GIT 'ER DONE!

Tax bloggers and journalists have been saying for about a month now that what should, and probably will, happen with regards to the extension of the “Bush” tax cuts is a temporary 2-year extension of everything for everyone. And Congress has promised an AMT patch extension.

It looks more and more like this is what is going to happen – and I expect that the fools in Congress and the Administration knew it all along.

So why do they have to continue to hem and haw and pose and posture, wasting our time, and providing more potential problems for the IRS with each day that passes?

Let’s get it over with – as you should have done weeks ago!

There is no doubt in my mind that we are being run by idiots!

THE 2010 CHRISTMAS PRICE INDEX

It is that time of year again when PNC Wealth Management calculates the “Christmas Price Index”.

Twenty-seven years ago the chief economist at PNC decided to figure out how much it would cost to buy the gifts identified in "The 12 Days of Christmas," which has come to be known as the “Christmas Price Index”. It is similar to the federal Consumer Price Index, which measures changes in prices of goods and services like housing, food, clothing, transportation and more that reflect the spending habits of the average American.

This year the cost to purchase each of the gifts in the song “The 12 Days of Christmas” is $23,439.38, a 9.2% increase over last year’s total cost of $21,465.56. This is the second highest jump in the history of the Index, and the largest percentage increase since 2003, when the index grew by 16%. Last year’s increase was a modest 1.8%.

So how come the IRS and the Social Security Administration says there is no inflation to warrant COLAs?

According to James Dunigan, managing executive of investments for PNC Wealth Management –

"This year's jump in the PNC CPI can be attributed to rising gold commodity prices, represented by the Five Gold Rings which went up by 30%, in addition to higher costs for wages and benefits impacting some entertainers.”

The biggest percentage increases involved birds – due to “the costs of feed as well as the availability and demand for certain feathered friends”. The Two Turtle Doves increased 78.6% to $100.00 and the Three French hens surged 233% to $150.00.

As there was no increase in the federal minimum wage this year the eight Maids-a-Milking, considered unskilled labor, did not get a pay raise.

Once again Dancing Ladies were the highest paid of the performers, earning almost $700.00 each, a 15% raise from 2009. The Leaping Lords got an 8% raise to bring their pay to about $477.00 per Lord. As usual the performing artists’ union did better for their members then the musicians’ union. Pipers and Drummers received a mere 3.1% raise, each earning between $212.00 and $214.00.

As part of its annual tradition, PNC Wealth Management also tabulates the "True Cost of Christmas," which is the total cost of items gifted by a True Love who repeats all of the song's verses. This holiday season, very generous True Loves have to fork over $96,824.00 for all 364 gifts, a 10.8% increase over last year.

True Loves who prefer the convenience of shopping online pay a grand total of $34,336.00. "In general, Internet prices are higher than their non-Internet counterparts because of shipping costs for birds and the convenience factor of shopping online," James Dunigan explains.

TTFN

SHE HAS GOT TO BE KIDDING!

Babs is getting senile!

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Included in Barbara Walters’ list of the 10 Most Fascinating People of 2010 is the cast of that steaming pile of shit THE JERSEY SHORE!

The idiots from that show can barely speak in complete sentences. There is nothing fascinating about these fools.

Fascinating is defined as arousing great interest and enchanting or alluring. Synonyms include absorbing, engrossing, gripping, riveting, interesting, bewitching, captivating, enthralling, entrancing, and attractive. None of these adjectives describes the cafones from TJS.

It is surprising that they, and the show, have become so popular. It just goes to show that the great unwashed masses ain’t very intelligent.

TTFN

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

* I have always advised clients and readers to think carefully before deciding to go into business with family members. The results can be disastrous.

Jean Murray provides “5 Ways to Prevent Trouble in the Family Business” at JEAN’S BUSINESS LAW/TAXES: US BLOG.

You may also want to read her posts on “Going Into Business with Family” and “Tell Your Family Business Horror Story”, which are linked at the end of the 5 Ways post.

* Bruce, the tax guy from Missouri, discusses “Misconceptions Business Owners Have About Their Returns”.

* It looks like good news from the IRS regarding the e-file mandate. Joe Kristan has read the proposed regulations and concludes that it contains “A Loophole Big Enough to Drive Robert D Flach Through”!

From Joe’s “mouth” to the IRS’ “ears”!

* YAHOO NEWS brought us the word –

“Veteran Rep. Charles Rangel, the raspy-voiced, backslapping former chairman of one of Congress' most powerful committees, was censured by his House colleagues for financial misconduct Thursday in a solemn moment of humiliation in the sunset of his career.

After the 333-79 vote, the Democrat from New York's Harlem stood at the front of the House and faced Speaker Nancy Pelosi as she read him the formal resolution of censure.”

Chuck breaks the law and has to stand up in front of the class while the teacher says he was a bad boy.

The message to America – If you attempt to defraud the government and cheat on your taxes you can go to jail, even if you are a television (idiot Richard Hatch) or movie (Wesley Snipes) star. The only people who are exempt from punishment and penalty are members of Congress.

So if you are thinking about cheating on your taxes you should run for Congress first – or maybe try to get appointed as Secretary of the Treasury

* Over at TAX GIRL Kelly Phillips Erb’s question for Fix the Tax Code Friday is “How Rich is Rich?”.

* Beancounter Donna Bordeaux rambles on with some good guidance on “Independent Contractors – How to Classify Workers”.

* CNN.MONEY tells us that “Tax Squabbling Earns Congress Failing Grade”. The article makes one very important point (highlight is mine) -

“Nearly all the big tax issues that were on the docket at the start of the year are still on the docket.”

These idiots have had a full year to act! They deserve more than just a failing grade. They should be expelled – especially the individual party leaders!
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* The NJ Division of Taxation, not always know for its sensible decisions, makes a good one for a change, as outlined in my post "2010 NJ-1040 Due Date Extended To April 18, 2011" at the NJ TAX PRACTICE BLOG.

