Saturday, May 31, 2008


* It seems the reports of Betty Hayes’ death have been greatly exaggerated, according to Kay Bell’s post “'Dead' Taxpayer Waiting for Rebate Check” at DON’T MESS WITH TAXES. When Betty asked the IRS why she hadn’t received her “stimulus” rebate check yet she was told it was because she was dead!
* Kay Bell also writes the EYE ON THE IRS tax blog for She answers the question I posed in my post “Hey Dude, Where’s My Rebate?" at May 28th’s “Rebate Whereabouts Redux”. As I expected, according to the IRS -
In general, the [rebate] payment schedule only applies if your return was received and the IRS finished processing it before April 15. If you filed your return on time, but close to the April 15 deadline, the IRS may not have finished processing it before April 15”.

* GINA IS BACK! After a too long absence, the result of “technical difficulties” and the demands of the tax filing season, Gina Gwozdz has returned to the blogoshpere providing excellent TAX TIPS. Welcome back, Gina!
* Roni Deutch provides her list of “
Top 10 Ways to Support the Economy with your Stimulus Check” at her TAX HELP BLOG.
Roni has recently joined the herd of those “pay pennies on the dollar” tv ads hawking Offer In Compromise consulting. While I have found Roni’s blogs to be helpful and correct I must advise you that anyone who promises they can get you “off the hook” with your Uncle Sam for “pennies on the dollar” is lying.
* Congratulation to Dan Meyer on the third anniversary of his fine blog TICK MARKS (it has nothing to do with Lyme Disease – it covers accounting, tax and personal finance).

* Paul Caron’s TAX PROF blog, recently named one of the top 50 law school blogs, reports on IRS statistics for the just-finished 2008 tax filing season in his post “2008 Tax Filing Season: E-filing Up 12.0%, IRS Web Site Visits Up 44.5%”.


BTW - many sincere thanks to Joe for spreading the word about my new tax blog ASK THE TAX PRO.

* The MD Taxes Network, CPAs specializing in health care professionals, has developed a 2-page “pdf” worksheet for valuing non-cash charitable contributions, based on the published values of used merchandise sold at the thrift shops of the Salvation Army and Goodwill Industries. Click here to download the worksheet.

* FYI – today’s question at ASK THE TAX PRO has to do with the safe harbor rule for avoiding the penalty for underpayment of estimated taxes.


Friday, May 30, 2008


I just got the word of verification from several sources concerning the advice I provided in my posting "A TAX PLANNING OPPORTUNITY".
One of my sources, the NATP research department, told me -
"There is no reason a person in the 10% or 15% tax bracket cannot sell stock for a capital gain that is taxed at 0% and then buy it back the next day for a tax-free step-up in basis. The wash sale rules only apply to losses, not gains. It is a good strategy for taxpayers in the lower income tax brackets."

PS - Todays question as ASK THE TAX PRO concerns filing a new W-4 now for a wedding scheduled for later in the year. You should also check out my "ramblings" in today's post at ANYTHING BUT TAXES.

Thursday, May 29, 2008


My new tax blog - ASK THE TAX PRO - is here!
The new ATTP blog is the result of the surprising response to the weekly feature that appeared here at TWTP on Wednesdays before I began my tax filing season hiatus.
You can ask me anything about individual federal or New Jersey (resident and non-resident) taxes - that is 1040 and NJ-1040 tax law, issues or policy.
So go to ASK THE TAX PRO and check out the "rules of the game".

Wednesday, May 28, 2008


Did you know that the lower capital gain tax rate for taxpayers in the 10% and 15% brackets goes from 5% to “0”% for 2008 through 2010? Yes, that is “zero percent” ($100.00 taxed at a “0”% tax rate is $0.00 in tax)! Well you do now.
The Jobs and Growth Tax Relief Reconciliation Act of 2003 originally reduced the tax rates on long-term capital gains, including capital gain distributions, and “qualified” dividends to 5% and 15%. It called for a 0% tax rate on such income for those in the 10% and 15% brackets for 2008 only. The Tax Increase Prevention and Reconciliation Act of 2005 extended the lower capital gain and dividend tax rates, including the 0% rate, through tax year 2010.

As it now stands most of the various tax laws passed during George W’s tenure will “sunset” in 2011, and the law will go back to that which was in existence before the hanging chads.

In discussing this topic I need to introduce you to a new tax term and acronym – Adjusted Net Capital Gains (ANCG). ANCG includes the following –

* net long-term capital gains (property held more than one year) less net short-term capital losses (property held one year or less), whether from transactions by the taxpayer himself/herself or passed through to the taxpayer on a Form K-1,

* capital gain distributions from mutual funds, and

* “qualified” dividends.

Net long-term capital gains do not include gains from collectibles, taxed at ordinary income rates up to a maximum of 28%, and “Section 1250” depreciation recapture, taxed at ordinary income rates up to a maximum of 25%.

Basically ANCG is the amount reported on Line 9b of the 2007 Form 1040 plus the smaller of the amount reported on Line 15 or 16 on the 2007 Schedule D (or the amount reported on Line 13 of Form 1040 if there is no Schedule D) less any amounts reported on Line 18 or 19 of the 2007 Schedule D and less any amount on Line 4g of the 2007 Form 4952 (Investment Interest Expense).

While ANCG is taxed separately at the special capital gain tax rates it is important to remember that this income is included in Adjusted Gross Income (AGI) as well as Alternative Minimum Taxable Income (AMTI) and can impact items of income, deduction and credit that are affected by AGI as well as cause you to become a victim of the dreaded Alternative Minimum Tax (AMT). I have discussed this issue before here at TWTP.

The ANCG income taxed at the 0% rate is that which would be taxed at the 10% or 15% rates if it were considered to be ordinary income. You begin with your net taxable income (Line 43 on the 2007 Form 1040) after deducting itemized deductions or the standard deduction and personal exemptions. You next deduct your ANCG. If the result is within the income range that is taxed at 15% than at least a part of the ANCG will be “tax-free”.

For 2008 the 15% tax bracket ends at $32,550 for Single filers and married couples filing separately, $43,650 for Head of Household, and $65,100 for joint filers. If your net taxable income less your ANCG is less than the amount that applies to your filing status you will benefit from the 0% tax rate in 2008.

Let us assume that you are single and your total net taxable income, including ANCG, is $31,000. All of your ANCG income will be tax free. If your ANCG for 2008 is $5,000 you have saved $250 in federal income tax.

But what if your 2008 net taxable income is $35,000 and you have $5,000 in ANCG? The first $2,550 of ANCG would be tax-free (taxed at 0%) and the remaining $2,450 would be taxed at 15%.

As the calculation of the tax on ANCG begins with your Taxable income, if you will have any kind of ANCG income for 2008 you may want to do whatever possible to reduce your taxable income to below the maximum 15% threshold. You can do this both by decreasing gross taxable income (reducing AGI) and increasing itemized deductions (reducing net taxable income).

My new special report
MY BEST TAX ADVICE lists ways to reduce your AGI. You can further reduce your taxable income by accelerating itemized deductions like medical, employee business and investment expenses (if you will be able to exceed the applicable 7½% and 2% exclusions), state income tax (make the 4th quarter 2008 state estimated tax payment in December of 2008 instead of January of 2009 – or increase your overall estimated payments), and charitable contributions.

If your income is such that it would be impossible to reduce it enough to take advantage of the 0% tax rate you should consider “gifting” appreciated securities to a family member who will be in the lower brackets.

