TO EXTEND OR NOT TO EXTEND (TAX LAW NOT TAX RETURNS THAT IS)

As various tax blogs, like Kay Bell’s DON’T MESS WITH TAXES, and other media have reported, the House has passed the annual extender bill. The ball is now in the court of the Senate.

Tax breaks that were extended in the House bill include –

• The option to deduct state and local general sales taxes,
• The additional standard deduction for real property taxes,
• The above-the-line deduction for qualified tuition and related expenses,
• The above-the-line deduction by educators for certain classroom expenses, and
• Direct tax-free transfer of IRA distributions to a charity.

Noticeably absent from the bill was the AMT patch.

Fellow tax blogger Professor Nellen tackles the basic extender issue in her post “Temporary or Permanent - Which Is Better?” at 21st CENTURY TAXATION.

This whole idea about having to extend a tax deduction every year or every other year is fairly new. And, if you ask me (and even if you don’t) it is ridiculous.

The 2010 “sunsetting” of Dubya’s tax cuts came about because the Republicans could not get the 60% majority in the Senate that was needed to make them permanent. The annual extension of the AMT patch and the various tax breaks is just an example of the utter laziness of Congress. Rather than sit still and give “the extenders” serious consideration they rush to pass an extension each year. A clear case of “manana” or “next year” disease.

According to the Professor the answer to her questions is, just like, as I have said, the answer to just about any tax question, “it depends” –

• “Some of these temporary items were for stimulus and should not be extended unless it is clear they worked.

• Any provision that has been extended more than 5 times should be seriously looked at to see if it should become a permanent provision. The research tax credit is a good example.

• Accountability measures should be created for new tax breaks and they should all likely start off as temporary.”

I agree that there can be a true temporary tax law that is intended to address a specific temporary situation, such as the mucking fess that our economy has become. Such a law can enact tax benefits for a targeted group to stimulate the economy, with the idea that the benefits will expire for good on a certain date.

As for other tax benefits, such as Dubya’s tax cuts and the subsequent “extenders” tax breaks, if Congress feels that a tax benefit or provision is a good and appropriate one it should be assumed permanent upon passage. There should be no “expiration date” or “sunsetting” on tax benefits (other than as mentioned in the previous paragraph). If in the future Congress feels that a benefit or provision is no longer good or appropriate it can always revise, replace or repeal it.

I do think there is some merit in the Professor’s call for accountability. Once a tax benefit is passed it should not be considered set in stone. Perhaps a special Congressional committee or, more appropriately and effectively, a blue-ribbon panel (like Dubya’s and BO’s tax reform panels) could be created to meet every 5 or so years to review the effectiveness of the Tax Code and make recommendations on reform, with the requirement that Congress must act upon the recommendation one way or another.

Let’s look at some of the items that have come to be known as “the extenders”.

• Obviously the dreaded Alternative Minimum Tax should be put to death. It is not a question of whether or not to make the AMT exemptions annually adjusted for inflation - there should be no AMT in existence in the first place. The true need for a “Minimum Tax” was done away with by Reagan’s passive activity limitation rules back in 1986.

• The above-the-line deduction for educators, limited to $250.00, is a gimmick. Dubya must have needed the support of teachers for something. It saves most educators probably no more than $70.00. Let’s forget about it. As an alternative perhaps Congress should revisit the issue of reducing deductions for employee business expenses via the AGI exclusion.

• The above-the-line deduction for tuition and fees is one of many options to help subsidize the cost of college education for dependents. Instead of a list of options, all with differing rules and phase-outs, there should be one basic deduction or credit. Why not make the American Opportunity Credit a permanent replacement for the HOPE and Lifetime Learning credits and the deduction for tuition and fees, extending the availability to all years of undergraduate and graduate studies and removing the “refundable” component. More better – make the AOC concept the only benefit and take it out of the Tax Code and make it a form of direct student financial aid.

• The option to deduct state and local sales taxes instead of state and local income taxes is a good thing – especially for those who live in states without state income taxes. It should be made permanent.

• I also think the direct tax-free transfer of IRA distributions to a charity is a good thing that should be permanent.

• As for Section 179 and bonus depreciation. I say let us do away altogether with the depreciation of real property (I have been suggesting this for some time now – as a general rule buildings do not lose value over the years), and also perhaps Section 179, but make 50% bonus depreciation permanent.

So what do you think?

TTFN

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

* Oops – my bad! In Sunday’s BUZZ I sent you to check out Bruce the MISSOURI TAX GUY’S latest “Reads from Last Week” – but there were none! I was anticipating one.

* It’s the big 6-0 for Kay Bell! I am talking about “Tax Carnival #60: Merry Taxes 2009!”, which is now running at DON’T MESS WITH TAXES.

I seem to recall I was going to use this Carnival to introduce my new blog on Schedule E rental property issues, and submitted an entry. But it apparently never got to Kay. I will have to check on that one. I also recall her “tweeting” something about having problems with submissions.

Even if I am not represented this time you should check out its many interesting and informative entries.

* Check out this horror story from Danny Westneat of the Seattle Times titled “$10 an Hour with 2 Kids? IRS Pounces”.

The DFBs (and I do not mean damned fool bureaucrats). So much for the “kinder, gentler” IRS.

Granted the EIC pretty much encourages tax fraud, and EIC claims should be investigated. But this is ridiculous.

Just another reason the EIC should be removed from the Tax Code and properly administered as a welfare program.

* TAX GIRL Kelly Phillips Erb discusses the above horror story in “IRS Insists Mom is Too Poor to Support Kids”. Her take -

“It’s really about agendas and the economy. As the economy slows, I fully expect more of these horror stories.”

* Over at GROWING WITHOUT RAIN, the author, an unnamed tax professional in North Carolina, has a slightly different take on the issue, and makes some excellent comments on the overall issue (especially his final paragraph) in the post "Enforcing the Rules– Or Extracting An Unfair Penalty" -

“Unlike the author of the article and many of the commenter's, I can’t entirely fault the IRS for what they did. Rachel Porcaro was unfortunate, to be sure, but there are many other people out there who deliberately set out each year to do deliberately what she did inadvertently – claim as many low-income credits as they can, at best questionably, and at worst deliberately fraudulently.

There are just too many people out there who know (or think they know) how to game the system to max out on EIC, and too many tax preparers out there who will prepare their returns without questioning whether the taxpayer is actually entitled to those credits. As long as we have a system that encourages low-income people to earn some income, but not “too much” income, we will have people who try to work that system to their advantage, and we will have a need for due diligence on the part of professional tax preparers, and on the part of the IRS, to flush out that fraud.

I don’t deny the need to help low income earners, to be sure. But I don’t think a system which is as easily subject to manipulation as is EIC is the best way to do it.”

* Bill Perez provides a good year-end tax tip for taxpayers with kids in college in his post “Prepaying College Expenses (Year End Tax Tips)” at WILLIAM’S TAX PLANNING BLOG.

* And Joe Kristan addresses year-end planning for businesses in “Fixed Assets and Year-End Planning” at the ROTH AND COMPANY TAX UPDATE BLOG.

* Joe also eloquently adds his voice to mine and that of other tax pros and tax bloggers who speak out against the conceit “that by careful rewarding certain behaviors with tax credits, Congress can make the world a better place” in his post “Missing The Target”.

“. . . the real problem is in believing these things can ever be accurately targeted. They are complicated -- even tax pros have to keep going back to their books when they claim these -- and errors are inevitable. The IRS barely can process the returns with its creaky computers, let alone catch all of the mistakes.”

As is often the case, his “bottom line” says a mouthful –

“It's hard enough just for the IRS to compute taxable income and process returns. Now the IRS is supposed to manage health, education, research, energy policy, antipoverty efforts -- you name it. It's not surprising that it's a mess; it's a surprise they can function at all.”

* The CCH daily email tax newsletter tells us “Estate Tax Action Uncertain in Senate”.

“The likelihood that the Senate will act on extending the estate tax before it expires at the end of 2009 remains uncertain as health care reform dominates lawmakers' attention.”

Senate Majority Leader Harry Reid has “as much as admitted that there was no time to pass the legislation this year”.

One option being considered is “a one-year extension of the estate tax at current 2009 levels that could be attached to an anticipated omnibus appropriations bill”.

So there still could be a lot of plugs pulled in January 2010!

* The Tax Foundation’s TAX POLICY BLOG tells us that “States Enact More Tax Amnesties”, with Massachusetts, New York, Ohio, and Pennsylvania jumping on the bandwagon.