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* I've been waiting for them Beans - and it was not in vain. Joe Arsenault gives us “BlogRoll Beans Early Snowfall Edition” over at CAFETAX. And wouldn't you know it - TWTP is included.

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* Be sure to check out Peter Reilly's compilation of "PAOO Greatest Hits" at PASSIVE ACTIVITIES AND OTHER OXYMORONS - and especially his "scoop" on "IRS To Stop Lousing Up Short Sales".

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TTFN

2011 STANDARD MILEAGE ALLOWANCES

The Internal Revenue Service today issued the optional standard mileage rates that are used to calculate the deduction for business, medical, moving, and charitable use of an automobile in 2011.

Beginning on Jan. 1, 2011, the standard mileage rates for the use of a car, van, pickup or panel truck will be:

* 51 cents per mile for business miles driven,
* 19 cents per mile driven for medical or moving purposes, and
* 14 cents per mile driven in service of charitable organizations.

The business rate is up 1 cent from 2010, and the medical and moving rate is up 2.5 cents. This is the first increase in the standard rates since 2008

The standard mileage rate for business, medical and moving purposes is based on the variable costs as determined by a study conducted by Runzheimer International.

The standard mileage allowance for charitable driving is set by Congress, and has been at 14 cents per mile for way too long now.

Click here to see the standard mileage allowances for past years.

THE MOMENT OF TRUTH

OK – I have read through PART II (Tax Reform) of the the National Commission on Fiscal Responsibility and Reform’s “The Moment of Truth”.

The section begins with an excellent assessment of our current tax system –

“America’s tax code is broken and must be reformed. In the quarter century since the last comprehensive tax reform, Washington has riddled the system with countless tax expenditures, which are simply spending by another name.”

It goes on to state that –

“The current individual income tax system is hopelessly confusing and complicated” and “fundamentally unfair, far too complex, and long overdue for sweeping reform.”

The Commission believes that –

“Tax reform should lower tax rates, reduce the deficit, simplify the tax code, reduce the tax gap, and make America the best place to start a business and create jobs.”

As discussed in the initial draft report, the Commission recommends we use “zero-base budgeting” by “eliminating all income tax expenditures”. Basically we would begin with no exemptions, deductions or credits. Congress and the President would then “decide which tax expenditures to include in the tax code in smaller and more targeted form than under current law, recognizing that any add-backs will raise rates”.

The report states that add-backs should be included for –

“* Support for low-income workers and families (e.g. child credit and EITC);
* Mortgage interest only for principal residences;
* Employer-provided health insurance;
* Charitable giving;
* Retirement savings and pensions.”

The report’s “Illustrative Proposal” would

* Create three (3) tax brackets – 12%, 22% and 28%.

* Repeal the dreaded Alternative Minimum Tax (AMT) and “PEP and Pease” (the “read my lips” taxes).

* Keep the Earned Income Tax Credit (EITC) and the Child Tax Credit either in current form or in some revised alternative (I assume this includes maintaining the refundable component).

* Keep the current law for the Standard Deduction and Personal Exemptions. Itemized deductions would be eliminated – so no more Schedule A.

* Tax capital gains and dividends at ordinary income rates.

* Create a non-refundable (thank God) 12% credit, available to all taxpayers, for mortgage interest on up to $500,000 of acquisition debt on a primary personal residence. There would be no tax benefit for equity loans or second residences.

* Create a similar, and also non-refundable, 12% credit for all taxpayers for charitable giving, with a 2% of AGI exclusion.

* Continue to exclude from income the cost of employer-provided health insurance premiums, capped at 75% of 2014 premium levels.

* Tax the interest on newly-issued currently tax-exempt state and municipal bonds.

* Consolidate the current menu of retirement accounts into one plan that limits “tax-preferred” contributions to the lesser of $20,000 or 20% of income.

* Expand the Saver’s Credit.

All other “tax expenditures” (i.e. deductions and credits) would be eliminated.

The Commission wants the tax rates to be structured so that $80 Billion in excess income is generated to reduce the deficit in 2015 and $180 Billion is generated in 2020.

To make sure that Congress moves quickly to pass comprehensive tax reform legislation, “the Commission recommends enacting a ‘failsafe’ that will automatically trigger should Congress and the Administration not succeed in enacting legislation by 2013 that meets specified revenue targets”. So if Congress remains true to form and sits on its arse too long the “failsafe” would impose across-the-board reductions in deductions and credits.

So that is what the final report, which will be voted on by the members of the Commission today (Friday), recommends.

Over the week-end I will work on my own tax reform plan, using this report as a starting point, and let you know my recommendations next week. I look forward to hearing what you think.

TTFN

PERMANENT = NO, TEMPORARY = YES

CNN.COM reports in “House Tax Break Vote Expected Thursday” that it seems the House is going to vote on a bill to “permanently extend tax breaks for those making $250,000 a year or less”.

The bill will not pass due to opposition from Republicans, who have vowed to prevent a vote on "any legislative item until the Senate has acted to fund the government and we have prevented the tax increase that is currently awaiting all American taxpayers”.

But what is important is that Congress must NOT extend the “Bush tax cuts” for either most or all Americans “permanently”. This must not happen! Any extension must be temporary. If the cuts are approved permanently Congress, in its infinite laziness, will abandon or avoid any serious discussion of substantive tax reform.

The “Bush tax cuts” MUST be temporarily extended for everyone for at the very most two tax years, so the new Congress will be forced to deal with tax reform.

WHILE I WAS OUT

Apparently a lot has happened on the tax front while I was visiting my uncle in Maryland.

(1) On Monday, the Senate failed to pass a bill to repeal the provision in the “health care reform” Act that requires nearly 40 million U.S. businesses to file 1099-MISC forms for every vendor that sells them more than $600 in goods beginning with tax year 2012.