Congress anticipated that high-income parents would “abuse” the 0% rate by transferring appreciated assets to their children, whether to just avoid tax or to finance college costs, and changed the “Kiddie Tax” rules so that beginning in 2008 they apply to dependent children under age 19, or under age 24 if a full-time student. The investment income, including ANCG, of such dependents in excess of $1,800 will be taxed at the parents’ tax rates.

However you can gift appreciated securities to your lower-income parents and benefit from the 0% rate. Let’s say you normally contribute $10,000 per year toward the support of your retired parent(s), whom you are unable to claim as dependents, and you plan to sell stock that will produce a 50% long-term capital gain.

Instead of giving your parent(s) $10,000 in cash, or directly paying $10,000 of their bills, you can gift shares of the stock you plan to sell with a current value of $10,000. Your parent(s), who will be in the 10% bracket or lower half of the 15% bracket, can sell the stock, pocket the $10,000, and pay 0% tax on the $5,000 in capital gains. You have saved $750 in federal income tax.

Here is another thought. The “wash sale” rules only apply to the sale of stock or mutual fund shares that results in a loss. As far as I know there is nothing to prevent a taxpayer who will pay 0% tax on ANCG is 2008 from selling 100 shares of a stock for a net long-term capital gain on Monday and then on Tuesday turning around and buying back 100 shares of the stock. However, I am not 100% sure about this. I will do some additional research to verify that this is possible – so don’t do it until you hear more from me!

Any questions?


Tuesday, May 27, 2008


As I expected, and just like in past years, the State of New Jersey has announced that the deadline for filing the 2007 “Senior Freeze” (Property Tax Reimbursement) application (Form PTR-1 or PTR-2) and the deadline for senior and disabled homeowners to file the NJ Homestead Rebate application has been extended until August 15, 2008. The original deadline was June 2, 2008.

For those who file these applications by June 2nd, the checks for the Property Tax Reimbursement will go out in mid-July and those for the NJ Homestead Rebate will go out in early August.

NJ Homestead Rebate checks for tenants will also be mailed out in early August.

Based on past years I anticipate that the deadline for filing these two applications will be further extended until October 31st.


Before recessing for Memorial Day Congress passed the Heroes Earnings Assistance and Relief Tax Act (H.R. 6081), aka the HEART Act.
According to a statement on the website of House Speaker Nancy Pelosi, the Act will -
“*Make tax relief for families of soldiers in combat under the EITC permanent. The bill makes permanent current law to include combat pay as earned income for purposes of the Earned Income Tax Credit (EITC). At the end of the year, soldiers’ families working to get into the middle class will be denied needed tax relief if combat pay is not counted for purposes of receiving the Earned Income Tax Credit.
* Make sure that reservists called up for active duty do not suffer a pay cut. Provides a tax credit of up to $4,000 for small businesses who continue to pay their National Guard and Reserve employees when they are called up to serve. According to a DOD survey, 55 percent of married Guard members and reservists suffer a loss of income when being called to active duty.
* Recovery rebates for military families. The bill clarifies that a military service member on active duty who files a joint return is eligible for a recovery rebate, even if their spouse does not have a Social Security number.
* Make it easier for veterans to become homeowners. The bill would make thousands of veterans eligible for low-interest loans by making changes to the qualified mortgage bond programs used to help veterans achieve homeownership.
* Make permanent other tax provisions to relieve economic hardships for military families. For example, the bill makes permanent IRS provisions to:
· permit active duty reservists to make penalty-free withdrawals from retirement plans;
· permit an employer to make contributions to a qualified retirement plan on behalf of an employee killed or disabled in combat;
· count extra pay for active duty military personnel from their previous civilian employer for retirement purposes; and
· permit recipients of military death benefit gratuities to roll over the amounts received, tax-free, to a Roth IRA or an Education Savings Account, among others
A Social Security Administration bulletin reports that the bill also “amends the Internal Revenue Code and the Social Security Act to exclude from FICA taxable wages any property tax rebate or other qualified benefit provided to volunteer firefighters and emergency medical responders in return for labor services. The IRS has previously ruled that such payments constitute
compensation for services performed.”
The bill is awaiting signature by George W.

In other legislative news, the House voted 263 to 160 to pass the Renewable Energy and Job Creation Bill of 2008 (HR 6049), known as the “extenders bill” because it includes extension of many currently expired popular individual and business tax breaks.

George W may veto the bill in its current form. According to a CCH Tax Headlines article, “the administration supports several of the tax-cut proposals in the measure, but objects to the proposed tax offsets to pay for them”.


Sunday, May 25, 2008


* Kay Bell reports on the US Supreme Court decision in the Kentucky Department of Revenue v. Davis case. According to Kay’s post “State Muni Bond Tax System Upheld”, “The U.S. Supreme Court just ruled that it's OK for states to exempt the earnings from the bonds they issue, but collect taxes on bonds issued by other states.”

* The CCH daily tax newsletter reported that, “Despite a veto threat and the likelihood that Senate lawmakers will not accept their extenders tax bill, the House on May 21 voted 263 to 160 to pass the Renewable Energy and Job Creation Bill of 2008 (HR 6049)”.

* Jay Leno had mother and daughter Bush on his show on Thursday night. In his monologue he mentioned that Jenna Bush was recently wed and that as a gift her father, George W, gave the happy couple each a $600.00 “stimulus” rebate check.


Saturday, May 24, 2008


THE WANDERING TAX PRO made the FIRE FINANCE Top 100 Personal Finance Blogs for May 2008 which is based on April 2008 data.

I was #42 in the SiteMeter rankings and #64 in the Quantcast rankings. The only other tax blog on the list was Kay Bell’s DON’T MESS WITH TAXES at #14 in SiteMeter and #24 in Quantcast.


FYI – due to my end of week trip I will be posting WHAT’S THE BUZZ tomorrow.

Thursday, May 22, 2008


I have heard from two separate 1040 clients whose Social Security numbers end in “00 thru “09”. According to the IRS Rebate Payment Schedule their individual “stimulus” rebate checks should have been mailed out “no later than” May 16th – which means they should have received them by now. They have not.

Neither client requested direct deposit on their Form 1040. One is married and his wife is a US citizen with a bona fide Social Security number (actually we all went to high school together a long time ago).

I went to the IRS website to check on the status of the two rebates and in both cases the response was:

We are sorry. Specific information about your Stimulus Payment is not available.”

These two taxpayers have something in common. Each had a balance due on their 2007 Form 1040 and, because they both owed “Sam”, each mailed their 1040 either on or just days before the April 15th filing deadline.

The only thing I can think of is that the IRS is overwhelmed by the mechanics of processing this poorly thought out election year gimmick and, similar to me during the last weeks of the tax season, their “eyes were bigger than their stomach” so-to-speak and they are unable to meet their hoped for deadline.

Have any of my colleagues out there come across a similar situation?


FYI – I am off to Newburgh New York for a long-overdue and much-needed rest. “Talk” to you when I get back.

Wednesday, May 21, 2008


Over the years I have gotten lots of different reactions from clients when I tell them the “bottom line” on their federal and state tax returns.

Some clients breathe a sigh of relief – “At least I don’t have to pay.”

Some are not surprised by the result – “I figured I would owe this year.”

Some are actually giddy when I tell them the amount of their refund.

I remember the response from one of my mentor’s clients many, many years ago – “Gott in Himmel!

And there are always a few who are never satisfied and complain, “Is that all I am getting back!?!

This reaction is often followed by, “How come [my brother, my neighbor, or my co-worker] always gets back more than I do?

