Monday, April 30, 2007


The 98th Carnival of Personal Finance is now available at the King of Debt’s WE’RE IN DEBT blog.

My posting on ASK THE TAX PRO – RECORD RETENTION, which tells how long you should keep your tax returns – appears under the MANAGE MONEY category.

Check out the entry from AN ENGINEERING APPROACH TO MONEY on “Fund Your ROTH IRA Early This Year” under SAVING MONEY. I have been saying the same thing for years.


According to the Tax Foundation, today, April 30th, is TAX FREEDOM DAY 2007.

On average, Americans have to work 120 days this year, 2 days more than 2006, in order to earn enough money to pay all federal, state and local taxes. This is more than the 105 days needed to pay for food, clothing and housing combined.

For 2007, Government at all levels will take an average of 32.7% of the nation’s income. This is down from the 34% high in 2006 and up from the 29.5% low in 2003.

Tax Freedom Day 2007 for New Jersey residents will be May 10th. NJ is #3, behind CT at May 20th and New York at May 16th. Oklahoma has the earliest Tax Freedom Day of the 50 states, April 12.

More detailed information on Tax Freedom Day is available at the Tax Foundation website.


Here is a question I received from a long-time friend and client, the Executive Director of a membership organization for artists.

(Q) Here's something that's come up at work, and I wondered if you could give me your opinion. At our exhibitions, for example, one artist sold a painting for $5,200.00. Of that, the host site retains a 20% “donation” and our organization retains a 20% “donation”. The artist would like a letter stating that she donated 20% ($1,200.00) to us and same to the host site. Is that correct? It is she who would be considered making the donation, and not the buyer, is that correct? The buyer received goods in value of $5,200.00 so I don't see how that could be a donation on the buyer's part.

(A) In the situation you described no one is making a donation.

You are correct that the buyer is not making a donation. The buyer is purchasing artwork for $5,200.00.

The seller is also not making a contribution, but paying a sales commission. The artist would have gross income of $5,200.00 and a commission deduction for $2,080.00 (20% + 20% = 40%) on Schedule C. The artist would report net taxable income of $3,120.00.

A contribution is an itemized deduction and reduces taxable income. A business expense, such as a commission, reduces Adjusted Gross Income, which could have a multitude of side benefits (see my post on THE MOST IMPORTANT NUMBER ON YOUR TAX RETURN), and reduces net earnings from self-employment, which will reduce self-employment tax (FICA equivalent). So a business deduction is more better than a contribution deduction.

Plus, a contribution is a voluntary gift to a charity. The 20% + 20% are mandatory reductions of the sale price - an expense of sale.

Methinks that the artist in question wants a letter to support a contribution deduction because he/she is not going to report the sale of the artwork on his/her 1040.


Saturday, April 28, 2007


The April 26th posting to GINA’S TAX ARTICLES, and a visit from a high school friend and business client with questions, reminded me that one important rule of tax planning is NEVER PUT YOUR NAME ON THE TITLE OF YOUR PARENTS’ HOME DURING THEIR LIFETIME.

If your parents “gift” you an ownership in their home, either partial or total, by putting your name on the title of their personal residence, for whatever reason, they are not doing you any favors!

If you inherit a parent’s personal residence, your “cost basis” in the home is the “fair market value” of the property on the date of death of the parent (or 6 months after, depending on how any required federal estate tax return is filed). If you sell the property shortly after the death you will have no taxable gain, as the sale price should be close to the market value at death.

If you are given the property as a “gift”, the cost basis of the “donor” (your parent) is passed on to you. If you are a co-owner of the property with your parent on the title, you will have a “half and half” cost basis when you inherit the home – one-half of the fair market value on the date of death, and one-half of the parent’s cost basis (what they paid for it plus any capital improvements). If your name is the only one on the title as sole owner, your cost basis is 100% of your parent’s cost basis. In either case you will have a substantial taxable capital gain.