The new 1099 requirements are opposed by both parties, but Senators could not agree on how, or whether, to make up the supposed $19 billion lost over the next decade by repeal.

This is the second time an attempt to repeal this provision has failed.

(2) According to “Obama, Hill Leaders Disagree in First Post-Election Bipartisan Meeting” from BNA SOFTWARE -

“President Obama Nov. 30 met with the party leaders of the House and Senate to begin forming a legislative agenda for the lame-duck session, but meeting participants agreed only to form a working group to come up with a compromise on extending tax cuts.

Later in the day, Democratic leaders in the House announced they were hoping to move legislation as early as Dec. 2 that would make permanent the Bush-era tax cuts for families earning less than $250,000.

Following the meeting, Obama called it a good start and that the American people would hold both parties accountable, but that there would have to be additional meetings soon, potentially at Camp David.”

Republican and Democrats continue to disagree on extending the “Bush tax cuts” for 200-250K+ earners.

A Wall Street Journal article suggests that “Signs Point to Extending All Tax Cuts Temporarily”. At this point in time this is the only real alternative – extend all “Bush” cuts for 2011 and perhaps 2012, and begin a serious discussion of Tax Reform, with the President’s panel report (see below) as a starting point as soon as Congress returns in January.

(3) The National Commission on Fiscal Responsibility and Reform issued its final report titled “The Moment of Truth”

It seems the commission co-chairmen didn’t change their basic framework from what they unveiled in the draft report last month but rather refined it to be more specific and realistic. The final report will be voted on by panel members on Friday.

I plan to read the tax portion of the report this morning, and will have more to say on it perhaps tomorrow.

(4) IRS Commissioner Douglas Shulman sent identical letters to Senate Finance Committee Chair Max Baucus and ranking Republican Sen. Charles Grassley and House Ways and Means Chairman Sander Levin and ranking GOP member Rep. Dave Camp on December 1st on December 1st urging Congress to pass an alternative minimum tax (AMT) patch and extend various individual income tax breaks before the upcoming tax filing season starts.

In the letter Shulman said -

"While I know you and your colleagues have a difficult challenge to enact legislation this year, I want to stress that it would be extremely detrimental to the entire tax filing season and to tens of millions of taxpayers if tax law changes affecting 2010 are deferred and then retroactively enacted in 2011.”

He expressed concern about the difficulty the IRS would face in dealing with amended returns if Congress lets the provisions expire and retroactively reinstates them next year.

"The IRS would likely be faced with millions of taxpayers who filed and paid additional tax based on a law that later changed. These impacted taxpayers would then need to file amended returns, which could take months to process and send refunds."

Most importantly -

"Specifically, it would be an unprecedented and daunting operational challenge to open the tax filing season under one set of tax laws with respect to AMT and extenders, begin accepting tax returns, and then have the law change.

The overall strain on IRS service operations would affect not only AMT taxpayers and those who benefit from extenders, but would also spill over into service disruptions and/or delayed refunds for tens of millions of other taxpayers."

TTFN

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

* I hope you overcame your BUZZ withdrawal this past week-end by checking out Bruce the MISSOURI TAX GUY’s Sunday “Week In Perspective”.

David Letterman is not funny. His bits are silly and he beats them to death. The one redeeming value of his show is his Top Ten list. Be sure to check out “Top Ten Things I’ve Learned from Being An Accountant”.

I take great exception to the following statement from “9 Out of 10 Accountants Can’t Add” –

“And who needs to know the tax code any longer? To do taxes, just fill in the blanks of any number of tax software on the market, and anyone can spit out tax returns.” What he talks about is, unfortunately, actually being done – and is one reason why the regulation of tax preparers is a good thing. However – be sure to read the joke at the bottom of this post.

* Peter Reilly gives us a thorough update of attempts to apply the “Cohan Rule” in his post “Does Cohan Still Rule” at PASSIVE ACTIVITIES AND OTHER OXYMORONS.

* I tell clients and readers that when given a choice of different options when filing a tax return, such as joint vs separate or depreciate vs Section 179, one should calculate the federal and state tax under all options before making a decision. I also point out that you may pay a bit more by filing separate federal returns, but save enough on the state returns to make it worthwhile.

Peter Reilly follows up his Cohan post with another reason why one should not automatically file a joint return in “Think Before Filing Joint Returns”.

* DAILY FINANCE tells you how to “Reduce Your Taxes: 8 Tips for Your Investment Portfolio”.

* Joe Kristan offers another discussion on the evils of “Hiding Government Spending By Running It Through Tax Returns” at the ROTH AND COMPANY TAX UPDATE BLOG.

* Professor Annette Nellen looks at the same issue from a state tax point of view in “Maine Spending in Tax System Greater than Outside It” at 21st CENTURY TAXATION.

* “Is the IRS making a habit of targeting groups said to be opposed to 'established' policy? Is it appropriate to segregate certain applications for additional review when they involve specific countries or issues? Should religion be a part of the review process?”

Kelly Phillips Erb discusses theses issues in “Jewish Group Accuses IRS of Discrimination” at TAX GIRL.

TTFN

TAX HISTORY

While I am in Maryland visiting with my uncle here is a brief history of the US income tax:

1643: The colony of New Plymouth, Massachusetts levies the first recorded income tax in America.

1861: Congress passed the first income tax law as an emergency measure to fund the Civil War.

1872: Congress repeals the income tax law.

1894: As a response to complaints that excessive reliance on tariffs as a source of revenue resulted in an increase in the cost of imported goods, Congress again passed an income tax law.

1895: The US Supreme Court ruled that the income tax law was unconstitutional.

1913: In February the 16th Amendment, which states "Congress shall have the power to lay and collect tax on incomes, from whatever sources derived, without apportionment among the several states, and without regard to any census or enumeration", was ratified by the necessary 3/4 of the states. On October 3rd Congress passed the Revenue Act of 1913, which created the first permanent US income tax.

