Sunday, September 30, 2007


When visiting my “mail drop” the other day – Global Mail near Journal Square in Jersey City (also a client) – I noticed a sign at the counter:


Kudos to my client! This sign should be prominently hung in every single business establishment and Post Office in America.

I am constantly amazed that while waiting on line at the bank or Post Office the person who is at the window currently being served is carrying on a conversation on a cell phone. What idiots!

As I have said before, in the “good old days” when you heard someone talking to himself/herself in the street it was because he/she was “not all there”. Nowadays, it is still because the person is “not all there”, but now he/she is talking on a cell phone.

Whenever I ride a public bus or train I am forced to listen to one side of about half a dozen phone conversations, none of which are particularly interesting.

I saw an excellent bumper sticker a while ago which read “GUNS DON’T KILL PEOPLE. IDIOTS TALKING ON CELL PHONES WHILE DRIVING KILL PEOPLE!” That is not a joke - I was almost run over crossing the street near my home when a person talking on a cell phone ran the red light.

Every single theatrical production, lecture or continuing education seminar must now be prefaced with the instruction “Please turn off all cell phones.” There was never an announcement “Please do not stab the person next to you with a knife”. Only a person who carries a cell phone everywhere would be stupid enough to have to be told to turn it off in such a situation.

There are only three (3) reasons why one should have a cell phone:

(1) So that a babysitter is able to contact you while you are out to dinner or at a movie to let you know of an emergency at home.

(2) So you can contact 9-1-1, the auto club, and/or your family if your car breaks down or you are involved in an accident (or to contact 9-1-1 for any other kind of emergency).

(3) So you can call a client, or a friend or family member, if you are on the road and running late for a business or social appointment, or to ask for directions if you are lost.

I dare anyone to name another legitimate reason.

I had a cell phone briefly several years ago, for reasons number (2) and (3). I kept it in my car and it was stolen. I never replaced it – and have never missed it.

Saturday, September 29, 2007


Another “buzz-y” week!

* Jeremy Vohwinkle of ABOUT.COM: FINANCIAL PLANNING provides help if you “worked for a company that entitled you to a pension benefit that has since gone out of business and wonder how to collect your money” in his posting “Finding a Lost Pension”.
* St Louis-based accountant Kirk Walsh discusses “Rangel’s Tax ‘Reform’ Proposal” in his blog at KIRKWALSH.COM. As one would expect, we must beware when a politician uses the terms “reform” or “fix”.
* Linda Beale reports on the status of fraud by H+R and Jackson Hewitt employees in her posting “Jackson Hewitt Pays $1.5 Million” at A TAXING MATTER.
* THE TAX GIRL, Kelly Phillips Erg, lists “9 Ways to Get Your Tax Return Noticed by the IRS (and that’s not a good thing)”. All are excellent points, especially item #8 and especially beginning with tax year 2007.
I was surprised at #7 – I have never seen a return claiming Form 2106 expenses on Schedule C. Nor have I ever seen a return where more than one filing status has been checked (Item #5).
Regarding #3 – you may be using the correct Social Security number but the wrong name. If you changed your name due to marriage or divorce you should promptly contact the Social Security Administration to get a new SS card with your new name. Sam will match numbers to names on tax returns and a problem will arise if a Social Security number listed on the return does not match exactly the name in the SSA files.
Similarly, re: Item #4, you may not necessarily have claimed an ineligible dependent. It may be that someone else has. You may be entitled to the dependency deduction under the law, but an ex-spouse or other relative may think they are too and erroneously claim the person on their return. So you do not actually have to make a mistake yourself for Sam to notice your tax return.
Many of the mistakes on Kelly’s list can be avoided by having your return prepared by a competent tax professional.
* Find out who won Kristine McKinley’s “$15 for your BEST grocery money saving tips" contest at FINANCIAL TIPS FOR WAHMs. And while you are there you can check out all the other tips for saving money when shopping for groceries.
* I am aware that the various state Divisions of Motor Vehicles will not issue vanity license plates using words or phrases that are “suggestive”. Many years ago a long-time client named Richard was denied vanity plates that read DICK1, DICK2, etc for his several autos and had to settle for RICK1, RICK2, etc.
An AP story I read at reports that recently the state of Oregon ordered a family to turn in the vanity license plates on its cars because their Dutch last name, written on the plates, is similar to an offensive word. The plates, UDINK1, UDINK2, and UDINK3 are on the vehicles of Mike and Shelly Udink and their son Kalei.
UDINK? I could see not allowing USUCK, but UDINK does not “suggest” anything to me personally. Isn’t a DINK a married yuppie couple with Dual Income No Kids?
Apparently, according to an Oregon DMV spokesperson, the word can be treated as a verb, which gives it a sexual reference, and also can be a racial slur targeted at the Vietnamese.
I have often toyed with the idea of getting vanity plates that read “1040” – but I am sure they are already taken. Perhaps TAXPRO.
* A newly married taxpayer asks Kathy Howell, an IRS employee who writes a tax Q+A blog at, “What should I file on my W-4?
My advice to newly-married taxpayers is that for at least the first year both should claim “Married, but withheld at higher Single rate-0” (basically the same thing as Single-0) to cover their arses. When the 2007 return is filed and the tax calculated they can make adjustments for future years. As a general rule, the spouse with the lower salary should always claim “Married, but withheld at higher Single rate-0” while the higher-earning spouse can claim “Married-0” or “Married-1”.
Married couples have to be concerned with not only the “marriage penalty” but the under-withholding that will occur because both spouses work.
* The Small Business Taxes and Management website has added a new special report to answer the question “Expenses of Dormant Business Deductible?
* Tuesday’s daily email Tax Newsletter from CCH reported on a new “phishing scam” in “New E-Mail Scam Mimics IRS 'Where's my Refund'". Check out the details and be on the look-out.
Over the past few days I have received several emails allegedly from “Internal Revenue Service” with a Subject Line message that makes reference to a refund. I have deleted all these emails unopened.
I have said it before and I will say it again – the IRS will never initiate any contact with a taxpayer via email.
* I read in an accounting email newsletter Iowa is conducting its first state tax amnesty program in more than 20 years. The program will run through October 31. This amnesty program covers all state taxes and fees administered by the Iowa Department of Revenue. For more information on the amnesty program go to
These tax amnesty programs are a wonderful way to raise funds and collect past due taxes. Congress, which has been so concerned with the tax gap of late, should seriously consider instituting a federal tax amnesty program. The IRS wouldn’t have to pay a private collection agency a % of the tax collected. If done right the costs of such a program would be minimal.
* MarketWatch reports on some of the actions the IRS is considering in an attempt to close the “tax gap” in “Closing the 'Tax Gap'". This includes (1) having credit-card companies report the total gross receipts on all merchant accounts, (2) making the failure to file an income tax return an “aggravated felony”, and (3) mandatory reporting of stock basis by brokerages. Thumbs way up on item #3 (I have been a long-time supporter of requiring brokers to report cost basis on Form 1099-B – it would make my life much, much easier at tax time), thumbs down on #2 (unless it requires a willful disregard of filing requirements – as with tax protesters), and no real objection to #1.

* The Yellow Rose of Taxes, Kay Bell, provides us with a “Toyota Tax Time Reminder” - “The tax credit for fuel-efficient Toyota and Lexus vehicles expires on Sunday, Sept. 30.”

Friday, September 28, 2007


I have been reviewing the various tax blog discussions on the subject of home foreclosures and resulting debt forgiveness.

