Sunday, December 31, 2006


It has finally arrived! December 31st – the “festival of W-2s”!

As has been my custom for many years now I will spend the day completing the typing of my clients’ W-2s (a full day of billable hours – hurray!).

Tonight I will spend the evening at home with Louse and Nosey (my cats), Audra McDonald and the New York Philharmonic, Garrison Keillor, Jack Daniels, Phillies cigars, and Mr New Year’s Eve Dick Clark! I will be dining on the traditional New Year’s Eve meal of Ritz Crackers and Temptee Whipped Cream Cheese and, new this year, Potato Skins (I could not find cocktail franks in the frozen snack section).

It has been well over 20 years since I have ventured out on New Year’s Eve, despite constant invitations. I did spend two NYEs in Times Square in my 20s, and that was enough. I remember being on the corner of 45th Street in NYC one NYE when the ball dropped. Shortly thereafter my friends and I were literally swept in a giant wave toward 42nd Street by the momentum of the crowd. I remember one friend stumbling and falling in the street, smiling and waving to the crowds as they trampled over him.

So HAPPY NEW YEAR! Let us hope that 2007 is less taxing!

THE 2006 NJ-1040

Guess what arrived in my mailbox yesterday? The 2006 NJ-1040 booklet! As of this morning the 2006 NJ state Gross Income Tax forms are still not available online.

With the minor exceptions listed below, there is no change to the new and improved layout of the return instituted last year, the tax rates and tables remain the same, and the mailing addresses for the return are the same as last year.

Here is what is new for 2006:

* The Earned Income Tax Credit Schedule no longer appears on the bottom of Page 3, but instead is in the Instruction Booklet. Qualifying taxpayers who asked the IRS to calculate the federal EIC will fill in an oval at Line 50 of the 2006 NJ-1040.

* Homeowners must enter the total amount of real estate taxes paid and tenants 18% of the net rent paid for the year on a new Line 36a, whether or not they are claiming a Property Tax Deduction.

* When calculating the Use Tax Due on Out of State Purchases (does anyone actually do this?) taxpayers must use the appropriate 6% or 7% rate in effect at the time of the purchase.

* Taxpayers who owned, occupied and paid property taxes on a home in New Jersey that was their principal residence on October 1, 2006, must fill in an oval at new Line 36B, indicating that they may be eligible for the NJ FAIR Rebate.

* A new credit has been added for taxpayers who employ qualified handicapped individuals in a “sheltered workshop”. The credit is calculated on Form GIT-317.

* A new “World Trade Center Scholarship Fund” is added to the list of charitable funds to which taxpayers can designate a portion of their refund.

The NJ TeleFile system that allowed certain taxpayers to file their NJ-1040 via telephone has been discontinued.

The NJ FAIR Rebate application process remains unchanged. Tenants apply via Form TR-1040 as part of the NJ-1040 filing (Page 4), while homeowners, must continue to file separately after the tax season.

For the life of me I still cannot understand why the “geniuses” in Trenton insist on having homeowners file their application later in the year, separate from the NJ-1040 filing. When the NJ Homestead Rebate was the only rebate offered both tenants and homeowners would apply for it on a Form HR-1040. Now that there is once gain only one property tax rebate why can’t we go back to the HR-1040 filing process?

As I have said before, it would be much, much more convenient and practical for taxpayers and tax preparers alike to have all New Jersey residents apply for the NJ FAIR Rebate with the filing of the NJ-1040. I know I would much rather take care of everything at the same time, instead of having to deal with homeowner client inquiries about the rebate 3 to 6 months after the end of the filing season. I also expect that it would be more convenient and practical for the NJ Division of Taxation as well to have everything done in one filing.

The separate filing for homeowners especially affects senior citizen homeowners, many of whom are confused by the process and, I suspect, as a result do not file for the rebate. This defeats one of the major purposes of the rebate – tax relief for senior citizens!

Saturday, December 30, 2006


As the last day of the year, and my annual “festival of W-2s”, fast approaches it is time to figure out where I‘m at.

I have not finished all the GD extensions. While I did finish one set of multiple-year returns – my long-time friend and fraternity brother is finally “current” - I still have another set to do for a couple from Florida. It is a real project with hurricane damage, like-kind exchanges and self-employment income to report – and I will be setting aside a couple of days during the first week of January to bring them up to date. Once the Florida couple has been “put to bed” I have a small pile of returns to review for amendment and some updating to do to be ready for the deluge that begins pretty much on February 1st.

The week between Christmas and New Years is always a busy one for me, as I work to close out the one set of calendar year companies I still do and determine how much to pay the doctor for the year (I give her one paycheck on the last day of the year), and close out payroll for the doctor’s companies and my very few other remaining business clients (close personal friends and a long-time client who began with Jim Gill the same year I did) – leading up to typing the balance of the W-2s on New Year’s Eve. I am pleased to report that I am on schedule here.

I am way ahead of schedule on my annual January 10th mailing to 1040 clients – everything has been written and printed and the envelopes have all been addressed. My “out-of-state” envelopes have all been stuffed and sealed, ready to be mailed. I am just waiting for the NJ Division of Taxation to issue the 2006 Form 1040-O “Opt Out” form so I can have it printed on the back of my medical expense worksheets before I can stuff the envelopes of my NJ clients.

I want to make sure I book a few theatre evenings in NYC for January via TDF before I have to forgo all cultural activity for 2½ months, which I will do as soon as all the W-2s are done.

Looking back at 2006, I did end the tax season with fewer GD extensions than the year before – but it once again took the rest of the year to put them all behind me (and, as mentioned above, all are not yet behind me). I have instituted some policies for 2007, which are outlined in my January client mailing, to make sure this does not happen again and I can have at least six “1040-free” months.

As I review the year in tax policy, while some progress was made in the pension area, the cafones in Congress really outdid themselves by dragging their arses on extending popular tax breaks until literally the last minute, which is sure to cause some agita during the upcoming filing season. At least they had the rare good sense to extend the breaks for 2 years so we do not have to go through the same nonsense again next year.

Looking ahead to 2007, I truly hope that the new heads of the Senate and House tax-writing committees are sincere in their intention to fix the dreaded Alternative Minimum Tax (AMT) problem – hopefully by repealing it altogether. The Reagan passive activity rules of the Tax Reform Act of 1986 successfully addressed the problem that the AMT was originally intended to solve, and it is no longer a valid tax. As James Maule pointed out in his tax blog “Mauled Again” (see my December 28th posting), the continued “existence of the AMT is proof positive of the flaws of the ‘regular’ tax. Fix the regular tax and there's no need to fix the fix”.

I will continue to post through the end of January, at which time I will take my normal tax season hiatus until the end of April. During the tax season I barely have time to relieve myself let alone blog! Your comments, questions and suggestions on THE WANDERING TAX PRO are always welcome, either by clicking on “comments” at end of a posting or by sending me an email at


Friday, December 29, 2006


A Section 529 College Savings Plan, so named for the section of the Internal Revenue Code that describes it, is an excellent way to save for your child’s college education, perhaps, as one book title suggests, “The Best Way to Save for College”.

Qualified withdrawals from a Section 529 plan were originally taxed as ordinary income. They were made tax-free in 2001 under the Economic Growth and Tax Relief Reconciliation Act of 2001, but were set to become taxable again in 2011 as part of the 2010 "sunset" provision of EGTRRA. The Pension Protection Act of 2006 has made the tax-free status permanent.

One of the benefits of such an account is that, according to the U.S. Department of Education, when filling out the FAFSA application Section 529 college savings plans are, if owned by the parents, considered to be an asset of the parent and not an asset of the student beneficiary.

As an asset of the parents, a maximum of 5.6% of the account will be considered in the family’s contribution calculation for each academic year. 35% of the student’s assets are considered in the calculation.

If the 529 plan is opened by grandparents or other relatives, with the student as the beneficiary, under current law the money won’t have any effect in determining federal financial aid for the student, as the assets would be considered to belong to the relative who opened the account.

Plus, withdrawals from a Section 529 plan that are used to pay for qualified education expenses are not included in family income for the year on the FAFSA application. So, qualified withdrawals in one year will not affect the student’s financial aid eligibility for the following year.

An excellent website for information on Section 529 Plans is


Thursday, December 28, 2006


As I have mentioned in earlier postings, each morning (except during the actual “tax season”) I review several tax-related “blogs” and news sites to keep up-to-date on federal tax issues and to look for items of interest to my readers.

There are many other tax-related weblogs out there. In addition to a THE WANDERING TAX PRO the internet also has a TAX MAN, TAX MAMA, TAX GIRL, TAX PROF, TAX PLAYA, and TAX GURU. Several of the better offerings belong to the site, of which I am a founding member.

Yesterday morning (Wednesday, December 27th) I found three blogs with postings worth passing on:

(1) Business Law and Taxes by Mark Minassian reports “IRS To Target Schedule C Filers”.