TTFN

MY TURN TO TALK FULLER LIPS, LARGER BREASTS, SLIMMER THIGHS, AND HR 3590

Those of you who follow the BUZZ every Wednesday and Saturday are aware of an online debate between tax bloggers Stacie Clifford Kitts of STACIE’S MORE TAX TIPS and Mary O’Keefe of BED BUFFALOES IN YOUR TAX CODE regarding the proposed tax on cosmetic surgery in the health care reform bill.

Stacie is a CPA and practicing tax preparer and Mary is a Public Policy Economist, college professor, and the coordinator of the Union College/Schenectady Department of Social Service VITA volunteer tax preparation program.

It all began with Stacie’s post “Let's Talk Fuller Lips, Larger Breasts, Slimmer Thighs, and H.R. 3590 (Patient Protection and Affordable Care Act.)”

Stacie’s initial post quoted from the bill –

“(a) In General- There is hereby imposed on any cosmetic surgery and medical procedure a tax equal to 5 percent of the amount paid for such procedure (determined without regard to this section), whether paid by insurance or otherwise.

(b) Cosmetic Surgery and Medical Procedure- For purposes of this section, the term `cosmetic surgery and medical procedure' means any cosmetic surgery (as defined in section 213(d)(9)(B)) or other similar procedure which—

(1) is performed by a licensed medical professional, and

(2) is not necessary to ameliorate a deformity arising from, or directly related to, a congenital abnormality, a personal injury resulting from an accident or trauma, or disfiguring disease.”

This treatment follow the way cosmetic surgery is treated as a medical tax deduction – it is not deductible unless it is “necessary to ameliorate a deformity, etc”.

So we are talking about a tax on what is basically an unnecessary indulgence. The individuals who will be subject to this tax will for the most part, due to the high cost, be able to afford it.

Stacie says –

“I can't say that I am totally opposed to taxing behavior. That is, I agree with sin taxes. Taxes on cigarettes and alcohol for instance do provide a certain amount of good since these products have been shown to cause harm to the public welfare. Likewise, the cost of treating people who have made themselves sick by indulging in unhealthy activities or behaviors must be considered - I get that - and if a tax on so called unhealthy products helps to relieve the public burden, then so be it.”

But opposes the tax on cosmetic surgery –

“But is cosmetic surgery really sinful? Personally, I fail to see how it is. Maybe our lawmakers can explain to me how slimmer hips, larger breasts, or plumper lips harms the public welfare or places a financial burden on the government.”

Her main concern is –

“I fear that this type of legislation opens the door for a whole litany of WTF taxes. I mean why not tack on an additional tax for hair coloring, nail salons, or makeup. These are also vanity products. Frankly where does it stop?”

Mary responded to Stacie’s post with “Taxing Cosmetic Surgery?”.

She begins by telling us –

“At the moment, Congress is ‘digging into the sofa cushions’ to find money to keep deficits from becoming even more unmanageable than they already are. Current deficits are not sustainable for the long-term. Something has got to give.”

She goes on to use her background as an Economist to “justify” the tax on cosmetic surgery.

“From a public policy point of view, there's a strong argument for taxing cosmetic surgery which does NOT apply to the other products Stacie mentioned.

The government provides large subsidies for the education of physicians. Yes, med students do pay tuition, often taking out large loans to do so, but their tuition does not cover all the costs of their training. Government subsidies for medical education make up the difference.

At the moment, people who purchase cosmetic surgery services are getting it at a discount thanks to the general public's subsidies of their physicians' training.”

Mary feels that because doctors providing unnecessary plastic surgery to the wealthy are not practicing medicine in a way that benefits society, as those in other specialties are, the government, and the American Public, is not getting a proper “return on investment” for the subsidies provided for such doctors’ education. Therefore it is appropriate to tax such frivolous plastic surgery procedures.

This is not to say that doctors who practice plastic surgery are all money-hungry pigs. I am sure Mary will agree with me that there is much work done in the area or plastic, or reconstructive, surgery that truly benefits society a whole, and more specifically accident and burn victims, those with abnormalities caused by birth defects or illness, and others.

Stacie responded to Mary’s response with “Still Talking About Fuller Lips, Larger Breasts, Slimmer Thighs, And H.R. 3590”.

“Given the current economic state, and the need for our government to find revenue sources, I worry what source will be next.

Are we now to accept that any government subsidized product or profession is subject to this excise tax? If this is your position, then be wary, there are hundreds of thousands of government subsidies in all types and forms.”

She ends with –

“However, people who elect to have cosmetic surgery are perceived as vain, spoiled, overindulged, and sinful.

Do you see how letting our government tax our life choices even when those choices are not harmful to the public welfare creates a morality clause in our tax system by giving lawmakers the power to tax those items or services that they believe are wrong?”

Mary returned with “More on Taxing Cosmetic Surgery, Subsidies, and Tax Simplification”.

She makes some very good points and gets to the real issue –

“If we as taxpayers don’t want more taxes, then we as taxpayers also have to send a clear signal to our politicians as to what we don’t want the government to be spending money on.”

And -

“Indeed there are hundreds of thousands of government subsidies all over the place, and an important ‘sofa cushion’ for our government to look under is to re-examine the public justification for each of those major subsidies.

In many cases, what makes the most sense is just to ELIMINATE the subsidy in the first place rather than continuing the subsidy and then excise taxing the subsidized product to undo the subsidy.”

She then “gets on her favorite soapbox” –

“Many times those subsidies we should consider eliminating are delivered through the tax code, so eliminating the subsidy just means eliminating a special interest tax break (what I call a "bed buffalo"). . . . .It's high time the government took a careful look at whether there are better uses for much of the money it spends on subsidizing this, that, and the other thing.”

She hits the nail on the head with –

“There are no easy answers here, but simplifying the tax code to eliminate a lot of bed buffaloes would reduce the kinds of such intrusive questions the IRS needs to ask.”

But Mary still supports the tax on cosmetic surgery, ending her post with –

“I don't think that air travel is "sinful," but I think there's a case for making sure that airline passengers are not subsidized by the general taxpaying public.

Similarly, I don't think that cosmetic surgery is "sinful," but I think there's a case for making sure that it's not subsidized by the general taxpaying public.”

Stacie has the last word (until this posting) with her final thoughts on the subject in “Babbling Incisively on About Fuller Lips, Larger Breasts, Slimmer Thighs and H.R.3590”.

She follows Mary’s advice and composes a great letter to “government” to identify what she doesn’t want the government to be spending our money on. Be sure to check it out.

But her basic opposition to the cs tax remains –

“The point is where does it stop? Yes, as Mary pointed out, they already started down this slippery slope, particularly with the [ab?]use of their taxing powers. Yes, the tax code is replete with behavior modifying incentives and disincentives. While this tax may be new, the concept on which it rests certainly is not. This "vanity" tax is merely an example of how far down the slope they’ve slipped.

So what’s next? Maybe congress will decide that having two bathrooms is unnecessary? So levy a tax or limit a deduction on anyone owning, renting, or squatting in a house with more than one?

How many cars per family are acceptable? Isn’t one enough? Why not charge an excise tax on each car purchased after the first?”

I do not look on the proposed tax on cosmetic surgery as a “sin tax” or a “vanity tax” but as a “luxury tax” on the wealthy, similar to the federal luxury tax on higher-end vehicles that ended its 10-year run on January 1, 2003.

I detailed my opinion on “sin taxes” and taxing the wealthy “because they can afford it” in my post “I’m Telling You Now”. In this post I said -

“I do believe that the Tax Code can be used to ‘encourage’ behavior that is beneficial to Society and to the Economy in general by ‘rewarding’ such behavior with tax benefits.

I am sure that we can all agree that charitable giving, post-secondary and continuing education, saving for retirement or health emergencies, investing in the stock market, reducing energy consumption, and perhaps even owning a home are all ‘behaviors’ that benefit society and the economy and that should be ‘encouraged’ by providing ‘rewards’ via the Tax Code through deductions, credits and preferred tax rates.

I am against using the Tax Code to ‘punish’ perceived ‘bad’ behavior. We say that smoking and alcohol are ‘bad’, so let’s tax cigarettes and liquor up the arse to make people stop smoking and drinking and, more importantly, raise revenues. Obesity is also ‘bad’, so let’s force everyone to eat properly, and filler government coffers, by excessively taxing junk food.