Tax law professor Jim Maule of MAULED AGAIN provides an excellent description of the situation in his well-named post “Greed, Stupidity. Poor Judgment and Taxes”:

“The recent downturn in the housing market, a predictable and predicted outcome of the rampant speculation in housing fueled by speculators and gamblers bored with the stock market and looking for something more exciting, more profitable, or more instantaneous, has created serious financial problems for homeowners who overreached when purchasing or investing in residential real estate. Those problems include not only loss of the home through foreclosure but higher federal and state income tax liabilities because the foreclosure can generate cancellation of indebtedness income.”

In simpler terms - families who wanted to buy a home that they could not afford found lenders willing to give them a mortgage with a minimal down payment, a low interest rate, and small monthly payments for an initial limited period. When this initial limited period passed and it was time to refinance the mortgage housing prices had dropped – so that the principal balance on the loan was more than the market value of the home – and interest rates had gone up. The overextended families could not afford the new monthly payments and the lenders had to foreclose on the properties.

In many situations the borrowers and lenders reached agreements so that portions of the mortgage debt were “forgiven” by the lenders. This debt forgiveness can result in taxable income to the borrower.
According to the IRS website’s page of Questions and Answers on Home Foreclosure and Debt Cancellation
“If you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes, depending on the circumstances….The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.
Here’s a very simplified example. You borrow $10,000 and default on the loan after paying back $2,000. If the lender is unable to collect the remaining debt from you {and writes off the loan - rdf}, there is a cancellation of debt of $8,000, which generally is taxable income to you.”
Congress needs some good press so they have proposed “bailing out” homeowners who are now faced with taxable debt cancellation income from these mortgage foreclosures.
The Mortgage Forgiveness Debt Relief Bill of 2007 (HR 3648) has cleared the House Ways and Means Committee by a unanimous voice vote (see yesterday’s “As the Congress Turns” posting). The bill would permanently exclude from tax liability any mortgage debt on a principal residence that is forgiven following a foreclosure or renegotiation with lenders – providing homeowners affected by the nationwide sub-prime mortgage crisis with $2 billion in tax relief.

Of course, in another testimony to its laziness, Congress has opted for a quick fix that will no doubt win its members votes back home rather than seriously addressing the issue and attempting to find a permanent, meaningful solution to prevent this situation from being repeated in the future.

Jim Maule has wisely pointed out that “The bottom line is that the proposed tax relief doesn’t prevent the foreclosure, doesn’t put the people back into their homes, and doesn’t do much to help them straighten out the mess that their lives have or will become because of the misguided decision to bite off more financial responsibilities than their means would permit them to chew.”

Joe Kristan of ROTH AND COMPANY TAX UPDATES points out in “Sub-Prime Mortgages, Sad Stories and the IRS” that such a bill “would create a new privileged class of income, followed inevitably by unintended consequences. Big companies would probably set up mortgage subsidiaries to make home loans to their executives, which would then be forgiven tax free.” He goes on to correctly observe that “Making mortgage debt tax free would also encourage people to borrow too much for home debt -- something the tax laws do too much already”.

Why do homeowners who have bitten off more than they can chew deserve tax relief any more than individuals who went overboard with credit card debt? Neither of them deserve any special treatment. No one put a gun to their heads to force them to borrow more than they could afford to pay back.

Actually a case could be made that tax relief for those with income from the cancellation of credit card debt is more appropriate. In a majority of cases a substantial portion of the credit card debt cancelled represents a usurious accumulation of excessive finance charges and late, overlimit and other fees.

Any portion of a cancelled debt, including interest, which would have been deductible if paid is not subject to federal income tax. As mortgage interest is generally deductible, any portion of cancelled mortgage debt that represents accumulated deductible interest is not taxable.

Relief already exists for most of the lower-income victims of this mucking fess. Debt cancellation on foreclosure is not taxable to the extent that you are insolvent. That is, to the extent that your liabilities (the money you owe) exceeds the value of your assets (the value of what you own). For tax purposes you are considered insolvent if after reducing your total original liabilities by the amount of debt cancelled your total outstanding debts still exceed the value of your assets.
You claim this relief on IRS Form 982 (Reduction of Tax Attributes Due to Discharge of Indebtedness). All you have to do is check the box at Line 1(b) in Part I and indicate the amount of debt forgiveness that is exempt from federal income tax on Line 2. You attach the Form 982 to your Form 1040 for the year in which the debt has been cancelled.
The Mortgage Forgiveness Debt Relief Bill of 2007 makes tax relief for mortgage debt forgiveness permanent. If this bill is to address the specific current situation why is it not temporary – for debt forgiven in 2007 and 2008 for example?
The bill also extends the deduction for Private Mortgage Insurance (PMI) for taxpayers making less than $55,000, or $110,000 if filing a joint return, through 2014. I still can’t for the life of me understand the logic (not that tax law has to be logical) of this deduction. The PMI lobby must have spread around a lot of money.
To pay for the tax forgiveness on debt forgiveness and the extended PMI deduction, the Section 121 exclusion of the gain on the sale of rental or vacation property converted to a personal residence would be reduced beginning in 2008.
I do not support HR 3648. Congress should not send a message to America that it is ok to be fiscally foolish and live beyond your means because you won’t have to pay the consequences. Those who lost out in this situation made their bed, now they should be made to sleep in it.
So what do you think?

Thursday, September 27, 2007


The House Ways and Means Committee approved H.R. 3648 this past Tuesday on a voice vote. The bill would exclude from taxable income mortgage debt discharge income.
I have not had a chance to review the bill in detail. Over the next few days I will be reviewing the whole mortgage foreclosure mess, which has received lots of space in various tax and finance blogs lately, and will weigh in with my 2 cents on the issue.
In the meantime:
Ryan Ellis of TAX INFO BLOG provides a general overview of the provisions of the bill in “Rangel Introduces Second Home Tax”, and
Joe Kristan of ROTH AND COMPANY TAX UPDATE BLOG (Joe- the new look of the blog is great!) discusses the part of the bill that affects vacation or rental properties converted to a personal residence in his post “Proposals for Mortgage Forgiveness Would Hit Vacation Home Owners”.
Be advised that this bill has only passed the House Ways and Means Committee, and is a long way from being actual law.


This just in from the IRS:
“Taxpayers can now request an Employer Identification Number (EIN) through a Web-based system that instantly processes requests and generates identification numbers in real time, the Internal Revenue Service announced today.
new and improved online application will reduce the time it takes taxpayers to get an EIN," said Richard Morgante, Commissioner of the IRS Wage & Investment Division. "Essentially they can get one while they wait –– within minutes."
Here's how it works. A taxpayer accesses the Internet EIN system through and enters the required information. If the information passes the automatic validity checks, the IRS issues a permanent EIN to the taxpayer. If the information does not pass the validity checks, it is rejected. The taxpayer then has an opportunity to correct the information and resubmit the application.
The Internet EIN application is interactive and asks questions tailored to the type of entity the taxpayer is establishing. This is similar to popular tax processing software packages on the market.
The system provides "help" screens throughout the application process. This means taxpayers will no longer have to print the EIN instructions and separately search for answers while requesting an EIN.
When the EIN application process is complete, a taxpayer has the option to view, print and save his or her confirmation notice, as opposed to waiting for the IRS to mail it. Third parties authorized by the taxpayer can also be provided with the EIN, but the third party cannot view, print or save the confirmation notice. Instead, the confirmation notice is mailed to the taxpayer.
An EIN assigned through Internet submission is immediately recognized by IRS systems. Taxpayers can begin using the EIN immediately for most business purposes.”
A new corporation or partnership, any entity that will be filing a separate income tax return, will need a federal Employer Identification Number. A sole proprietor or a one-man LLC reporting income and expenses on a Schedule C does not need a separate federal ID number – it can use the owner’s Social Security Number. However, if the sole proprietor or one-man LLC will be hiring employees and paying wages it will need an EIN in order to file payroll tax returns. It is also possible that the bank where the business checking account will be maintained may require a separate EIN.
If I have occasion to use this new process in the future I will let you know how it goes.