“In a recent telephone conference, IRS commissioner Mark Everson said that they will be conducting more audits on individuals running unincorporated businesses (i.e. self-employed individuals).”

Mark goes on to provide some very wise advice (my Schedule C clients – are you “listening”?) – “If you are self-employed and file Schedule C, always keep detailed and organized records, don’t deduct your personal (non-business) expenses on your Schedule C and make sure you report all of your income. You are already on the IRS radar; there’s no need to make their job easier.”

(2) Mauled Again by Prof. James Edward Maule offers “A Proposed Congressional New Year's Tax Resolution” regarding the dreaded Alternative Minimum Tax (AMT).

“To me, the AMT is nothing more than a patch on a very flawed regular income tax. In other words, if the regular income tax were properly designed, there would be no need for a "fix" to deal with the consequences of taxpayers whose regular income tax liabilities are reduced because they take advantage of the deductions available in the tax law. If the regular income tax causes some taxpayers' tax liabilities to be less than what people think they ought to be, and yet those tax liabilities are computed properly, then the problem is in the design of the regular income tax. In other words, the existence of the AMT is proof positive of the flaws of the "regular" tax. Fix the regular tax and there's no need to fix the fix.”

(3) In “Ford and Taxes” the blog Roth & Company Tax Updates discusses the major tax law enacted during the term of recently deceased President Gerald Ford.

“There was one significant piece of tax legislation in the Ford administration, the Tax Reform Act of 1976. The current structure of the estate and gift tax dates from the 1976 act, as do the $3,000 capital loss cap, the limits on vacation home losses, and the “at-risk” rules of Section 465. President Ford left behind a top tax rate pf 70% (starting at $100,000 on joint returns), a top capital gains rate of 35%, and a top corporate rate of 26%. No wonder there were a lot of C corporations then.”

A word of caution as you read tax or other financial blogs - be advised that most postings are written for a general audience. You must remember that the application of any tax or financial planning technique or strategy is dependent on the special “facts and circumstances” of each particular situation. You must evaluate any technique or strategy considered in the context of your own individual situation.

If you read something interesting in a tax blog that you think might apply to you discuss it with your tax preparer before taking any action. Remember - one man’s tax savings may be another man’s overpayment.


Wednesday, December 27, 2006


You can deduct as an “employee business expense” 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,
· 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).

Are the costs of obtaining a Masters in Business Administration (MBA) or equivalent degree deductible as a business expense? According to the Tax Court – Yes and No.

YES: A taxpayer was employed to sell sports-related products because of his prior experience in sports medicine. In the course of his job he performed management, marketing and financial tasks. Encouraged by his employer, he enrolled in an MBA program in the hopes of “moving up the ladder”. As a result of his studies he was promoted.

The Tax Court, in D.R. Allemeier Jr, T.C. Memo 2005-207, found that –

· Encouraging the taxpayer to obtain an MBA degree as a means of advancing through the company did not amount to a “minimum requirement” for promotion, and neither did the fact that the taxpayer actually advanced as a result of the MBA program;

· The MBA degree did not prepare the taxpayer for a new trade or business, as he was already per-forming managerial and financial tasks before enrolling in the program, and, while he was promoted as a result of the MBA, he did not change the basic nature of his duties; and

· While a degree that qualifies a taxpayer for a professional certification or license, such as a law degree, may prepare him for a new trade or business even though he had previously been performing essentially the same tasks, an MBA does not qualify one for a professional certification or license.

The cost of the MBA degree was deductible.

NO: A taxpayer had been employed by several financial firms as a “financial analyst”. In the investment banking industry a financial analyst is a temporary position which usually does not last more than 2 or 3 years. An MBA degree is a requirement for an “associate”, which is a permanent position. The taxpayer received a Master of Management degree, the equivalent of an MBA, and obtained a position in the general management program of a management firm.

The Tax Court, in Will M McEuen III et. ux. v. Commissioner, T.C. Summary Opinion 2004-107, found that –

· The taxpayer enrolled in the degree program to meet the minimum education requirement for an associate in the investment banking industry; and

· The degree qualified for a new trade or business because the education allowed the taxpayer to perform significantly different tasks than those performed prior to enrollment in the program.

The cost of the degree program was not deductible.

As is often the case in tax law, the “deductibility” of an MBA degree depends on the “facts and circumstances.

If you cannot deduct your MBA as a business expense all is not lost. You may be able to claim some of the tuition and fees as a deduction or credit elsewhere on the return. But that is the subject of another posting.


Tuesday, December 26, 2006


With the yield on tax-free municipal bonds high relative to the yield on most taxable investments, you should seriously take a look at tax-free bonds and bond funds as an investment alternative.

When evaluating tax-free municipal bond investments you must first determine the “equivalent taxable yield” of the bond. This is done by subtracting your effective tax rate from 100% and dividing the tax-free yield by the result.

Let us say you are a NJ resident in the 25% federal and the 5.525% state tax brackets. You will be able to itemize, so you save 25% of the 5.525% state tax. Your effective tax rate is 29.144% (5.525% x 75% = 4.144% + 25%). 100% - 29.144% = 70.856%.

A 3% yield on a NJ municipal bond is equal to earn-ing 4.23% on a taxable investment (3% divided by 70.856% = 4.23%). A NJ muni paying 3.5% will pay the same as a taxable bond or CD paying 4.94% (3.5% divided by 70.856% = 4.94%).

If you are looking at a bond from another state (you live in New Jersey but the bond is issued by a Florida municipality) you would only factor in your federal tax bracket. If that is 25% you would divide the muni yield by 75% to determine the equivalent taxable yield.

Not a math wizard. For a helpful “Tax-Free Vs Taxable Yield Calculator” you can go to and click on “Calculators”.

While it is true that interest on the obligations of a state or local government is exempt from federal income taxes under IRC Section 103(a), tax-free bond income is not always tax free. You should take the following facts into consideration before you decide to invest in a tax-free municipal bond or bond fund.

* Tax-free income from state and local municipal bonds and municipal bond funds is included in the calculation of the taxable portion of Social Security and Railroad Retirement benefits. In certain situations, each $1.00 in tax-free bond interest can result in an additional 85 cents of taxable income!

* Tax-free income from “private activity bonds” is considered a “tax-preference” for purposes of calculating the dreaded Alternative Minimum Tax (AMT). If you are a victim of the AMT the interest from these bonds is taxed at a rate of 26% or 28%.

* The interest on state or local bonds or bond funds, while exempt from federal taxation, may be taxed on your resident or non-resident state tax returns. For example, interest from a NJ bond is exempt on the NJ resident and non-resident returns, but income from a Massachusetts municipal bond is not. Similarly, a NJ resident with income from a multi-state municipal bond fund must pay NJ state tax on that portion of the income that is attributable to the fund’s investments in non-NJ bonds.

* If you sell a tax-free bond, or shares in a tax-free bond fund, for more than your cost, you must pay federal income tax on the capital gain. If you buy a bond for $10,000 and sell if for $10,500 the $500 gain is taxable. However, if, instead, you sell the bond for $9,500 you have a deductible $500 capital loss. Any “accrued interest” that is part of the purchase or sale price of the bond is not included in determining the gain or loss when the bond is sold.

* If you borrow money to buy shares in a tax-free bond fund on “margin”, the interest charges are not deductible as investment interest on Schedule A.

As with any investment, changes in interest rates could affect the value of a municipal bond or shares in a muni bond fund. If you believe that interest rates will rise in the near future it would be wise to limit your consideration to short-term and intermediate-term bonds.


Sunday, December 24, 2006


God rest ye merry employees.
Let nothing you dismay.
Your W-2s will arrive on time –
I’m typing them today!
The quarterlies are all reconciled;
not a penny’s gone astray.
O tidings of comfort and joy, comfort and joy.
O tidings of comfort and joy.

This Christmas Eve I will be continuing my long-standing holiday tradition – typing W-2s! I will finish up this task on New Years Eve.

To avoid another disaster like this past Thanksgiving, the Flachs have decided to play it safe and will be having Christmas Day dinner at “the home” – Francis Asbury Manor in Ocean Grove.

HO! HO! HO! MERRY CHRISTMAS to you and yours! Let me leave you with another Tax Time Carol.

Joy to the world - tax season’s near.
I’ll soon be flush with cash!
Let every client be organized,
and give me all I need, and give me all I need,
and give me all I need to prepare their returns!


Saturday, December 23, 2006


* The IRS has officially announced new guidance today to help tax filers claim the extended tax breaks on their 2006 tax returns.

The guidance indicates where and how the extended tax breaks are to be reported on the 2006 Form 1040 and verify what I wrote in yesterday’s posting.

Part of this new guidance is the release of Publication 600, which contains the 2006 optional state sales tax tables along with a worksheet to calculate the deduction and general instructions.