The client is convinced that you have done something wrong because his brother, neighbor or co-worker makes exactly the same as he does and is in exactly the same situation as he is and yet gets a much larger refund.

Well for one thing, how do you know your brother, neighbor or co-worker always gets back a lot more? Have you actually seen his tax return each year? And how do you know just what he makes or what situation he is really in?

Maybe this person is just practicing “one-upmanship” and tells you he gets back a lot more just to bust a certain part of your anatomy.

Even if this person to whom the client is referring has a base salary similar to that of the client and lives in a similar home in a similar community there are a variety of reasons why the refund is different.

· Your refund is a factor of the tax withheld. Perhaps this person has much more tax withheld.

· This person’s spouse may not work, while the client’s does. Or the client and/or his spouse may have a second job.

· This person may pay lots more in real estate tax (the amount of tax paid on a similar house can vary substantially from town to town) or have a much larger mortgage and/or more home equity borrowing. He may have a vacation home which generates additional expenses or rental property that produces a tax loss.

· This person may have a lot of out of pocket expenses connected with his job and be able to claim them as a miscellaneous deduction – or he may have excessive medical or dental expenses well in excess of the AMT exclusion amount.

· Perhaps this person has kids in college and can claim an education tax credit or tuition and fee deduction. Or his kids are under age 17 and eligible for a Child Tax Credit.

· This person or his spouse may have a sideline start-up business that generates losses.

· Or maybe this person lies through his teeth on his tax return while the client’s return is prepared honestly and correctly!

My response to this question from a client is – “Show me his tax return and I will tell you why.”


Tuesday, May 20, 2008


It doesn’t matter who actually pays the qualified tuition and fees to the school. The education tax credit or Deduction for Tuition and Fees is claimed by either the student himself, who is claiming himself/herself on his/her own tax return, or to the person(s) who is claiming the student as a dependent. In the case of education for the taxpayer or a spouse, it is obvious that the credit or deduction is claimed on the single or joint return (but not on a separate return). If the student is a dependent child, the parents who claim the child as a dependent get the tax benefit.

What if grandparents pay the expenses directly to the college or university for a grandchild who is claimed as a deduction on his/her parents’ joint tax return? The parents get the credit or deduction and not the grandparents.

What if the dependent child, or his/her parents, takes out a student loan to pay for the tuition and fees? If the parents claim the child as a dependent on their return they get the credit or deduction. It makes absolutely no difference if the proceeds of the loan are paid directly to the school or first to the student, or who will ultimately pay off the principal on the loan.

A direct payment to a school by a “third party” is treated as if the money was given to the student and the student paid then paid the school.

What if the student himself/herself actually pays the school costs out of his own pocket? If he/she is claimed as a dependent on his parents’ joint return the parents get the credit or deduction.

IRS Field Service Advice FSA 200236001 addresses a special situation that provides an opportunity for some tax planning. It discusses whether a dependent can claim an education tax credit.

James Q Taxpayer, the 19 year old son of John Q and Jane Q, is an unmarried full-time college student who had net taxable income for the year in question. John and Jane provided more than half of James’ support for the year and are entitled to claim him as a dependent.

During the year James incurred expenses that qualified for the HOPE education tax credit. However, John and Jane's modified Adjusted Gross Income (MAGI) was in excess of $160,000.00, and could not claim the credit (nor the deduction).

James' tax liability, before any credits, was more than the amount of tax savings John and Jane would have realized by claiming James as a dependent. For example James’ tax liability is $1,100 and the tax benefit to John and Jane for claiming James as a dependent would be $952 ($3,400 x 28%) – or less if the exemption was partially phased-out due to excessive AGI. Or "0" if John and Jane are victims of the dreaded Alternative Minimum Tax (AMT).

John and Jane, although entitled to, did not claim James as a dependent on their 1040. James filed a tax return, but, because he qualified as a dependent of John and Jane, did not claim an exemption for himself. James did, however, claim the HOPE Scholarship credit on his return.

It is important to note that because the parents (John and Jane) could claim a dependency exemption for the "child" (James), he (James) could not claim an exemption for himself. IRC Section 151(d)(2) states that a child cannot claim a personal exemption for himself/herself if the parent(s) is eligible to claim that child as a dependent.

But the FSA affirms that, as the parents did not claim the child as a dependent, the child (James) was entitled to claim the HOPE Scholarship credit on his return if he met the other eligibility requirements.

Using the number above the net federal income tax savings by using this strategy is anywhere from $148 to $1,100! Of course state tax consequences would also have to be considered. This tax planning opportunity also applies to the “above-the-line” deduction for student loan interest.

In these posts on education tax benefits I have frequently referred to a “modified” Adjusted Gross Income, or MAGI (no gift from this Magi). For purposes of the education tax credits you begin with the AGI and add-back any foreign earned income exclusion, foreign housing exclusion or deduction, and American Samoa, Guam, Northern Mariana Islands and Puerto Rico resident income exclusions. In the case of the Deduction for Tuition and Fees you also add back the “Section 199” deduction for “domestic production activities”. As you can see, for most taxpayers the actual AGI will apply.

Any questions?

PS - Check out today's posting at ANYTHING BUT TAXES to find out how to solve the NJ budget crisis.