If one parent died and left a joint residence to the surviving spouse and your name is then put on the title as co-owner, the cost basis is a bit more complicated, as your parent had a “half and half” basis at the time of the gift.

If you are co-owner of your parents’ home and it is sold during their lifetime, they will get a “Section 121” exclusion of up to $500,000 ($250,000 if only one parent) on the gain from the sale of their personal residence – and therefore will most likely pay no tax on the sale. However, unless you actually live in the home with your parents and meet the two-year holding period requirement, the home is not your personal residence and you must pay federal and state income tax on your half, or third, of the capital gain.

If you purchase your parents’ home outright that is a different story. Your cost basis is what you pay for the property – assuming you pay a reasonable market price. However, again assuming that you do not live in the home, it will not be your personal residence and you will still pay tax on any capital gain from its sale, but the tax will be a lot less due to your higher cost basis.

You may be able to avoid some of the problems discussed above with a “life estate” - a legal arrangement that allows your parent to have possession of the home during his or her lifetime and, after death, for you to gain ownership of the property. A life estate may also have other financial, estate or Medicare planning benefits.

Any questions?


Friday, April 27, 2007


Once someone finds out what I do for a living it is only a matter of time before I am presented with a tax question.

Sort of like old standard about the individual who, upon meeting a doctor at a party, opens the conversation with “Doc, I have this pain…”.

I don’t mind general questions, and most of them are.

During my recuperative stay in Ocean Grove my host asked me a common question, which I will address in this installment of ASK THE TAX PRO.

(Q) How long should I keep my tax returns?

(A) First of all, it is my belief that you should keep the paper copy of your tax returns (Form 1040 or 1040A plus all supporting federal Schedules and Forms) forever. This provides a permanent record of your financial history. You never know when the information on a prior year’s tax return will come in handy for a variety of tax or financial related reasons, or just to satisfy personal curiosity.

The time period for keeping all other records ties in to the fact that the IRS, and the appropriate state tax authorities, has three (3) years from the due date (or filing date if you had any extensions) of a tax return to audit and revise that return (except in the case of tax fraud – then the IRS can go back forever). If you filed your 2003 Form 1040 by the initial April 15, 2004 due date, “Uncle Sam” had until April 17, 2007 to audit it and ask for additional taxes.

I recommend keeping all back-up documentation that supports an item reported or deducted on your tax return for four (4) full years. This includes all applicable bank statements and cancelled checks as well as W-2s, 1099s, 1098s, and appropriate receipts and bills. You can toss all such information for your 2003 tax return in December of 2007.

Hold on to your individual pay stubs for the year until have received the Form W-2 for that year. Reconcile the year-to-date cumulative totals on the last pay stub for the year to the amounts reported on the W-2. If they match you can throw out all but the last pay stub. Keep the final pay stub for the year, with the year-end cumulative numbers, with your tax return documentation for that year.

Certain documentation requires longer holding periods. For investments in stock, bonds and mutual funds you should keep all confirms and other appropriate back-up (such as notices of splits and records of any dividend reinvestments) for as long as you hold the investment plus four (4) additional years. You should keep the confirmation slip or other documentation for the sale or disposition of the investment for four (4) years after the sale or disposition.

Similarly, if you own real estate you should keep all Closing or Settlement Statements for the purchase and refinancing of the property, and documentation of any capital improvements, for as long as you own the property plus four (4) additional years. You should keep the Closing or Settlement Statement or other documentation for the sale or disposition of the property for four (4) years after the sale or disposition.

If you have invested in a limited partnership or “sub-chapter S” corporation, or are a partner in a business organized as a partnership, a “sub-chapter S” corporation or an LLC or LLP, you should keep the annual Form K-1 you receive from the investment or business for as long as you own an interest in the entity plus four (4) additional years, and keep any paperwork related to the sale or disposition of your interest for four (4) years after the sale or disposition.