* IRS Commissioner Mark Everson has acknowledged that using private agencies to collect debts under a new program will cost more than hiring additional agents to do the job.

"I admit it. I freely admit it," Everson said.

Everson told lawmakers on the House Appropriations subcommittee that oversees the IRS budget earlier this year that the private collection agencies the IRS uses will get 22% to 24% of the money they collect.

It has been estimated that IRS employees could collect the same debts at a cost of only 3% of what they collect.



The Winter 2007 issue of the Tax Foundation’s quarterly tax policy newsletter TAX WATCH, which summarizes the Foundation’s policy work in a simple, attractive format, is now available online.
Of special interest is the article “Which Americans Benefited from the 2001 and 2003 Tax Relief?” According to Foundation President Scott Hodge, “While it’s true that the wealthy wave a higher dollar amount from any across-the-board tax cut because they pay more in taxes, the latest IRS data show that effective tax rates have fallen for every income group recently.”

Quoting from its study “New IRS Data Show All Income Groups Have Seen Tax Liabilities Fall Since 2000”, the article reports that “the percentage decrease in tax burden was greatest for those in the lowest income groups between 2000 and 2004.”

A taxpayer with an Adjusted Gross Income (AGI) or $35,000 saw a 40% decrease in tax burden. The tax burden of an individual earning $1.75 Million decreased by only 14.8%.

You can download a copy of TAX WATCH in “pdf” format at the
Tax Foundation website. Click on “Click here to read the full issue”.

Friday, December 22, 2006


I just discovered that my post YOU GO, GIRL! has been selected as the "Top Story of the Day" at!

While I do not want to give this topic any more importance than it deserves, I have one more comment on the exchange between Rosie and Trump:

Rosie questioned Trump’s character and gave legitimate examples to back up her opinions. Trump responded by calling her a slob, fat, unattractive, a loser and a bully. “Nuff said!


While in the “law library” the other day reading the Fall 2006 issue of the National Association of Tax Professionals’ quarterly magazine TAXPRO JOURNAL, to which I am an occasional contributor, I came across an article on inherited IRAs by Kary Bartmasser and Neal Frankle with an important lesson in the “don’t assume” category.

Do not assume that your banker, broker, or other investment or financial advisor knows tax law.

The article, written for tax professionals, points out, “Retirement money usually involves serious dollars. Unfortunately, the people advising your clients don’t know much about it, and that poses a threat to your clients and you.”

A banker is employed by the bank and wants what is easiest and most profitable for the bank. A broker is a salesman who wants to sell you an investment that will provide him with a nice commission. They may be trained in banking law or investment law and strategy, but they do not necessarily have any training in or knowledge of what the Tax Code says you can and cannot do.

Bartmasser and Frankle recount several horror stories where a bank, mutual fund, or investment broker advised a client to do something that was totally contrary to tax law and ended up costing the client, or almost costing the client, tons of money in unnecessary taxes, interest and penalties.

Whenever you are given advice on a tax matter by a non-tax person you should always get a second opinion from your tax preparer before taking any action.

The financial advisor may not be knowingly giving you bad advice, or lying to you for his own benefit. He may just be uninformed, or ill-informed, and may be making a wrong assumption himself.

It is quite possible that your banker, broker or other advisor is not only competent, and ethical, in his own field, but also has a working knowledge of related tax law, and that the advice he gives you is correct. However, you should still run it by your tax professional before you do anything just in case.

The article also brings out the point that while the Tax Code will allow you to do something with an inherited IRA to minimize the current and/or future tax consequences, the individual rules of the account custodian, such as a bank, mutual fund or brokerage, may be stricter than the Tax Code and not permit certain actions.

If you inherit an IRA you should first consult with your tax professional on the options available to you, and the tax cost of each option. When you decide what you want to do you should check with the account custodian to see if they will be able to do it for you. If they will not you should move the account to a custodian who will permit you to do what you want.


Thursday, December 21, 2006


While I generally don’t agree with Rosie O’Donnell, and am not a fan, I give her a “right on!” for her recent comments about Trump.

"Left the first wife, had an affair, left the second wife, had an affair. Had kids both times, but he's the moral compass for 20-year olds in America. Donald, sit and spin, my friend."

She went on to say, "He inherited a lot of money. wait a minute, and he's been bankrupt so many times where he didn't have to pay. ... I just think that this man is sort of like one of those, you know, snake oil salesman in LITTLE HOUSE ON THE PRAIRIE.”

The other day Trump decided to overlook the current Miss USA’s “indiscretions” and let her keep her crown in a press conference reported on Page 1 of local newspapers as if it were actual news, and as if anyone actually gave a damn. “The Donald” could care less about Miss USA, morality or second chances. He hasn’t gotten much press lately, thank the Lord, and just wanted to show-off himself and his “God-like” forgiveness in a public forum.

Speaking of Trump, did you hear that he is launching a new line of TRUMP ICE CREAM. This new project is especially close to the conceited one. Not only will the ice cream bear his name, but the actual product will be made from the millionaire’s own feces. Trump is also finalizing plans to bottle his flatulence to be used in a new men’s cologne.


George W signed the TAX RELIEF AND HEALTH CARE ACT OF 2006 into law yesterday, making the extension of expired tax breaks official.

I have posted an analysis of the Act on the FEDERAL TAX UPDATE Page of my website.

Now, back to my discussion of the top three extended tax breaks -


Taxpayers who itemize on Schedule A can elect to deduct state and local sales tax paid instead of deducting state and local income tax paid. If you deduct state and local income tax on your Schedule A you cannot also deduct state and local sales tax, and vice versa. For this purpose state and local income tax includes the deductible unemployment (SUI) and/or disability (SDI) tax withheld in certain states.

You have two options for claiming a sales tax deduction – the actual amount paid for the year, per accumulated receipts, or the amount taken from the IRS-generated Optional State Sales Tax Tables, with an additional amount allowed if you also pay local sales tax, plus the actual tax paid on the purchase of “big-ticket” items such as a car, motorcycle, truck, van, recreational vehicle, sport utility vehicle, off-road vehicle, boat, airplane, motor home, home, and home building materials, and any sales tax paid on the lease of a motor vehicle.

The amount you can deduct if you use the IRS tables is based on your “total available income”, your state of residence, and the number of exemptions you claim. Your “total available income” includes your Adjusted Gross Income plus any nontaxable receipts, such as –

· tax-exempt interest,
· Veteran’s benefits,
· Nontaxable combat pay,
· Workers’ Compensation benefits,
· the non-taxable portion of Social Security and Railroad benefits
· IRA, pension or annuity distributions (does not include any amounts that are “rolled-over”), and
· public assistance payments.

If you also pay local sales tax you determine the additional amount you can deduct by (1) dividing the local sales tax rate by the state sales tax rate and (2) multiplying the result times the amount from the tables for your state. Let’s say your state imposes a 5% sales tax and your city imposes a 1% local sales tax. 1% divided by 5% = .2, or 20%. The deduction you are allowed from the Optional State Sales Tax Table is $500.00. $500.00 multiplied by 20% = $100.00. Your total deduction is $600.00 - $500.00 for state sales tax and $100.00 for local sales tax.

Taxpayers who lived in more than one state during the year must pro-rate the amount from the tables for each state by the number of days in the year lived in each state.

If you are filing separately and your spouse elects to deduct state and local sales tax you are required to also deduct state and local sales tax on your separate Schedule A.

If you live in a state that does not have a state income tax, the sales tax deduction is indeed a welcome break. However, under the right circumstances, even taxpayers in such high income tax states as New York, New Jersey and California can realize a greater tax savings by electing to deduct sales tax.

When deciding whether to deduct sales tax or income tax you must keep in mind the fact that if you deduct the state income tax paid on your 2006 Schedule A you must report as taxable income in 2007 any state income tax refund you receive in 2007 (to the extent that you received a “tax benefit” from the state income tax deduction). If you deduct state and local sales tax you do not have to claim your state income tax refund on your 2007 Form 1040. So when calculating the allowable state and local income tax paid to compare to sales tax paid, do not include the total amount of state withholding and estimated tax payments for the year, but instead use the actual state tax liability for 2006 from a finished, or draft, 2006 state tax return.

The sales tax deduction may be especially beneficial to retired taxpayers who itemize. Many states have a “retirement income exclusion”, as does New Jersey, and seniors often pay minimal, if any, state of local income tax.

While it is too late for 2006, here is something you might want to do for 2007. It is “déjà vu all over again”, as this advice is taken from a tax planning booklet I wrote in 1983, when both sales tax and state income tax were deductible:

“Keep a manilla envelope or shoe box in your kitchen, bedroom or study and save every supermarket, department store, credit card or other receipt that lists the amount of sales tax paid on your purchases. If you are dining out and pay cash, make a note of the date, name of restaurant, cost of meal, and amount of sales tax and put it with your receipts. If you use your credit card when dining out, make sure the sales tax is itemized on the receipt.