Monday, May 19, 2008


Testifying about educational tax incentives at a hearing of the House Ways and Means Select Revenue Measures Subcommittee Karen Gilbreath Sowell, Treasury Deputy Assistant Secretary for Tax Policy, pointed out that the federal tax code includes credits, deductions, exclusions and deferrals that are numerous, overlapping and complex. Constipation, Mr. Holmes.
"The incentives vary in terms of who may receive benefits, which expenses may be covered, and how large an exclusion, deduction, or credit may be allowed," she told the subcommittee. She also testified that the complexity of the educational tax incentives increases the record-keeping and reporting burden on taxpayers, and makes it difficult for the IRS to monitor compliance.
There is indeed a laundry list of tax deductions, credits and exclusions that related to educational expenses. Most apply to “post-secondary” (after High School) tuition, but some benefits can be used for “primary and secondary” (K-12) education and for books, supplies, room and board.
For example a recent post told you that withdrawals from a Coverdell Education Savings Account can be used for “tuition for any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law
The major tax benefits that relate to the costs of a college (post-secondary) education for yourself, your spouse, or a dependent are the HOPE and Lifetime Learning education tax credits and the “above-the-line” Deduction for Tuition and Fees. As with any item where you are given options you should compare these three tax benefits to see which provides the greatest tax savings.
The availability and amount of all three of these tax benefits is based on AGI. The phase-out range for these credits are available on the WHAT’S NEW FOR 2007 and WHAT’S NEW FOR 2008 pages of my website.
The Deduction for Tuition and Fees is limited to $4,000 for Married Couples with a “modified” AGI of under $130,001 and Single and Head of Household filers with a MAGI under $65,001, and $2,000 with corresponding MAGIs under $160,001 and $80,001. No deduction is allowed for couples with a modified AGI over $160,000 and individuals with a MAGI over $80,000. FYI, this deduction “expired” on December 31, 2007, but legislation has been introduced to extend it for at least tax year 2008.
None of these tuition tax benefits are available if you are married and filing separate returns.
The HOPE credit, named for Hope, Arkansas and not “I hope I graduate”, is limited to the first two fiscal years of postgraduate education. As of the beginning of the tax year the student must not have completed the first two years of college – the freshman and sophomore years. While this fiscal period can occur over three actual calendar years (the calendar year the student starts college as a freshman in the fall, the calendar year the student completes his freshman year and begins his sophomore year, and the calendar year the student finishes his sophomore year) the HOPE credit can only be claimed in two tax years for any individual student.
The maximum HOPE credit is $1,650 – based on $2,200 of qualified tuition and fees. It is determined as follows – 100% of the first $1,100.00 of tuition and 50% of the second $1,100.00. If the total tuition paid is $2,000 the HOPE credit is $1,550 ($1,100 + $900 x 50%). If the total tuition is $1,000 the HOPE credit is $1,000.00.
The Lifetime Learning credit is 20% of the first $10,000.00 of qualified tuition and fees – up to a maximum credit of $2,000. If the tuition and fees paid is $6,000 the Lifetime Learning credit is $1,200.
A student who began college in the fall of 2007 has two options for claiming the credit for 2008. If his total tuition for the year is $5,000 he would by better off with the HOPE credit, which would be $1,650. If his tuition for that year is $9,000 the Lifetime Learning credit would be $1,800 – which is "more better" than $1,650.
Remember that a credit is a dollar-for-dollar reduction of tax liability. So a $1,650 tax credit means $1,650 in your pocket – assuming the tax liability after other credits is at least $1,650 (the education tax credits are not “refundable”).
Also remember that the amount of the credit allowed is phased-out as AGI exceeds a certain amount. You may be entitled to a maximum $2,000 credit based on the amount of tuition paid, but your AGI may limit the amount of credit allowed to $1,000.
The Deduction for Tuition and Fees is an “above-the-line” adjustment to income. It is a tax deduction, not a credit, which reduces your Adjusted Gross Income and ultimately your Taxable Income. So your base tax savings from claiming this deduction is determined by your tax bracket. A taxpayer allowed a $4,000 deduction who is in the 25% tax bracket will save at least $1,000 in federal income tax. A $4,000 deduction for a person in the 28% bracket puts at least an additional $1,120 in his/her pocket.
In the case of both the credits and the deduction the amount of qualified tuition and fees paid must be first reduced by 100% of all tax-free scholarships, fellowships and grants, employer-paid educational assistance, veteran’s education benefits, and any other nontaxable payments (other than gifts or inheritances). These payments are not allocated between qualified (tuition and fees) and non-qualified (room and board, books and supplies) education expenses. So if your son’s total qualifying tuition and fees for the year is $10,000 and he receives a scholarship for $4,000, only $6,000 is eligible for a credit or deduction.
You also cannot “double-dip”. You cannot claim an education credit or tuition and fee deduction for qualifying expenses paid for by a tax-free distribution from an Education Savings Account or a Section 529 qualified tuition program. You cannot claim a Deduction for Tuition and Fees if a Hope or Lifetime Learning education credit is claimed for the same student.
Let us look at a couple whose modified AGI is below the beginning of the phase-out range for the education tax credits - which also means that the MAGI is less than $130,001. The couple paid $10,000 in qualifying tuition and fees for the calendar year. The student, a freshman at the beginning of the calendar year received a $5,000 scholarship and is reimbursed $1,000 from his father’s employer-paid education assistance program. This makes a total of $4,000 in available tuition and fees ($10,000 - $5,000+$1,000).
The amount of Lifetime Learning credit that can be claimed is $800 ($4000 x 20%). However, as the student is in his first fiscal year of college he/she is entitled to a HOPE credit of $1,650. The taxpayers are in the 25% federal tax bracket, so a $4,000 tax deduction would result in $1,000 in federal tax savings. In this situation it is clear that the HOPE education credit puts the most money in the taxpayers’ pocket.
However, if the student starts the year off as a junior, or if the taxpayers had claimed a HOPE credit for the two previous tax years, the Deduction for Tuition and fees would result in $200 more in tax savings than a Lifetime Learning credit. This is because the deduction provides a 25% savings on the $4,000 in qualified tuition while the credit provides only 20%. $4,000 x 5% = $200.
I recently began work on the GD extension for a new client (I know I say “read my lips, no new clients” – but this taxpayer technically qualified as he is the “child”, albeit in his 50’s, of an existing client). As usual with a new client I asked to see the prior two tax returns (in this case 2005 and 2006). I noticed that on the 2005 return he claimed a Lifetime Learning education credit for tuition and fees paid for the final (senior) year of his daughter’s college.
The tuition on which the credit was claimed was slightly less than $2,000. His MAGI was less than the amount required to receive the benefit of 100% of the credit, and he was in the 25% tax bracket by a little over $3,000. He should have claimed a Deduction for Tuition and Fees instead of the Lifetime Learning credit – as it would have reduced his tax liability by an additional $70+ (25% vs 20%). I will be preparing an amended return to do just this (there was also another error that I picket up – so that it is financially worthwhile to amend the return).
I have found that most taxpayers, as well as many tax preparers, will automatically claim an education tax credit if the MAGI is under the threshold amount. They will not check to see if the deduction is “more better”. Don’t make this mistake – calculate your 1040 tax liability claiming an education credit and calculate it again taking a Deduction for Tuition and Fees and see which results in the least tax liability. Also make sure to take into consideration resident and non-resident state and local taxes.
There may be an added benefit to claiming the deduction instead of the credit. A taxpayer in the 25% bracket who claims a deduction for $4,000 in tuition can save more than just $1,000 ($4,000 x 25%). Because the deduction reduces the taxpayer’s Adjusted Gross Income (AGI) it could also increase a multitude of other tax deductions and credits, and therefore reduce the tax liability by additional amounts.
More on claiming a deduction or credit for qualified tuition and fees tomorrow!


Check out today's post at ANYTHING BUT TAXES to find out the winners of this year's STELLA AWARDS!

Sunday, May 18, 2008


As I was finishing up a GD extended Form 1040 late this morning I found myself starting to nod off in mid signature. It was a sign that enough is enough is enough. It is time to officially end the tax filing season - and to spend “a week without 1040s” to recuperate.

It is a good stopping point – as all that is left at this point is red-files (need more information).

The number of sets of individual returns that I have done so far this year is now at 375. I have completed 30 sets between April 16 and May 18. I will have no problem living up to my “boast” of doing 400 sets of returns per year.

I look forward to at least a full week “1040 Free”!


Saturday, May 17, 2008


* Here is an older post that I missed. Jim of BLUEPRINT FOR FINANCIAL SECURITY listed “50 Fun Facts About Taxes” in his April 15th post. Included –