Under this act, the first $3000 of income for single persons and $4000 for married couples was exempt from taxation. A "normal" tax of 1% was applied to income above $3000 or $4000, and a "super" tax of from 1-6% was applied to income in excess of $20,000. Deductions were allowed for business expenses (including depreciation), interest paid on "personal indebtedness", all national, state, county, school and municipal taxes paid, casualty losses, and worthless debt. In the first year only 1 out of every 271 American citizens were taxed and $28 Million in revenue was raised.

1916: The Federal Estate Tax was enacted to help generate additional revenue to fund America's anticipated entry into the first World War.

1917: Congress raised tax rates in response to the increasing cost of the war and approved credit for dependents and deductions for charitable contributions.

1918: The maximum combined basic and super income tax rate reached 77%.

1922: For the first time preferential tax treatment was provided for capital gains.

1932: The tax law was amended to provide that US presidents were liable for federal income tax on their salaries. Franklin Roosevelt was the first president since Abraham Lincoln to pay federal income tax on his presidential salary.

1935: The Social Security tax, 1% on the first $3000 of wages, was enacted.

1941: Tax tables for low-income taxpayers were introduced, simplifying the calculation of tax liability.

1942-1945: New tax laws, in response to the cost of World War 2, created withholding on wages, more tax brackets for lower income taxpayers, the standard deduction, a personal exemption for dependents, a deduction for medical expenses, and increased tax rates. By the end of the war the maximum tax rate was 94%.

1953: The Bureau of Internal Revenue becomes the Internal Revenue Service. And Robert D Flach, who would eventually become the internet's WANDERING TAX PRO, is born.

1954: Congress completely revised the Tax Code, changing rates, redefining Adjusted Gross Income, and adding credits for retirement income and dividends and new itemized deductions.

1961: Taxpayers were required to provide their Social Security or other taxpayer identification number to banks and other financial institutions so they could report interest and dividend payments to the IRS.

1964: Tax rates were reduced from a range of from 20% to 94% to from 16% to 77%. The Income Averaging method of tax computation was introduced.

1970: Congress created a Minimum Tax so high-income individuals could not completely avoid paying taxes through the use of preferential tax shelters, loopholes and deductions.

1972: Robert D Flach, who would later become the internet's WANDERING TAX PRO, prepares his first Form 1040 as a paid preparer.

1974: Congress created the deductible Individual Retirement Account (IRA) for taxpayers not covered by employer pension plans.

1975: Low-income taxpayers were allowed to claim a refundable Earned Income Credit (EIC).

1979: Unemployment compensation was made partially taxable.

1981: Tax legislation reduced tax rates by 25% over 3 years, indexed tax brackets for inflation, and applied the same tax rates to earned and unearned income.

1984: For the first time recipients of Social Security and Railroad Retirement benefits were subject to tax on up to 50% of the benefits received, depending on the recipient's income.

1986: The largest revision of the Tax Code since 1954, the Tax Reform Act of 1986, was enacted. The law reduced the number of tax brackets from 14 to 2, decreased the maximum tax rate from 50% to 28%, repealed the dividend exclusion, Income Averaging, the itemized deduction for sales tax paid and the preferential treatment of long-term capital gains, introduced the passive activity rules, the Kiddie Tax, the deduction from gross income for health insurance premiums paid by self-employed individuals, and the 2% of AGI limitation on most miscellaneous itemized deductions, phased out the itemized deduction for personal (credit card, auto loan, etc.) interest, limited the deduction for business meals and entertainment to 80%, and replaced the additional personal exemption s for age 65 and blind with an increased standard deduction.

1987: For the first time taxpayers were required to list the Social Security number of dependent children, age 5 and over.

1990: The Revenue Reconciliation Act of 1990 added a third tax bracket (31%) and instituted the reduction of itemized deductions and phase-out of personal exemptions for high-income taxpayers.

1993: The Omnibus Budget Reconciliation Act added the 36% and 39.6% tax brackets, increased the maximum tax on Social Security benefits from 50% to 85%, and reduced the deduction for business meals and entertaining from 80% to 50%.

1998: In response to abusive treatment of taxpayers by the Internal Revenue Service, the IRS Reform and Restructuring Act of 1998 was enacted.

2001: Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001, the largest tax cut in over 20 years, with 85 major provisions. All provisions of this act will expire in 2011. And Robert D Flach begins publishing THE WANDERING TAX PRO blog.

2003: To stimulate the economy, Congress passed the Jobs and Growth Tax Relief Reconciliation Act of 2003, the third major tax bill in as many years, and the third largest tax cut in history.

CLICK HERE TO DOWNLOAD A COPY OF THE 30-PAGE SPECIAL REPORT "SUMMARY OF MAJOR ENACTED TAX LEGISLATION FROM 1981-2006" BY THE TAX POLICY CENTER.

TTFN

GUEST POSTS WELCOME!

Over the past few months I have received several comments/emails from fellow personal finance writers and bloggers asking if I would accept a guest post for publication at THE WANDERING TAX PRO.

Guest post submissions are always welcome. Just send me an email with the post in a word document attachment. Posts must be on a federal or state (NJ or NY) income tax topic. A favorite topic is “What is the Best Tax Advice You Have Ever Received”.

For the most part, unless the topic is time sensitive, I will “stockpile” the post for use when it best suits my publishing schedule. I will notify the author via email in advance when the post will appear.

The copyright of the guest author will be respected, and I will not reprint any guest posts in another format without the author’s express permission.

Of course, I reserve the right to accept or reject the submission.

So those of you who have emailed me or submitted a comment requesting permission to submit a guest post – submit away!

SPEAKING OF TAXES

I am off to the Baltimore area to visit my uncle for a few days.

