephone tax scam targets students who owe fake 'federal student tax'” at DON’T MESS WITH TAXES.

* The CHECKPOINT daily tax and accounting e-newsletter says “House Appropriations Committee releases draft bill with more cuts in IRS funding” (highlight is mine) –

“On May 24, the House Appropriations Committee released a draft of a spending bill which would cut IRS's FY 2017 budget by $236 million from the fiscal year 2016 enacted level and which would be $1.3 billion below President Obama's budget request. The bill provides $10.9 billion for IRS, holding the agency's budget to below the 2008 level. House lawmakers said this amount provides sufficient resources to perform its core duties.”  

While it may provide “sufficient resources to perform its core duties”, what about the unrelated and unnecessary duties that have been thrust upon the IRS by Congress – forcing it to become Social Workers and administer federal welfare and other benefit programs like the Earned Income Credit and Obamacare?  The idiots in Congress erroneously gives the IRS additional unrelated work to do but does not provide it with the proper funding!

Do we need any more proof that the members of Congress are idiots and need to be voted out of office?

* A good suggestion from David Waldrop, aka THE ASTUTE ADVISOR -   “Finances A Little Messy? It’s Time For Spring Cleaning”.

* Ever wonder “Does Your State Have an Estate or Inheritance Tax?”.  A map from the TAX FOUNDATION answers the question for you.

Residents of my former home state of New Jersey are doubly screwed, something that happens a lot to NJ residents when it comes to taxes (highlight is mine) –

“Currently, fourteen states and the District of Columbia impose an estate tax while six states have an inheritance tax. Maryland and New Jersey have both.”

* Let me end this meaty BUZZ installment with some great advice from Jason Dinesen of DINESEN TAX TIMES – “If You’re a Sole Proprietor, Think Hard Before Forming an S-Corp” –

“But if you go into it naively believing that S-corps are full of rainbows and unicorns and tax savings with no headaches or extra ‘stuff’ for you to deal with, you’re going to be overwhelmed with what you’ve gotten into. I know because I deal with this all the time with my clients.”

While I believe that all sole-proprietors should register their business as an LLC, I also firmly believe that more often than not the corporate entity, whether an S or a C corporation, is not the right way for a sole proprietor to go.

THE FINAL WORD

The recent acceptance, and even support - however reluctant, of Tronald Dump as a legitimate candidate by some Republican politicians and leaders is truly disturbing.  It certainly shows that most politicians really do value Party above country.

The only thing that keeps me from worrying too much about our future is my belief that, regardless of what voters may say now, when they are actually in the voting booth in November and realize that their vote will decide the future of the country, and the world, those with any intelligence and true concern will not be able in good conscience to pull the lever for dangerous buffoon Trump.

Let us all pray that I am right – or else we are all in very, very serious trouble.

TTFN