When you buy an illegal drug, like marijuana or even moonshine, in Tennessee, you have 48 hours to report it to the Department of Revenue to pay your tax and get a stamp for the substance.
There were 402 tax forms in 1990, by 2002 that number had jumped to a staggering 526.
The Cato Institute estimates that there are approximately 1.2M tax preparers in the country.
According to the Joint Committee on Taxation, in 2006, 53.7% of all federal income taxes were paid by those earning $200k+. Those between $100k and $200k paid out 28.3% of income taxes. That means 82% of taxes paid are by those making more than $100k
* TAX GIRL Kelly Phillips Erb reports that the “Overwhelming Majority of Americans Cynical About Tax Rebates”.
According to a poll conducted by CNN/Opinion Research Corp., a whopping 82% of Americans believe the stimulus package won’t work. This is up sharply from 70% of Americans who said the same thing in February.”
* Speaking of TAX GIRL - there can never be too many post to warn you about “Scams, Schemes and Tomfoolery”, as KPE does regarding the “stimulus” rebates.
Kelly reiminds you, as I have said here many time before, that the IRS will neversend you email or phone you without your first contacting them”. She also quite rightly warns, “do not believe anyone who tells you that they can get your rebate to you ‘faster’ - this is not true. As slow as the IRS is moving to get those checks out, there is no private service that can speed it up.”
* In “
Calling All Small Business Owners” A Tax Consultant for All Seasons reports that the IRS is offering a phone forum on May 21. All you need is internet access and a separate phone line. Click here for registration information.
* Kay Bell of DON’T MESS WITH TAXES reports that the IRS is stepping up efforts to root out offshore tax evasion
by enforcing a law originally enacted in 1970 to help detect laundered drug money aggressively and appling stiff new penalties to taxpayers who don’t file disclosures required under the law.
The disclosure to which Kay refers is IRS
Form TD F 90-22.1, officially known as a Foreign Bank and Financial Account Report, or FBAR (not to be confused with FUBAR, a term that could also be applied to the IRS on occasion). A question at the bottom of Schedule B asks “At any time during [the tax year] did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?” If you answer “yes” you must complete Form TD F 90-22.1.
In my 37 tax seasons I have only come across one taxpayer who checked yes and completed the disclosure form. He was an officer at a NYC branch of a Swiss bank and in this capacity had signature authority on foreign bank accounts.
I often ask clients if they have money in Swiss accounts, telling them that the IRS asks the question on Schedule B – but none have ever admitted having any such accounts.
* An article from Smart Pros, included in Friday’s daily “Headlines” email, indicates that “Up to 350,000 households aren't getting the $300 per child owed them as part of their economic stimulus rebate payments”.

For example - a couple with two qualifying dependent children (under age 17) received a check for, or direct deposit of, $1,200.00 instead of $1,800.00. It seems the problem involves taxpayers failing to check a box on their paper tax returns – at Line 6c it is item (4) - and to two computer software systems that weren't capturing the information needed to trigger the payment. Just another reason not to rely on tax software.
IRS spokesman Terry Lemons said the agency was confident it had identified all the people affected by the mistake. He said the IRS will send letters to those who missed out on the refund and that checks for the child credit will be mailed out in July. People need not contact the IRS or file additional paperwork, he said.”
* Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG excellently sums up the entire “stimulus” rebate election year bribe program, especially in light of recent reports of multiple FUs –
Bad ideas, badly executed. Bipartisanship at work!
‘Nuff said!

Friday, May 16, 2008


Trish McIntire of the OUR TAXING TIMES blog mentioned in today’s post “Rebate Problems” that “it seems that many Refund Loan customers are threatening lawsuits against preparers (notably the big tax prep companies) because their rebates are coming by check”.

Apparently taxpayers who applied for refund-anticipation loans, or who had their e-filing fees deducted from their refunds, won't receive their rebates by direct deposit, even if their regular tax refunds were delivered that way. They must wait for a paper check.

Believe me, I am the first person to encourage lawsuits against the “big tax prep companies” (you know about whom I am speaking) for greed, incompetence, misleading clients, and the like with regards to their various high cost services and products. And there have been many over the past few years (that is one reason Henry and his brother charges so much – they have to pay for their legal fees and the cost of the many settlements they have negotiated). I can’t think of one reason why anyone would overpay these guys to prepare a tax return. However in this instance I must agree with Trish and admonish the greater of two evils.

I, like Trish, am “fascinated by the attorneys who are considering the class action suits. Are they so desperate for work that they are thinking about suing a preparer for not seeing into the future?

What did a person whose rebate was not directly deposited actually lose? Everyone will still eventually get their appropriate check. Are the lawyers going to sue for interest at 2% on $600.00 for the month or two that the payment is delayed? What arseholes!

In most “class action suits” what eventually happens is that the “class” gets a check for $12.36 each and the “barritors” (no, I did not mean to say barristers – look it up) who initiate these actions end up with millions in fees.

Many years ago on one of my post-tax season Atlantic crossings on the QE2 the ship was forced to change course and go south to avoid an iceberg or some such other obstacle (it if was indeed an iceberg it would certainly be sort of “deja-vu-ish” - as Cunard is the “descendant” of the White Star Line of Titanic fame). As a result an extra day was added on to the length of the crossing.

To “compensate” for any inconvenience Cunard provided a one-hour open bar and a free bottle of wine at each table that evening, and the ship’s Travel Office made all necessary arrangements free of charge for passengers who had to change or adjust bookings. In our case we had to push up by one day our reservation at a hotel in Southampton, which Cunard took care of for us.

I remember that we were thrilled to have an extra day at sea on the luxurious QE2, as were most of the passengers. We actually saved money in the long run as we spent one less night at the Southampton hotel.

While I was reading in the lounge the afternoon after the delay was announced a ship’s officer called for our attention and said that one of the passengers wished to address us. A young woman, who identified herself as a lawyer, told us that Cunard had refused to compensate her for having to pay her babysitter back in the States for an extra day and to reimburse her for other minor costs, such as telephone calls, that arose from the delay. She planned to institute a class action suit against Cunard and said that anyone wishing to join with her in this action could contact her later that afternoon in her stateroom, which was somewhere well below deck in “steerage”.

I don’t recall if her announcement was met with hardy laughter then and there – but she was the joke of the cruise for the remaining two days. Everywhere one turned you could hear someone laughing about the “absurd American lawyer” or saying “what did you expect from a lawyer”. I doubt very much whether anyone joined in her action, as nothing was ever heard about it again.

Bill the Bard was right – the first thing we do is kill all the lawyers!


Thursday, May 15, 2008


Here are two news items of interest -

* Ways and Means Committee Chairman Charles B. Rangel has introduced H.R. 6049, the Energy and Tax Extenders Act of 2008, which will extend tax credits and deductions that expired last year or would expire at the end of this year. H.R. 6049 will be considered by the Ways and Means Committee today.
H.R. 6049 would provide important tax relief for individuals and families, including:
· Deduction of State and local sales tax
· Deduction of tuition and other education expenses
· Deduction of out-of-pocket expenses by teachers
· Deduction of property taxes for non-itemizers
· Relief for more than 12 million children through an expansion of the refundable child tax credit to taxpayers earning $8,500 a year.
The bill apparently does not include an extension of the AMT fix.

Click here for the official Ways and Means Committee press release and here to view a summary of the bill.

BTW, the Ways and Means Committee website includes an excellent section that provides details on the status of Tax Legislation in the 110th Congress.

* An article from the Chicago Tribune included in today’s daily Headline email reports that the IRS is admitting that some “stimulus” rebate checks have been directly deposited to the wrong bank account.

The article quotes Kevin McKeon, the IRS spokesperson for the New York region–

"We do know of instances of problems; we've heard of situations where stimulus checks have gone to the wrong people's bank accounts. We're getting a lot of calls to the toll-free number."

The IRS advises those receiving misdirected IRS deposits to report the mistake to their bank. Paper checks sent to incorrect recipients must be mailed back to the IRS.


Tuesday, May 13, 2008


I have decided to work through this coming Sunday (May 18th) on the GD extensions before "coming up for air" – so that I can either complete and mail out or transfer to a "red file" all the GD extensions I had to file this past April.

While I did get a “second wind” I am once again “running out of steam” and need to take time off to recuperate soon.

As a result my postings to THE WANDERING TAX PRO between now and next Monday will be scarce. I will be doing a "What's The Buzz" posting on Saturday.

FYI, I have posted to both ANYTHING BUT TAXES and THE FLACH REPORT this morning. In “Ain’t Broadway Grand” at ABT I report on the 2008 Tony nominations, and at TFR I discuss economic “stimulus” measure for businesses.