At the end of the year, add up the sales tax from these records, exclusive of any applicable to a car, boat, etc, and compare your total to the amount allowed in the Optional Sales Tax Table. You may find that you are allowed a larger deduction by using the tables, but you will never know unless you save your receipts and compare.”

The 2006 Schedule A does not include a box to check if you are claiming sales tax or income tax, and the 2006 instruction booklet will not include the Optional State Sales Tax Tables. Although I have not verified this via an actual IRS notice or publication, it seems that, according to the Update section of the Quickfinder Handbooks website (the 1040 Handbook is an excellent resource which I have been using for at least the past 16 years), if you elect to deduct state and local sales tax you should write “ST” on Line 5 of the 2006 Schedule A. The IRS will apparently be issuing a 2006 Publication 600 with the Optional State and Local Sale Tax Tables, worksheets and instructions, similar to what it did for 2004.

The Quickfinder Handbook update also indicates that the deduction for Educator Expenses should be entered on Line 23 in the “Adjusted Gross Income” section of Page 1 of the 2006 Form 1040. This is the line for deducting contributions to an Archer Medical Savings Account (MSA). You should write “E” on Line 23 if you are claiming this deduction and “B” if you are claiming a deduction for both Educator Expenses and contributions to an MSA. If you write “B” you must attach a statement to the 1040 identifying the amount for each deduction.

Similarly, the deduction for Tuition and Fees is reported on Line 35 of the same section, which is the line for claiming a deduction for the Domestic Production Activities Deduction. Write “T” on this line if you are deducting Tuition and Fees and write “B”, and attach a breakdown, if claiming a deduction for both items.

Any questions?


Wednesday, December 20, 2006


As Congress has finally passed an “extender” bill, reinstating expired tax breaks, I thought this would be a good time to review the “top three” tax breaks affecting 1040s that were extended.


Teachers, instructors, counselors, principals and aides who work at least 900 hours during an academic fiscal year in Kindergarten through 12th Grade can deduct up to $250.00 of the “out-of-pocket” cost of classroom supplies (paper, pens, glue, scissors, etc), books, computer software and hardware, and other equipment and materials used in the classroom. For educators in health and physical education the supplies must be related to athletics.

Educators who spend more than $250.00 on such items can deduct the difference as “Employee Business Expenses” under “Job Expenses and Certain Miscellaneous Deductions” on Schedule A, subject to the 2% of Adjusted Gross Income (AGI) exclusion.

This deduction will, on average, put about $63.00 in your pocket. It’s not much – but, hey, better in your pocket! Because the deduction is allowed “above-the-line”, reducing your AGI, it could also provide additional tax savings by increasing or permitting deductions and credits that are affected by AGI.

CCH reports that in 2005 this deduction was claimed by over 3 Million taxpayers.


You can deduct tuition and fees required for enrollment or attendance at any accredited college, university, vocational school or other accredited post-secondary education institution.

Fees paid for books, supplies and equipment qualify for the deduction only if these items must be paid to the qualified education institution as a condition of enrollment or a condition of attendance.

The cost of room and board, transportation, medical insurance or similar personal living expenses associated with the education are not deductible.

You must reduce the amount of qualifying tuition and fees by any scholarships, fellowships, Pell grants, employer-provided assistance, or veterans’ assistance received as well as by any interest from US Savings Bonds that has been excluded from federal income tax and any tax-free distributions from an Education Savings Account or Section 529 Qualified Tuition Program.

As I have pointed out in earlier postings, 100% of all scholarships, grants, awards and reimbursements received by the student must be applied first to tuition and fees when calculating the deduction, or an education credit. You cannot allocate such amounts between qualified tuition and fee expenses and non-qualified charges for books and supplies and room and board.

If the total qualified tuition and fees paid for the year is $8,000.00 and the student received a $3,000.00 scholarship and $2,000.00 from his father's employer, leaving a net personal payment of $3,000.00, the deduction, or credit, is based on $3,000.00, even though the student also paid $1,000.00 for books and supplies and $6,000.00 for room and board.

You can deduct up to $4,000.00 if your “Modified” Adjusted Gross Income (MAGI) is less than $130,000.00 for Married Filing Joint or $65,000.00 for Single, Head of Household or Qualifying Widow(er), or up to $2,000.00 if your MAGI is between $130,001.00 and $160,000.00 for Married Filing Joint and between $65,001.00 and $80,000.00 for Single, Head of Household or Qualifying Widow(er). Married taxpayers filing separately cannot claim the deduction.

As with the Educator Expenses, this deduction is “above-the-line” and will reduce your AGI.

You cannot claim a deduction for tuition and fees if you also claim a HOPE or Lifetime Learning Credit for the same student, or it you deduct the costs elsewhere on the return, such as an “Employee Business Expense” on Schedule A or a business expense on Schedule C.

If your AGI is such that you have the option of claiming either the deduction for tuition and fees or an education credit you should do calculations for all your options and see which way provides the most tax savings. The Lifetime Learning Credit is 20% of the first $10,000.00 of qualified tuition and fees – but the deduction could provide a 25% savings. Plus, as mentioned above, the deduction will reduce your AGI and in doing so could provide additional tax benefits.

This is just one example where the Tax Code provides choices on how to treat a certain situation or item (i.e joint or separate, credit or deduction, depreciate or Section 179). When faced with choices you should do separate tax calculations to determine which option will result in the lowest tax. Also consider how the various federal options affect your resident and non-resident state and local tax returns.

Since the IRS had already “gone to press” with the 2006 forms and instructions before Congress decided to pass the extender bill, it is unclear just where you will report these two deductions on your 2006 Form 1040 or 1040A. As soon as I find out I will pass the information along to you.

to be continued…

Tuesday, December 19, 2006


Beanna Whitlock, Executive Director of the National Society of Tax Professionals, brings up an interesting item in an article in the December issue of the Society’s newsletter THE FEDERAL TAX ALERT, which arrived this week-end.

I was aware that the new energy credit for the purchase of a qualified hybrid vehicle cannot be applied against the dreaded Alternative Minimum Tax (AMT), but not, as Beanna points out, that the credit is only allowable to the extent the “regular” income tax exceeds the AMT! And if I did not know this, 99.99% of the taxpayers who purchased a hybrid vehicle expecting to get a large credit did not know it.

If you purchase a hybrid car in 2006 that qualifies for a $3,150 tax credit, and your net federal income tax liability calculated in the “normal” way, after deducting most other credits, is only $200 more than your tax liability calculated under AMT, your Alternative Motor Vehicle Credit is only $200! You have lost $2,950 in anticipated tax savings!

Plus, as the instructions for Form 8910, the form used to calculate the Alternative Motor Vehicle Credit, state, “If you cannot use part of the personal portion of the credit because of the tax liability limit, the unused credit is lost. The unused personal portion of the credit cannot be carried back or forward to other tax years.” So the $2,950 is lost forever.

Go to the Form 8910 itself and
read through lines 13 to 18 (line 12 is the maximum amount of credit allowed) for yourself.

The dreaded AMT hits taxpayers in states with high income, sales and real estate taxes, and where a high cost of living inflates salaries, especially hard. States like New Jersey and New York – where my clients live.

I echo what Beanna says in closing her article:

“My concern is that these taxpayers bought a hybrid expecting the tax credit. The credit can be substantial and therefore will in most cases create angry taxpayers when they find out that their $3,000 reason for buying the car was lost due to AMT, a term they do not understand. And now I have to tell them that there is no alternative deduction option or carryover available.

I am not looking forward to being the bearer of bad news when my taxpayers say, ‘Be sure to take my hybrid vehicle credit!’”

Oi vey!


Monday, December 18, 2006


It seems like just yesterday I was featured in TAX CARNIVAL #7. And now here comes Kay Bell of DON’T MESS WITH TAXES again with TAX CARNIVAL #8 – STOCKING STUFFERS. Kay has gone “bi”, monthly that is, and now hosts 2 tax carnivals a month.

I anchor the carnival with my posting on YOU’RE NEVER TOO OLD TO PAY TAXES. One entry in the carnival answers a question I asked a few postings ago. Apparently California “Registered Domestic Partners”, although not specifically identified as married under the law, must file California state income tax returns as Married – either Joint or Separate. This status is not always a good thing, and dual-earner “domestic partners” may find that they end up paying more state income tax this way.

After viewing the carnival I have just one question – what is a WAHM?

While you are at it, you should check out the new format of


The maximum deduction you can claim as a net capital loss on your federal Form 1040 is $3,000 - it has been $3,000 for almost forever. If you have more than $3,000 in net capital losses on Schedule D you can carry forward the excess to future tax returns until all the losses have been used up.