One of the main reasons I am against ‘sin taxes’ is that I do not want the local, state or federal government to determine what is a ‘sin’ or what is ‘bad’ behavior. I do believe the phrase is “a slippery slope”. What if, God forbid (no pun intended), the extreme religious right comes to power? The possibilities are frightening.

I am also against taxing the rich simply ‘because they can afford it’. Recent studies have shown that the “rich” already pay more than their share of taxes. The Tax Foundation’s TAX POLICY BLOG recently posted “Tax Burden of Top 1% Now Exceeds That of Bottom 95%.

I do not believe in a highly ‘progressive’ tax system that ‘punishes’ such positive behavior as ambition, entrepreneurship and just plain hard work with a higher tax rate.”

I am against a sin tax, a vanity tax, and a luxury tax. I side with Stacie in opposing a tax on unnecessary plastic surgery, regardless of Mary’s excellent arguments used to try to justify the tax.

I agree with Mary that if the subsidy is wrong it should be corrected or eliminated. I also agree with her that the true problem lies in the mucking fess that the Tax Code has become. Many government programs and subsidies are administered through the Tax Code – and this should not be. The purpose of the Tax Code is to raise revenue. Period.

And here is another point I would like to make. Why must increased taxes, fees and miscellaneous charges always be the only answer to fund a program or to reduce a budget deficit?

When a businessperson faces losses, or reduced income, he/she first looks to reducing costs.

As a tax professional I decide that I do not need to order two tax handbooks, so I get the 1040 Quickfinder only and no longer also order the TaxBook. I am getting everything I need from NATP, so why also belong to NSTP? Instead of traveling to Reno, Nevada for continuing education classes I will take only those offered locally.

If that is not enough I next look at “tightening the belt” with regards to personal indulgences. Dine out less often. Take one less trip or see one less Broadway show.

Raising fees is a last resort, or done in combination with reducing unnecessary costs.

There is plenty of pork, excess entitlements, and unnecessary spending in any government budget (especially that of the State of New Jersey). Cutting the budget does not automatically mean cutting spending on vital social programs and services, other than to trim excesses in their administration. The first step any government entity should take when facing financial issues is to look for and eliminate unnecessary spending.

So there you have my take on the issue. I am sure Stacie and Mary, and others, will have something to say about my comments.

TTFN

ON THE BOARDWALK IN ATLANTIC CITY

Last Thursday and Friday I attended the annual National Association of Tax Professionals year-end tax update seminars, titled “The Essential 1040” and “Beyond the 1040”, at CAESAR’S Atlantic City.

I did not stay at CAESAR’S this year. The advertised seminar room rate at CAESAR’S was $95.00 per night. I stayed at the TROPICANA, a short walk down the Boardwalk, for the special rate of $49.00 per night for Wednesday and Thursday night and $99.00 for Friday night. Not only was the TROP cheaper, but it had many more options for dining, shopping and entertainment.

Now we all know that I did not pay $49.00 and $99.00 a night at the TROP, nor would I have paid $95.00 per night at CAESAR’S. I actually paid $65.89 for two nights and $122.86 for one night at the TROP (total $254.58) and would have paid $118.30 for three nights at CAC (total $354.90). This is because of two $5.00 per night special fees (total $10.00) and a 14% hotel tax! An excellent example of how New Jersey nickels and dimes its residents, and visitors, to death with fees, charges and taxes to keep its politicians, and their cronies, fat.

This is one of my “pet peeves” regarding travel. I wish the TROP and CAESAR’S had been honest in their advertising and said the room rate was $65.89 per night or $118.30 per night instead of $49.00 and $95.00 – just as I wish all hotels would advertise the true cost of a room when providing a “quote” or when advertising. The various fees and taxes vary from state to state, so, unless you know the charges for each individual state, you cannot automatically add the appropriate amount to the advertised price to come up with the true cost.

That said – back to the subject at hand.

“The Essential 1040” presents updates, adjustments, new developments, and changes to the tax law for 2009, and 2010 if known, with an overview of two topics thrown in for good measure. The “Beyond the 1040” seminar discusses certain timely topics in more detail.

While, for me, these year-end classes are more reminders then new knowledge, there was a lot of clarification of items, and it is always good to work through various tax scenarios and see how the information flows to the actual form or schedule. I made lots of notes, including items to discuss with specific clients before year-end.

The NATP membership is made up of all kinds of tax professionals, with all kinds of initials, or none, after their names. It appears that CPAs are less trustworthy than EAs or us poor unenrolled folks, as they were the only category of attendee who was required to physically sign out and record the time at the end of each day in order to get CPE credit. Now my CPA colleagues will say that it is because the AICPA is more diligent in verifying the continuing education of its members – but we know otherwise. {Sorry about that – I just couldn’t resist}

Our “teacher” for both days was veteran NATP instructor Alice Orzechowski, a CPA, an EA, and a goat farmer from Maryland. This was her third visit to NJ this year, as she also gave presentations at the NJ NATP chapter seminar in September and at a seminar sponsored by the NJ chapter of NSA.

While Alice obviously uses tax preparation software, and assumed everyone in the room also does (“the question” was not even asked this year), she has a healthy attitude about the capabilities of tax software. Throughout the two days she would often “disclaim” the fact that “your tax software is not going to be able to do this” or exclaim, “do you really think your software is going to do all this?”.

She told us that one year the tax software program she used had automatically checked the box on Page 2 of the 1040 to indicate “your spouse itemizes on a separate return or you were a dual status alien” on every single 1040 it processed. And on occasion she discovered tax software making math errors.

Here are some items of interest and some reminders from the seminars -

* While the basic standard deduction, and additions for age, blindness, and real estate taxes, is not allowed in calculating the dreaded Alternative Minimum Tax (AMT), the deduction for sales tax on a new car purchase and the disaster loss deduction (as additional Standard Deduction calculated on Schedule L) are deductible for determining AMT. The 2009 Form 6251 (currently in draft status) provides for deducting these items.

* The additional standard deduction for real estate taxes, limited to $500 or $1,000, is for any real estate taxes paid during the year that would have been deductible on Schedule A if filed. It is not restricted to real estate taxes paid on a personal residence.

* The $49,500 limit on the deduction for sales tax on a new car purchase is per car and nor per return. You can purchase two new cars (one for each spouse), or a new car and a new motorcycle, or 2 new cars and a new motor cycle and a new motor home between February 17 and December 31, 2009, and claim the sales tax deduction on the first $49,500 as an additional Standard Deduction for each new vehicle!

* The various standard per diem amounts for business travel between October 1, 2009 and September 30, 2010 have been increased -

(1) The meal and incidental expenses per diem for “locations not specifically listed” has increased from $39.00 per day to $46.00 per day. The lodging per diem remains at $70.00 per day.

(2) The incidental expenses only per diem has increased from $3.00 per day to $5.00 per day.

(3) The “inside continental US” meal and incidental expenses per diem for qualified members of the transportation industry has increased from $52.00 per day to $59.00 per day. For 2009 and 2010 80% of meals are deductible (as opposed to 50% for all other taxpayers).

* The per diem rate is determined by the city where you spend the night (i.e. where you sleep). If your business meeting is in New York City, and you eat all your meals in New York City, but you are staying in a hotel in Jersey City or North Bergen (New Jersey) to save money on the room rate, you must use Jersey City or North Bergen as the location for determining the per diem allowance. Of course in such a case you can elect to claim actual meal expenses instead of the per diem

* As an example of the complexity of the Tax Code, here are the AGI phase-out beginning points for a married couple filing jointly for the various available educational tax benefits -

• HOPE and Lifetime Learning Credit = $100,000
• Excluding Savings Bond Interest = $104,900
• Student Loan Interest Deduction = $120,000
• Tuition and Fees $4,000 Deduction = $130,001 (no phase-out – just not allowed)
• Tuition and Fees $2,000 Deduction = $160,001 (no phase-out – just not allowed)
• American Opportunity Credit = $160,000

God, and Congress, only knows why there is a different phase out amount for each individual item.

* The new American Opportunity Credit will pretty much make the deduction for tuition and fees obsolete for 2009 and 2010, except for graduate students, due to the increased income threshold. It also makes the HOPE credit obsolete, except in the case of students attending schools in the Midwestern Disaster Area, in which case a $3,600 maximum per student credit is available.

* If a taxpayer claims a HOPE credit for one student it must claim the HOPE credit for all eligible students, regardless of where they attended school. The same applies for the American Opportunity Credit. You cannot claim the HOPE credit for one student and the American Opportunity Credit for another student.

