Friday, October 31, 2008


HAPPY ALL HALLOW’S EVE! (No, I am NOT the "model" in the above picture!)

Before I get to taxes I want to let you know about some breaking Presidential election news.

Click here and then click on the Election 2008 News Channel 3 box for this late-breaking news.

Now – on to our topic for the day –

It is that time of the year again – time for year-end tax planning.

Last year at this time I wrote a series of posts on the topic of Year-End Tax Planning, which, for the most part, still apply.

Here are links to the series -


You will also find a year-end tax planning item in the post STUFF.

Here are some things that you should be aware of when reading these posts and planning your year-end strategies –

(1) It is difficult to predict what the 2009 Form 1040 will look like. I quoted IRS HITMAN Richard Close yesterday in SOMETHING’S COMING as correctly saying, “Regardless of which candidate is elected, 2009 is going to be a year of change. Of course I’m mostly talking about the IRS. From simple things like forms, all the way to policy changes, things are drastically going to change.”

For one thing, while the special “0” capital gains tax rate for those in the 10% and 15% tax brackets is currently in effect through 2010, Congress may change this next year. Depending on who sits in the Oval Office there may be differing changes to the capital gains tax structure. So one should try to maximize the benefits of the “0”% tax rate in 2008.

The bottom line when the next tax year is such an unknown is that one should follow “traditional” tax planning strategies – defer income and accelerate deductions. There is no need to try to “second guess” the new Congress.

(2) Congress has already passed the annual AMT “patch” for 2008. However, the AMT is also an area that may be greatly revised, or even abolished altogether, in 2009.

(3) Congress has also extended the various popular tax breaks that expired on December 31, 2007 for two years. So the following items are in effect for both 2008 and 2009 -

* The option to deduct state and local sales tax instead of state and local income tax.
* The above-the-line “adjustment to income” for qualified tuition and fees.
* The above-the-line “adjustment to Income” for up to $250 in educator expenses.
* The residential energy tax credits.
* The ability to make tax-free transfers directly from an IRA to a qualified charity.

(4) You can click here to download a PRELIMINARY YEAR-END WORKSHEET and here to learn WHAT’S NEW FOR 2008.

So – any questions?


Thursday, October 30, 2008


In his post “2009: The Year of Change” IRS HITMAN Richard Close predicts, “Regardless of which candidate is elected, 2009 is going to be a year of change. Of course I’m mostly talking about the IRS. From simple things like forms, all the way to policy changes, things are drastically going to change.”

I certainly agree with Richard.

For one, Congress is “chomping at the bit” to pass another “stimulus” bill, which may well be needed. It will no doubt include new tax cuts and benefits. Let us pray that it does not include any more GD (like extensions) rebates!

Even without the desire to pass a new stimulus bill there will be a major tax Act passed in 2009.

We are fast approaching the “sunset” of all the tax changes passed during the early Bush years. As it now stands, on January 1, 2011 the Tax Code will go back to the way it looked before George W took office. I expect, regardless of who the new Commander-In-Chief is, there will be attempts to make permanent all or parts of what has become known as the Bush tax cuts. Even Obama wants to keep some of the tax cuts.

One specific area of concern is the federal Estate Tax, also called by some the “death tax”. While repeal is probably too much to expect, there will certainly be big changes in store. While I am not a supporter of the concept of the estate tax, I want to make absolutely sure that the concept of “stepped-up” basis remains intact. It would be a true nightmare at tax time if inherited property had a “carry-over” basis. As it is now most taxpayers have no idea what they paid for an investment 5 years ago, let alone what their parents or grandparents paid for something 25 or 50 years ago!

Then there is the issue of the dreaded Alternative Minimum Tax (AMT). Congress has been passing an annual one-year “patch” for the past several years, on occasion waiting until literally the last minute to do so. The House Ways and Means Committee tried to completely abolish the AMT earlier this year, replacing it with a tax “surcharge”, but without success. Let us hope that the newly elected Congress will once and for all address this problem and realize that, as I have been saying all along, like Frankenstein in the old Hammer films, the AMT Must Be Destroyed!

While I will not be holding my breath, I would sincerely hope that when considering tax law changes next year the new Congress seriously looks at making the system simpler and fairer. McCain has proposed giving taxpayers the choice of calculating their liability under the current system or a simpler, flatter one. As I have said time and again, forget the current system – make the simpler one the only one.

Any change to the Tax Code is good for the tax preparation business. The 2010 tax filing season, when 2009 tax returns are prepared, should prove to be a very profitable one for those in my profession.