I thought you might enjoy reading some of my favorite quotes, in no particular order, about the federal income tax:

“The nation should have a tax system that looks like someone designed it on purpose.” - William Simon

"As a citizen, you have an obligation to the country's tax system, but you also have an obligation to yourself to know your rights under the law and possible tax deductions -- and to claim every one of them." – Former IRS Commissioner Donald Alexander

“The only difference between death and taxes is that death doesn't get worse every time Congress meets.” - Unknown

"The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least amount of hissing." - Jean-Baptiste Colbert

“When a new source of taxation is found it never means, in practice, that an old source is abandoned. It merely means that the politicians have two ways of milking the taxpayer where they had only one before.” - H.L. Mencken

“A person doesn't know how much he has to be thankful for until he has to pay taxes on it.” ~Author Unknown

"Congress thinks it is a lot easier to trim the taxpayers than expenses." – Author Unknown

"It is the legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by any means which the law permits." - US Tax Court

"Our tax code is so complicated, we've made it nearly impossible for even the Internal Revenue Service to understand." – Former Treasury Secretary Paul O’Neill

"The hardest thing in the world to understand is the income tax." Albert Einstein

"The United States is the only country where it takes more brains to figure your taxes than to earn the money to pay it." Former Florida Senator Edward J Gurney

"A friend is one who takes you to lunch even if you're not tax deductible." – Jack Benny

"If Patrick Henry thought that taxation without representation was bad, he should see how bad it is with representation." - Farmer's Almanac

"The tax code last year included 2.8 million words. The Holy Bible itself has only about 775,000 words. Obviously, God did not need to issue such copious instructions for living as we currently have for complying with tax laws." – Senator Orrin Hatch

"The taxing power of government must be used to provide revenues for legitimate government purposes. It must not be used to regulate the economy or bring about social change." – Ronald Reagan

"A tax loophole is something that benefits the other guy. If it benefits you it is tax reform." – Former Senator Russell B Long

"I'm proud to be paying taxes in the United States. The only thing is - I could be just as proud for half the money." – Arthur Godfrey

"The income tax has made liars out of more Americans than golf." – Will Rogers

TTFN

BLACK FRIDAY SUGGESTIONS

Today is BLACK FRIDAY. How about buying some of my products today?

THE SCHEDULE C LETTER

ITEMIZED DEDUCTIONS: A COMPLETE GUIDE TO SCHEDULE A

TAX PROFESSIONALS FORMS, SCHEDULES AND WORKSHEETS

ANOTHER BROADWAY TRIVIA CONTEST!

While I have not received many responses to similar posts in the past – I thought I would try a Broadway Trivia Contest once again in lieu of BUZZ this holiday week-end.

The winner will receive a free copy of my THE 2010 edition of my special report “ITEMIZED DEDUCTIONS: A COMPLETE GUIDE TO SCHEDULE A”.

Rodgers and Hammerstein’s SOUTH PACIFIC was having a bit of trouble during its out of town try-outs. It appears the show was running a bit long. Thoughts were turned to how to trim a few minutes from the production.

Several suggestions were made to cut a little song from the 2nd Act. But Richard and Oscar would not have it – they were adamant in their support of this song. Their response was - if the song was cut they might as well close the show out of town. Since R+H were the producers the song remained.

What is that song?

You can provide your answer either via a comment to this post, or by sending an email, with BROADWAY TRIVIA CONTEST in the subject line, to rdftaxpro@yahoo.com.

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TTFN

GOBBLE GOBBLE!

HAPPY THANKSGIVING!

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

* As I usually begin each Wednesday BUZZ – be sure to check out Bruce the MISSOURI TAX GUY’s Sunday “Week In Perspective”. It is chock-a-block” with good stuff.

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* Bruce discusses the various options available if you owe your “Uncle Sam” and can’t pay in “Simple Solutions to IRS Tax Debt Problems”.And click on the “tax debt help” link at the end of the first paragraph for a detailed overview of the Offer In Compromise program.

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* Kelly Phillips Erb, everyone’s favorite TAX GIRL, suggests that “Snipes Saga Finally Over?”.

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“ABC News is reporting that Wesley Snipes must now report to jail after his request for a new trial was denied by a federal judge.”

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Meanwhile fellow tax cheat Chuck Rangel is merely chastised by Congress and told to pay the IRS what he owes.

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* Kelly has announced her annual “12 Days of Charitable Giving 2010”, with a “twist”.

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“This year, I’m asking readers to submit, via email to charity@taxgirl.com, the name of a charity that most deserves a boost this year. Ideally, it would be one that you have supported financially over the past year or that you plan to support before the year end. In addition to the name, I’ll need the city where the charity is located, what it does and why you support the charity (personal stories would be great). A link to the web site and the best way to make a donation would be terrific: the more information that you can provide, the better.”

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The deadline for nominations is November 30th at 11:59 pm.

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* Does the IRS have a check for you? IR-2010-113 reports that –

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“The Internal Revenue Service is looking to return $164.6 million in undelivered refund checks. A total of 111,893 taxpayers are due one or more refund checks that could not be delivered because of mailing address errors.”

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Think you are one of the 111,893? “The best way for an individual to verify if she or he has a pending refund is going directly to IRS.gov and using the ‘Where’s My Refund?’ tool.”

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And the best way to avoid this kind of problem is to request that your refund be directly deposited to your checking or savings account.

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* TAX PROF Paul Caron treats us to “The 10 Highest State Income Tax Rates For 2011” from Forbes.

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New Jersey is #5 at 8.97%, which kicks in at $500,000 of income for both Married and Single filers. NJ is tied with New York and Vermont, both also with a top rate of 8.97%. NY also kicks in at $500,000, but Vermont kicks in at $379,150. NJ is a “gross” tax, while New York, and I expect also Vermont, follow the federal with regards to allowable losses and deductions. Hawaii and Oregon top the list with 11%.

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* The NATP’s TAXPRO WEEKLY email newsletter reports –

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“A draft version of the 2010 Schedule SE is available on the IRS website. The revised form cleverly hides the deduction for a self-employed person’s health insurance as a subtraction to the Line 3 calculation. The deduction for health insurance for purposes of calculating self-employment tax is only permitted for 2010.”