Wednesday, September 26, 2007


Q. I have one question about a Beneficiary IRA. I thought it was a regular IRA until I happened upon the Motley Fool website that mentions something about mandatory distributions and the five-year rule – I inherited the IRA four years ago – yikes! I don’t want to break any IRA rules! So now I have to do something about it and I need to Ask The Tax Pro.


A. As the “non-spouse” beneficiary of an IRA (I am assuming here, as you did not specify in your question) four (4) years ago you were limited in your choices of what to do with the money in the account.

Under the five year rule you read about at Motley Fool the entire balance in the inherited IRA account must be withdrawn by the end of the fifth (5th) year following the year that the person from whom you inherited the account went to his/her final audit. If the owner of the IRA account passed away in 2003 you have until December 31, 2008 to take the money from the account. Under this rule you do not have to take any distributions prior to December 31, 2008.

All, or part (see my posting on “Inherited IRA”), of the distribution in 2008 will be subject to federal, and probably state, income tax - but it will not be subject to the 10% premature withdrawal penalty if you are under age 59½.
IRS Publication 590 (Individual Retirement Arrangements) provides information on how to treat distributions from an IRA.
The Pension Protection Act of 2006 changed the rules for non-spouse beneficiaries, effective for tax years beginning after 2006. Ryan Ellis of TAX INFO BLOG (the former “Tax Player”) discusses the new rules in his excellent posting “How to Deal with IRAs from the Beneficiary End”.

I hope I have been of help.


Tuesday, September 25, 2007


I just got back from NYC where I saw two (2) shows from the New York Musical Theatre Festival (1:00 pm and 8:00 pm - reviews to follow in a later post) and was checking my email when I discovered that the “Carnival of Small Business Issues” has been posted at Edith Yeung’s blog DREAM THINK ACT.
It features my post on “In the Courts – Employing Your Kids”. This is yet another new Carnival for me!


A client, whose, in our opinion, perfectly legitimate alimony deduction for 2004 was questioned by the IRS, recently received the following letter, dated September 18, 2007:

“Dear Taxpayer:

Thank you for your correspondence of Apr. 20, 2007.

We haven’t resolved this matter because we received a large volume of similar responses at the same time. We haven’t been able to complete our review of the information you sent. We will contact you again within 60 days to let you know what action we are taking.”

Prior to that, the taxpayer had received a letter dated July 11, 2007 referring to “your correspondence of Apr. 20, 2007” and stating that the IRS needed additional time to review the issue and would respond within 45 days.

The initial response to my correspondence of Apr, 20, 2007 was dated May 25, 2007, and said that an additional 45 days was needed before they could respond to the issue.

My correspondence of Apr. 20, 2007 had referred to a previous letter on the subject that I had written on December 16, 2006, which had been totally ignored.

While all this was going on, we also received a letter from the Internal Revenue Service dated July 20, 2007, which stated that the alimony deduction claimed on the 2005 Form 1040 had been denied and requesting a payment of additional tax.

I wrote to the IRS stating that we were in the process of resolving the exact same issue for 2004 and requested that further action on tax year 2005 be deferred until the resolution of the 2004 issue.

We received a reply dated September 10, 2007, which stated that the IRS was “still reviewing your response [my letter regarding 2005] and will reply by 9/24/2007.”

What is going on down at the IRS?

When the Internal Revenue Service writes to a taxpayer you have to drop everything and respond promptly or else face liens, levies, and money being withheld from subsequent federal and state refunds and rebates. Yet when a taxpayer, or his duly authorized representative (in this case I have a signed Form 2848 - Power of Attorney and Declaration of Representative - on file for the taxpayer and returns), writes to the IRS he has to wait 150 days for an answer (actually more – since the initial inquiry was sent in December of 2006)!
I have submitted this case to the
IRS Taxpayer Advocate Office. According to the IRS website, “You may be eligible for Taxpayer Advocate Service assistance if….You have experienced a delay of more than 30 days to resolve your tax issue.”
I will let you know what happens.


It seems that due to my increased popularity (or should that be notoriety) as a competent tax professional and my increased exposure on the internet I am getting more and more email tax questions from clients and non-clients, readers and non-readers. So I will attempt to make every Wednesday ASK THE TAX PRO WEDNESDAY, much like WHAT’S THE BUZZ is posted each Saturday.

If you want to submit a question you should first read my posting “Ask The Tax Pro – Please”.

I suppose to cover my arse I should offer the normal disclaimer that my postings are “prepared for educational and general information purposes, and should not be considered legal advice or legal opinion”.

What my answers will basically be, based on the limited information provided in the question, and based on a review of “tax authorities” (Tax Code, Tax Court, Revenue Rulings, Letter Rulings, IRS publications, etc) and my 35 years of experience preparing 1040s, are what I would recommend to a client in the same situation.

Of course the phrase “based on the limited information provided in the question” is extremely important in this context. There may be other facts and circumstances not mentioned in the question that could affect the advice I would give.

I actively encourage you to discuss my answers with your own tax professional before acting. You can find a tax professional in your area at

One last word – I do not write this blog to solicit new business. I already have more 1040s than I want to handle, and I do not accept corporate, partnership, estate or trust work.

Regarding last Wednesday’s ASK THE TAX PRO entry on health insurance for the self-employed – only one fellow blogger, Will, stopped by to give my answer his blessing. Gina, Kay, Kelly, Trish, Dan, Joe, Jim, Ryan, et al – what’s the word? Did I get it right? Don’t be afraid to let me have it if I was totally off base.

And everyone else – ASK THE TAX PRO!