Sunday, May 11, 2008


I do not think David Letterman is funny - and I find the bits on his show that take up time before the interviews especially lame and humorless. However there always is the exception that proves the rule.

Here is what Letterman had to say about his Mother’s Day gift during his Friday night monologue -

I was going to send my mother something special for Mother’s Day and then I realized she is already getting that economic stimulus check.”

Happy Mother’s Day!


Saturday, May 10, 2008


* Kay Bell, the yellow rose of taxes, provides a detailed post on the tax aspects of yard and garage sales in her post “Taxes On Garage Sale Proceeds”. I identify with her aversion to “hondling”. Her conclusion to the post is one I came to years ago. When all is said and done having a yard sale is probably not worth the potential agita involved. Donate the items to Goodwill or the Salvation Army and claim a tax deduction.

* Jim Maule discusses some additional costs of George W’s “stimulus” election year bribe in his post “Tax Rebate Program Gets More Expensive” at MAULED AGAIN. Jim agrees with me that “the entire tax rebate gimmick is just that, a gimmick”.

What about the cost to the IRS for processing the millions of “0” liability Form 1040As that have been and will be filed just to qualify for the rebate check. I would expect that at least half will be filed manually. We are told that it costs much more for the IRS to process a “paper” return than it does to process one that is electronically filed.

* Right on, IRS MIND! Your blog post “
Pennies on the Dollar’- I Don't Think So....” took the words right out of my mouth by stating “Nothing irks me more than the 'pennies on the dollar' ads on TV that state that I can get your tax debt lowered. Anyone who provides a "predetermined" conclusion about your personal finances and your tax debt is a fraud.”

The Internal Revenue Service itself has issued a consumer alert advising taxpayers to “beware of promoters’ claims that tax debts can be settled for ‘pennies on the dollar’ through the Offer in Compromise Program”.

* The title of this article by Scott Burns from MSN Money, included in an daily headlines email last week, caught my eye – “The Naked Truth About Income Taxes”. The first paragraph hooked me.

Taxes are unpleasant and unfair. We all know this. And our friends in government work hard to keep it that way.”

The article discussed some of the findings in the IRS report "
Individual Income Tax Rates and Shares, 2005". It includes some surprising facts, including the following-

In 1986, Americans filed 103 million federal income-tax returns. Of those, 84 million filers had to pay taxes. That's about 81.5% of all returns. By the time Clinton took office, the percentage of filers paying taxes had declined to around 75%. During the Bush years, the percentage of filers who paid taxes has continued to decline. It fell to about 67.4% in 2005.”

* Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG quotes some excellent words to live by when making tax policy by Megan McArdle of The Go to his post and click on his link to read the entire article.

* It seems that perennial headline chaser and publicity seeker Rev Al Sharpton joins the list of “celebrities” who owe their “uncles” substantial back taxes. According to an article on the home page of -

Government records obtained by The Associated Press indicate that Sharpton and his business entities owe nearly $1.5 million in overdue taxes and penalties.

Sharpton's own debts include $365,558 owed in New York City income tax
and $931,397 in unpaid federal income tax, according to a lien filed by the Internal Revenue Service last spring. His for-profit company, Rev. Al Communications, owes the state another $175,962 in delinquent taxes.

Tax headaches are nothing new for Sharpton. The 53-year-old minister has been assailed over his career for running up big tax debts
and failing to abide by rules governing his charities and election committees. He is perpetually being sued for failing to pay his bills.”


Friday, May 9, 2008


I got the following email from KC early yesterday evening.
I'm not sure if you are answering any questions regarding the stimulus rebate, but I have one. I did my taxes online with H&R block and had my refund direct deposited. Do I qualify for direct deposit for the rebate or will I get a paper check? I am getting conflicting answers. Thank you
Well, KC, as I am stuck for a Friday post here is your answer:
The answer to your question depends on where you had the refund directly deposited. If you indicated on your 2007 Form 1040 that you wanted your refund directly deposited to your personal checking or savings account and provided a Routing and Account number, and your refund was successfully directly deposited, then your “stimulus” rebate should also be directly deposited to the same account.
What if you filed a Form 8888 to have the refund directly deposited to more than one account? According to the IRS Stimulus FAQ Page on Direct Deposit - “If you elected to split your refund between several accounts, you will not receive your stimulus payment by direct deposit. Instead, you will receive a paper check.”

If you were tricked into an expensive Refund Anticipation Loan (RAL) or had your refund directly deposited to an H+R debit card with high hidden fees here is what the IRS has to say:
Q. I chose direct deposit for my 2007 tax refund but also requested a refund anticipation loan (RAL) from my preparer. How does that affect my stimulus payment?
A. Taxpayers who use RALs or enter into any other loan or financial agreement with their tax professional cannot receive their stimulus payments by direct deposit and instead will get a paper check.
Q. I chose to have my tax refund deposited onto a "stored value card" or debit card through the professional tax preparer I used. Will my stimulus payment be directly deposited onto that same stored value card or debit card account?
A. Yes, unless you requested a refund anticipation loan (RAL) through your tax professional, or the stored value card or debit card account has been closed, in which case you will receive your economic stimulus payment by paper check
I hope I have been of help.
While we are on the subject of the “stimulus” rebate – please check out Kelly Phillips Erb's posting “Scam Alert: Monthly Stimulus Payments” at TAX GIRL.

Thursday, May 8, 2008


I am no longer featuring a weekly ASK THE TAX PRO here at TWTP – and am stockpiling questions submitted during the tax season for a new blog devoted to such questions to “open” in June. However I couldn’t resist responding to the following email from a New Jersey taxpayer -

I saw your blog online and wondered if you'd heard about any errors in processing at the NJ Division of Taxation. Yesterday I received a statement of account underpayment claiming that my husband and I only had about $350 in NJ taxes withheld when our return and W2s show $3500 (we are dinosaur paper filers).

Their helpline consistently says to call back later because of high call volume, and I received an automated response to an email I sent them saying that because of high volume it might be more than 10 business days to get a response.

I would think the rush would be mostly over by now, so I'm wondering if there are lots of others in the same boat as me. I was looking online for evidence of this and found you. I'm concerned since the payment deadline for the $ they say I owe them is 5/15, and I'm not sure I'll be able to get through by then!

A second email followed a day later -

Update--finally got through on try #7 and, after being on hold for between 15-20 minutes got through to a representative who looked at it, confirmed it as a scanning error and told me to disregard the notice. I should have asked but didn't about the source of their high call volume--if they have a lot of errors, etc. It seems like they could design a better exception process to identify these errors before sending a notice... but, well, you know (and I know you know, because I read your blog).

Ahh, NJ

Errors in processing returns at the NJ Division of Taxation? Does a bear relieve himself in the woods? I feel your pain!

I do believe I have previously blogged that at least half of the balance due CP notices sent out by the IRS are incorrect (I am being conservative). With NJ it is at least 2/3 – again being conservative.

I have seen balance due Statement of Accounts from NJDOT that have not given the taxpayer(s) credit for dependents, dependents in college, age 65, medical deductions, or state income tax withheld, even though the information is clearly stated on the NJ-1040 as originally submitted. For two years in a row a Statement of Account sent to a client did not include $100,000 in NJ Gross Income Tax withheld, even though Copy 2 of the W-2 was included with the mailing. Of course the wage income was properly reported.