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Click here to download the draft copy of the 2010 Schedule SE.

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* They say if it ain’t broke don’t fix it. Well the Form 1040X (Amended US Income Tax Return) wasn’t broke. It had remained virtually unchanged in format for as long as I can remember because it worked just fine as it was – a three column form where one would list the original information, the changes, and the corrected information. Well for some unknown reason the IRS (not Congress – I could understand it if it was Congress because they are idiots) changed the almost perfect 1040X in January of 2010 – making it a one-column form.

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Well now Trish McIntire tells us that the IRS has returned the 1040X back to its original format in her post “1040X Revised Again” at OUR TAXING TIMES.

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The IRS forms department apparently had nothing to do but sit around and twiddle their thumbs – they couldn’t work on the 2010 tax forms or instructions yet because of the irresponsibility of Congress – so they revisited the 1040X.Well for whatever reason – I am glad to have the old 1040X back again.

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Click here to the "new" old 1040X.

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* I join TAX PROF Paul Caron in welcoming a new blog to the “Tax Blogosphere” – TAX TIPS FOR POKER PLAYERS by tax attorney Brad Polizzano, aka TaxDood.

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According to Brad –

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“With this blog, I intend to highlight the many tax issues a poker player should be aware of in order to properly report gambling earnings.”

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* Frequent TWTP commenter Peter Reilly discusses a few issues, including the regulation of tax preparers, in a post that is mainly about the Tax Court case concerning the crooks at Refunds Now Inc titled “Making A List And Checking It Twice” at PASSIVE ACTIVITIES AND OTHER OXYMORONS.

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The post includes the following comment on the idiocy of Refund Anticipation Loans (RALs) -

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“Refund anticipation loans are a natural outgrowth of certain types of tax preparation businesses, once you get past the underlying financial irrationality. Somebody has, in effect, made a series of small non-interest bearing loans to the federal government. They then pay a usurious rate to get paid back a couple of weeks sooner. I think there is a sub-branch of microeconomics that studies phenomena like this. I'm sure it's not called stupinomics, but that would be a good name for it.”

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* Tonya Moreno shows us “How to File a Part-Year Resident State Tax Return: Instructions for filing multiple state tax returns after making a permanent move” at ABOUT.COM:TAX PLANNING US.

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* I am sorry to hear that Dan Meyer is “Suspending Tick Marks”, a great blog on accounting and taxes (as I love to say – it has nothing to do with lyme disease).

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I thank Dan for his support of TWTP over the years, especially the inclusion in his “12 Blogs of Christmas” (which will be missed this year).

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Let’s hope that, as Dan says, it is only temporary and he returns to the “Tax Blogosphere” in mid-February of 2011. In the meantime I look forward to his comments on other tax blogs.

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Due to the holiday I doubt there will be enough BUZZ for a complete installment this coming Saturday – but we shall see.

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TTFN

DON'T ELIMINATE THESE DEDUCTIONS

Many of the tax reform proposals that are surfacing recommend eliminating the itemized deduction for local real estate and state and local income or sales taxes. Some also call for doing away with the deduction for mortgage interest; one wants to replace the deduction with a 15% credit.

I want to keep the deductions for state and local taxes and mortgage interest on acquisition debt.

We are well aware that a family living in New York, New Jersey or California with a combined annual income of $150,000 may just be getting by, or is barely comfortable, while a similar family residing elsewhere in the US can live like royalty on $150,000 per year. However the federal income tax system is geographically neutral - the tax rate schedules are the same no matter where in the US you live.

So it is possible that a family in middle America, with less actual dollars of earnings but a much higher disposable income and standard of living, is paying a smaller federal income tax than one with less disposable income, due to a much higher cost of living, in the Northeast.

The income is higher in certain regions of the country because the cost of living, including housing costs and state and local real estate, income and sales taxes, is much higher. The cost of a home is much higher in New Jersey than Kansas, and so are the state income taxes and local property taxes and corresponding mortgage interest.

The deductions for local real estate tax, state and local income or sales tax, and mortgage interest on acquisition debt are greater in New York, New Jersey, California, and other higher income states than in states with lower costs of living. The ability to claim these deductions helps to provide some degree of regional “equalization” and alleviate geographic tax “penalties”.

TTFN

ANOTHER DEFICIT REDUCTION REPORT

On the heels of the discussion draft issued by the co-chairmen of President Obama's National Commission on Fiscal Responsibility and Reform, the Bipartisan Policy Center’s Debt Reduction Task Force has issued “Restoring America’s Future” (click here for the full report or here for the Executive Summary), another comprehensive plan to solve debt crisis, create jobs, simplify taxes, and fix Social Security.

The Bipartisan Policy Center (BPC) is a non-profit organization that was established in 2007 by former Senate Majority Leaders Howard Baker, Tom Daschle, Bob Dole and George Mitchell to develop and promote solutions that can attract public support and political momentum in order to achieve real progress.

For purposes of this post I am only interested in the proposals for tax reform – and I look at the proposals from the point of view of making the Tax Code simpler and more fair.

In the introduction to the “Create a Simple, Pro-Growth Tax System” section the report discusses our current tax system –

“The system is so complex that most taxpayers – even those with low incomes – now use either a professional tax preparer or tax software. The alternative minimum tax (AMT), initially designed to ensure that all high-income taxpayers paid some income tax, has become the poster child for the tax system’s failure, requiring Congress to enact annual and increasingly expensive temporary patches to prevent the AMT from ensnaring millions of middle class households (especially those with children) in a web of pointless complexity, high tax rates, and unfairness.”

The report proposes “a radically simplified income tax that will lower tax rates, broaden the base, and eliminate the need for millions of households to file tax returns”.

The proposals include –

* Replace the current graduated brackets of from 10% to 35% with two individual tax rates – 15% and 27%.