Monday, September 24, 2007


I do not watch professional, or college, sports (except for the Pro Bowlers Tour on ESPN and reruns on ESPN Classic – the entire extent of my ESPN channel viewing) nor do I follow sports in the media. It appears that the New England Patriot’s coach Bill Belichick was fined $500,000, and the team was fined $250,000, for the illegal videotaping of the New York Jets' defensive coaches signals in the teams' Sept. 9 season opener.
The various tax blogs have been abuzz lately concerning the question of whether the coach can deduct his $500,000 fine as a business expense. I guess I should weigh in with my 2 cents worth on this topic.
I had not previously blogged on this topic because, frankly, my dear, I don’t give a damn. It certainly is not an issue that would affect me or any of my clients (although there was the one year some 25+ years ago that we prepared the 1040 for the then captain of the New York Giants football team, who had gone into a short-lasting partnership with a regular client of ours on a restaurant near the stadium – FYI he never paid us). But then perhaps it does indirectly affect me and my clients, considering the title of this posting.
IRS instructions state that “Some miscellaneous expenses that you cannot deduct are...Fines and penalties you pay for violating a law.” Internal Revenue Code Section 162(f) states “No deduction shall be allowed under subsection (a) for any fine or similar penalty paid to a government for the violation of any law.”
So, to digress a moment, the fine on a ticket for overtime parking while visiting a client’s office is not deductible because it is imposed by and paid to a Municipal Court - although the quarter put in the meter is deductible.
The fine in this case was not imposed by or paid to a governmental agency or entity for the violation of a legal statute. They were paid to the NFL for breaking a rule – basically not playing fair. So a deduction for this fine is not specifically denied in the Code. Neither does the Code specifically allow such a deduction.
Kelly Phillips Erb (a.k.a. The Tax Girl) points out that “Canadian tax laws allow for a deduction for fines and penalties ‘provided the action giving rise to the penalty was done to earn business income.’” But that is Canada and not the US.
We now must determine if the fine is an “ordinary” or “necessary” business expense under Code Section 162(a). An "ordinary" expense is one that is common and accepted in a field of business, and a "necessary" expense is one that is helpful and appropriate to your business.
Unfortunately, lately such an expense has become all too “common” and “accepted” in the business of professional sports. It is certainly not “helpful” to the coach, but one could argue that it is appropriate in the field of professional sports that such fines be assessed. If the coach refused to pay the fine I expect he would be barred from participating in the NFL, so one could also say it is “necessary” for him to pay it in order to maintain his current position and salary.
I have reviewed the arguments in the various tax blog postings on this subject – mostly for deducting the fine (our good friend the Tax Girl stands alone, although Jim Maule is not so strongly for). A listing appears at the end of this post.
These discussions report several Tax Court cases in which a business entity was allowed to deduct a fine assessed by a related non-governmental organization.
First, my answer on what should be - The punitive value of such a penalty should not be reduced by allowing the “perpetrator” to recover a substantial % of the fine via a tax deduction. I believe that the Tax Code should be revised by Congress to make certain fines and penalties assessed by non-governmental industry-policing entities, such as the fine discussed here, non-deductible. The federal and state government, and ultimately its individual taxpayers, should not have to subsidize this type of behavior.
However, as tax law professor Jim Maule of MAULED AGAIN points out in his, as usual, thorough and scholarly exposition on the subject, “the determination of whether the fines are deductible must be made under the law as it is, not the law as we would prefer it to be.” Unfortunately, again using the “when in doubt – deduct” rule, I would agree with the prevailing opinion that the fine can be deducted as an ordinary and necessary business expense on the coach’s Form 1040.
I think I also agree with the closing comments on Jim Maule’s post:
“The cynic in me thinks that if the IRS challenged the deduction and prevailed, Congress would enact some sort of moratorium barring the IRS from challenging the deduction of fines imposed by the NFL. Not far behind would be special legislation making sports fines explicitly deductible no matter how common or rare the underlying transaction, unless the fine was imposed on account of violation of a government’s criminal law.”
How would the coach deduct the $500,000 fine? Since, I assume, he is a W-2 employee of the New England Patriots he would have to claim the fine as an “employee business expense” on Form 2106 (or Form 2106-EZ), which would be carried over to Schedule A to be reported as a miscellaneous expense subject to the 2% of AGI exclusion. Such employee business expenses are not deductible in calculating the dreaded Alternative Minimum Tax (AMT), but based on his level of income the coach would certainly not fall victim to AMT. As I have said here before – millionaires don’t pay AMT.
Ryan Ellis (the blogger formerly known as Tax Player) of the TAX INFO BLOG, speaking at the TAX PROF BLOG, does the following computations for us:
“It's been reported Bill has an annual salary of about $5 million, so let's use that as a rough approximation of AGI. Assuming no other miscellaneous itemized deductions subject to the limit that shaves $100,000 off his deduction right there, leaving him with $400,000. The Pease phaseout {the “read my lips” tax – rdf} will get him, as well. Assuming $5 million of AGI and $1 million of itemized deductions (about standard), the Pease phaseout will reduce his itemized deductions by $145,308. The pro-rated share (40%) of this assigned to the remainder of the fine is $58,123. That leaves him with $341,877 to deduct. Assuming he is in the 35% bracket, the federal tax subsidy on this will be $119,657. The IRS will subsidize 24% of the Belichick fine.” Plus the coach’s home state (if it has a state income tax) will also kick in something toward the $500,000.
Now if this were a Schedule C deduction, with federal and state income tax at the highest level and the Medicare portion of the self-employment tax, we are talking about a total tax subsidy of close to 45% of the $500,000!
And that’s my 2 cents worth on the issue. Here is what other tax bloggers have said:

Saturday, September 22, 2007


* Jeremy Vohwinkle answers the question “Should You Take a 401(k) Loan?” in a posting at ABOUT.COM: FINANCIAL PLANNING. While Jeremy doesn’t actually come right out and say it, the correct answer is “NO”. The posting mentions the two main reasons why this is so:
(1) “Compounding interest is one of the greatest assets you have going for you in a retirement plan. Over time, the interest and gains on the money in your account snowballs and can accumulate significantly. When you pull money out of your retirement account, you are reducing the amount of money that can compound.”
(2) “When you default on a 401(k) loan and have not reached the age of 59 1/2, the IRS treats the loan as a distribution which would not only be subject to income taxes, but an additional 10% early withdrawal penalty as well.”
I have seen the consequences of (2) with many clients over the years. In most of these cases a taxpayer changed jobs with an outstanding balance due to his former employer’s 401(k) from to a loan taken out many years earlier. The outstanding balance was reported as a “premature withdrawal” in a Form 1099-R and was fully taxable to both “Sam” and New Jersey, plus he was hit with the 10% penalty. A $10,000 balance could result in over $4,000 in total tax due, with no corresponding current income from which to pay the tax.
I will admit that taking a loan from your 401(k) is more better than taking an outright premature distribution.
* The office of the Treasury Inspector General for Tax Administration has apparently been busy lately issuing reports. Joe Kristan of ROTH AND COMPANY TAX UPDATES discusses a recent report on Schedule C filings in his posting Another Way to Pay for Amway” -

“The Treasury Inspector General for Tax Administration issued a report last week with some startling figures on how many taxpayers report improbable Schedule C "sole proprietorship" losses for amazing lengths of time. The report says 70,000 taxpayers with six-figure incomes reported Schedule C losses for four consecutive years (2002-2005) where the business expenses were at least five times revenues. Another 30,000 taxpayers claimed schedule C losses for four straight years with no gross receipts at all, losing an average of $5,456 each over that period.”
I have seen many of such Schedule Cs over the past 35 years. In some cases the taxpayer was actually making a legitimate effort to earn money with a sideline business.
The bottom line? Joe suggests, “We can expect legislation, but it's far from certain that Congress is capable of drawing a 'bright line' that shuts down true ‘hobby losses’ without clobbering legitimate businesses that happen to have a bad year or two.”
* THE HAPPY ROCK blog suggests an interesting concept in his post “
Simple Tip For Spending Less - Think About Pre-Tax Dollars”. For NJ taxpayers the amount is probably $1.44 (using 25% federal and 5.525% state tax rates), and not $1.33, for every dollar you spend. A tip of the hat to Kristine of FINANCIAL TIPS FOR WAHMs for bringing the post to my attention.
* Kay Bell of DON’T MESS WITH TAXES provides a brief overview of ways taxpayers can get help paying for “post-secondary” expenses from Uncle Sam in her post “Education Costs 101: Tax-Saving Ways to Pay for School”.

Kay makes the good point that, “A credit, which lets you reduce your tax bill dollar-for-dollar, usually is better. But, and you knew that was coming since this is about taxes, everyone's situation is different, so a deduction might be the better choice for some.”
As I always say, when you have a choice of accomplishing the same end by more than one method you should calculate the tax consequence of each individual method and determine which one will produce the greatest overall federal, state and local tax savings. For example the HOPE Education Credit is 20% of the first $10,000 of qualifying tuition and fees, but an above-the-line deduction for tuition and fees could provide a 25% tax savings and will reduce your Adjusted Gross Income (AGI). It all depends on your level of income and the amount of qualifying tuition and fees.

Another reminder – 100% of all awards, grants and scholarships must be applied to tuition and fees when calculating the amount eligible for an education credit or deduction. The same applies to Veteran’s benefits and employer-paid benefits. You cannot allocate these items between tuition and room and board.