If the net capital loss on Line 16 of your 2006 Schedule D is $10,000 you can deduct $3,000 against other income on your 2006 Form 1040 and carryover $7,000 in losses to 2007. If you have $3,000 in net capital gains for 2007 you can use $6,000 of the carryover loss in 2007 and carry the remaining $1,000 forward to 2008.

New Jersey has different rules. The New Jersey state income tax is a “gross” tax. It does not permit losses in one category of income, such as net gains from disposition of property, to be applied against income from other categories, such as wages, pensions and annuities, and interest. New Jersey also does not permit excess losses in any category to be carried forward to future years. Capital losses can only be used to wipe out capital gains. Excess capital losses, or losses in any category of income, are lost.

Capital gains are taxed by New Jersey at the same rate as all other income. There is no special capital gains rate.

In the above example the $10,000 of net capital losses for 2006 will not be deductible on the NJ return, and cannot be carried forward. You would never receive any NJ state tax benefit for these losses. In 2007 you would pay NJ income tax on $3,000 of net capital gains at your normal NJ tax rate, probably 5.525%.

So what to do?

A New Jersey resident who finds himself faced with $10,000 in net capital losses in December of 2006 should do whatever possible to generate an additional $7,000 in capital gains before year end. At a 5.525% state tax rate this could save $387.00 in state income taxes. However, you will not realize this potential $387.00 savings on the 2006 return. The savings will come in a future tax year.

Generally when discussing capital gain and loss planning I remind taxpayers that the first criteria for evaluating any transaction should always be financial - taxes are second. However in this case it really does not matter.

If you have a stock or mutual fund investment that you could sell at a $7,000 gain, but you want to hold on to it because you think it will continue to grow, you can sell the investment today and buy it back tomorrow. The wash sale rules only apply to investment sales that result in a capital loss!

By claiming a gain on a stock or mutual fund, which will not be taxed because of excess capital losses, and buying it back you will automatically increase your basis in the investment at no cost to you, and reduce the taxable gain when it is sold at a profit in the future.

I should point out that investment losses can also be applied against capital gain dividends on the NJ-1040, just as they can on the federal Schedule D.

Any questions?


Sunday, December 17, 2006


A week and a half ago, before leaving for the NSTP seminar in Atlantic City, I saw the current revival of the Stephen Sondheim-George Furth musical COMPANY at the Ethel Barrymore Theatre.

I was truly looking forward to the evening. COMPANY is one of my all-time favorite musicals. I had seen the original back in 1971, and, while still a college student, I produced a semi-amateur production of the show at the Park Theatre in Union City in May of 1973. I can sing the entire score, and recite much of the dialogue. In some way I kind of identify with the show – about a confirmed bachelor named Bobby surrounded by an inner circle of crazy married friends.

My production of COMPANY was extremely ambitious for Hudson County NJ at the time. We constructed a two-level set of “apartments” similar to Boris Aronson’s Tony-award winning design, and I employed a full orchestra consisting of music professors and graduate students from Jersey City State College, several of whom have since gone on to play in actual Broadway pits.

We held open auditions and built a cast from the cream of Hudson County’s amateur talent. I have always wondered if then Jersey City resident and aspiring actor Joseph Lane, who later changed his first name professionally to Nathan, had auditioned for us. If I ever find out that he did I will proceed to kick myself repeatedly.

I sent a pair of tickets for “opening night” to both Stephen Sondheim, who had a year before told a lecture series on Musical Theatre I attended at NYC that he enjoyed seeing local productions of his shows, and Hal Prince. Mr. Sondheim sent me a letter of regret, which I have framed and displayed in my apartment, stating that he could not attend because he would be in London working on the Angela Lansbury-starring production of GYPSY. I never heard from Hal Prince, and his tickets were not used.

While an artistic success, the production, in which I was the only investor, lost money. At about the same time we started work on COMPANY I had received an offering in the mail from Alexander Cohen to invest in his upcoming production of GOOD EVENING, a review with Peter Cook and Dudley Moore. Had I invested the money I spent on COMPANY in GOOD EVENING I would have made a nice profit!

Over the years I have seen two regional productions of COMPANY, but did not see the Roundabout Theatres 1995 revival.

I originally planned to see the show at full price with friends, but I got a special offer in the mail from and went online to purchase a ticket for $75.25. Days after purchasing the ticket my monthly Theatre Development Fund mailing arrived offering COMPANY for about $35.00! To be fair, the TDF ticket would probably be in the Nose Bleed Section of the theatre, while my ticket was in the front orchestra.

The current John Doyle version of COMPANY differs quite a bit from the original I had seen in 1971. This production has a bare-bones set and minimalist staging, and features Doyle’s trademark gimmick of having the actors double as the orchestra. It is indeed just a gimmick – which he has used in some 15-20 productions over the past 15 years. It really does not add anything to the show, although it was done here seamlessly and did not interfere with the flow of the action. There were two instances where it actually provided a nice touch.

It all began out of necessity in 1991 when Doyle was staging a regional theatre version of CANDIDE in Liverpool on a tiny budget. He could not afford to pay both actors and musicians, so he hired actors who could play musical instruments.

The current cast compares well to the original of 35 years ago, which included future familiar television faces Barbara Barrie (Barney Miller’s wife), Beth Howland (the nervous waitress Vera on ALICE) and Charles Kimbrough (the anchor of FYI on MURPHY BROWN), Donna McKechnie, who went on to fame in A CHORUS LINE, popular Disney movie actor Dean Jones (who apparently was not happy with the role and was replaced by Larry Kert) as Bobby, and Broadway legend Elaine Stritch. Raul Esparza makes a good Bobby.

This COMPANY added a solo number for Bobby to close Act One - “Marry Me A Little”, which had been cut from the original production but had reappeared in the same-titled off-Broadway musical review of the early 1980s made up of songs cut from Stephen Sondheim musicals. The “Tick Tock” number, danced by Donna McKechnie in the original, was missing in this production. The scene ending with the song “Barcelona”, which had included “Tick Tock”, was less effective here than in the original version because of the minimal staging and the loss of the dance number.

The bottom line is that, while over 35 years old, COMPANY still holds up, and this production, for the most part, does it well. The music is still great and the lyrics and dialogue still witty. The haunting strains of “Bobby” still call to me. Two enthusiastic thumbs up!


Saturday, December 16, 2006


* JLP reports some interesting information on what the IRS considers to be “other” taxable income in his posting “IRS: WE DON’T CARE HOW YOU GET IT. JUST BE SURE AND REPORT IT!" at his blog All Financial Matters.

* SHOE by Chriss Cassatt and Gary Brookins is one of the few newspaper comic strips I still read and enjoy. Did you see Friday’s strip? Shoe is attending a press conference given by Senator Belfry. The Senator announces,, “There’s a new sense of ethics in Congress these days so I just want to reaffirm that I can’t be bought! However, I am available for an occasional rental.”

* I was saddened by the passing of veteran character actor Peter Boyle this past week. The current generation remembers him as Frank, father of Ray and Robert, on tv’s EVERYONE LOVES RAYMENT. Older fans remember his performance as “the Monster” in Mel Brooks’ YOUNG FRANKENSTEIN, singing a duet of “Putting On The Ritz” with Gene Wilder.

I will always remember Mr. Boyle as the much less sympathetic forerunner to Archie Bunker (“Forty-two percent of all liberals are queer, that's a fact. The Wallace people did a poll”) in the 1970 independent cult classic JOE, directed by John G Avildsen of CRY UNCLE and ROCKY fame. Boyle played blue-collar Joe, who helps an upscale father, played by prolific television guest-star Patrick Dennis, search for his runaway junkie daughter, played by Susan Sarandon in her film debut (the ROCKY HORROR PICTURE SHOW was 1975).

* This past Thursday the New Jersey legislature, prompted by the state’s Supreme Court, passed a bill permitting gay “civil unions” with all the legal rights and responsibilities of marriage although not the actual title. NJ joins Connecticut and Vermont as the third state to do so. Massachusetts is the only state to permit same-sex marriages. California has a very strong “domestic partner” law.

This brings up an interesting question. Will same-sex participants in a “civil union” be able to file as “Married Filing Joint” on the NJ-1040? Or will the fact that they are not technically “married” preclude this status? I have not done a Massachusetts state income tax return since before same-sex marriages were allowed, so I don’t know how it is treated there. Perhaps someone out there can tell me. As for NJ – we will have to wait and see.

Irregardless of how New Jersey, or Massachusetts, treats the issue on the state tax return, same-sex partners will not be able to file as Married Filing Joint or Separate on the 1040 (or 1040A). Congress “just said no” to the idea of same-sex marriage by passing a federal law during the Clinton years that limits the definition of marriage for federal purposes to the union of one man and one woman.