* A 529 plan allows tax-free distributions to pay for the room and board of the student as well as tuition, fees, course materials, and computer equipment. The room and board can be provided on campus, off campus, or in the taxpayer’s home. The room and board amount is limited to the lesser of the amount actually paid or the allowance for room and board included in he cost of attendance as defined in Section 472 of the Higher Education Act of 1965 in effect as of June 7, 2001. To determine the amount you can use for room and board for a student who is living at home go to the website of the college and look-up the cost allowance for room and board for living at home for purposes of financial aid.

* The IRS wants taxpayers to attach a copy of the Closing/Settlement Statement to the Form 1040 for all claims for the First Time Homebuyer Credit filed on 2009 income tax returns. This is as it should be. In such a case the tax return cannot be electronically filed.

* Be sure to tell your tax professional if you make non-deductible contributions to a traditional IRA. Just because the contribution is not deductible does not mean that it is not reportable. And make sure that the tax pro knows about all non-deductible contributions made in previous years. Once a non-deductible contribution has been made a Form 8606 should be included with each and every Form 1040 filed thereafter, whether or not additional non-deductible contributions are made, to carryforward the IRA basis amount.

FYI – it has nothing to do with the tax seminars, but the IRS 2009 Publication 17 (Your Federal Income Tax – For Individuals) is now available to download.

TTFN

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

I’m back – and so is the BUZZ. It seems a lot happened on the tax front while I was in Atlantic City.

* And the beat goes on!

Stacie Clifford Kitts and Mary O’Keeffe continue the debate on taxing cosmetic surgery with “Babbling Incisively on About Fuller Lips, Larger Breasts, Slimmer Thighs and H.R.3590” and “More on Taxing Cosmetic Surgery, Subsidies, and Tax Simplification”.

Check out Stacie’s letter to “the government”. We should all send one like this.

I printed out the entire debate (so far) and took it with me to AC to read. I will post my take on the issue at TWTP next week, after reporting on the AC seminars.

This has been a great example of how a tax blog debate should be conducted. {Hint to a couple of tax bloggers who shall remain nameless so as not to provide them with undue attention}

* While I was gone the IRS finally announced the optional standard mileage allowance rates “used to calculate the deductible costs of operating a vehicle for business, charitable, or moving purposes”.

Beginning January 1, 2010, the standard mileage rates for the use of a car (or van, pickup or panel truck) will be:

50 cents per mile for business miles driven
16.5 cents per mile driven for medical or moving purposes
14 cents per mile driven for charitable purposes

You will note that the new rates for business and medical/moving mileage are lower than the rates used for 2009. The charitable mileage rate is determined by Congress and not the IRS and has remained at 14 cents per mile for many years now (with brief adjustments for volunteer work in or for Presidential disaster areas).

The new rates were reported in most tax blogs – but I like Kay Bell’s post “2010 Deductible Mileage Rates Released” at DON’T MESS WITH TAXES.

* The CCH daily email tax newsletter reported that “Hoyer Says Some Tax Issues May Get House Consideration Before Recess”.

“House Majority Leader Steny Hoyer, D-Md., laid out an ambitious agenda of tax legislation for House lawmakers to complete before the Christmas recess starts in about three weeks. Hoyer told reporters on December 1 that he hoped to finish bills dealing with estate tax reform, job creation and expiring tax provisions before the House's scheduled adjournment date of December 18.”

There is nothing like rushing through such important and complicated issues.

* CCH also reported that “Estate Tax Bill Wins Approval in House”.

“House lawmakers approved the Permanent Estate Tax Relief for Families, Farmers, and Small Businesses Bill of 2009 (HR 4154) by a vote of 225-to-200 on December 3. The legislation would permanently extend the current exemption for estates up to $3.5 million per individual and $7 million for married couples and set a maximum rate of 45 percent on estates above this threshold.”

Now on to the Senate.

* Russ Fox brings us the latest word on the application of the “Cohan Rule” (see my post “I’m a Yankee Doodle Tax Pro”) in “Thank You, George Cohan: A Gambler Gets Lucky”.

The bottom line of this recent tax court case - “The petitioner prevailed without records thanks to the Cohan rule”.

* I came across an interesting item from TRUTHANDPOLITICS.ORG that lists the “Top US Marginal Income Tax Rates, 1913—2003”. It is a “table of the top marginal tax rate faced by married couples”.

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* Trish McIntire tells us about “MSRRA” – aka the “Military Spouses Residency Relief Act” (signed into law by BO on November 11th) - at OUR TAXING TIMES.

* Joe Kristan reports on another tax lesson learned in his post “If You Need Time to Read, An Extension You Need” at the ROTH AND COMPANY TAX UPDATE BLOG.

Joe tells us - “It's common for procrastinators to get their returns on April 15, sign them without a second glance, and go on their way”, and reports on a related court case

The moral of the story –

“If you don't have time to read your return before April 15, get an extension.”

* The December 2nd “Tip of the Day” at the Small Business Taxes and Management site is a good one (highlight is mine) -

“Gifts to needy individuals not deductible . . . You can help victims of disaster or hardship by making gifts directly to the victims. But this type of assistance does not qualify as a tax-deductible contribution since a qualified charitable organization is not the recipient. However, individual recipients of gifts are generally not subject to federal income tax on the value of the gift. If you make a gift directly to an individual, you are not subject to federal gift tax unless the total gifts made in a year exceed the annual exclusion amount.”

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* Don't forget to check out the weekly "Reads from Last Week" from Bruce, the MISSOURI TAX GUY.

TTFN

THE GEITHNER PENALTY WAIVER ACT

I know I said I would not be posting today and tomorrow - but this item caught my attention before leaving for AC on Wednesday morning.

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Here is an email that I got from John Carter’s office before leaving for AC (highlights are mine) -

Geithner Penalty Waiver Act Introduced in House. Carter Bill would eliminate IRS penalties for foreign depositors:

Taxpayers who applied for the U.S. Treasury Department’s amnesty plan for foreign income should pay the same penalty rate as that paid by the Treasury Secretary on his International Monetary Fund (IMF) back taxes, according to House Republican Conference Secretary John Carter. Carter and Congressman Lynn Westmoreland (R-GA) tonight delivered speeches on the House Floor Live on CSPAN in support of the Geithner Penalty Waiver Act.

Carter says the nation must take that step if it is to uphold the Rule of Law and the Constitution. “People must have the assurance they will be treated like their neighbor when an issue of law arises. That is a necessary ingredient to have a civil society, and that is what we have been fighting for in Iraq and Afghanistan.”

The former Texas judge this week is introducing the Geithner Penalty Waiver Act to grant all taxpayers currently seeking penalty relief on foreign deposit back taxes the same zero percent penalty rate as Geithner was assessed for failure to report or pay taxes on IMF income.

Carter says the Equal Protection Clause of the 14th Amendment to the U.S. Constitution mandates equal penalties for similar offenses, and that the failure of the IRS to assess any penalties against Geithner demands similar penalties for all taxpayers with substantially equivalent cases.

“This bill seeks to codify what is now established by the law of precedent,” says Carter. “The Geithner case has established a legal precedent for the determination of penalties by the IRS, and that precedent can be cited in all federal tax courts. The penalty is now set at zero.”

“Taxpayers who willfully attempt to evade paying their fair taxes should pay a penalty, or our tax code becomes unenforceable,” says Carter. “This bill is not to reward tax evaders, but to defend the Rule of Law itself. If we as a nation choose not to enforce the law against the politically privileged, then we cannot enforce the law against others without undermining respect for the law itself.”

Carter had previously introduced the "Rangel Rule Act of 2009", saying at the time – “if you're caught cheating on your taxes, you would pay what you owe, then write ‘Rangel Rule’ at the top of your return, and you wouldn't be charged any penalty or interest”.

He has a good point. All taxpayers should be treated the same, regardless of government position.

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The point is not that those who FU on their taxes should not pay penalty or interest - but that cafones like Rangel and Geithner, who should know better, should!

As another tax pro/blogger pointed out (I forget who) - if the regulation of all tax professionals by the IRS passes Congress and tax pros must pass a test and take continuing education to become a “Licensed Tax Preparer” in order to continue to practice, then those members of Congress who write the tax laws, and those in government who oversee administration of tax law, like Rangel and Geithner, should also be required to pass the test and take annual continuing education in taxes.