Receipts and bills for personal expenses that are not related to any items reported or deducted on your tax return can generally be tossed after one year. You can throw out all such bills for calendar year 2006 in January of 2008. You may want to keep bills, receipts and cancelled checks for equipment, appliances and the like for at least as long as these items are covered under warranty.


Thursday, April 26, 2007


This year instead of leaving for my annual post tax season recuperative trip to Ocean Grove on the day after the filing deadline I decided to stay at my desk, working on the more simple GD extensions, through the end of the week.

I headed down to the shore after breakfast on Sunday, April 22nd and checked in, for the second year, at the comfortable Laingdon Hotel on Ocean and Bath Avenues near the North End. This year my room was on the third floor, a carbon copy of the single second floor room I had last April.

I next checked in with my parents at Francis Asbury Manor, the United Methodist Homes’ assisted living facility along Fletcher Lake at the South End - their home since last August. That night we had planned to dine together at Schneider’s Restaurant in nearby Avon, known for its German-Austrian-Hungarian cuisine – but upon arriving at the eatery’s parking lot we discovered it was closed on Sunday and Monday! So we ended up at our old standby – the IHOP on Route 66 near the Route 35 circle.

My father was due for a haircut (what few hairs he has left) and beard trim, so we scheduled the occasion for Monday after lunch – but when we got there the barber shop was closed. We were more successful the next morning, which we followed with lunch at Schneider’s, where my father had their delicious German Potato Pancakes.

Monday night every restaurant I attempted to go to was closed, so I decided to try a new place that I had passed many times in the past year – Jimmy’s Italian Restaurant on Asbury Avenue, not far from the Route 35 circle. I was surprised to find it had valet parking (because of the neighborhood, I was later told). It was a good choice – and as it turned out I was glad every other place was closed. My hosts at the Laingdon Hotel told me on my return that it was frequently being written up in newspapers and magazines as a hidden gem of the shore.

My visit would not be complete without checking on the progress of Asbury Park’s renovation. The Casino building, the gateway from Ocean Grove to Asbury Park, was in the process of being torn down – the portion that overhung the beach, which, I believe, once housed a skating rink, was already gone. An architect’s drawing near the site indicated that it would be rebuilt to look as it did in its prime. Work was also finally being done on the old dilapidated Howard Johnson’s restaurant on the Boardwalk across from Convention Hall.

Tuesday night I decided to try Carmine’s Asbury Park, on Main Street (Route 71) and Cookman Avenue, another Italian Restaurant, which had been closed on Monday night. Despite its misleading sign, it is not connected to the family-style Carmine’s of New York City and Atlantic City. Another good stop.

While having breakfast at The Starvin’ Artist on Monday I noticed an interesting sign: “Everyone brings joy to this place –- some when they enter and some when they leave!” That would have been an appropriate sign to display when we had the storefront office.

As the purpose of the trip was “recovery” I spent the bulk of my time reading my latest mystery, or just sitting and relaxing, on the Boardwalk or in the small park next to the famous Auditorium. The weather was truly summer-like during my stay, with cool ocean breezes making it almost perfect.

I returned to Jersey City relaxed and refreshed. Now if only I can stop doing tax returns in my sleep!


Saturday, April 21, 2007

1040s NO MORE.

I can’t stand to look at another 1040!

So, as it says above, I am off to Ocean Grove for a few days to recuperate.

"Talk" to you when I get back.



Now that the tax filing season is over and you have filed your 2006 Form 1040 (or 1040A) the tendency is to forget all about taxes until next year (I know I wish I could).

However, before you file away your 2006 tax returns you should make one last review to see what you can learn from them to help make 2007 less taxing.

(1) Did you owe your uncles a bundle? You should change your withholding at work to have more tax withheld.

(2) Did you get back a bundle? You should file a new Form W-4 with your employer to have less tax withheld.

I realize that many taxpayers, including some of my clients, use excess income tax withholding as a sort of “forced savings”. They look forward to a huge refund each year to fund their family vacation or some other such activity or project. When banks were paying pitiful interest this wasn’t so bad. However, with online money market accounts paying 4.5% to more than 5% on liquid savings you are losing money by making an interest-free loan to your uncles.