Wednesday, October 29, 2008


Q. In 2004 I was a part-year resident of Michigan (from January thru November) and a part-year resident of New Jersey (December), but received NO income from New Jersey itself (only Michigan, New York and Virginia). Do I have to file a part-year return for New Jersey? If I do, should I allocate 11/12 of the year's income/expenses to Michigan and 1/12 to New Jersey?

I understand I have to file non-resident state returns in New York and Virginia as well.

A. Yes - as a part-year resident of the great State of New Jersey (lucky you) you must file a NJ-1040 for 2004 to report all of your taxable income for period of residence – even though the period of residence is only one month.

As a resident of New Jersey you are taxed on all “taxable” income regardless of the source – not just income from sources within New Jersey.

You would not just allocate 1/12 of all income for the year. What you would report to New Jersey is the money that was actually received in the month of December – your period of residence.

You would only report wages received in the month of December – or for those days in the month of December that you were a NJ resident. You should be able to determine this amount from your pay stubs. You would not report 1/12 of the wages earned in Michigan if, as I expect, you did not work in Michigan while living in New Jersey. Except if, while a New Jersey resident, you received a final paycheck of severance pay or accumulated unused sick or vacation pay. It is possible that some of this information would be on your individual W-2s.

As for interest and dividends, again you would only report the amount received during your period of NJ residence. You would also report any capital gains from investment sales that took place during this period.

You would be allowed a deduction for “excess” medical expenses that you paid during your period of residence. As for your personal exemptions – in this case you would claim only 1/12 of the $1,000 or $1,500 NJ exemption amounts.

And yes, you would also have to file non-resident Virginia and New York state income tax returns. You would be able to claim a credit for the taxes paid to these states on your resident NJ-1040 or, if applicable, Michigan returns.

Any more questions?


Tuesday, October 28, 2008


Sorry for the crack, Barrack. I couldn't resist the Broadway reference.
Just thought I would weigh in with my comments on the issue of “redistribution of wealth” and "refundable" tax credits.

I personally do not believe in a “progressive” tax system, like the one currently in place, where individuals with higher income pay a higher percentage of their income in taxes.

An argument can be made that the more money a person makes the more he needs and benefits from the services and protections of the government - so a person who makes more should pay more taxes. If there were a flat tax then a person making $250,000 would obviously pay more than a person making $25,000 – although not proportionally so.

The truth is that in many cases the lower one’s income the more benefits, services and protections one receives from the government. I remember reading an article back in the late 1970s which compared a household of working taxpayers who earned too much to receive much government “assistance” of any kind to a household that was basically, as my mentor Jim Gill would say, “on the tit”, that is taking full advantage of the many welfare, disability and unemployment benefits available to them from the government. When one added up the dollar value of all the payments and free benefits and services received by the non-working household from various federal, state and local agencies and calculated the take-home pay, after various tax and other withholdings, of the working household it turned out that the non-working household actually ended up with a higher income!

I do not believe that the Tax Code should be used to “redistribute” wealth or assist in providing “welfare” to lower income individuals. The purpose of the federal income tax is to raise the money necessary to run the government – period. While the Code can encourage certain positive activities such as saving and investment, higher education, charitable contribution and volunteer work, home ownership, etc – all things that benefit society in general – it should not be used for “social engineering”.

I am also against the concept of “refundable” tax credits – credits that allow an individual or family to “make a profit” from filing a tax return. This includes the current Earned Income Tax Credit and the Child Tax Credit.

As the Tax Policy Center’s TAX VOX blog recently pointed out in a post, the Earned Income Tax Credit is basically the largest poverty program in the U.S. It distributes $42 billion to more than 20 million low-income families. It is, for the most part, just another form of Aid to Families with Dependent Children.

While I am not against tax relief for the working poor or the concept of providing aid to families with dependent children, or other types of welfare programs for the working poor, I strongly believe these concepts should not be incorporated into the Tax Code.
The EITC does not provide the safeguards, checks, and balances required in other federal and state welfare programs necessary for responsible fiscal management. As a result, it is perhaps the most abused provision of the tax code. Studies have suggested that close to 30% of all EITC claims are bogus.

Refundable credits in general encourage tax fraud. This is because the fraudulent tax return that is created does not rely on withholding, which is carefully matched by the IRS, to generate the refund. The crook can make up “non-matchable” income, such as earnings from self-employment, to generate the phony refund.