* While I will not publish the figures until they are officially released by the IRS, CCH has released what it anticipates the
2008 federal tax brackets and inflation adjustments to be. They are usually on the money. I will be creating a WHAT’S NEW FOR 2008 Page with the final numbers on my website in mid-October.

* Check out my “comments” on Trish McIntire’s posting “Come Out, Come Out, Wherever You Are!” at OUR TAXING TIMES.

* A 30-something married mom provides some good advice in her post “
You Never Know Until You Ask” over at I’VE PAID FOR THIS TWICE ALREADY (the trials and tribulations of getting out of debt… and someday beyond). This was one of the postings included in the 3rd installment of the "Carnival of Everything Finance", in which I was also represented.


Friday, September 21, 2007


Today’s “Fix the Tax Code Friday” question at Kelly Phillips Erb’s TAX GIRL deals with the way property taxes are assessed. Her concern was that because of where she lives within her municipality she receives less overall township services than those who live in other areas, yet all homeowners are taxed based on the assessed value of their property and not on use or need of services provided. I commented on the post to agree that this is basically unfair and to add the fact that, in New Jersey at least, all homeowners share the cost of the local school system whether or not they have any children who actually use the system. In my case I never had and never will have children, yet a part of the rent I pay on my apartment goes to fund the school system. I am paying for municipal services that will never benefit me.

To be honest, I did acknowledge that in the long run a good school system benefits all residents. Better schools translate to higher and more sustained property values and a better educated population is good for everyone.

In the course of writing a commentary on the Alternative Minimum Tax for the National Association of Tax Professional’s quarterly TAXPRO JOURNAL I mentioned the fact that recent tax cuts have created an increasing number of American “non-taxpayers” – individuals and families who pay absolutely no federal income tax, or who actually “make money” on their 1040 due to refundable credits. I suggested, as I have done here in the past, that perhaps we should have a true “Minimum Tax” that requires each and every non-dependent American to pay at least $100.00 in federal income taxes!

After sending the commentary off to NATP it occurred to me that this is also relative, to a degree, to Kelly’s conversation on property taxes. It concerns the same issue. The inequity is not limited to property taxes. The growing number of lower-income American “non-taxpayers” are actually receiving the benefit of many more direct and indirect (federally funded) government services than I am. Yet they pay absolutely nothing for these valuable services while, because my income is relatively higher or, more to the point, is taxed at a much higher effective rate due to the lack of spouse and/or children, I end up paying for services I do not receive and subsidizing others who pay absolutely nothing for the wealth of services and benefits they are getting.

I have no easy solution to the issue. It is a basic, probably inescapable, reality of an income-based tax system. It is just something to think about, and something that should be kept in mind when certain political camps complain that tax cuts benefit only the wealthy and not the working, or non-working, poor. Let’s face it – tax cuts benefit those who actually pay tax!

That is my 2 cents worth (although I think that amount should be adjusted for inflation)!


Tushar Mathur of EVERYTHING FINANCE has just informed me that the 3rd installment of the "Carnival of Everything Finance" is up and running. My posting on “Buy or Lease – That is the Question” is included in the Spending Wisely section.


Wednesday, September 19, 2007


Q. Thanks for your great blog.
My spouse (Age 67) is retired from the US Government, receiving a federal retirement check, and is also drawing Social Security. Her retirement payment is reduced by an amount for Federal Blue Cross-Blue Shield health insurance for both of us. Her Social Security payment amount is reduced by a different amount for her Medicare coverage. We have to report both her full federal retirement allowance (before the insurance premium deduction) and Social Security benefits (before the insurance premium deduction) as taxable income - hence we get to pay taxes on the retirement and social security money spent for this insurance. Finally, I am retired but operate a single person LLC consulting business providing abut $60K taxable income (after minor business expenses).
Since my only health coverage is that provided by my wife's BCBS, can I deduct the above costs (around $4500) as an "above-the-line" medical expense on my 1040?
A. You have posed a very interesting, and controversal, question. In order to respond properly I have done extensive research on this question.

Before going on allow me a comment on the description of your situation – you are not, or should not be, reporting your wife’s full Social Security benefits as taxable income on your 1040. At most you are paying tax on only 85% of the gross benefit.
The issue in question is whether you can deduct insurance premiums for a policy issued in a name other than that of the sole proprietor, or if the policy must be purchased in the name of the business or the business owner.

First, the results of my research -

(1) There is nothing I could find in the Internal Revenue Code to provide specific quidance. The Code itself does not say that in order to qualify for the special deduction the policy must be in the name of or set up by the Schedule C business.

According to Internal Revenue Code Section 162 (l)(1)(A) – “In the case of an individual who is an employee within the meaning of section 401(c)(1)
, there shall be allowed as a deduction under this section an amount equal to the applicable percentage of the amount paid during the taxable year for insurance which constitutes medical care for the taxpayer, his spouse, and dependents.” Section 401(c)(1) concerns a "self-employed individual treated as employee". The “applicable percentage” is 100%.
(2) However, IRS Publication 535 (Business Expenses) says – “The insurance plan must be established under your business. Partners and more-than-2% S corporation shareholders can claim the self-employed health insurance deduction only if the policy is in the name of the partnership or S corporation. For sole proprietors, the policy does not have to be in the name of the business if it is in the name of the sole proprietor.”
(3) IRS Headliner Volume 163 (May 15, 2006) reports - “In many solely owned businesses, the owner of the business will purchase health insurance in his or her own name versus the name of the business. The type of entity may greatly affect where this insurance premium expense may be deducted on the individual’s personal income tax return.
In Chief Counsel Advice (CCA) 200524001, it was held that a self-employed individual who is a sole proprietor and who purchases health insurance in his or her own name may treat that as health insurance purchased in the name of the sole proprietor business. As such, the insurance would qualify under the provisions of IRC §162(l). Assuming the self-employed individual meets the other provisions of IRC §162(l), the individual may claim a deduction for the insurance premiums in arriving at his or her adjusted gross income; also referred to as an above-the-line deduction.”
(4) Chief Counsel Advice (CCA) 200524001 says - “A self-employed individual who is a sole proprietor may deduct medical care insurance costs of the sole proprietor and his or her family from the earned income of his or her trade or business when the health insurance policy purchased by the sole proprietor is issued in his or her individual name and not in the name of the sole proprietor’s trade or business.”
Under the heading of “Discussion” in CCA 200524001 it says that “the statute has always required that a plan be established under a trade or business”, although the reference prior to this comment says that the Code Section that indicated such coverage is treated as an “employer-provided benefit” was retroactively deleted. As stated above I could find nothing in 162(l) that specifically said the insurance had to be established under the Schedule C trade or business.
A Chief Counsel Advice (CCA) is considered to be “administrative authority”. Like a General Counsel Memoranda it explains the legal reasoning behind a specific IRS position. Similar to a Technical Advice Memoranda and a Field Service Advice it cannot be relied on or cited as precedent.
(5) Let us look at the reasons behind why Congress created this special above-the-line deduction. As CCA 200524001 states, “One of the reasons for enacting the Section 162(l) deduction was that the existing rules relating to the exclusion from gross income for benefits under employer accident or health plans created unfair distinctions between self-employed individuals and the owners of corporations. Owners of corporations could exclude from gross income health benefits provided by the corporation, whereas no similar exclusion was available to self-employed individuals.”
Basically, prior to the enactment of Section 162(l), the owner of a one-man corporation could treat himself as an employee of the corporation and receive all the benefits, and the corresponding business tax deductions, allowed for employees, including employer-provided health insurance – but self-employed business owners who filed a Schedule C did not receive an equal tax benefit. Congress wanted to correct this inequity and provide the self-employed individual with a deduction that was the equivalent of that for the employer-provided health insurance coverage available to the corporate employee.
One could argue that Congress may have “intended” that the policy be issued in the name of the business. But this possible “intention” did not make its way into the Code.
(6) I have not found any Tax Court decisions that specifically address this issue.