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TTFN

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

I am off to Atlantic City to attend the annual National Association of Tax Professionals’ year-end tax update seminars. The seminars are at CAESAR’S PALALCE again this year, but I am being frugal by staying at the TROPICANA for much less. Besides, there are many more choices for dining, entertainment and activities at the TROP.

I return home Saturday afternoon, and I will be posting on items of interest from the seminars next week. FYI – this week’s usual Saturday BUZZ entry will appear on Sunday.

I haven’t had the time to write and schedule posts to appear while I am away on Thursday and Friday. If you need your daily fix of RDF you can go to the INTERNET GUIDE TO IRS SCHEDULE E, where posts are scheduled through the end of the week.

Lots of BUZZ again today!

* Have you checked out THE INTERNET GUIDE TO IRS SCHEDULE E yet?

* Rob Teuber’s “Friday’s Tax Quote – November 27, 2009” at his TAX LAW FORUM blog missed the cut for Saturday’s BUZZ – so I will use it to start this edition -

"If you are truly serious about preparing your child for the future, don’t teach him to subtract. Teach him to deduct." -Fran Lebowitz

* The AMT BLOG is currently at Week 5 in its series of posts titled “It’s Fall: 10 Weeks of Alternative Minimum Tax Planning Ideas”. The series discusses a list of things you can do to reduce your dreaded AMT bill, if will be a victim, and all of them are very simple.

* MISSOURI TAX GUY Bruce had a full “Reads from Last Week” this past Sunday. As usual we seem to read the same tax blogs, but he brings to our attention several good reads from personal finance blogs.

* Kelly TAX GIRL Phillips Erb tells us about Arnold’s tax woes in her post “The Governator Blames Tax Lien On ‘Snafu’”

* Our TAX GIRL also puts a tax spin on the recent gate-crashers at BO’s first White House state dinner in “White House Party Crashers Forgot Invites… And Tax Returns”.

BTW – congrats to Kelly TAX GIRL being nominated for the ABA Journal’s 2009 Blawg 100, selected from more than 2,500 blawgs!

* NASDAQ tells us that “US House To Vote On Permanent Estate Tax Bill Next Week”. The article anticipates that the House will be voting today (Wednesday) on a bill from Rep. Earl Pomeroy (D., N.D.).

“The Pomeroy bill would make permanent a 45% rate on inherited wealth, with the first $3.5 million exempt from the tax. Without congressional action, the tax will be repealed in 2010 and return in 2011 at a 55% rate with a $1 million exemption.”

The bill is apparently backed by BO.

* Jim begins a series of “focused” posts on an annual financial review at BARGAINEERING, covering banking, credit, investing, and taxes. He starts the ball rolling with “10 Reasons Why Credit Unions Kick Ass”, pointing out that “Credit unions exist to help its members. Commercial banks exist to enrich their shareholders”.

* Stacie Clifford Kitts gives us her 2 cents + on taxing cosmetic surgery in her post “Let's Talk Fuller Lips, Larger Breasts, Slimmer Thighs, and H.R. 3590 (Patient Protection and Affordable Care Act.)” at STACIES MORE TAX TIPS.

Stacie tells us – “The Patient Protection and Affordable Care Act now in the Senate has declared VANITY as the eighth deadly sin punishable by the imposition of a 5% excise tax.”

Her bottom line is –

“I fear that this type of legislation opens the door for a whole litany of WTF taxes. I mean why not tack on an additional tax for hair coloring, nail salons, or makeup. These are also vanity products. Frankly where does it stop?

I am all for affordable health care, balancing the budget, and reducing debt. But come on lawmakers, I find it hard to believe that you can't do better.”

While I don’t know about fuller lips, but I am for patient protection, affordable care, and larger breasts!

* Mary O’Keeffe has an interesting response to Stacie’s post on taxing cosmetic surgery in her post “Taxing Cosmetic Surgery?” over at BED BUFFALOES IN YOUR TAX CODE.

* And Stacie responds to MOK’s response in “Still Talking About Fuller Lips, Larger Breasts, Slimmer Thighs, And H.R. 3590”.

A good blog tax debate, with both sides remaining civil and respectful, and staying "on topic". As it should be!

* Speaking of “sin taxes”, TAX PROF Paul Caron turns us on to the subject of “Projected Revenues From Marijuana Tax”.

He tells us – “CNN has published a 50-state ranking of the potential tax revenues that could be raised by legalizing and taxing marijuana, based on state-by-state marijuana consumption.”

According to this report New Jersey could raise $19.3 Million by taxing weed. California would increase its revenues by $105.4 Million. Wyoming would benefit least, with only $1.2 Million. It doesn’t say how much would be raised in Washington DC, but I expect it would be a lot. Congress must be on something to do some of the crazy things that it does.

* Getting back to Mary and her Bed Buffaloes, she tells us about the the IRS on-line tutorial on 2009 tax returns for participants in the Volunteer Income Tax Assistance (VITA) program

I checked it out briefly and it appears to have lots of good information. You should especially read the section on “What’s New This Year”.

Mary has promised –

“I'll highlight some particularly tricky common issues and post commentaries in a series of posts to this blog. Hopefully this will help readers in general--as well as my students--check their mastery of tax law.”

* Roni Deutch gives us some “Holiday Gift Advice for Employers and Employees” at her TAX HELP BLOG.

* Professor James Maule discusses a Quinnipiac University poll on the NJ budget crisis in the post “Poll on Tax and Spending Illustrates Voter Inconsistency” at MAULED AGAIN.

As a life-long resident of New Jersey (with a very brief period living in New Rochelle NY) I can tell you that it is indeed possible to reduce government spending and reduce taxes without reducing necessary services. The NJ budget is chock-a-block with pork, with politicians and their family members holding two and three paid show and no-show jobs and double and triple-dipping in the state benefit pool.

Education funding can be cut without hurting the classroom. A large chunk of education spending does not provide any benefit to students. There is no way in any world to justify a $700,000 + severance package for Superintendents of Schools. Sick pay is an accommodation and not an entitlement – unused sick pay should not be accumulated beyond one year. Apparently no Superintendent of Schools in NJ has ever taken a sick day – they choose to “work at home” on occasion.

And now is no time to have created the position of a do-nothing Lieutenant Governor with all of the corresponding expensive bureaucracy. There are also plenty of other unnecessary local and state government jobs that can be done away with without hurting the delivery of essential government services.

* REUTERS reports that “U.S. Tax Reform Panel Delays Recommendations”.

“The tax panel of the President's Economic Recovery Advisory Board (PERAB) had been set to release an "almanac" of ideas for tax reform on December 4. But the board's chairman Paul Volcker, former chairman of the Federal Reserve, said the panel needs more time to review the public comments.”

It seems that the panel has received more than 500 comments thus far, including mine. To be honest, if the reason given for the delay is true I am pleased.

* I can’t have a BUZZ without at least one item from Kay Bell, the Yellow Rose of Taxes. She discusses “529 Plan Dropouts” at her EYE ON THE IRS blog at Bankrate.com.

TTFN

PERSONAL FINANCE CARNIVALS

A recent BUZZ entry is included in two recent Blog Carnivals, including -

* Carnival of Financial Planning - Edition #117 - November 27, 2009 at THE SKILLED INVESTOR

* Carnival of Money Stories – My Financial Dreams Edition at THE FINANCIAL BLOGGER (in category #3)

There were two other Carnivals that were supposed to be published on November 30th – but no go.

FYI, my two other tax blogs, INTERNET GUIDE TO IRS SCHEDULE E and NEW JERSEY TAX PRACTICE BLOG, now appear on the TAXES page at Alltop.com.

THE ANNUAL CHRISTMAS PRICE INDEX

It’s that time of year! Once again I kick off December by bringing you PNC Wealth Management’s CHRISTMAS PRICE INDEX.

Thanks to the weak economy in 2009 the 26TH Annual PNC Christmas Price Index increased by a mere 1.8% compared to last year in the economic analysis based on the prices of gifts in the holiday classic, "The Twelve Days of Christmas”.

The total price tag for 2009 is $21,465.56, only $385.46 more than last year. It is the smallest increase since 2002, when the index fell 7.6%. The Christmas Price Index exceeds the U.S. government’s Consumer Price Index, the widely used measure of inflation calculated by the Bureau of Labor Statistics, which is down 1.5 % for 2009.