While voting on same-sex unions, the NJ legislature failed to act on much-needed property tax reform.


Friday, December 15, 2006

THE ROTH 401(k)

Most of you are familiar with the ROTH IRA. Now there is a new ROTH on the block – the Roth 401(k).

The ROTH IRA was created by the Tax Reform Act of 1997 and has been available since 1998. While similar to the “traditional” IRA in several ways (such as the contribution limitations, penalty for excess contributions, prohibition against pledging the assets of the account as security or borrowing from the account, and restrictions to the type of assets that can be contributed to and held in the account) it has several unique features that make it “more better”.

· Contributions are not deductible.
· You do not have to take “required minimum distributions” upon reaching age 70½ - you never have to take any distributions during your lifetime.
· You can continue to contribute to the account once you reach age 70½ for as long as you have earned income.
· “Qualified distributions” are totally tax free.
· Only the earnings portion of a premature withdrawal is subject to the 10% penalty.
· While ROTH IRA accounts are included in the decedent’s taxable estate, beneficiaries are not subject to income tax on distributions from an inherited ROTH.

The Economic Growth and Tax Relief Reconciliation Act of 2001 extended the ROTH concept to the employer sponsored 401(k) plan. Effective with tax years beginning on or after January 1, 2006, employer’s can elect to offer 401(k) participants a ROTH option.

While contributions to “traditional” 401(k) plans are considered “pre-tax”, ROTH 401(k) contributions are made with “after-tax” dollars. Contributions to a ROTH 401(k) will not reduce the amount of taxable wages reported on Box 1 of your Form W-2. But, like the ROTH IRA, qualified distributions from a ROTH 401(k) will be totally tax free.

For 2006 you will be able to contribute up to a total of $15,000.00 to any combination of a traditional 401(k) and a ROTH 401(k) - the maximum is $15,500.00 for 2007 - plus an additional $5000.00 if you will be age 50 or older on December 31st. For example, you can elect to put half into a ROTH and half into a traditional. Any company match will continue to go into the traditional 401(k).

While the ability to contribute to a ROTH IRA is phased out if your AGI exceeds a certain amount, there are no income limitations for a ROTH 401(k). Anyone who is eligible to participate in a traditional 401(k) plan can also participate in a ROTH 401(k) plan, regardless of income, providing your employer offers such an option.

Unlike the ROTH IRA, you must take distributions from your ROTH 401(k) account beginning within 6 months of turning age 70½. However, upon leaving your employer you can roll over the balance in your ROTH 401(k) to a ROTH IRA and never have to touch the money.

Why would you want to opt for a ROTH 401(k)?

· You do not rely on the tax savings from your “pre-tax” 401(k) contributions to balance your budget.

· You are young and plan to keep your money in your 401(k) plan for a long time.

· Your Adjusted Gross Income is too high for you to be able to open a ROTH IRA account.

· You will have more than enough savings accumulated in a various accounts for your own retirement needs. You want to reduce the amount of your annual required minimum distributions, and you want to be able to pass as much of your retirement plan money as possible tax-free to your beneficiaries.

Like everything in EGTRRA 2001, the ROTH 401(k) was scheduled to “sunset” at the end of 2010. This did not mean that your ROTH 401(k) account would suddenly become taxable – just that you would no longer be able to make additional contributions after 2010. However, the Pension Protection Act of 2006 has made the ROTH 401(k), and its sister the ROTH 403(b), permanent.

While the law allows employers to offer employees a ROTH 401(k) option, the employer must elect to institute such a plan. When it was thought that the ROTH 401(k) would only have a 5-year life employers were reluctant to offer such plans, considering the amount of paperwork involved. Perhaps now that it is permanent more employers will be making the option available to its employees.

A good source of information on the subject is the
ROTH 401(k) Web Site.

Thursday, December 14, 2006


In my Tuesday, December 12th posting I told you that if you receive correspondence from the IRS or a state tax agency regarding a tax return you should send it to your tax professional immediately.

If you call or email your preparer don’t begin with the accusation, “You made a mistake on my tax return!” Nothing burns my toast more than a client who says or writes this to me when he receives a notice or does not understand something on the return. It automatically puts me in a bad mood and I must bite my tongue from replying, “Well f—k you, too!”

As I said on Tuesday, more than 50% of federal and state tax notices are incorrect. If a notice is correct and there was an omission on a return it may be because a client did not receive a Form 1099 for an item of income (just because you did not receive a 1099 does not mean that one was not issued or that the item is not taxable), or misplaced it, or simply forgot to give it to me, or his preparer, with his tax “stuff”.

On occasion a client will, as I instruct, review the finished returns before mailing and call me with the accusation because there is simply something he does not understand.

One client told me I made a mistake because he had added up the individual items deducted on Schedule A and the total I entered on the bottom of the page, and deducted on Page 2 of the 1040, was wrong. After counting to ten I calmly explained that because his Adjusted Gross Income (AGI) exceeded a certain amount I had to reduce his itemized deductions by 3% of the excess – one of the “read my lips” taxes. When this occurs I always include the calculation worksheet somewhere within the taxpayer’s copy of the return, which in this case he skipped over.

I am not perfect. I am only human, as is your tax preparer. It is possible that I could make a math or other error when preparing your return, as could your preparer. I do 400+ tax returns during a year, 95% within a 2½ month period, and I am bound to make one or two mistakes. But don’t automatically assume that I, or your preparer, is at fault when “Uncle Sam” asks for more money!

I also take exception with the IRS and state tax agencies for stating in their notices “there is an error on your return.” The form letter should read “we think there may be an error on your return” or “based on our matching program there seems to be a discrepancy on your return” or something to that affect.

So if you must call or email your preparer when you receive a notice about your tax return (I instruct my clients to “mail it to me immediately – please do not call or email first”) just say, “I received a notice in the mail from the IRS (or New Jersey or New York) and I have put it in the mail to you” or “and I want to bring it in to your office for you to review.” And if you do not understand an entry on your tax return simply say so.

Wednesday, December 13, 2006


FEDERAL - The recently passed Tax Relief and Health Care Act of 2006 reinstated several tax deductions for 2006, including the above-the-line deductions for educator expenses and tuition and fees and the option to deduct state and local sales tax instead of state and local income tax.

However, the IRS had already gone to press on the 2006 Form 1040 and 2006 Schedule A and the corresponding instructions without the reinstated tax breaks. The IRS has said it will issue a special publication with instructions for all the extended items.

The lines on the 2006 Form 1040 previously used for educator expenses and tuition and fees have been replaced by the deductions FOR Archer MSA contributions (Line 23) and jury duty pay returned to an employer (Line 34). How taxpayers will report the extended deductions on the 1040 is not yet known.

The only other major change to the 1040 is the addition of a line in the “Payments” section of Page 2 for the refundable “Credit for federal telephone excise tax” (Line 71). The 2006 Form 1040 has a total of 76 lines, one more than last year.

Similar changes have been made to the 2006 Form 1040A.

The 2006 Schedule A allows for only “State and local income taxes” on Line 5.

There are some new federal tax forms for 2006 to accommodate new tax breaks, including:

* Form 5695 Residential Energy Credits,
* Form 8888 Direct Deposit of Refund – allows you to split your refund among up to three (3)accounts, including IRAs and HSAs (see my December 10th posting),
* Form 8910 Alternative Motor Vehicle Credit – for qualified hybrid cars,
* Form 8913 Credit for Federal Telephone Excise Tax Paid – to be used if you want to claim the actual tax paid instead of the standard amount

The mailing addresses for the federal income tax returns of New Jersey residents have been changed again. For most of my tenure as a tax preparer the returns were sent to Holtsville NY. Then it was changed to Philadelphia for refunds or and Cincinnati for balance due returns. For 2006 I will be sending client returns with no payment to Kansas City MO and returns with a payment to St Louis MO. It is a good thing I stopped buying pre-printed mailing envelopes and changed to address labels instead!

While the New York State full-year and part-year resident income tax returns (IT-201 and IT-203) remain unchanged from last year’s new 4-page format, there have been several changes to NYS income tax for 2006.

The maximum tax rate for NYS has been reduced back to $6.85% and the maximum rate for NYC has been reduced back to 3.648%. The 7.25% and 7.7% state brackets and 4.05% and 4.45% city brackets have been eliminated. The Standard Deduction for Married Filing Joint and Qualifying Widow(er) has been increased from $14,600.00 to $15,000.00 and from $6,500.00 to $7,500.00 for Married Filing Separate.

The New York City School Tax Credit has been increased from $125.00 to $230.00 for Married Filing Joint and Qualifying Widow(er), and from $62.50 to $115.00 for Single, Head of Household and Married Filing Separate. This particular credit always puzzles me – I claim it for all applicable NYC resident taxpayers and sometimes the client gets it and sometimes he/she does not.