* Eliminate the Standard Deduction and all itemized deductions.

* Create a 15% credit for home mortgage interest on a principal residence of up to $25,000 and a 15% credit for charitable contributions, both “refundable”.

* Replace the personal exemption for children, Child Tax Credit, Earned Income Credit, Head of Household filing status, and Child and Dependent Care Credit with a universal credit of $1,600 per child, indexed to changes in the Consumer Price Index (CPI), and an earnings credit of 21.3% of the first $20,300 of earnings for each worker in the “tax unit” (I assume each spouse), also indexed to the CPI. If I read the report right I do believe the excess credits will be refundable in some manner.

*Eliminate or scale back all other “tax expenditures”.

* Limit combined individual and employer contributions to qualified retirement plans to 20% of annual earnings up to a maximum of $20,000 per year, indexed for inflation.

* Create a refundable savings credit for taxpayers in the 15% bracket.

* Eliminate the preferential rates on capital gains and dividends.

The two allowable credits discussed above, for mortgage interest and contributions, will not be provided to the taxpayer, but will go directly to the institutions. Mortgage lenders will apply for a tax credit, which will be passed through to homeowners as a 15% reduction in their home mortgage interest payments, and qualifying charities will apply to the IRS for a “matching grant” to supplement taxpayer contributions “so that for every $85 the taxpayer gives, the charity will receive another $15”.

The report also outlines curious rules so that the child credit discussed above is “automatic” and does not have to be requested each year.

The Task Force also calls for –

*A new “modest” 6.5% national Debt Reduction Sales Tax (DRST) to be phased-in over 2 years, and

* A temporary Social Security “payroll tax holiday” for all of 2011 that “excuses” employers and employees from paying the 12.4% Social Security tax (and presumable the appropriate portion of the “self-employment tax”). According to the report “the tax holiday will not impact the solvency of the {Social Security} Trust Funds, which will be reimbursed in full from general revenues at the same time that they would have received payments in the absence of the holiday”. The report suggests this will create between 2.5 and 7 Million new jobs.

While there is much worth discussing in the report I must continue to voice my strong opposition to any kind of “refundable credit” paid via a tax return.

I do somewhat like the concept of providing the benefit for mortgage interest via a reduction in the actual mortgage payment (much like I would have the benefit for education expenses provided via direct tuition grant), and am not totally against a “matching grant” approach to charitable contributions, and agree that they are worth looking into.

However the mechanics of it all is somewhat confusing. Would all mortgage holders apply for and receive a 15% federal “grant” for all first mortgages issued? How would it work with mortgages given or “taken back” by individual? And what about refinancing? Much of the “methodology” of the benefits provided in the report raise all kinds of “how to” questions.

Of the various proposals in the two reports I still think I would prefer to use the “zero base” option of BO’s Commission chairman as a starting point. I would initially eliminate all “tax expenditures” and add back to the Tax Code only those deductions that are absolutely appropriate - some kind of higher Standard Deduction, a higher personal exemption for dependents, and tax benefits for state income and real estate taxes, acquisition debt mortgage interest, charitable contributions, and perhaps employee business expenses. And I would provide any benefits for higher education, employment encouragement (EIC) and other items as direct payments or supplemental welfare checks (as discussed in Friday’s post).

So what do you think of this new report?

TTFN

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

* Joe Arsenault provides us with a “BlogRoll Beans ‘Almost’ Thanksgiving Addition” at CAFÉ TAX.

* TAX GIRL Kelly Phillips Erb brings us up-to-date on the “progress” of the much-needed tax legislation in the lame duck (aka lame arse) Congress in “Black Friday, Indeed, for Congress: Vote Looming”

She tells us –

“Democratic leaders met this week to talk turkey and decided on two things:

1. A vote on the Bush tax cuts won’t happen until after Thanksgiving; and
2. The Bush tax cuts will be extended for those making $250,000 or less.

And that’s all we have. That means there’s a lot, obviously, that we don’t know.”

* Kay Bell touches on the same issue in “If Your First 2011 Paycheck is Smaller, Thank, er, Blame Congress” at DON’T MESS WITH TAXES.

Thanks to the irresponsibility of the cafones in Washington that Joe Kristan “affectionately” refers to as Congresscritters the 2011 withholding tables are still up in the air.

Kay explains why January paychecks will be smaller -

“Why? Because the payroll withholding tables for 2011 that employers (or payroll companies that workplaces outsource the job to) are now based on what the law will be in January.

No, the IRS can't just take Congress' word that it will do it's job and make some final decisions on what the rates will be. Would you trust them to follow through, especially based on recent (and not so recent) history?

And the 2011 law means that there's no 10 percent income tax rate for anyone and highter tax rates for wealthier individuals.

The IRS does the work on these calculations in October or early November. The lead time is necessary to get the data to workplaces in time for them to implement them on Jan. 1.

But with the tax votes now pushed into December, expect to see your first 2011 paycheck withholding at the higher rates.

And that will mean a smaller paycheck (or two) when the coming year rolls in, even if Congress eventually extends all the tax cuts before Dec. 31.”

* USA Today tells us that, as KPE predicted in a TAX GIRL post, “House Ethics Panel Votes to Censure N.Y. Democrat Rangel”.

So now, if the full House approves formal censure, Chuck will have to stand in front of Congress while it is announced to the world that he has been a bad boy. Big whoop!

And, oh yes, Chuck will have to pay the back taxes he cheated the government out of. It would seem to me that this should be a given in order to keep his seat.

The article points out that Rangel “failed to disclose assets and income in reports to Congress and failed to report and pay taxes to the IRS on rental income from his Caribbean vacation villa for 17 years”.

Kelly quotes the reaction of Rep. Michael McCaul (R-TX) in her post -

“Failure to pay taxes for 17 years. What is that?”

According to Blake Chisam, the House ethics panel's prosecutor, “No other House lawmaker has been found guilty of as many counts of rule-breaking by an ethics panel”.