PNC Wealth Management has also tabulated the “True Cost of Christmas,” which is the total cost of all the items gifted by a True Love in all of the song’s verses. This year very generous True Loves will $87,402.81 for all 364 gifts, only 0.9% more than last year.

PNC reports that – “Among the 12 gifts in the Index, three items fell measurably from last year while five increased in cost and four remained steady.”

A sharp rise in gold prices caused the cost of the Five Gold Rings to jump 42.9% to $499.95. The cost of the Three French Hens increased by 50%, going from $30.00 to $45.00, while the cost of the Partridge that was in the pear tree was cut in half, dropping from $20.00 to $10.00. The cost of the Pear Tree itself dropped 25%. The cost of Six Geese-A-Laying fell 37.5%.

Eight Maids-A-Milking made 10.7% more in 2009, due to an increase in the federal minimum wage, and the fee for Nine Ladies Dancing increased by 15%. The Dancing Ladies continue to be the most expensive item on the list at $5,473.07. I can certainly attest to the high cost of Dancing Ladies.

The most expensive individual item was the Swan-A-Swimming, costing $750 each, as compared to $608 and change for each Dancing Lady.

The Lords-A-Leaping, Pipers Piping and Drummers Drumming did not get a pay raise in 2009. They cost exactly the same as 2008. As I point out each year, the performing artist union does a better job for its membership than the musicians’ union. Each Leaping Lord gets $441.36 while the musicians only average about $207.

For True Loves who would rather shop online PNC calculates the cost of “The Twelve Days of Christmas” gifts purchased on the Internet. These True Loves will pay a grand total of $31,434.85 to buy the items online. While less expensive than last year, it is about $10,000 more than shopping the “old fashioned” way.

James Dunigan, managing executive of investments for PNC Wealth Management, explains that, "In general, Internet prices are higher than their non-Internet counterparts because of shipping costs for birds and the convenience factor of shopping online.”

Click here to download the Christmas Price Index. For more about the history of the Christmas Price Index and some FAQs click here.

TTFN

GUIDANCE FOR TAXPAYERS WITH RENTAL PROPERTY

I expect that by now there is a website, and probably a blog, about every aspect of every subject imaginable.

This includes TAXES. There are all kinds of websites on income tax topics – from the dreaded Alternative Minimum Tax (AMT) to Volunteer Income Tax Assistance (VITA). And there are all kinds of general and specialized tax-related blogs, like THE WANDERING TAX PRO.

While there are a multitude of web pages and web articles devoted to the subject of reporting rental income and expenses on IRS Schedule E, and a Google search results in tons of links on the subject, I could not find a website or blog specifically devoted to this subject.

So here I have decided to fill the void with a new blog titled THE INTERNET GUIDE TO IRS SCHEDULE E – which is now “up and running”.

This new blog will deal with all aspects of reporting income and expenses from rental real estate on Schedule E of the federal Form 1040.

It will discuss in detail how and when to report rental income and what expenses are deductible and how to deduct them.

It will cover all kinds of rental real estate – from two-family owner-occupied properties to vacation rentals to apartment buildings to commercial property.

It will also include a regular BUZZ-like feature to provide links to and comments on other online resources - websites, web pages, online articles, and blog posts – on the subject.

Your comments on and suggestions for this new blog are certainly welcome. You can comment on a particular post or email me at rdftaxpro@mail.com. When emailing be sure to put INTERNET GUIDE TO IRS SCHEDULE E in the “Subject Line”. The rules for submitting comments and questions to TWTP will also apply to my new blog.

So before you do anything else please check out THE INTERNET GUIDE TO IRS SCHEDULE E!

TTFN

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

Did you survise "Black Friday"? I didn't leave the apartment - except to get breakfast from a local deli and to get my mail.

* In case you missed my Thanksgiving Day entry – check out this Thanksgiving-themed post from Professor James Maule of MAULED AGAIN titled “Gratias Vectigalibus”. His comments echo some of my own sentiments.

* And in case you were too busy shopping on “Black Friday” to visit TWTP – check out my post on “The ‘Education Menu’ of Tax Benefits”

* USA TODAY reports that “Americans' Tax Burden is Lightest in Developed World”.

“Total U.S. tax revenues in 2008 equaled 26.9% of gross domestic product, according to provisional figures released Tuesday by the Organisation for Economic Co-operation and Development. That figure – which includes local, state and federal taxes, including Social Security – was lower than the 1990 ratio and far below levels across Europe. In Denmark, the total tax take exceeds 48% of the economy. In France, it tops 43%; Germany, 36%.”

Try telling someone who lives in New Jersey that their tax burden is “light”.

* Joe Kristan joined Kay Bell and Kelly Phillips Erb (and, of course, king of the tax bloggers Paul Caron) in reporting and commenting on the proposed “war tax” included in the "Share the Sacrifice Act" in his post "War Tax. Why Stop There?" over at the ROTH AND COMPANY TAX UPDATE BLOG.

Joe, his tongue firmly in check (where it is often found), suggests –

“It might be a good idea to have a dedicated "Share the Sacrifice" tax for every new program. The possibilities are endless:

- A 'Give it up For Goldman' tax to finance TARP and the bailouts.
- 'Reach Deep for Realtors' to finance the extended homebuyer credit.
- A 'Pimp your Neighbor's Truck' tax to finance "Cash for Clunkers."
- 'Pay up for Pork' for any transportation bill.
- A 'Share the Stupid' tax for the stimulus spending.”

Joe also offers “Bend Over For Benzes” to finance Iowa’s film tax credit. I would revise this a bit to “Bend Over For Bozos” for just about any quick fix reaction tax bill from Congress.

* Kelly Phllips Erb tells us “7 Audit Lessons (or How I Learned to Stop Worrying and Love the IRS)” at TAX GIRL.

“Love the IRS” may be going a bit far. I doubt if anyone loves the IRS. But there is no reason to hate, or fear, the Service.

As I mentioned in Wednesday’s BUZZ Kelly’s law firm was audited by “Sam”. This post continues the tale of her audit – and provides 7 great tips for anyone facing an audit.

I have blogged in the past about the fact that I have, thank the Lord, had very little audit experience over the past 38 years. I can count the number of audits I have been involved with on the fingers of both hands. I do not represent taxpayers before the IRS (one reason I never saw the need to become an EA), nor do I want to if I can help it. I only get involved in the audit of a tax return I have personally prepared. But from what little audit experience I have had I can tell you that Kelly’s tips are right on the money. While the audit in question was of a corporation, these tips apply to audits of 1040s as well.

Every taxpayer faced with an IRS, or state, audit should read this post before going to the appointment.

* Stacie Clifford Kitts asks, “Have You Heard About Form 1099K?” over at STACIE’S MORE TAX TIPS.

Stacie tells us –

“If you use Paypal or another service to process credit card payments, under these proposed regulations you may be receiving a new form 1099K which will report the amount of payments processed by the service for you.”

She then goes on to quote the official IRS notice on the new requirements. According to the notice, these new requirements will take effect “starting with transactions in calendar year 2011”. So don’t go looking for an 1099K form this coming January or February.

* The NATP’s weekly email newsletter reminds us of something I believe I mentioned earlier in the year here in a BUZZ installment -

“NRP Employment Tax Audits to Begin in February 2010

In February 2010, the IRS will begin its first Employment Tax National Research Project (ET NRP). Business practices regarding employment tax issues may have changed significantly over the last 25 years since the last IRS employment tax study in the 1980s.

Examinations comprising the study will be conducted to collect data that will allow the IRS to understand the compliance characteristics of employment tax filers. The results will allow the IRS to gauge more accurately the extent to which businesses properly comply with employment tax law and related reporting requirements. When completed, this information will help the IRS select and audit future employment tax returns with the greatest compliance risk.

There are two main goals for the ET NRP:

• To secure statistically valid information for computing the Employment Tax Gap, and
• To determine compliance characteristics so IRS can focus on the most noncompliant employment tax areas.

The IRS will randomly select 2,000 taxpayers each year for the next three years. The examinations will be comprehensive in scope. Taxpayers will receive notices describing the NRP process similar to those used in recent NRP studies for individuals and Form 1120S corporations.

Records pertaining to employment tax returns and issues will be subject to review during these examinations. Employers should have all of their records available to expedite these examinations.”

* Back at the ROTH AND COMPANY TAX UPDATE BLOG, Joe Kristan’s post “New Business? How Do You Go About It?” led me to “Get It Right the First Time” by Chris Branstad at IOWABIZ.COM.

