Wednesday, July 17, 2019


Many first-time home-buyers take a distribution from their company’s 401(k) retirement plan to help fund the down payment for the purchase of the home.  And, unfortunately, they tell their tax professional about it AFTER it has been done.

This is a bad idea.  The distribution is included in the federal and probably also state taxable income of the taxpayer – at a cost of 25% to perhaps as much as 40% of the distribution.  In addition, if the taxpayer is under age 59½ he or she must pay an additional 10% penalty for early withdrawal – bringing the cost of the distribution up to as much as 50%.  So, a distribution of $20,000 only puts $10,000 to $13,000 in the taxpayer’s pocket.

The overall tax and other financial benefits of home ownership may eventually outweigh the tax cost of a 401(k) withdrawal, but I still say this is still not a good idea.

If there is no other source of funds for the down payment consider taking a loan from the 401(k) plan, if allowable, instead of an outright distribution.  The interest rate on 401(k) loans is usually low, and you are actually probably paying the interest to yourself.  This loan must eventually be paid back, or the outstanding balance will be treated as a distribution when employment with the company ends.  FYI, the interest charged on the 401(k) loan is NOT deductible on Schedule A.

One way to avoid the 10% premature withdrawal penalty when a loan from the plan is not an option is to rollover a 401(k) distribution of up to $10,000 into an IRA account and then take a $10,000 distribution from the IRA account.  Or just take $10,000 from an existing IRA account instead of the 401(k) plan.  One of the exceptions to the 10% penalty for premature withdrawals from an IRA account is a distribution for first-time purchases.  A purchase qualifies as “first time” if the taxpayer did not own a home in the two years prior to the withdrawal.  This exception DOES NOT apply to premature withdrawals from a qualified plan such as a 401(k).

So, if you are thinking about buying a home your 401(k) plan should be the last place you turn to for funding the down payment.  And you should discuss it with your tax professional BEFORE you do anything.


Tuesday, July 16, 2019


While working on my summer 2019 newsletter to 1040 clients I came across this verification of a change to the 2019 NJ-1040 that I had heard about - “Bigger deduction for veterans' income tax becomes state law” –

Gov. Phil Murphy on Sunday signed A-5609/S-3960, which increases the gross income tax deduction for veterans from $3,000 to $6,000.

Veterans must be honorably discharged or released to qualify.”

This change will apply to taxable years beginning on or after January 1, 2019.  Veterans who got a $3,000 deduction on their 2018 NJ-1040 will now get $6,000 on their 2019 NJ-1040.


* From FORBES.COM’s TaxGirl Kelly Phillips Erb - “Taxpayer Advocate: You Literally Need A Map To Navigate Our Tax System (So They MadeOne)” -

The map highlights the complexity of tax administration, with its many connections, overlaps, and repetitions between stages.”

* Fellow tax pros – have you seen the July issue of THE TAX PROFESSIONAL yet?

* The IRS has issued a draft copy of a new Form 1040-SR for senior taxpayers.  Hey, it is bigger than a postcard.

* And we return to Kelly Phillips Erb, who borrows a lyric from Peter Allen to tell us about another new Form 1040 – the 2019 draft version - in “Everything Old Is New Again As IRS Releases Form 1040 Draft”.

The new 2019 Form 1040 is the same as the previously mentioned Form 1040-SR without the large print and the Standard Deduction Chart.

The 2018 “postcard” Form 1040, actually bigger than a real postcard, was the stupidest thing I have seen in my 47+ years in the business.  This new 2019, instead of being half a full 8½ x 11 sheet, as Kelly points out “takes up just 2/3 of the page”.  However, it does to some degree bring back the logical flow of the old, far “more better”, Form 1040.  There are still 6 additional schedules to supplement the Form, with some minor changes to the content but not the size for 2019.

One item on the 1040 is noticeably missing – the box to check for “full-year health coverage or exempt”.  Since the Obamacare “shared responsibility” penalty for 2019 and beyond is “0” the IRS no longer needs to know if you had proper coverage.

Trump is many things – ignorant, incompetent, a liar, a narcissist – but one this he is NOT is a Conservative.

Click here for my latest post at TRUMP MUST GO!

Trump is also obviously not a Christian.

Anyone claiming to be a Conservative or a Christian who supports and defends Trump, the Trump Presidency and Trump’s re-election is NOT a Conservative or a Christian.


Wednesday, July 10, 2019


According to IRS Topic 306 –

If you didn't pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they either owe less than $1,000 in tax after subtracting their withholding and refundable credits, or if they paid withholding and estimated tax of at least 90% of the tax for the current year or 100% of the tax shown on the return for the prior year, whichever is smaller.”