Rangel is a crook and should be thrown out on his arse and forbidden from running for office again!

The moral of this story is that it is ok for Congresscritters to behave unethically, and even illegally, because even if they get caught they will not have to pay any consequences other than brief public embarrassment.

And, as an aside, nobody should be allowed to be elected to Congress for 40 years. There must be some kind of term limits for all elected officials.

* Rambling Beancounter Donna Bordeaux gives us a good overview of the “Small Business Health Care Tax Credit”, one of the currently effective provisions of the convoluted “health care reform” bill, at her firm’s blog.

One problem with this credit is that is does not cover the small business owner. Among the many things that Congress does not understand is the fact that many small business owners cannot afford to provide insurance for themselves or their families, let alone their employees.

TTFN

RESTATING MY THOUGHTS ON "TAX EXPENDITURES"

As expected the proposal to start from “ground zero” by doing away with all “tax expenditures” currently in the Tax Code from the discussion draft issued by the co-chairmen of President Obama's National Commission on Fiscal Responsibility and Reform has not been universally praised. Taxpayers are all for simplifying the Code and raising taxes on others, but do not want to give up any of the benefits they are getting. And Congresscritters, who care more about themselves and getting reelected than in properly running the government, will fight any efforts to put an end to their pet tax deductions, credits and loopholes as long as the money keeps flowing in from lobbyists.

The release of the draft has resulted in increased discussion of the issue of “tax expenditures”, a topic of concern for a while now. I have been talking about the problems for years, and most recently Mortimer Caplin, the IRS Commissioner during the terms of Presidents Kennedy and Johnson commented on the situation, as reported in “Former Commissioner Blasts IRS’s Social Mission”, which I highlighted in a recent BUZZ installment.

The article pointed out that Caplin “believes the Internal Revenue Service is currently facing a tougher task than it did back when he was commissioner as a result of the additional roles handed it by Congress through the enactment of new social programs”.

The item further states –

“However, IRS responsibilities today revolve not only around tax collecting, but also include policing social and economic policies with limited resources. The passage of the health care bill add exponentially to an already packed list of administering homebuyer credits, economic stimulus disbursements, and work pay credits, among others, he noted.”

Former Commissioner Caplin, correctly, pointed out –

“Even the Earned Income Tax Credit could have been handled by Health and Human Services. What has happened is that there are a tremendous amount of fraud and deficiencies associated with the program. This has produced a great loss of revenue, because the Service has to focus attention on the wrong returns. Rather than looking at high-income returns, with, say, foreign investments, they have to examine the EITC. Their mission has been watered down.”

And most important –

“And instead of having an annual appropriation, which gets examined yearly, the programs get into the Tax Code but never get out. Congress has to be more selective. They’re leaning more on giving credits than on appropriations.

It’s more difficult to amend the Internal Revenue Code than cut an appropriation. Congress should not be in the habit of just automatically adding another credit to the code.”

What better way to begin the process of rewriting the Tax Code then to start with no deductions or credits and add back only those that are appropriate and necessary?

I am not saying that we should totally do away with the benefits provided by the Earned Income Credit, the various education tax credits and deductions, and other such “expenditures” that are currently complicating the Tax Code. What I am saying, and what has been said by many others, is that these are social programs and should not be administered via the Tax Code.

Here is what I suggested in my post “There Has Got To Be A Better Way” from August of 2009 -

“Why, then, could not the U.S. Department of Education automatically apply the American Opportunity Credit, or the HOPE or Lifetime Learning Credit, towards the price of tuition, with the possibility of any remaining available credit being applied at the college book store? Then the government would be assured that the money is actually spent on continuing education. If the student “drops out” the unused portion of the “government subsidy” would be returned to the Department of Education.

And why, then, could not the First Time Homebuyer Credit be applied to the purchase of a qualifying home at the actual closing? Then the government would be sure that a primary personal residence was actually being purchased by a ‘first-time’ homebuyer. A ‘Statement of Qualification’ could be added to the papers filed with the purchase on which the purchaser(s) would certify, under penalty of perjury, that he/she/they qualify for the $8,000 payment.

If there are credits to be provided to cover health insurance premium purchases in any upcoming Health Care Reform bill, why not have the U.S. Department of Health and Human Services credit the amount to the price of the actual premiums? Then the government would be sure that the money is actually spent on health care coverage.

Perhaps the amount of Retirement Savings Credit allowed could be actually deposited by the government into the individual’s IRA or other retirement savings account. Then the money would actually add to and help to grow retirement savings.

And in the case of the Earned Income Credit, why not just provide the qualifying individual or family with a supplemental welfare check, perhaps through the SSI system?

Doing things in this way would be beneficial in many ways.

(1) It would be easier for the government to verify that the recipient of the subsidy or hand-out actually qualified for the money, greatly reducing fraud. And tax preparers would no longer need to take on the added responsibility of having to verify if a person qualified for government funds.

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

(3) We would be able to actually measure the true income tax burden of individuals. No longer would about half of the American population either pay absolutely no federal income tax or actually make a profit from filing a tax return. These people would still be receiving government hand-outs, but it would not be tied into the income tax system so they would actually be paying federal income tax.

(4) We could measure the true cost of education, housing, health, welfare, etc programs in the federal budget because the various subsidies would be properly allocated to the appropriate departments and not be reported as a part of net income collected via income tax.

(5) The Tax Code would be much less complicated, the cost to the public for preparing a tax return would be reduced, and the IRS would have much less to process and to audit.”

What inspired the post in which the above appeared was the “Cash for Clunkers” program. This was a targeted benefit program that was not run through the Tax Code. It had no affect whatsoever on the Form 1040. The money was applied to the qualified purchase at the point of purchase. While I have not done any special review of the program or its results it appears that it was as successful and went as smoothly as one would hope for a government-run benefit program.

TTFN