There have been some new credits added for New York, including some energy credits for residents, and changes made to existing ones – but these do not affect my clients.

NEW JERSEY - New Jersey has not yet released the 2006 NJ-1040, although there should be no major changes. As soon as Trenton issues the 2006 forms I will let you know what is new.


Tuesday, December 12, 2006


Nobody likes to get a letter from “Uncle Sam” (or your state “aunt” or “uncle”).

There are 2 basic rules concerning correspondence from the IRS or a state tax authority:

(1) Do not ignore an IRS or state tax notice. The problem will not just go away. The only things that might go away are your wages or your home!

On the other hand -

(2) Do not automatically pay the amount requested on an IRS or state tax notice. It has been my experience over the past 35 years that more than 50% of all federal and state tax notices are incorrect.

Carefully check the return being questioned. If it was prepared by a tax professional, send a copy of the notice to your preparer immediately. If you prepared the return yourself and you do not understand the notice you should consult a tax professional.

This year I have seen a lot of “Statement of Account – Balance Due” notices from “Uncle Jon” (the NJ Division of Taxation) – and more than 90% have been totally erroneous! I can count on the fingers of one hand the number of correct notices I have reviewed so far this year.

I heard from more than a dozen clients who had owed “Uncle Jon” on their 2005 Form NJ-1040 and had sent a check for the balance due with their return by the April 17th filing deadline. In each case the NJ-1040 was filed online using NJWebFile, which generated a personalized NJ-1040-V payment coupon that was included with the mailing of the return and check. And in each case the check cleared in the normal amount of time.

In September these clients all received a billing notice from the Division of Taxation for the amount due on the 2005 NJ-1040, which had already been paid, plus accrued penalty and interest. As it turns out, in each case the DOT had applied the 2005 payment to the client’s 2004 NJ-1040!

If this were the case, the 2004 account should have indicated an overpayment and NJ should have sent refunds to the taxpayers – but no refunds were sent.

Some clients called or emailed the Division of Taxation directly and explained that they had paid the tax and they had a copy of the cancelled check. Others send the notice to me and I wrote to the “cafones” in Trenton. In every case the situation was corrected.

If the DFBs (clean version is “damned fool bureaucrats”) in Trenton want tax professionals to file all NJ state resident returns electronically they should at least make sure the system works!

Just recently two clients received balance due notices from “Jon”. One statement failed to give the client credit for $100,000 in NJ state income tax withheld that was clearly reported on the W-2, and the other reported a “72t” pension distribution from Lucent, reported on a Form 1099-R, twice – both as wages and as a pension distribution. However, the NJ state income tax withheld from the pension distribution was not included twice.

I emailed the Division of Taxation in both situations, and, to my surprise, received a prompt, and satisfactory, response. For the first notice I was asked to fax a copy of the W-2; the error on the second notice was automatically corrected with no further documentation required.

In the past, when I would write (via postal mail) to the NJ Division of Taxation regarding a client issue I would never hear from Trenton. In most cases the issue would eventually be taken care of and the taxpayer would receive either the appropriate refund or no further requests for payment - but I would never receive the courtesy of a written response or acknowledgement to my correspondence. In some cases it would take several unanswered letters on my part for the state to finally resolve the matter properly. So the moral of this story appears to be if you have to write to the NJ Division of Taxation about your NJ-1040 you should do it via email.

Most of the returns I did for 2005 were filed using NJWebFile on the Division of Taxation website. The NJ-1040 paper return is a “scanable” form. The information on the return is electronically “read” by a machine – there is no person entering information from the return into a computer. In each case there is, supposedly, no longer the risk of “human error”. So how come the state issues so many error-laden notices?


Monday, December 11, 2006


The tax bill extending popular tax breaks through 2007 that was passed early Saturday morning apparently also provides for a deduction for PMI premiums on Schedule A.

PMI – Private Mortgage Insurance – is usually required when you buy a home with less than 20% down.

It appears that this new itemized deduction will only apply to PMI paid on mortgage insurance contracts issued in 2007. It will be phased out as AGI goes from $100,000 to $110,000 ($50,000 to $55,000 for married taxpayers filing separately).

I will be posting more on this, and the other provisions of the bill, on the FEDERAL TAX UPDATE Page at once it has been signed by George W.



My Tuesday, December 5, 2006 posting KEEPING TRACK OF INVESTMENT COST BASIS has been included in 2 blog carnivals:

It is the #1 "Editor's Pick" in the Carnival of Investing at InvestorTrip, an investment Blog that is dedicated to sharing information on investing, wealth building, and personal finance.

It also appears in the 1st edition of the Carnival of Finance at MoneyWalks by Andy Oshiro.

Check out these blog carnivals for some good advice and information on finance and investing.

Thanks, guys!

Sunday, December 10, 2006


As reported earlier, I spent last Thursday and Friday in Atlantic City. The purpose of my visit was Friday’s all-day year-end tax update seminar presented by the National Society of Tax Professionals.

The seminar was originally scheduled for the Sands Hotel and Casino, but as the Sands closed its doors for good on November 10th (it will be replaced by a new $1.5 Billion, 2000-room mega-resort to open in 2010) it was moved to the Holiday Inn, a non-casino hotel between the Tropicana and the Hilton.

I stayed overnight at the Tropicana, which has been totally remodeled since my last visit to AC, in a very comfortable room in the North Tower with a “casino view” – when I looked out my window I could see the great unwashed feeding slot machines.

The new Tropicana has many, many dining choices, from a deli, ice cream stand, buffet, rib joint, and branch of “Hooters” in the Boardwalk-level “Market Place” to more high-end Italian, Irish, Oriental, Cuban and Russian themed restaurants in the “Quarter”. I chose to dine at “Carmine’s” in "The Quarter", which serves “family style”. My Chicken Saltimbocca was enough to feed at least 3 people – I can’t believe I ate the whole thing!

I looked at the menu of “Ri Ra”, the Irish pub, but was disappointed, although not surprised, to find that it’s Shepherd’s Pie was not Shepherd’s Pie. Like most Irish restaurants I have encountered in the US, what is advertised as Shepherd’s Pie is really Cottage Pie – ground beef, mashed potatoes and vegetables. True Shepherd’s Pie is sheep and mashed potatoes only!

I limited my slot losses to $10.00!

As my hotel was all the way at one end of the Boardwalk I did not have much chance to explore. I did notice one big change since my last time here – the Ocean One mall, where I used to dine at a German Restaurant with a very extensive international “beer menu” on the third level, has become the much more upscale “Pier Shops at Caesars”.

The seminar, like the NATP one last month, was merely a “refresher” for me. Below are a few items of interest from the seminar, for your information -

* We reviewed comparisons between tax year 2003 and 2004, from the most recent IRS Statistics of Income Bulletin. Here are some facts for tax year 2004 returns:

  • Taxable Income increased by 10.6%.
  • Total Tax Liability increased by 10.5%.
  • Wages increased by 6%.
  • Adjusted Gross Income (AGI) increased by 6%.
  • Net Capital Gains increased by 53.2%.
  • Net Capital Losses decreased by 12%.
  • Qualified Dividends increased by 29.2%.
  • Taxable Pensions and Annuities increased by 5.5%.
  • Taxable Social Security Benefits increased by 12.8%.
  • Premature Withdrawals from Pension Plans increased by 41.6%.
  • The Average Total Itemized Deductions increased by 4.8% (the average was $21,038).
  • 5.7 Million taxpayers lost a total of $34.9 Billion in itemized deductions as a result of the “read my lips tax” – the phase-out of itemized deductions based on AGI.
  • The number of returns that fell victim to the dreaded Alternative Minimum Tax (AMT) increased by 31.7% - and the total amount of AMT paid increased by 38.1%.

The average amount of AMT paid by taxpayers with AGI of between $100,000 and $200,000 was $5,498.

* We also discussed the “tax gap” – the difference between what taxpayers should pay and what they actually do – which is estimated to be over $300 Billion per year.

More than 80% of the tax gap is from under-reporting of net income. Non-filing of returns and underpayment of taxes each make up about 10% of the total. 80% of the 80% comes from understated income and not overstated deductions, and 43% of the 80% is from small business taxpayers.

* The IRS has reported that there will be more audits of entities that generate “net earnings from self-employment” (i.e. sole proprietors and one-man LLCs that file Schedule C and partnerships) in the future.

* It looks like it will be “more better” to claim the standard amount for the refund of federal telephone excise tax than to claim the actual amount of tax paid.

* While IRS will now allow you to have all or part of your federal refund directly deposited into an IRA, it is best not to do this if you are relying on the refund to fund a 2006 IRA deduction. There are too many potential problems – if the refund is reduced or increased by the IRS, or if the direct deposit does not physically take place by April 16, 2007, or if the trustee applies the deposit to tax year 2007 instead of 2006. If you are expecting a federal refund of $5,200 and you want to use $4,000 of this refund to fund your 2006 IRA contribution, you should write a check for the contribution and mail it to the trustee, making sure to indicate that the contribution is being made for tax year 2006.