(7) While it does not pertain directly to the issue at hand, I found a statement online from a non-IRS source that said “health insurance through COBRA is considered to be held under your former employer’s name. This twist means you cannot claim COBRA payments as a deduction.”

Now, to answer your question -

In your situation the health insurance policy under which you are covered is neither in the name of your Schedule C business nor in your individual name. It is in the name of your spouse, or perhaps in the name of the federal pension.

I think it is clear from the above that it is the “official” position of the Internal Revenue Service that the policy should be issued in the name of your Schedule C business, or in your individual name. Meaning that you must go out and actually purchase the policy yourself. An above-the-line deduction for the $4,500 in health insurance premiums deducted from your spouse’s federal pension might not survive an IRS audit.

However, as I have indicated above, I have found nothing in the Tax Code or the Tax Court that specifically disallows the special deduction for self-employed health insurance premiums on a policy that is not issued in the name of the business or the business owner. This is your only source of health insurance, and, as a self-employed individual, you are entitled to an above-the-line deduction for “the amount paid during the taxable year for insurance which constitutes medical care for the taxpayer, his spouse, and dependents.”

The rule of thumb is “when in doubt – deduct”. So if I were preparing your tax return I would claim an “adjustment to income” for the $4,500 in premiums withheld from your spouse’s pension.

If you are audited by the IRS on this issue and the deduction is disallowed you will then have to decide how far “up the line” you are willing to go.

I would go one further and also claim a deduction for a self-employed individual who was making COBRA payments, contrary to the online advice I found.

You can also try to get the deduction allowed through the “back door”, as a deduction on the Schedule C itself (which will reduce your self-employment tax as well), under IRC Section 105 by (1) approving a “medical reimbursement plan” for the employees of your business (stating, for example, that the business will reimburse all employees for medical expenses, including health insurance premiums paid, up to a maximum of $5,000 per year as an employee benefit) and (2) hiring your spouse as an employee of your business. I am assuming your business has no other employees. Of course to do this your wife would have to become a bona fide employee of your company and actually perform legitimate duties. However, that is a topic for another posting.

Hey fellow tax bloggers and tax professionals – do you agree with me on this issue, or am I way off?


Tuesday, September 18, 2007


Here is pretty much everything you always wanted to know about “points” – but didn’t know just who to ask:

A “point” is a percentage point charged to obtain a mortgage. One point on a $100,000 mortgage would be $1,000. Two points would be $2,000. Points (aka Loan Origination Fee, Loan Discount, Discount Points, etc) are usually reported on Lines 801-802 on the back of the standard HUD Closing/Settlement Statement.

Points paid to borrow money are deductible as interest on Schedule A. Generally, points are “amortized” over the life of the loan. Points on a typical 30 year mortgage are deducted over 360 months. If the points paid on a 20-year mortgage are $3,000 you can deduct $12.50 per month ($150 for a full year).

However you can deduct the total amount of the points paid on a loan used to buy, build or substantially improve your principal residence, and secured by that residence,
in full in the year paid.

If the seller of the property elects to pay all or part of the points in order to help the buyer obtain the mortgage, or as an additional incentive to buy, the seller-paid amount is considered to have been paid by the buyer.

In order to deduct the points in full in the year of purchase the amount of money paid at closing, including any seller-paid points and the initial down payment or deposit, must at least equal the amount of points charged. The points on a $300,000 mortgage are $6,000. You had initially given a $1,000 deposit and paid $25,000 at closing. The $6,000 is deductible in full on your Schedule A.

The mortgage lender will generally report the amount of points paid on the purchase of a principal residence on the Form 1098 sent to the borrower in January of the year following the sale. If this is the case the points are included in the amount reported on Line 10 of your Schedule A. Points not reported on a Form 1098 (including any amortization of points or the deduction of remaining “unamortized” points – see below) are reported on Line 12.

You do not have to deduct the points paid on the purchase of a principal residence in full in the year paid. You can elect to amortize the points over the life of the mortgage. Why would you want to do this? Consider the following example.

John and Jane Q Taxpayer close on the purchase of a principal residence in November of 2007. The total amount of points paid at closing is $2,500 and the interest paid on the mortgage for 2007 is also $2,500. The real estate tax adjustment on the Closing Statement is $458. This is the first principal residence for both of them – prior to the purchase J+J had rented an apartment. Their deductible state and local income taxes and charitable contributions add up to $4,142. Their itemized deductions for 2007 total $9,600. The 2007 standard deduction for a married couple for is $10,700. So they are not able to itemize on their 2007 Form 1040. They can elect to amortize the points paid on the purchase over the life of the mortgage loan so they will be able to get a tax benefit for the points in future years.

Be advised that if J+J will be victims of the dreaded Alternative Minimum Tax (AMT) for 2007 they may want to itemize, claiming the full amount of points paid, even though their deductions are less than the allowable standard deduction. The standard deduction is not deductible in calculating AMT. However mortgage interest and points paid on the purchase of a primary residence and charitable contributions are deductible for AMT purposes.

Points paid on the refinance of your principal residence and the initial purchase or refinance of a vacation home or a rental or investment property must be amortized over the life of the mortgage. However, if you refinance a mortgage on your principal residence in order to get additional money to “substantially improve” that residence you can deduct in full the points paid on the funds used for the improvements. A substantial improvement is one that adds value to the home or prolongs its useful life.

If you pay-off a mortgage on which you have been amortizing points early (i.e. you sell the property or refinance the mortgage with a new lender) you can deduct the amount of “unamortized” points on that mortgage in full in the year of the pay-off.

Let’s say you paid $3,600 in points on a 30-year mortgage to purchase a vacation home. You have deducted a total of $540 in points on prior years’ tax returns through 2006. You sell the home in January of 2007. You can deduct $3,060 in points on your 2007 Schedule A ($3,600 - $540). If it was a rental property the points would be deducted on Schedule E.

This does not work if instead of selling the property in January you refinance the mortgage with the same lender. Using the numbers from the above example let us say that you initially purchased the vacation home with a mortgage from Bank of America. In 2007 you refinance the mortgage with Bank of America to get a lower interest rate and to reduce the term from 30 years to 15 years. There are no points on the refinance. Because you refinanced with the same lender the remaining $3,060 in “unamortized” points must continue to be amortized at $17 per month over 180 months.

Deductible points are limited by the same $1 Million in acquisition debt as mortgage interest deductions.

Did I miss anything?


Monday, September 17, 2007


The 118th edition of the "Carnival of Personal Finance (Fun Money Facts Edition)" is up and running at Golbguru’s MONEY, MATTER AND MORE MUSINGS (Musings on Money, Personal Finance, Frugality, Debt, and Other Matters).
Golb has added some interesting money facts in between the Carnival’s 12 categories of 88 posts. For example, did you know that Martha Washington is the only woman whose portrait has appeared on a U.S. currency note. It appeared on the face of the $1 Silver Certificate of 1886 and 1891, and the back of the $1 Silver Certificate of 1896.
My ASK THE TAX PRO post on Medicare Premiums is the very last on the list – under the Retirement category. In the days of vaudeville if your name couldn’t be first on the ad the next best placement was last.
I especially enjoyed the posting on “Fire Your Broker: 10 Keys to Investing Successfully On Your Own” from MILLIONAIRE MOMMY NEXT DOOR under the category “Investing – General Discussions”. According to the Millionaire Mommy, “I burned through five brokers before realizing that no one cares as much about my money as I do. Brokers are salespeople. Naturally, they care more about their bottom line then mine.”