In February of 2018 the IRS revised the federal income tax withholding tables to reflect the lower rates enacted by the GOP Tax Act.  However, as many taxpayers found to their shock when preparing their 2018 Form 1040, withholding was reduced too “liberally” – perhaps on purpose so taxpayers would think that the Act reduced their taxes more than it actually did.  The result was that many taxpayers received substantially reduced refunds than they had in the past or had substantially increased balances due to the IRS with the filing of their returns – even if their income and withholding status and allowances did not change.

As I said back in April in my post “That Was The Tax Season That Was – Part Two” -

Taxpayers did benefit from the lower rates of the Act, but the perhaps $50 per week more in their paycheck was usually more than the actual perhaps $25 tax savings.  The additional $25 or more per week had to be paid back when filing their 2018 return.

In addition, since the Act did away with the deduction for personal exemptions as well as many itemized deductions, the concept of the withholding exemption no longer applied.  Individuals who claimed additional exemptions for a spouse or dependents or for excess itemized deductions and did not revise their withholding for 2018 were royally screwed.  The increased amount and availability of the Child Tax Credit for dependent children under age 17 helped in some cases – but often not enough.

Almost every taxpayer whose withholding was based on the federal tables – and not a flat amount as with most IRA withdrawals and Social Security benefits – was under-withheld.  This was especially disastrous with multiple sources of withholding – like two-income couples, taxpayers with more than one job, and those receiving both pension and W-2 income.  I had clients owing $4,000, $9,000 and $20,000 because of the IRS withholding FU.”

The IRS realized its FU and thankfully, via IR-2019-55 issued on March 22, 2019, somewhat “relaxed” the safe-harbor for avoiding the penalty for underpayment of taxes - going from 90% of current year liability to 80%. 

Recently two of my clients received notices from the IRS assessing a penalty for underpayment of estimated tax using the old 90% of current liability threshold instead of the correct 80% to calculate the penalty.  These penalty assessments are clearly wrong.

I have no idea why the IRS has not made an adjustment to its penalty assessment software program to reflect the change to 80% for 2018 returns.  The Service has also not changed the 2018 Form 2210 to reflect this change.

If you receive a CP 14 or other notice from the IRS assessing a penalty for underpayment of estimated tax for 2018 DO NOT PAY THE ASSESSMENT. 

First check the math on the return, shown on Page 3 of the notice, to verify that the assessment was erroneously based on 90% of the current tax liability.  Then call or write to the IRS to explain their FU, referencing IR-2019-55.  If you write don’t expect a prompt response from “Sam”.  It will probably take 3 months before the issue is resolved.

Better yet – as soon as you receive ANY notice from the IRS or a state tax agency GIVE IT TO YOUR, OR A, TAX PROFESSIONAL IMMEDIATELY.   

You may also be able to further reduce the penalty by submitting IRS Form 2210 to “annualize” your 2018 income.  Another reason to give the notice to your, or a, tax professional – he or she will be able to let you know if this might work for you and properly prepare the Form 2210 for you. 


Tuesday, July 9, 2019


* Some good advice from Sterling Raskie at GETTING YOUR FINANCIAL DUCKS IN A ROW – “Don’t Leave Money On The Table!”.

* Hey tax pros – check out the new July 2019 issue of THE TAX PROFESSIONAL.  It is free – so please share it with colleagues and co-workers.

And in case you missed it, click here for the June 2019 issue.

* Robert W Wood explains “Five Key IRS Rules On How Lawsuit Settlements Are Taxed” at FORBES.COM, pointing out one of the inequities of the GOP Tax Act (highlight is mine) –

A little tax planning, especially before you settle, goes a long way. It's even more important now with higher taxes on lawsuit settlements under the recently passed tax reform law. Many plaintiffs are taxed on their attorney fees too, even if their lawyer takes 40% off the top. In a $100,000 case, that means paying tax on $100,000, even if $40,000 goes to the lawyer.”

* ACCOUNTING TODAY tells us “Trump signs IRS reform bill into law”.  The law = the “Taxpayer First Act”.

Thankfully –

However, lawmakers eliminated a controversial provision that would have codified the Free File Alliance into law after a controversy erupted over whether it would prevent the IRS from developing free tax preparation software of its own.”

I wish the IRS would create a way for taxpayers to submit their 1040 direct to the IRS online free of charge, without having to purchase a commercial tax preparation software program, like NJ does with its NJWebFile program.

* Back to FORBES.COM, where Denise Appleby gives us “4 Tips On Avoiding The 10% Early Distribution Penalty On IRA Distributions”.

* And FORBES.COM’s TaxGirl Kelly Phillips Erb reports “IRS Updates Identity Verification Process To Better Protect Tax Information”.


It is truly a sad commentary on the current state of our country that, based on everything we know about who and what Trump is from what he has said, tweeted and done both before and after being put in the White House, Trump continues to be considered a legitimate and acceptable choice for ANY elected office by anyone – and is apparently the preferred choice of 40% of Americans.