A recent post at Pete Pappas’ THE TAX LAWYER’S BLOG asked the questions “Do 'rich' people have a civic duty to help the middle class and the poor?” and “How to you define rich?”.

First of all, as I said in my comment to Pete’s post, rich in terms of a dollar amount is different in different parts of the country. A couple in one part of the country could truly live like royalty on what a couple in another part of the country (especially here in the Northeast) needs to just keep their heads above water. Unfortunately the Tax Code uses one set of numbers for the entire country – and unfortunately I cannot offhand think of an easy way to correct this inequity. The result is that those in New York, New Jersey, Massachusetts, Connecticut, California, and similar areas end up being royally screwed.

While the government may have a responsibility to help the middle class and the poor by providing various welfare and benefit programs, I do not believe the so-called “rich” have any civic duty to do anything other than treat their employees fairly, honestly and equally. Obviously the wealthy should not be allowed to improperly build their wealth on the backs of the working class – but that is where the “duty” ends.
There may be a moral, ethical, or religious “duty” for an individual to be “charitable”, but it is not one that should be imposed by government through the use of the federal income tax system.

That’s what I think. So what do you think?


Monday, October 27, 2008


I have been subscribing to the newsletter TAX HOTLINE from Bottom Line Publications (originally, I believe, known as Boardroom Books) for over 25 years now, and have mentioned it on several occasions here at TWTP.

I recently received the November 2008 issue to find that it is now called BOTTOM LINE WEALTH, and combines personal finance with tax issues. It is still an excellent publication.

The November issue has some items of interest that I would like to share with you.

Dr. Allen Sinai’s column ON THE ECONOMY deals with “What A New President Can Do”. He tells us that “newly elected presidents have often played a decisive role in shifting the US economy” and discusses what Kennedy, Reagan and Clinton did to fix inherited problems in the economy. The highlights below are mine.

When John Kennedy was inaugurated in 1961, the country was in a recession. In an attempt to rev up the economy, Kennedy increased government spending and proposed cutting taxes. The eventual tax reductions stimulated consumer spending and business investment, and the economy entered a strong expansion.

When Ronald Reagan took office in 1981, the economy was stagnant while inflation was high. Reagan responded with big tax cuts and a massive increase in defense spending. The combination set off a boom that ran from 1982 through 1988

You will note that in both these cases, according to Sinai, tax cuts resulted in a stronger economy.

Slick Willy’s actions were a bit different.

After taking office in 1993, Bill Clinton changed the economy’s course, balancing the budget and reducing the deficit. With Washington borrowing less, interest rates declined. That allowed consumers and businesses to take out loans, spend and prosper. Clinton presided over the best decade the US economy ever had.”

In Clinton’s situation balancing the budget and reducing the deficit did the trick.

Just something to think about when deciding on who to vote for this November.

The issue’s TAX BITES column tells us that “A new identity theft assistance unit has been set up by the IRS to help taxpayers facing identity theft problems” which is known as the Special Victims Assistance Unit (was it named by a fan of the LAW AND ORDER franchise?). For more information click here.

I wish to take exception to two of the “10 Questions to Ask…A Tax Preparer” suggested in an article by Martin S Kaplan CPA.

Question #3 is “Are you a licensed CPA? Enrolled Agent? Tax Attorney?” Kaplan tells us to “stick with tax preparers who have one of these designations”.

I have written several times, here at TWTP and in guest posts and comments elsewhere, that a CPA is not necessarily the best choice, and certainly not the most cost efficient, to prepare your tax return. While there are CPAs out there who are experienced in individual income taxes (several of them write tax blogs) and may even charge reasonable fees, just because a person has the initials CPA after his name does not mean that he is an expert when it comes to federal and state income taxes. You will notice the initials after the Kaplan’s name.

As for a tax attorney – if you think a CPA is expensive…! You certainly do not need a tax attorney to prepare a 1040. When you may need a tax attorney is if you are in deep doo doo (technical term) with the IRS.

Now an Enrolled Agent – there Kaplan is on the money.

Question #5 is “Do you use a computer to review returns before filing?” Here Kaplan says, “Some old-timers still don’t use tax-preparation software. Avoid these preparers. The Tax Code is simply too complex to do without software to double-check the tax preparer’s math and call potential errors and omissions to his attention.”

As one of the old-timers to which Kaplan refers I say “poppycock” (another technical term)! As I learned at a recent IRS Tax Forum class on the most frequent 1040 errors (see my post “IRS Nationwide Tax Forum 2008") relying on tax-preparation software causes a multitude of problems. One must manually check the math of all returns – especially software-generated returns.