It is great to have one’s professional advice supported by peers. Both Chris and Joe echo my advice on incorporating.

Chris says –

“Running to the secretary of state to get corporate filings is not the first step in developing your business.

Incorporating before your business has an identity is like getting a marriage license before you decide on a groom. You will likely have to start over.

First, determine: Who are you? What do you want? What is your growth strategy? What is your exit plan?”

Chris’s marriage analogy is similar to what I have used in the past. I have told readers and clients that incorporating is like marriage – getting the marriage license may be cheap, but the divorce can cost a fortune.

Joe advises (highlight is mine) –

“Don't go with a corporation -- S corporation or C corporation -- unless you really are sure of what you are doing. Once you incorporate, you may find yourself with taxable income for the privilege of undoing it.”

Joe gives the best advice of all, which applies to a multitude of tax issues – “You should get your tax pro involved”!

* And speaking of great advice, the Small Business Taxes and Management site’s News and Tip of the Day for Friday, November 27th gives an excellent piece and advice and provides a court case reference to tell you why.

“If you're agreeing to something with the IRS, get it in writing. In Harry E. Crisci (2009-2 USTC 50,647; U.S. District Court, West. Dist. Pa.) the IRS levied on the auction proceeds from the sale of the company's assets. The amounts recovered by the Service were applied to both trust fund and nontrust fund liabilities of the company, rather than first applying all the proceeds to the trust fund liabilities. That left the company officers with a personal liability. The Court found no evidence the IRS said the proceeds would first be applied to the trust fund liability and found reliance by the company on the Service's vague statements unreasonable.”
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* A guest post by Kimmer at THE MISSOURI TAX GUY just made it into the BUZZ. The title - "Personal Finance 101: Budgeting - It Doesn't Have to Hurt". It is a good primer on the subject.

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* Don’t limit your Christmas gift-giving to presents for individuals. Make gifts to charity as well. Here is a good one to consider:

The Second Chance Fund of the American Humane Association- The medical costs of treating and rehabilitating an abused animal can easily become overwhelming for any animal welfare organization -- particularly when long-term care is necessary. The Second Chance Fund is one way American Humane works to support member organizations in their vital work. By providing financial assistance, in select cases, to animal welfare organizations responsible for the temporary care of animals as they are prepared for adoption into permanent, loving homes, the program provides animal victims of abuse or neglect with a second chance at life.

TTFN

THE "EDUCATION MENU" OF TAX BENEFITS

Earlier this week I discussed the new American Opportunity Credit for qualified post secondary tuition, fees and course material expenses.

The AOC is only one of many items on the “menu” of education tax benefits.

THE AOC replaces the HOPE education credit. The other credit available for educational expenses is the Lifetime Learning Credit, which it non-refundable. While the AOC is limited to the first 4 years of post-secondary education, and cannot be claimed more than 4 tax years, the Lifetime Learning Credit is available for all years of postsecondary education and for courses to acquire or improve job skills and for an unlimited number of years.

The Lifetime Learning Credit is also available for all years of postsecondary education, including graduate school, as well as for education to acquire or improve job skills. The student does not have to be pursuing an undergraduate degree or other recognized education credential and it is available for a single class. The cost of course materials cannot be used in calculating the Lifetime Learning Credit.

The amount of the credit is 10% of up to $20,000 in qualified expenses for a maximum of $2,000. While the AOC is $2,500 maximum is per student, the Lifetime Learning credit $2,000 maximum is per tax return. You can have two dependents in college during the year, and each can claim up to $2,500 of the American Opportunity Credit. But if you have two dependents in graduate school in the same year the maximum Lifetime Learning Credit you can claim for both combined is $2,000.

The phase out range is for “modified” AGIs of between $50,000 and $60,000 for singles and $100,000 and $120,000 for married couples. It is not available to married taxpayers who file separately.

Special rules apply for both credits for a student attending college in a Midwestern disaster area.

Click here for a good IRS-published comparison of the two credits.

You can claim an “above-the-line” deduction (“adjustment to income”) for qualified tuition and fees. This deduction is limited to $2,000 for modified Adjusted Gross Income of up to $65,000 for singles and $130,000 for married couples filing joint and $4,000 for MAGI of up to $80,000 for singles and $160,000 for joint filers. The deduction is not available for married taxpayers who file separately.

The deduction is available for tuition and fees and student-activity fees and course-related books, supplies and equipment if they must be paid as a condition of enrollment or attendance.

Taxpayers can also claim an itemized deduction as an “employee business expense”, or a deduction on Schedule C if self-employed, the cost of education that is (1) expressly required by an employer, by law, or by government regulation, or (2) maintains or improves skills required in your current trade or business. Education is not deductible if it (1) is the minimum requirement for a trade or business, or (2) prepares one for a new trade or business, even if the taxpayer does not intend to enter the new trade or business.

Deductible expenses include –

• tuition, textbooks, registration fees, and supplies,
• round-trip transportation to the education (the only time travel is deductible),
• meals (at 50%) and lodging while away from home,
• lab fees, student cards, insurance and degree costs, and
• writing expenses for term papers and dissertations (i.e. research and typing)

Generally expenses for education that lead to a degree are not deductible, as it is assumed that an undergraduate degree is the “minimum requirement” for a trade or business and a graduate degree prepares one for a new trade or business. See my post on “Is An MBA Deductible”. A graduate degree may also be deductible for teachers.

There are no income or AGI limitations involved with such a deduction, other than the 2% of AGI exclusion for “miscellaneous” itemized deductions.

With a deduction the tax benefit received is determined by your marginal tax rate (i.e. are you in the 10%, 15%, 25%, 28% or 35% tax bracket).

When determining whether to claim a credit, above-the-line deduction, or Schedule A or C deduction for education, as in any situation when you are given options, you should calculate the tax benefit under each each option to determine the one that provides the most overall federal, state and local tax savings. While a credit is generally better than a deduction, this is not always the case. Because of AGI and other considerations I have often come across returns where it was “more better” to claim a deduction than a credit.

For parents of newborns or young children perhaps the best way to save for their college education is with a Qualified Tuition Program (QTP), also known as a “Section 529 Plan”. Contributions to a 529 Plan are not deductible, but the earnings that accrue over the years are tax-free if used for qualified education expenses. For purposes of Section 529 qualified expenses include tuition, required fees, books, supplies, equipment, computer equipment and services (for 2009 and 2010), special needs services, and, for someone who is at least a half-time student, room and board.

There are no statutory limitations to the amount that can be contributed to a Section 529 Plan, other then they cannot be more than the amount necessary to provide for the qualified education expenses of the beneficiary, but there are Gift Tax considerations, and there are no AGI or MAGI income phase-outs. Anyone can contribute to a Section 529 Plan regardless of income.

Here is a great idea – use the cash gifts your newborn receives to open a Section 529 Plan.

For more information on Section 529 Plans click here.

You can also save college using the Coverdell Education Savings Account. Parents and family members can contribute up to a maximum of $2,000 per student beneficiary per year to a Coverdell ESA.

As with a Section 529 Plan, contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed and distributions are tax-free if they are used for a beneficiary’s qualified education expenses at an eligible institution.

What is good about a Coverdell ESA is that distributions can be used for qualified education expenses for Kindergarten through 12th Grade as well as college and graduate school. Qualified expenses include tuition, fees, books, supplies and equipment (not computers), and room and board for students who are enrolled at least half-time.

Of course there is a “modified” AGI phase-out range - $95,000 to $110,000 for singles (including Married Filing Separate) and $190,000 to 220,000 for Married Filing Joint.

The above are only a few of the items on the “education menu”. Click here for an IRS-published overview of the education menu. More detailed information is available in IRS Publication 970 (Tax Benefits for Education).

There are special rules for coordinating the interaction of the various items on the education menu. For more information you should consult your tax professional.

TTFN

HAPPY THANKSGIVING!

I hope you have a "successful" Thanksgiving!

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My father was taken from rehab to the hospital yesterday, so we will be celebrating the holiday at the Jersey Shore Medical Center this year.

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My Thanksgiving dinner will consist of a ham and cheese sub from my friend Carmen's deli.

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At least Nosey (my cat) will be having turkey!

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Before you go please check out this Thanksgiving-themed post from fellow tax blogger Professor James Edward Maule of MAULED AGAIN (click here), which echoes some of my own sentiments.

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TTFN

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

AND I THOUGHT I WAS ADDICTED TO BLOGGING!