It remains impossible for me to believe that anyone with intelligence and a conscience could ever support Trump for any office.


Friday, June 28, 2019


The 2018 Form 1040 was the first tax return filed with the changes enacted by the GOP Tax Act.  Many taxpayers were surprised, and some shocked, with the bottom line of their 2018 federal tax returns.

In “Dealing With The GOP Tax Act” I explain the differences between the new law of the GOP Tax Act and the “old” tax law and discuss what you can do in 2019 to pay the absolute least federal income tax possible under the new tax law and avoid surprise and shock when preparing your 2020 tax return next year.

I also explain the new limited itemized deduction for mortgage interest and provide special worksheets for keeping separate track of acquisition debt and home equity debt – very, very important now – with a detailed example.

I will send this 12-page special report as an email “pdf” attachment for only $2.00.  You can receive a print copy via postal mail for $3.50.

The first 100 orders will also receive free of charge "What's New For 2019"!

Send your check or money order for $2.00 or $3.50, payable to TAXES AND ACCOUNTING, INCORPORATED, and your email or postal address to –



Wednesday, June 26, 2019


In light of the Democratic debates tonight and tomorrow night looks at the “Tax Plans for All 24 Democratic Presidential Candidates”.

Assuming Trump lasts until 2020, I will most definitely vote for whoever gets the nomination of the Democratic Party.  Not because I am a staunch Democrat or liberal but because I am an intelligent and patriotic American.  However, I reject the ongoing Democratic theories, included in the tax plans and discussions of these candidates, that the solution to all our ills is to “tax the rich” simply because they can afford it, and that the US Tax Code should be used for social engineering, to redistribute wealth, and to deliver federal welfare and other government benefits.

With one exception, nothing in any of the tax plans or proposals of the Democratic candidates that have tax plans or proposals is new or innovative.  Most if not all of them want to expand the Earned Income Tax Credit and to increase tax on higher income taxpayers, either by increasing the top rate of adding a special “wealth surtax”, capital gains, and corporations. 

The Earned Income Tax Credit does not belong in the Tax Code.  And I do not support punishing ambition, entrepreneurship and success.  The way to make corporations and the wealthy pay more tax is not to increase the tax rate, but eliminate all the truly special-interest tax breaks and loopholes.

The one new and innovative item, something I have not seen elsewhere or thought of myself, is from Rep Eric Swalwell, who proposes allowing employers to make tax-free payments toward their workers’ student loans.  A good idea.

Of all of the currently 24 whose hats are in the ring, my preference for the Democratic candidate in 2020 is Joe Biden.  However, I most strongly oppose his plan to eliminate the step-up in basis for inherited capital assets.  Tax policy and financial considerations aside, this would be a nightmare for taxpayers and tax preparers.   

FYI, I wrote about my thoughts on tax reform in “The Tax Code Must Be Destroyed”.

Normally, except for 2020, elections should not be decided on one issue alone.  The 2020 Presidential election is the rare exception, and it has nothing to do with taxes or any other area of policy.  The one and only issue of 2020 is removing Donald T Rump from the White House.


Monday, June 24, 2019


On June 20, the House Ways and Means Committee approved 3 tax-related bills -

* The Taxpayer Certainty and Disaster Tax Relief Act (H.R. 3301) would extend through 2020 some 40 tax provisions that expired or are about to expire and provides disaster tax relief portion, funded by ending the Tax Cuts and Jobs Act's estate tax exemption in 2022 instead of in 2025.

* The Economic Mobility Act of 2019 (H.R. 3300) would expand the earned income tax credit and make the child tax credit fully refundable.

* The Promoting Respect for Individuals' Dignity and Equality (PRIDE) Act of 2019 (H.R. 3299), would permit same-sex married couples to amend their filing status for income tax returns with respect to which the statute of limitations has already passed.

All three bills received votes primarily along partisan lines. There is no indication if and when the legislation would reach the House floor for a vote.

I certainly support the Senate Republicans promise that the extenders package is "dead on arrival".  I oppose the extension of these tax benefits – and most certainly if the extension is retroactive to 2018 (not sure if they are in this bill).  Having temporary tax benefits that are constantly extended is truly stupid.  And creating tax deductions and credits that are retroactive to a prior tax year whose returns have already been filed creates problems and agita for taxpayers, tax preparers and the IRS, as well as for state tax agencies. 

I also strongly oppose expanding the Earned Income Credit and making the Child Tax Credit fully refundable.  The EIC does not belong in the Tax Code, and I oppose ALL refundable credits.  The Tax Code should not be used to distribute federal welfare benefits, and refundable credits in general are a magnet for tax fraud.    

I have no problem with promoting respect for individuals' dignity and equality.

Senate Republicans have announced their opposition to all of the bills.

So, what do you think?