I agree that the Tax Code is complex, which is why I keep up-to-date on the tax law by daily visits to tax blogs and other online resources and by attending several federal and state continuing education classes throughout the year. At many of these classes, after I identify myself as still preparing tax returns by hand, I am often told that I am the only person present (along with the one or two others in the room who also do manual returns) that actually knows tax law or how to prepare a tax return.

While taxpayers should obviously never rely on a “box” to properly and accurately prepare their tax returns, neither should tax preparers. Software-generated tax returns are only as good as the knowledge and experience of the person entering the data, and, I cannot say this often enough, need to be manually checked for math and other errors before being given to the client for filing.

While Kaplan’s article is flawed, the November issue of BOTTOM LINE WEALTH also has articles on investing and Social Security scams with great information.
I highly recommend this newsletter as being an excellent, and very reasonably-priced, source of tax planning and preparation as well as investment information.

BLP has a special offer for you. They will send you six (6) Financial Guides plus 3 monthly issues of BOTTOM LINE WEALTH absolutely free. If you like BOTTOM LINE WEALTH you may continue to subscribe at the rate of just $39.00 per year (9 more issues for a total of 12) (plus sales tax where applicable), which is a savings of more than $20.00 off the regular rate. You will also receive all the benefits of BLP’s Continuous Service Guarantee. If I don't like it, I'll simply mark your bill "cancel," owe nothing and keep all the free reports and issues. Click here to sign up.

FYI, I have not been solicited or paid by Bottom Line Publication in any way to write this post. I did it all on my own.


Saturday, October 25, 2008


* Thank the Lord! Kelly TAXGIRL Erb reports that “Pelosi Confirms Tax Rebates ‘Unlikely’ Before New Year”. Kelly says – “In a move that should surprise very few, House Speaker Nancy Pelosi confirmed yesterday that Congress is ‘unlikely’ to approve an economic stimulus package that included tax rebate checks during this calendar year.”

Kay Bell also touches on the topic in her post “So Long to Second Tax Rebate”. Kay echoes my sentiments when she says of another rebate, “The immediate economic aid, to both individual taxpayers as well as our struggling economy, would be limited. And the costs could cause more problems by adding to our ginormous federal deficit.”

The Yellow Rose of Taxes quotes from an excellent post titled “Will There Be A Second Stimulus Check? I Hope Not” by David of MY TWO DOLLARS - "We do not have the cash to be throwing good money after bad; we are already doing that with the bailout."

But, unfortunately, it continues. Subsequent posts at the above and other blogs indicate that there may be some support for a second “stimulus” rebate check. However I doubt if any more tax legislation will be passed during 2008 – mainly because, as one blog post mentioned, I doubt that Congress, now adjourned for the year to campaign, wants to come back to Washington and do any more real work.

* Before we leave DON’T MESS WITH TAXES you should check out her post “
401(k) Do's and Don'ts”.

The most important Don’t is “Don't take early distributions”! I just dealt with a client whose $19,000 premature 401(k) distribution cost $7,700 in federal income taxes – or 40.5%! And that did not count the state income tax cost. If you must take money from your plan prematurely borrowing is better than an actual distribution.

* And speaking of Kelly of TAXGIRL, she begins a series of very detailed posts on state taxes with “State Tax Primer from A to W: Alabama”. I hope she hasn’t forgotten about my ASK THE TAXGIRL question!

* According to a Buffalo newspaper article titled “Tax Forms Not Coming in the Mail” that according to the New York State Department of Taxation and Finance they “won’t be mailing tax forms directly to individuals anymore.” This means that the IT-201 and IT-203 packages will not be mailed out to resident and non-resident taxpayers. New York “expects to save $1 million in mailing, printing and processing costs”. For me, a tax professional who still prepares tax returns by hand, this means additional expense.

* Another blog list! Roni Deutch gives us her “
Top 10 Common Misconceptions About Taxes” at her TAX HELP BLOG. I have discussed many of these misconceptions in the past at TWTP.

Roni makes a good point in her introduction – “Since most people have their tax returns prepared by a specialist, they usually do not feel it necessary to educate themselves on tax issues. However, this can result in grossly inaccurate returns, and can even lead to IRS fees and penalties. While many tax myths have been dispelled in recent years, there is still a lot of confusion out there.”