I have just one negative comment about the seminar – the continental breakfast consisted of only bagels and cream cheese or butter (plus, of course, coffee or tea and juice). Lately the continental breakfasts at tax seminars have been getting skimpy. I look forward to the one at the NJ-NATP January seminar, which is usually much more extensive.


Saturday, December 9, 2006


It appears that the Senate has just this morning passed a bill extending the expired tax breaks for two years (2006 and 2007) by a 79-9 vote. As mentioned in my last posting, the House had passed the bill on Friday.

The extended tax breaks include the above-the-line adjustments to income for educator expenses and tuition and fees and the option to deduct state and local sales tax instead of state and local income tax, among others.

As soon as George W signs the bill and I get a chance to review it I will post an analysis on the
FEDERAL TAX UPDATE Page at my website.



I'm back! More on my trip later.

It has been quite a morning so far. First I locked myself out of my apartment (I grabbed the wrong keys on the way out) - luckily I have left a copy of my keys with my long-time friend who has the deli on the corner. Then I am almost run over by a women going through a red light while talking on her cell phone. I almost proved true the bumper sticker I reported on in my Nov 2nd posting (at - "Guns don't kill people. Drivers with cellphones do."

Hey, the day can only get better!

Now, back to Congress: According to fellow tax blogger Kay Bell's Friday posting in DON'T MESS WITH TAXES those "cafones" in the House of Representative have fu-ed a simple task once again.

"The House overwhelmingly (367-45) passed a tax measure today that would reinstate the deductions for state sales taxes, tuition and fees and educators' out-of-pocket expenses [The Tax Relief and Health Care Act of 2006].

In addition to the tax provisions, the bill makes the previously mentioned (here) changes to Medicare-related fees and opens 8.3 million acres in the Gulf of Mexico near Florida to new oil and gas drilling.

Senate Budget Committee Chairman Judd Gregg (R-N.H.) says he will try to kill the bill because of its $40 billion, five-year price tag."

Congress was expected to adjourn on Friday, but, as Kay puts it. "It looks like the start of their holiday season is going to be held hostage a little bit longer to pork barrel politics."

Thanks and a tip of the hat to Kay for keeping on top of this issue.

Wednesday, December 6, 2006


I will be up at almost the crack of dawn tomorrow morning to leave, via casino bus, for an overnight in Atlantic City to attend the National Society of Tax Professionals year-end tax update seminar. It has been several years since I have been to AC for a tax seminar, and I am sure there are a lot of changes since my last visit.

As we "speak" Congress still hasn't passed an extender bill. The word is that House Ways and Means Chairman William M. Thomas continues to push for additional tax provisions.

Since Republicans and Democrats in both the House and the Senate, as well as George W, all want to extend these tax breaks why can't they simply write a bill to do so and get it over with? They should have done so months ago. Why must they muck around with trying to stick on other items that have not been agreed upon and drag it on till literally the last minute? I guess that would be too easy.

It is expected that a bill will be passed before Congress adjourns this Friday, and that the expired tax breaks will be extended for two (2) years (2006 and 2007).

I will let you know what happens when I return from AC, as well as report on any items of interest from the seminar.

"Talk" to you on Saturday.


Several years ago when I was doing payroll for the Art Center in Summit one of the teachers came to me to complain about her paycheck.

“I’m 72 years old. You shouldn’t be taking Social Security out of my pay!”

On another front, a retired individual, who eventually became our client, stopped filing tax returns once he turned age 65, even though his annual taxable income was above the filing threshold.

Both were wrong.

You pay “FICA” (Social Security and Medicare) tax, and self-employment tax, from the day you are born until the day you die as long as you have “earned income” (i.e. wages or net earnings from self-employment).

After you turn age 65 (before Clinton it was age 72) you can earn as much as you want without having to pay back some of your Social Security benefits (there is an earned income limita-tion in the year that you turn 65), but even at age 100 Social Security and Medicare tax must be withheld from your wages.

Also, you must pay income tax from the day you are born until the day you die as long as your net taxable income is more than the appropriate filing threshold. And you must file a federal tax return as long as your gross income (all income that is not exempt from tax) exceeds your filing threshold (your standard deduction, including any addition for age or blindness, plus your personal exemption and, if married filing joint, that of your spouse).

The individual who stopped filing returns at age 65 became our client when the IRS reconstructed all his unfiled returns, using the standard deduction, and put a lien on his home!


Tuesday, December 5, 2006


Did you know that, in the event of an IRS audit, the burden of proof for the cost basis of an investment sale you have reported on Schedule D is with the taxpayer. As per T.C. Memo 2003-259, if a taxpayer cannot provide proof of the cost basis of a stock or other investment sold it will be considered to have a "0" cost basis. As a result, the entire gross proceeds will be fully taxable!

It is very very important that you hold onto the "confirmation" slip you receive from your broker for the purchase of an investment for as long as you own that investment, and four (4) years thereafter. You should also save the monthly brokerage account statements that show the initial and subsequent purchases, notices of splits, and any dividend reinvestments for stocks, and the annual year-end account statements that list all the activity for the year for mutual funds for the same period of time.

I would recommend setting up a separate file folder or pocket in an accordion file for each individual investment you own. Start with the paperwork for the initial purchase (i.e. the confirm) and add any appropriate statements and documentation each year. If you invest in a limited partnership put the Form K-1 you receive each year in the file. When you sell all or a part of the investment put the sale confirm in the file and give the file to your preparer at tax time.

The cost basis of an investment you receive as a gift is generally what the person making the gift paid for it. If you receive a gift of stock, a bond or mutual fund shares ask the person giving you the gift for a copy of the purchase confirmation slip for your file. Also make a note of the date you received the gift and place it in the file. If you are gifting an investment to a relative you should give that person, or his/her parents if a minor, a copy of your purchase confirm.

The cost basis of an investment you inherit is the “fair market value” of the investment on the decedent’s date of death. This is the “mean average” price of the investment on that date. It is also the value reported for the investment on the decedent’s federal estate or state inheritance tax return. If you can, get a photocopy of the page of the estate or inheritance tax return that lists the value. If this is not available to you, you can go to and look up the price for the date of death. You will need to know the “ticker symbol” of the investment. Print out the result and put it in your file for the investment. You should also be able to get the information from your broker, or possibly the Executor of the estate.

If you inherit real estate you should also document the date of death fair market value for your records as soon as you can. Again, this value will be in the estate or inheritance tax return and you should be able to get it by contacting the Executor.

By the way, I have developed a "Cost Basis Worksheet" for my clients. If you send me a #10 SASE I will send you a copy of this worksheet and instructions. Send the SASE to COST BASIS WORKSHEET, ROBERT D FLACH LLC, PMB 411, 72 VAN REIPEN AVE, JERSEY CITY NJ 07306-2806.


As holiday party season is approaching, here are some websites that may prove helpful.

As the host/bartender of a holiday party you would have no problem if a guest requests a “Screwdriver” or a “7 and 7”. But what if someone asks for a “3am On A School Night” or “A Kick In The Bollocks”? You can go to this site and search the data-base of over 6000 mixed drinks and cocktails. “3am On A School Night” is 1 shot Wild Turkey and 4 shots Kool-Aid Tropical Punch. “A Kick In The Bollocks” is ½ oz Coconut Cream, 1 oz Double Cream, 1 oz orange juice, 1 oz Peach Schnappes, and 1 oz Dark Rum shaken and strained into a 5 oz cocktail glass and garnished with two melon balls marinated in the rum. I did a search “Stinger” and came up with 16 variations. My drink of choice is the “Brandy Stinger”, which, as I thought, is 3 parts Brandy and 1 part While Crème de Menthe - shaken, not stirred.

Here are some sites that provide guidance for the morning after your holiday party. My favorite cure from the above sites is “The Greasy Burger and Milkshake.” Another interesting cure is the “whining” cure. “If you don’t feel good, everyone should know about it. Strangely enough, the more you tell others about how bad you feel, the better you feel.”

The above sites are from the JUST FOR FUN section of my special report SURFING USA, a compilation of useful, interesting and humorous sites I have come across during my travels on the web. In addition to websites that are Just for Fun, the report identifies and describes links to free online calculators and sites on Personal Finance, Tax Planning and Preparation, and the World of Entertainment.

I will send you SURFING USA in print format via postal mail for $2.00 or as an email attachment in “pdf” format for $1.00. Send your check or money order (payable to Robert D Flach LLC) with your postal or email address to SURFING USA – ROBERT D FLACH LLC – PMB 411 – 72 Van Reipen Avenue – Jersey City NJ 07306-2806.

To check out my other reports and publications go to