Here is a “buzz” item that I couldn’t wait until Saturday to bring you:

Kristine McKinley of FINANCIAL TIPS FOR WAHMs (which I now know is Work At Home Moms, although her blog’s advice and information could probably also help WAHDs as well) wants to cut her grocery bill. Her blog has initiated a contest titled "My Best Grocery Money Saving Tip". To enter all you have to do is give a quick tip about how you save money on your grocery bill in the comment section of the blog. It can be about using coupons, shopping at wholesale clubs, using a price book - whatever works for you.

According to Kristine, “The person with the best tip will win $15 delivered via PayPal on September 22. All tips must be received by 9PM Friday, September 21. You may enter as many tips as you want (one tip per comment please). Be sure to either leave a link to your website/blog or your email address in your comment so that I am able to contact you if you're the winner.”

I am a WAHTP (Work At Home Tax Professional), or perhaps a WAHA (Work At Home Accountant). If I worked in the Accounting Department at Wal-Mart would I be a WAWA (Work At Wal-Mart Accountant)? Is a Danish Young Professional Work At Home Dad a DYPWAHD? How about a Wealthy Internet Genius Work At Home Mom – a WIGWAHM! Sorry for having so much fun with this – the possibilities are endless.


The September issue of the National Association of Tax Professionals’ TAXPRO MONTHLY reports on Michael D and Christine Alexander vs Commissioner (TC Summary Opinion 2006-127). This case involves self-employed parents deducting “wages” paid to their children.

This is a great deduction for parents of minor children who have a net income-generating Schedule C business. For 2007 a dependent can earn up to $5,350.00 in wages (or a combination of wages and up to $300.00 in “unearned income” – i.e. interest, dividends, capital gains) and pay no federal, and probably no state, income taxes. Contributions to a traditional IRA can add another $4,000.00 to that figure (however, in the long run, it is probably better to contribute to a ROTH IRA in such a situation).
Plus, if the child is under age 18 you do not have to withhold or pay FICA (Social Security and Medicare) taxes, and probably state unemployment and disability contributions, on the payments. Wages paid by a parent’s unincorporated business to a dependent child under age 21 are also exempt from FUTA (federal unemployment) tax.
The parent gets a deduction on his/her Schedule C for the wages paid, which will reduce income tax, self-employment tax, and Adjusted Gross Income.

However, to be deductible the wages must be for actual legitimate services to the business as an employee, the child must actually be paid the wages, and the amount of wages paid must be reasonable for the type of services provided. Routine family chores (see the Court’s discussion below) will not qualify, you cannot just claim a deduction and not actually give the money to the child (or deposit the money in the child’s IRA account), and you are not allowed to pay your 10 year old son $50.00 an hour for sweeping up your office.

In the case discussed in the newsletter the parents had three home-based businesses – a tree farm, a tailoring business, and a beagle-breeding business.

Their son, a 21-year old college student, helped with his mother’s tailoring business during summer break. His jobs included getting supplies at a fabric store, general cleaning and shampooing the rug in the sewing room, and accompanying his mother to the store.

Their two minor daughters worked in the beagle-breeding business walking the dogs, cleaning and cutting the grass in the beagle yard, hauling garbage, bleaching dog bowls, treating dogs for fleas, clipping nails and hosing kennels.

None of the children received an actual pay check. The son received $4,000.00 over the course of the year, most before he actually began work. A type of “drawing account” was kept for each of the daughters. Earnings were accumulated, and the girls were given money as they needed it, or the parents would purchase items for the girls and deduct the amount from their “account”. No quarterly (941) or annual (940, W-3, W-2) payroll tax returns were prepared for any of the wages claimed as a deduction.

The Court felt that “many of the tasks [the son] performed were in the nature of routine family chores such as cleaning, vacuuming, taking out garbage, and accompanying [his mother] on shopping trips. Such chores are part of parental training and discipline rather than the services rendered by an employee for an employer.” This, plus the fact that the son’s wages were not paid as earned and there were no payroll tax returns filed, caused the Court to conclude that the payments made to the son were not deductible as wages.

While I agree with the Court on the son, I felt that the daughters could have qualified as true employees. However, the Court disallowed the deduction for their wages as well.

It is very important that you “cross your t’s and dot your i’s” when it comes to documenting a deduction for dependent wages. You must make sure you pass the “duck test” (if it waddles like a duck and quacks like a duck…). Forget that these are your kids and treat them as you would any other employee.

· Create a written job description for each “position” outlining the duties and responsibilities involved.

· Pay the kids on an hourly basis.

· Use a time card to document hours worked and work performed.

· Write a company check as payment each week or every-other week.

· Even though the wages are not subject to FICA and FUTA tax and probably also state unemployment and disability contributions, file all appropriate quarterly payroll tax returns, such as the federal Form 941 (you can indicate that the wages are exempt from FICA on the form), submit an annual federal Form 940 or 940EZ indicating the amounts paid as “exempt”, and issue a W-2 in January to report the wages paid.

· If you have other employees make sure the kids’ wages are included on the quarterly and annual payroll tax returns.

If you send me an email with “THE WANDERING TAX PRO FORM REQUEST” in the “Subject Line” I will send you, as a “pdf” attachment, an Employee Time Card form you can use for your kids.

Any questions?


Sunday, September 16, 2007


I just wanted to let my New Jersey readers know that the rebate checks for “non-senior” and “non-disabled” homeowners are in the mail. If you filed your NJ Homestead Property Tax Rebate application by the original August 15th deadline you should get your check next week. Checks for those who filed after August 15 will be issued as quickly as possible.

If you have not submitted your application yet you still have until October 31st to do so.

Click here to read the NJ Department of Treasury press release.

Click here to submit your application online.

Click here to check on the status of your rebate.

You can get more information on the 2006 NJ Homestead Property Tax Rebate on the NEW JERSEY UPDATE Page of my website.


Saturday, September 15, 2007


I just received the following email alert from a client. For what it is worth I pass it along to you -

“A new virus has just been discovered that has been classified by Microsoft as the most destructive ever. This virus was discovered yesterday afternoon by McAfee. This virus simply destroys Sector Zero from the hard disk, where vital information for its functioning are stored. This virus acts in the following manner: It sends itself automatically to all contacts on your list with the title: 'You've received a Post Card from a Family member'.
As soon as the supposed virtual card is opened the computer freezes so that the user has to reboot. When the ctrl+alt+ del keys or the reset button are pressed, the virus destroys Sector Zero, thus permanently destroying the hard disk. Yesterday in just a few hours this virus caused panic in New York , according to news broadcast by CNN.
This alert was received by an employee of Microsoft itself. So don't open any mails with subject: 'A Post Card from ...' As soon as you get the mail, delete it!! Even if you know the sender!!!
Please pass this mail to all of your friends.”

I do recall receiving several emails with that entry in the “Subject Line” at two of my email addresses. I assumed it was spam and automatically deleted it – which apparently was a good thing. As I have said before, I never open an email unless I recognize the “address” or name of the sender.


* GLG of GINA’S TAX ARTICLES starts us off this week with a reminder that “Diabetes Testing Supplies Are Deductible”.