The NJ-1040 is now a scannable form – which means that the information is machine-read and not entered into the system by a person. It seems to me that there are more errors from machine scanning than there were when a person sat at a keyboard and “manually” input the information.

With the scannable system you are told not to staple pages or forms together, as the metal in the staple will mess up the scanning process. NJDOT says they do not lose or misplace any loose pages or forms – yeah, right.

NJDOT processing errors are not limited to paper returns. A client recently received a balance due Statement of Account for a return that I submitted online via NJWebFile (I am required by NJ law to submit all my full-year resident NJ-1040s “electronically” unless the client tells me not to and signs an “opt out” form – for me the only method of so doing is NJWebFile). The Statement of Account failed to give the taxpayer credit for NJ Gross Income Tax withheld. The state tax withheld was clearly entered in the course of the NJWebFile input. Again, of course, the wages were included in the Statement.

Two years ago every single NJ-1040 with a balance due that I submitted via NJWebFile was FU-ed. In each case the taxpayer paid the tax due, using the coded payment voucher that was part of the confirmation print-out, by the April due date. And in each case the client was billed for the tax liability – which had already been timely paid - plus penalty and interest in September! Luckily in all but one case (that I know of) the taxpayer realized that NJ had FU-ed and either sent me the Statement of Account, as per my general instructions to clients, or called the DOT directly to report the error.

What happened was that instead of crediting the payment made by the client properly to tax year 2005 the money was applied to tax year 2004. So the system still showed an open balance due for 2005.
My question to NJ, which remains unanswered, is this - If the payment was applied to tax year 2004 there would be an overpayment for that year. Why did the NJDOT not automatically refund this overpayment, or at least issue a letter of inquiry to the taxpayer? If the IRS shows an unidentified payment applied to a particular tax year “account” that produces an overpayment it will at least send out a letter of inquiry.

In the past when I received an erroneous NJ Statement of Account I would write to the NJDOT. I would, and will, never call the NJDOT, or the IRS for that matter. Based on past experience, both mine and my clients’, I do not trust what I would be told via phone. I want a written documentation of all contact. For the most part it appeared that my correspondence was totally ignored. In some cases the problem was taken care of by NJDOT, but I was never given the courtesy of a written acknowledgement or response. In many cases I had to write to upper-level NJDOT management, as far up as the Director, before I got appropriate action.

Lately I have had good responses when I send an email to the “address” indicated on the specific Statement of Account notice. Emails I send to the general DOT email address take forever to get a response, although one is always eventually received.

I would not worry about not being able to get through to NJDOT by a stated deadline. If they are wrong and you are right, as is the case more often than not, there will be no penalty or interest assessment.

One item to note – if you are wrong and owe NJ money you are charged interest from day one. If they are wrong and owe you money don’t expect the check to include any interest. What's good for the goose (NJ) is apparently not good for the gander (taxpayer).

On the whole dealing with the IRS is a pleasure compared to dealing with the New Jersey Division of Taxation.


Wednesday, May 7, 2008


More misconceptions.

While none of my clients asked me this question during this past tax season, every now and then I will hear, “Why am I paying taxes on these dividends? I didn’t receive the money – it was reinvested.”

I have also been asked on various occasions why I reported a capital gain on the transfer of money from one mutual fund to another mutual fund within the same fund “family” (Fidelity, Vanguard, T Rowe Price, Van Kampen, etc).

“I didn’t sell anything – I just moved it to another fund.”

Just because you did not receive cash in your hands does not mean that it is not taxable.

Dividends are taxed when paid by the corporation or mutual fund, regardless of where the money actually went. In the case of reinvested dividends it is as if you received a dividend check, deposited the check, and then purchased additional shares of the fund.

If the Flach Fund issues a $50.00 dividend payable in December 2007, and as per your instructions to the fund all dividends are reinvested, you pay tax on $50.00 on your 2007 income tax return. The $50.00 will increase your cost basis in the fund investment.

When you sell your total investment in the Flach Fund all the dividends that have been reinvested over the years will be added to your original purchase, and any subsequent cash purchases, to determine the cost basis for calculating taxable gain or loss.

You purchased 100 shares of the fund for $1,000.00 in February 2002. You were issued $425.00 in dividends from 2002 through 2007, all of which were reinvested. You sell your entire investment in the fund in 2008 for $2,000.00. You have a $575.00 taxable capital gain, most of which will be “long-term”.

Part or all of the $50.00 dividend that was issued in 2007 by the Flach Fund may be considered “qualified dividends” and taxed not at your “regular” income tax rate, but at the lower capital gains rate of 5% or 15%. That portion of the $50.00 that is “qualified” will be identified on the Form 1099-DIV you receive from the Flach Fund.

In 2008 the lower 5% capital gains rate is reduced to 0% - so if the fund issues another $50.00 dividend in 2008 and you are in the 15% “regular” tax bracket you will pay absolutely no federal income tax on the $50.00, although, as far as I know, it will still increase your cost basis in the fund.

While “qualified” dividends are taxed separately at a lower rate, the dividend income will increase your Adjusted Gross Income (AGI) and may cause you to reduce or lose various deductions and/or credits and/or increase taxable Social Security or Railroad Retirement benefits. So, as discussed here before, the effective tax cost of the $50.00 dividend may be more than 5% or 15%.

When you transfer money between funds of the same “family” (i.e. from Fidelity Growth and Income to Fidelity Puritan) think of it similar to reinvested dividends – you sell shares in Fidelity G+I, receive and deposit a check, and then use the money to purchase shares of Puritan. It is no different than telling your broker to sell shares in GE and use the money to buy shares of IBM. Each individual fund is a separate investment and each transfer is treated as a separate sale of that investment and must be reported on Schedule D. It does not matter that the funds are in the same “family”.

The only exception is if you transfer money from a “money market fund” to a mutual fund. The price of a share in a money market fund is always $1.00. Money market funds are basically the same as cash. If you transfer money from a money market or cash reserves account of a fund family to the family’s Growth and Income Fund it is like taking money out of a savings account at your local bank and using it to purchase shares of the fund. The sale of shares of a money market account does not have to be reported on Schedule D.

Any questions?


Tuesday, May 6, 2008


Most states that have income taxes require non-residents to pay tax on income earned in their state. The most frequent example is a taxpayer who works in one state but lives in another. If you work in New York but live in New Jersey you first pay state income tax to New York and then take a credit for the tax paid on the New Jersey resident return.

From my experience it seems that a majority of the states determine the tax on non-residents by first determining the state income tax that would be assessed if the person had been a full-year resident of the state, and then pro-rating the tax based on the amount of actual taxable income earned in the state divided by the total income determined as a full-year resident.

If the total state tax liability determined as if the taxpayer were a full-year resident is $1,000.00, and the actual amount of income taxable by the non-resident state is 30% of the total taxable income (if taxed as a full-year resident), than the non-resident state income tax liability is $300.00.

The tax is not determined by simply taxing the income attributable to the non-resident tax by the appropriate state income tax rate.

While working on a GD extension for a client who lives in Rhode Island but has Kansas-source income taxed by Kansas I came across one of the inequities of this method of tax computation.

For 2007 the taxpayer’s federal Adjusted Gross Income (AGI) was $18,000+ more than that of 2006, due to increased capital gain income reported on Schedule D. However the portion of the federal AGI that was subject to Kansas state income tax was $2,100+ less than 2006. The calculation of Kansas state income tax begins with the federal AGI, as is the case with many states.