I used to suggest that, if possible, you should reduce your withholding and have an amount equal to the increase in take-home pay automatically withheld from their paycheck for deposit into a credit union savings account. This way you wouldn’t see the additional money and therefore wouldn’t have a chance to spend it foolishly.

Now I recommend you schedule an automatic withdrawal from your checking account in the amount of the increase for transfer to a high-interest online savings account at INGDirect, EmigrantDirect, AmboyDirect, etc. on the day after payday.

Of course you must have the self-control not to touch this savings account during the year.

(3) Was getting your tax “stuff” together a real PITA this year? Set up a filing system for tax records so that you will have everything in order next February.

(4) Did your dependent son or daughter have to file federal and state returns to get a full refund of the income tax withheld from an after-school or summer job, possibly at a cost that was more than the amount of their refunds?

Before starting a job a student is given a Form W-4 to fill out. Line 7 of the W-4 allows an employee to claim exemption from federal and state income tax withholding, if he/she had no income tax liability for 2006 and does not anticipate earning enough to pay income tax for 2007, by writing the word “EXEMPT” in the box indicated.

Writing “EXEMPT” on the form means that the employer will withhold only FICA (Social Security and Medicare) and any required state unemployment and/or disability taxes from the student’s wages.

For 2007, the federal standard deduction for a dependent with a W-2 is the amount of earned income (i.e. wages) plus $300.00, not to exceed $5,350.00. The state amount varies, and may be more of less than $5,350.00. For NJ it is $10,000.00.

If your son or daughter will not earn more than $5,350.00 in 2007 from a part-time job, including up to $300.00 in interest, dividends and capital gains, he/she should claim “EXEMPT” on his/her Form W-4. This way there will be no need to file a 2007 federal income tax return simply to get a refund of the income tax withheld.


Friday, April 20, 2007


While I was working away on my 1040s there was some action on the tax front, especially in New Jersey.

The Division of Taxation announced that NJ same-sex couples who enter into the newly approved “Civil Union” have the right to file a NJ state tax return as “Married Filing Joint” beginning with the 2007 NJ-1040.

“Normal” married couples must file as either Married Filing Joint or Married Filing Separate (although there are circumstances in which a legally married individual with a dependent child living apart from his/her spouse can file as Head of Household). The DOT language does not make it clear whether the choices of participants in a “Civil Union” will be similarly limited – or whether they each can continue to file as Single (or Head of Household if there is a dependent), as they would have to do on their federal returns.

In the case of two-earner same-sex couples there may be a distinct financial disadvantage to filing as a Married individual – it is known as the “marriage penalty”.

New Jersey has also announced the details of the new NJ Homestead Property Tax Credit/Rebate program.

This new NJ Homestead Rebate replaces the NJ FAIR Rebate, which in turn replaced the NJ SAVER and old NJ Homestead Rebate.

The application process is the same as for the NJ FAIR and NJ SAVER rebates. Tenants have already submitted their application on Form TR-1040, which was part of the 2006 NJ-1040 filing. Homeowners will receive an application in the mail and apply either online or via telephone. Senior and disabled homeowners will receive their applications in May. Applications will be mailed to “normal” homeowners in June or July.

What changes is the amount of the rebates. Almost all “normal” tenants and homeowners will receive a much bigger amount than they did in 2006. Senior and disabled residents should receive at least the same amount as last year, with homeowners possibly receiving more.

The method of delivering the rebate may also change for non-senior and non-disabled homeowners. Instead of a check, if it can be done, the rebate will appear as a credit on their 3rd or 4th quarter real estate tax bill. Seniors and the disabled will continue to receive a check in early August.

I have posted detailed information on the new rebate program on the NJ UPDATE Page of my website. Information is also available on the NJ Division of Taxation website or by calling 1-888-238-1233 (Homeowners) or 609-292-6400 (Tenants).