I will go Gina a bit further to state that the cost of eyeglasses and contact lenses, hearing aids, dentures and false teeth, artificial limbs, prosthetic devices, crutches, orthopedic shoes, wheel chairs, elastic stockings, oxygen and oxygen equipment, an air conditioner, humidifier or air cleaner for the benefit of a sick person, special telephone equipment and television close-captioning equipment for the hearing impaired, guide dogs or other animals aiding the blind, deaf and disabled, X-Rays, blood and other diagnostic tests, etc. are deductible. This includes maintenance and upkeep, such as hearing aid batteries and repairs and contact lens solutions.

New Jersey taxpayers can deduct medical expenses on their NJ state income tax return, to the extent that the total exceeds 2% of NJ Gross Income, even if they cannot deduct them on their federal return because they do not itemize, or their total is not more than 7 ½% of their AGI.

I discuss medical expenses in detail in my special report on “Deducting Medical Expenses on your 2007 Form 1040”. A special NJ edition is also available. Click here to find out how to get a copy via email for only $1.00.

* Colorado tax attorney Keith Mitchell provides an extensive listing of tax measures that are currently, or were, being considered by Congress in his posting “
A Smattering of Tax Measure Legislation”. There are some good ideas among the list – especially the repeal of the dreaded AMT, making permanent marriage penalty relief for at least lower-income taxpayers, and suspending the use of private debt collection companies to collect unpaid taxes and prohibiting the use of any IRS funds for tax collection contracts with private companies, and requiring brokerage firms to report the adjusted cost basis of securities held by their clients.
* The House of Representatives voted 220-175 to pass H.R. 1908, the Patent Reform Act of 2007 (see article), which I mentioned last week. The Act will overhaul patent rules, making it harder for companies to be sued for patent infringement, and bans patents on tax-planning methods and strategies. I join Dan Meyer of TICK MARKS in commending the House for its decision.
* Kristine McKinley of FINANCIAL TIPS FOR WAHMS (wtf is a wahm?) reminds us that the third quarter federal and state estimated tax payment is due Monday, September 17th in her posting “Don't Forget Your Third Quarter Tax Estimate!”.
* The September-October 2007 issue of the Tax Foundation’s TAX WATCH, a bimonthly tax policy newsletter presenting the Foundation’s economic research and analysis in a simple, non-technical format, is now available. The issue includes the articles Paying for Public Schools: What's the Cost of Judicial Mandates?, U.S. Corporate Taxes Still Among World's Most Punitive, Fixing AMT without Raising Tax Rates, and Study Finds Income Redistribution between Young, Middle-Age and Elderly.
* My posting “What’s Good for the Goose is Apparently Not Good for the Gander in New Jersey!” at THE NJ TAX PRACTICE BLOG (my other weblog) gives an example of how NJ taxpayers are screwed. As I point out in the posting, “When the taxpayer errs he/she is penalized. But when the State errs it is not penalized!”
* It is Kay Bell of DON’T MESS WITH TAXES who updates us on the hybrid car energy credit this week as she points out “if you want a Toyota or Lexus hybrid and a federal tax credit on your 2007 return, you've got to drive one of them off the lot by Sept. 30” in her posting
"Toyota Tax Credit Time is Running Out". And don’t forget (I know I keep mentioning this, but it is important) – you will not get a hybrid car energy credit if you are a victim of the dreaded AMT.

Kay also brought to my attention a blog posting on “10 Fun and Free Websites to Look Up the Value of Your Home (and your neighbor’s home)” from THE DOUGH ROLLER, one of the postings from the “Carnival of Homeowners #12” at HOMEOWNERS INSURANCE LOWDOWN.

* In its posting “New Census Housing Data Shows Where Property Taxes on Homeowners Are Highest” the Tax Foundation’s TAX POLICY BLOG tells us that 7 of the Top 10 counties in median real estate taxes paid for 2006 are in New Jersey; the other 3 are in New York. Hunterdon County in NJ is #1. Hudson County did not make the Top 10 – it came in at #14 with median taxes of $5,887.00. The Tax Foundation also reports that New Jersey tops the list of Property Taxes on Owner Occupied Housing by State for 2006. Constipation, Mr. Holmes! Tell me something I don't know.


Thursday, September 13, 2007


It has been quite a while since I have written a posting of “ramblings” on non-tax topics. In the past I would say if Larry King can get away with it so can I. However, since my last Ramblings post the "suspendered one’s" USA Today column has been cancelled. It appears I was not the only one who could care less about Larry’s thoughts and opinions.

Anyway – here goes:

* It seems that I am a jinx, at least in one area. Whatever check-out line I get on in a supermarket or department store will automatically become the slowest moving line in the store.

If there are two lines available, one with two people and one with six people, and I get on the line with two people, as common sense would suggest, those in front of me will discover that there is only 48 cents left in their Families First card despite protests of “there must be more”, or have the wrong sale item and need to return to an aisle to make a substitution, or require multiple price checks, or have difficulty swiping their credit card, or discover that they do not have enough cash and have to remove items, one at a time, to get down to what they can pay!

If I move to the line with six people the problem on the two-person line will suddenly be resolved and the person who has replaced me on that line will breeze through check-out and be in his/her car before I get up to the cashier.

If I am on it there is no such thing as an “Express” line.

Some valuable advice for shoppers – do not get behind me on a check-out line.

As I now make weekly trips to the Jersey shore to visit my parents at an Assisted Living facility I have discovered that this jinx has carried over to the toll lines on the Garden State Parkway. If I get in an “exact” change lane the lane next to me for “cash receipts”, where the attendant makes change, which has more cars will move faster!

I tried EZ-Pass, but the “electronic tag” had to be attached to the license plate of my car (it could not be attached to the windshield inside the car on my model because there was metal in the glass) and it was constantly being damaged by cars bumping into the tag in the process of parking and had to be replaced often, at $25.00 a pop, so I gave it up.

* The headline on one of the highlighted articles under the category of “Entertainment” on my home page this past week read “Smellovision' Attempting a Comeback”. But “smellovision” has been around for quite a few years now - reality television (don’t tell me this shit don’t stink)!

* Sad news for those of us who like to wander. It appears that Biss Tours, a Rego Park company providing escorted bus tours closed its doors for good last Friday after 41 years of operation. According to an article in the Queens Chronicle, brought to my attention by a blog reader, the popular local business is thought to have overextended itself following the purchase of Parker Tours, a similar bus company operating on Long Island.

I had taken several one-day and extended overnight bus trips with Biss and Parker over the past six or seven years, and often wrote about them here at THE WANDERING TAX PRO. What I especially liked was the Hoboken pick-up location. Prior to traveling with Parker and Biss I used Starr Tours, which left from Trenton.

I will miss Biss!

* Are you a “schmuck” or a “schmo”?

According to the online Urban Dictionary a “schmuck” is a Yiddish term for “that portion of one’s penis which is cut off during circumcision”, or, metaphorically, a prick, an asshole, a moron or idiot. “Schmo” is Yiddish for an idiot or a cuckold. So I guess a schmuck is an aggressive idiot, while a schmo is more of a poor soul.

Obviously, as a reader of THE WANDERING TAX PRO, you are neither.

* I am very disappointed with the TVLAND cable channel. This channel had such great potential, and used to live up to this potential. However, I have just discovered that it will producing a new “reality” show titled “The Next Great Supermodel”, a total copy of the current steaming piece of excrement known as “America’s Next Top Model”. What does this have to do with classic television?

Why does every channel, cable or broadcast, feel that it must add to the pollution of the airwaves by producing its own “reality tv” entry?

*Craig Wilson’s column on quotations in yesterday’s issue of USA Today closed with one from Mark Twain-

“Sometimes I wonder whether the world is being run by smart people who are putting us on or by imbeciles who really mean it.”

To which Craig replied, “It’s nice to know some things never change.”

Craig, to borrow a part of your column’s title, “I couldn't have said it better myself”!