Because the federal AGI was substantially greater, so was the Kansas state income tax determined as if the client had been a full-year resident. And because of the nature of the 2007 AGI increase, the % of Kansas taxable income as a non-resident to total taxable income as a resident was much smaller.

The bottom line – for $2,100+ less in state taxable income the client paid $254.00 more in Kansas state income tax!

It is true that the taxpayer received a credit for the tax paid to Kansas on the Rhode Island state income tax return – but it was not a dollar-for-dollar credit and the client still ended up with $140+ additional net “out of pocket”.

Who said taxes were fair?


Monday, May 5, 2008


Kay Bell has posted “Tax Carnival #36: A Cinco de Mayo Tax Celebration” at DON’T MESS WITH TAXES.
Included is my post “It Ain’t Necessarily So.”
Check it out.


As an addendum to this morning’s post:

The source of many misconceptions about federal and state income taxes is often unsolicited tax advice from uninformed friends, family and even “Strangers on A Train”.
Talk about bad tax advice. You should check out the May 4th comment on my post “
ASK THE TAX PRO – STATE TAXES FOR A NJ RESIDENT WORKING IN NYC" from Schadenfreude and my response.


I find each tax filing season that my clients still have misconceptions about various tax deductions and credits. In many cases a little knowledge is dangerous. I will devote several posts to some of the misconceptions I came across during this and previous seasons.

One client, a single parent, needed to keep her Adjusted Gross Income (AGI) under a certain amount to qualify for a specific state program. To this end she made a contribution to a traditional IRA, thinking that it would be fully deductible and therefore reduce her AGI.

This was not the case. The client was an “active participant” in an employer pension plan, as evidenced on her W-2 by reference to the type of plan and amount of her contribution in Box 12 and the fact that the “Retirement Plan” box was “x-ed”. Because her AGI exceeded $62,000.00 she could not deduct her IRA contribution.

Her response to me when I advised her of this fact was, “But I thought I could contribute to both”.

That is totally true – you can contribute to both your employer’s plan(s) and a traditional - or if you qualify a ROTH - IRA. However you may not be able to deduct part or all of your contribution to the traditional IRA.

The amount of the contribution that can be deducted is “phased out” for active participants in an employer plan as “modified” AGI goes from $83,000 to $103,000 for married taxpayers filing a joint return and Qualifying Widow(er)s, and from $52,000 to $62,000 for Single and Head of Household filers.

The amount of “participation” in the employer plan does not matter. You can be covered by the plan for only one month. A contribution of $100.00 to an employer plan can keep you from deducting a $5,000 contribution to a traditional IRA.

If one spouse is an active participant in an employer plan but the other spouse is not, the “non-covered spouse” can deduct in full any contributions to his/her traditional IRA if the joint “modified” AGI is under $156,000. The deduction is “phased out” as the “modified” AGI goes from $156,000-$166,000. No deduction is allowed if MAGI exceeds $166,000.

“Modified” AGI in these cases is the Adjusted Gross Income adjusted by adding-back foreign income exclusions, excluded adoption assistance benefits, the “domestic production” deduction, and such educational items as excluded savings bond interest and the "above-the-line" deduction for student loan interest, and tuition and fees.

In both cases if a married couple is filing separate returns the IRA deduction is “phased-out” as MAGI goes from $0.00 to $10,000. Another way the Tax Code tries to keep married taxpayers from filing separately.

In my client’s situation I reported the traditional IRA contribution as non-deductible on Form 8606. This creates a “basis” in her IRA investments so that when she begins to take withdrawals a portion will be treated as a tax-free “return of basis”. A Form 8606 should be filed with each subsequent Form 1040, even if no additional non-deductible contributions are made, to keep track of the IRA basis so that it is not forgotten when withdrawals are ultimately made.

When calculating the amount of tax-free return of basis that applies to a withdrawal all traditional IRAs, regardless of the source of the original contributions (i.e. deductible, non-deductible, roll-over from employer plan) are taken into consideration - and it does not matter from which individual IRA account the withdrawal comes from. One client deposited deductible and non-deductible contributions into separate accounts – but this had absolutely no affect on the taxability of subsequent withdrawals.

I told the client the proper way to reduce her AGI was to increase her “pre-tax” employee contribution to her employer’s plan. This will reduce the amount of federal wages reported on her Form W-2 and therefore her AGI.

If the taxpayer is a participant in a 401(k) plan his/her contributions will most likely also reduce the state taxable wages. However, while “pre-tax” for federal purposes, the contributions of employees of federal, state and local government units and non-profit organizations to a 403(b), 457, 414(h) or similar plan may not be “pre-tax” for state income tax purposes. Such is the case in New Jersey.

The moral in all of the misconception stories is - contact your tax professional before doing anything tax related. If the client discussed above had simply emailed me before making the IRA contribution I would have set her straight.

Any questions?


Saturday, May 3, 2008


Welcome to the return of “What’s The Buzz”.
Not much buzz lately. Several tax bloggers have been taking a break to recuperate after the end of the tax season. Blog postings have been pretty much devoted either to the “stimulus” rebate checks or Wesley Snipes.
Every tax blogger, myself included, has reported on the basics of the rebates. But several have brought up some interesting points or information on these checks:
* Trish McIntyre of OUR TAXING TIMES makes a good point in her post “Change of Address”. If you have changed your address since you filed your 2007 federal income tax return make sure to get a Form 8822 to the IRS ASAP to be sure your stimulus check is not returned to the IRS. Unless the IRS has been notified of a change the rebate check will be mailed to the address used on the 2007 Form 1040 or 1040A – unless, of course, the taxpayer requested direct deposit.
* Former Tax Playa Ryan Ellis deals with the stimulus rebate on a joint return filed by a “Surviving Spouse” in his TAX INFO BLOG.
FYI, a rebate will also be issued for an individual deceased taxpayer who files a tax return for 2007 – i.e. for a taxpayer who went to his/her “final audit” either during 2007 (in which case it would be the final return), in early 2008 before filing a tax return, or in 2008 after filing a tax return.
* IRS MIND reminds us that the IRS will apply a “stimulus” rebate against any existing outstanding tax debt from prior years. Plus, if you have not filed a return for a past year the rebate may be withheld “in lieu of unfiled returns”.
Your rebate may also be applied to other outstanding federal debts or to outstanding state taxes or debts.
* A TAX CONSULTANT FOR ALL SEASONS reports on IRS ANNOUNCEMENT 2008-44, which says that if your “stimulus” rebate is directly deposited into an IRA or other such “tax-favored” account (i.e. Health Savings Account , Archer MSA, Coverdell Education Savings Accounts, Qualified Tuition Plan, or 529 plan) you can take the money out tax-free and penalty-free.
If you requested that your 2007 federal income tax refund be directly deposited your “stimulus” rebate will be directly deposited to the same account. So if you had your refund deposited to an IRA account your rebate will also be sent there.
Kay Bell also discusses this issue in her post “Unwanted Rebate Deposits” over at DON’’T MESS WITH TAXES.
* Kristine McKinley reports that, as I anticipated, the IRS website now has a “Where’s My Rebate” feature in her newly renamed THE MONEYWISE COACH (formerly Financial Tips for WAHMS) blog.
* Brett Arends of the Wall Street Journal gives some excellent advice regarding what to do with your “stimulus” rebate in his article “Stimulate Savings, Not Spending” at MARKETWATCH.
* Whatever you decide to do with your rebate check DO NOT do what Pastor Steve Munsey suggests, as shown in TAX GIRL Kelly Erb Phillips’ post “God Wants Your Rebate Check (and Your Refund Check)”.