I forgot to mention yesterday that all of my clients who were eligible claimed the standard telephone excise tax credit amount of $30.00 - $60.00.

My January client mailing told of the credit and explained that taxpayers could claim a standard amount, based on the number of exemptions on their return, or request a refund of the actual amount of excise tax paid on all household phones (landline and cell) by going through 43 months of phone bills. I told them not to send me their phone bills – there was no way I was going to waste time with this during the season. If they wanted to claim the actual amount they would have to calculate it themselves.

Nobody provided me with the actual amount of tax paid – so they all claimed the standard amount.


Thursday, April 19, 2007


Well, I survived another tax filing season – my 36th! To paraphrase a Stephen Sondheim song from FOLLIES, “I got through all of the tax season – and I’m here!”

As it turned out I ended up preparing 39 GD extensions (7 more than last season) – plus I know of at least 3 others that will be prepared directly by the client. Of the 39 that I filed, 25 were the result of client lateness – their “stuff”, or all the information necessary to complete the returns, was not in my hands by March 31st. Of the rest, 4, while in my hands by the 31st, arrived at the tail end of March and I did not have enough time to get to them. The rest consist of real projects that I kept putting off till the end of the season (“my eyes are bigger than my stomach” syndrome) and, as is always the case, a few that literally got “lost in the shuffle”.

I noticed a few common items on 1040s this season. Interest income was up substantially – a result of “more better” CD rates. So were capital gain distributions from mutual funds – a sign that the market did pretty good in 2006.

I have always said that for a tax preparer, like the 7 stages of grief, a tax season has 3 stages. The first is “the hunger” – there is plenty of time, bring on more 1040s! The second stage is “panic” – oh my God, how am I ever going to get all these returns done in time? And the third is “Frankly, my dear, I don’t give a damn!” – basically f**k it all, if it gets done it gets done.

This year I curbed my hunger by, for the most part, standing firm on my pledge of “no new clients”. I only took on a few. I actually did not panic to any real degree. And the moment of “f** it all” did not hit until the morning of Friday the 13th.

Contrary to my usual policy of heading to Ocean Grove for a few days of recuperation on the day after the deadline, I will be working through Saturday on the more simpler of the GD extensions and those that got “lost in the shuffle”. I will leave for the shore on Sunday, and return to my desk on the following Thursday morning.

It feels good to once again be able to rise in the morning after the sun!


Want to see George W’s 2006 Form 1040?

You can view past and present tax returns of George W and Dick Cheney, as well as those of past Presidents while in office, at PRESIDENTIAL TAX RETURNS.

Both W and Cheney claimed the $40.00 standard telephone excise rebate on their 1040 – and neither were victim of the dreaded Alternative Minimum Tax (AMT).


Tuesday, April 17, 2007


I realize that this is the official last day of the 2007 tax filing season – the extended deadline for filing your federal and state income tax returns. But for me, for reasons I have probably discussed here in an earlier posting, the tax season was over last night - I no longer work on 1040s on the last day of the season.

I just wanted to make two points on this the last day:

(1) It is very important that you get your federal and state income tax returns, or an automatic extension request, in the mail today (postmarked by midnight), even if you are not sending all, or any, of the money you owe your “uncles”! The federal penalty for paying late is .5% (.005) of the balance due per month. The penalty for filing late is 5% (.05) of the balance due per month – 10 times more!

(2) Do not waste your money by sending your tax returns registered mail - return receipt. It does not mean a damned thing! The postmark is all that counts. At a continuing education seminar many years ago we heard about a tax preparer who sent an empty envelope to the IRS registered mail – return receipt on the 15th of every month. If there is a problem with the filing date in the future “Sam” will put much more weight on your sworn testimony, or that of your tax professional, that you, or he, took the envelope to the Post Office and placed it in the mail box on April 17th than if you have a signed postal receipt from the IRS.

I will be returning to regular daily posting tomorrow or Thursday.

To repeat – Thank God It’s Over!!!