* JOE TAXPAYER’s “This Week’s Roundup” led me to an answer to the question “What is a Charitable Gift Annuity?”, a guest post written by Benjamin Clark at CHRISTIAN PF.

As Benjamin explains –

“The basic premise of the charitable gift annuity is the donor gives a gift to the charity and the charity agrees to pay an annual annuity to the beneficiary for the remainder of the beneficiary’s life. Upon the beneficiary’s death, the agreement terminates and the charity is under no further obligation.”

* Shannon Buggs of the HOUSTON CHRONICLE is correct when she says “It's Better to Break Even”.

She is, of course, talking about breaking even when you file your Form 1040 (or 1040A).

“If you get the withholding amount just right, you can wind up on Tax Day not having to write a check for additional taxes owed. In the end, the goal of tax planning is to pay as little in taxes as legally possible.

Please notice I did not write that the goal is to collect the biggest refund check you can.

But people with middle and high incomes who get refunds are making no-interest loans to the government and just getting back the money they could have been using sooner.

Yet about three of every four American households — more than 100 million taxpayers — get refunds averaging about $2,700.

That's a big chunk of money they could have been saving, investing, spending or giving to charities over the course of the year.

And if they had been using that money in any of those ways, those households would have been boosting the economy.”

While I do agree with what Shannon is saying, considering the pitiful state of interest on liquid savings I also do understand why some of my clients use excess withholding as a form of “forced savings”, and I also understand the, while illogical, psychological pleasure of a big refund.

* Kay Bell keeps us up-to-date on the status of health care “reform” in her post “Health Care Debate is On!” at DON’T MESS WITH TAXES.

She tells us that the already-passed House version of the Health Care bill is 2000+ pages, and the not-yet passed Senate version is “right now is more than 2,000 pages. What finally is approved, if anything, could be even bigger.”

* And over at her other blog – EYE ON THE IRS at Bankrate.com – Kay reports on some “Black Friday Tax Holidays”.

* Trish McIntire warns newly marrieds about an unexpected surprise that they may get at tax time in “Wedding Bell Blues” at OUR TAXING TIMES. The marriage penalty for a two-income couple is alive and well!

I have always advised dual income couples to marry early in the year. You are considered married for tax purposes for the entire year if you are legally married on December 31st. So, if you are going to pay the tax penalty for being married you might as well “get your money’s worth” and enjoy the “benefits” (such as they are) for as long in the year as possible.

* Tax lawyers usually are called upon to help taxpayers, especially corporations, with problem audits. But the corporations of tax lawyers can also be audited. So Kelly Phillips Erb tells us in her post “On the Other Side of the Table”. It seems that Kelly’s law firm is being audited!

Kelly has a healthy attitude about the whole thing. She says, “There’s no use being freaked out about it – advice that I give my clients (and my readers) and advice that I’ll stand by”.

And, “I’m trying to take something positive from the whole mess. Besides blog fodder (how convenient is that?), it is giving me some additional perspective from the client side – and that can only be good, right?”

Good luck, Kelly!

* Joe Kristan, author of the ROTH AND COMPANY TAX UPDATE BLOG, reminds business owners that, while a wink is the same as a nod to a blind horse, “'Bought' Isn't the Same as 'Placed in Service'”.

“Deductions for fixed assets -- depreciation and Section 179 deductions -- don't necessarily start when you buy an asset. They are only available when the asset is ‘placed in service’.’”

Joe goes on to tell about a court case where a taxpayer used this rule to his advantage.

The bottom line of the post is one that is especially applicable at this time of the year –

“That's a taxpayer victory here, but it also implies a warning to taxpayers: if your machinery is still in shipping crates needing to be put together at year-end, it's probably not yet eligible for depreciation or Sec. 179 deductions. If you want the deduction this year, get it out of the box and hook it up!”

* Don’t be surprised if the Social Security number that appears on a 1099 you receive next January looks like this – “XXX-XX-1234”.

Bill Perez tells us about an IRS pilot program in which “Your Social Security Number May Be Truncated” over at WILLIAM’S TAX PLANNING BLOG.

* I no longer exchange gifts – but when I did I stayed home on Black Friday and did my shopping online. If I were still buying gifts I would be checking out the items in this message I recently received.

TTFN

OI VEY! AN UPDATE ON MY LAST POST

Mary O’Keefe, a tax professor and author of the BED BUFFALOES IN MY TAX CODE blog, is keeping me honest.

Mary has brought to my attention an excellent IRS 2-page comparison of the American Opportunity and Lifetime Learning education tax credits. Click here to download.

Under the heading “Who Can Claim a Dependent’s Expenses?” this IRS tool confirms what I said in my post –

“If the taxpayer does not claim the exemption on the tax return the dependent can claim the credit.”

However it points out a what Mary calls “bed buffalo” in a footnote –

“None of the credit is refundable if the taxpayer claiming the credit is a child (a) who is under age 18 (or a student who is at least age 18 and under 24 and whose earned income does not exceed one-half of his or her own support); (b) who has at least one living parent, and; (c) who does not file a return.”

So while James in my post’s example can claim the credit on his tax return, none of the credit is refundable. This means that James’ tax liability must be at least $2,500 (and, of course, the tuition and other costs used to determine the credit must be at least $4,000) to take full advantage of the credit.

I stand corrected.

A special “thank you” to Mary for keeping me honest!

TAX PLANNING AND THE AMERICAN OPPORTUNITY CREDIT

In this past Saturday’s edition of the BUZZ I told you about the finding of a Treasury Inspector General for Tax Administration (TIGTA) review of the education tax credits.

“TIGTA's review looked at taxpayers who claimed the credit in 2006 and 2007 and found that, in 2006, approximately 203,000 taxpayers erroneously claimed a total of over $300 million in Hope Credits. In 2007, over 169,000 taxpayers erroneously claimed a total of over $232 million in Hope Credits.”

Well that is nothing compared to what will happen with 2009 and 2010 returns, when the HOPE credit becomes the American Opportunity Credit and, as such, becomes partially refundable.

Hey, we all know by now that refundable credits are basically an open invitation to commit tax fraud.

Some background on the AOC-

The new American Opportunity Credit modifies the existing HOPE Credit for tax years 2009 and 2010. The “new and improved” HOPE Credit is now available to many more taxpayers, including those with higher incomes, as the AGI phase-out range is $80,000 - $90,000 for singles and $160,000 - $180,000 for married couples, and those who owe no tax, as it is partially refundable. It also adds required course materials (“books, supplies and equipment needed for a course of study whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance”) to the list of qualifying expenses, and allows the credit to be claimed for four post-secondary education years instead of two. The maximum credit has also been increased to $2,500 per student.

Click here to go to the IRS page of American Opportunity Credit: Questions and Answers.

Despite the increased AGI phase-out range, many parents with dependents attending college will still be unable to receive any tax benefit, especially in my neck of the woods. However, there is HOPE (no pun intended).

IRS Field Service Advice FSA 200236001 tells us that there is a way for a dependent child to claim the HOPE Scholarship credit.

James Q Taxpayer, the son of John Q and Jane Q, was an unmarried full-time college student who had net taxable income for the year. John and Jane were entitled to claim James as a dependent.

During the year, James incurred expenses that qualified for the HOPE education credit. However, John and Jane's Adjusted Gross Income (AGI) was in excess of the maximum AGI threshold, and could not claim the credit.

James' tax liability, before any credits, was more than the amount of combined federal and state tax savings John and Jane would have realized by claiming James as a dependent.

John and Jane, although entitled to, did not claim James as a dependent on their 1040. James filed a tax return, but did not claim an exemption for himself. James did, however, claim the HOPE Scholarship credit on his return.

The National Office of the IRS has concluded that because the parents (John and Jane) could claim a dependency exemption for the "child" (James), he (James) could not claim an exemption for himself. But, as the parents did not claim the child as a dependent, the child (James) was entitled to claim the HOPE Scholarship credit on his return if he met the eligibility requirements.

I know of no reason why this will not also apply to the American Opportunity Credit.

This “loophole” suggests a tax planning opportunity. If the taxable income of James above, the dependent student, can be controlled it would be good to make sure James earns at least enough to generate a tax liability that assures he will be able to take full advantage of the American Opportunity Credit, including its refundable portion. {OOPS! CLICK HERE TO READ A CORRECTION - rdf}

It may be too late to generate sufficient income for a qualifying dependent student for 2009 – but there is still 2010.

TTFN