* The Tax Foundation has updated the Presidential Candidate Tax Plan Comparison section of our website to reflect recent changes and clarifications in Sen. McCain's and Sen. Obama's tax policies. The most significant changes: both candidates have recently outlined short term tax policies designed to help taxpayers deal with the current economic troubles. Check it out
here. You will note that Obama continues to push “refundable credits” – which are currently probably the largest source of tax fraud.

* Last week it was Joe the Plumber. This week the most prolific tax news story concerned Sarah Palin’s $150,000 “make-over”. Kay Bell of DON’T MESS WITH TAXES, Joe Kristan of THE ROTH AND COMPANY TAX UPDATE BLOG, Richard Close of IRS HITMAN, Paul Caron of TAX PROF, Linda Beals of A TAXING MATTER, Dan Shaviro of START MAKING SENSE, and the Tax Foundation’s TAX POLICY BLOG all add their 2 cents worth on this “tax kerfuffle”. As for me, I have more important things to deal with at the moment. Just one question – who is paying for Michele Obama’s wardrobe? Maybe I’ll blog about it when I have more free time.

* Michael Rozbruch of the TAX RESOLUTION UNIVERSITY blog provides some good advice in his post “
How to Hire a Tax Resolution Company You Can Trust - 7 Ways to Ensure That Your IRS Tax Problems Are in Good Hands”.

Of course the first rule to remember in hiring a Tax Resolution Company is to never hire a firm that promises they can resolve your IRS debt for “pennies on the dollar”!

* Condolences to blogger June Walker on the loss of her brother. We are glad that June is back blogging again. Her blog deals with tax issues for the self-employed (like my former THE FLACH REPORT blog used to) and often contains some excellent advice and information.

I hope all is well with fellow tax-blogger Ryan Ellis (the former TAX PLAYA) of the TAX INFO BLOG. He hasn’t posted in over a month.

* Here is a new one – instead of “I didn’t file my taxes because the dog ate my 1040” a New York State politician is claiming he did not file because he was a victim of “Non-Filers Syndrome”! You have got to be kidding! Check out TAX PROF Paul Caron’s post “Embattled NY Official Raises 'Non-Filers Syndrome' as Tax Defense". What an idiot!

Maybe Dick Wolf can use this as a defense on LAW AND ORDER for a “perp” who kills a tax auditor.

* Peter Pappas poses three interesting questions at the end of his post “In Their Own Words: McCain v. Obama on Taxes” over at THE TAX LAWYER’S BLOG – questions that you may want to take the time to answer. I did.

The questions are – (1) How do you define “rich?”, (2) Is imposing higher taxes on “rich” people “punishing success?”, and (3) Do “rich” people have a civic duty to help the middle class and the poor?

* This week’s TAXPRO WEEKLY email newsletter from the National Association of Tax Professionals brings us two items of interest.

First up - "IRS has $266 Million in Undeliverable Refunds and Stimulus Payments: The IRS is urging taxpayers to make sure their mailing address is up-to-date. If a taxpayer has moved since he or she last filed a tax return, Form 8822, Address Change Request, should be filed with the IRS. It is critical that taxpayers who are due a stimulus check update their addresses with the IRS before year-end, because by law, economic stimulus payments must be sent out by December 31 this year."

Let me preface the second item by quoting from the opening lyrics to Lerner and Lowe’s “I’ve Grown Accustomed to Her Face” from MY FAIR LADY – “Damn, damn, damn, damn!” - "Reminder - Brokers’ Statements to Arrive Later Beginning in 2009: The recent bailout bill extends the date by which brokers must furnish information forms to customers. This includes Form 1099-B and also other forms from brokers, including realtors. Beginning with statements furnished in 2009, brokers will avoid penalties if they furnish these forms on or before February 15, as opposed to the previous due date of January 31."

I suppose I shouldn’t complain – what with the often multiple “corrected copies” of Consolidated 1099 Statements from brokerage houses these last few years the final information is rarely provided until mid-March – which is a real PITA and often the cause of a GD extension.

* I will be glad when the election is finally over. I don’t think I can take One Day More. It certainly makes you think. If we just look at the issue of taxes – in many cases, based on what they have said, neither candidate really knows his arse from a hole in the ground when it comes to the Tax Code (I hope all four of the candidates have read my post “Taxes 101 for Politicians”). And, judging from the constant posts about lies and discrepancies in ads and the debates at the Tax Foundation’s TAX POLICY BLOG and other blogs, neither have any clue as to what either the tax changes of the Bush years have actually done or what each other has proposed regarding tax policy. If these guys are so clueless when it comes to the issue of Taxes are they just as clueless when it comes to other important election issues? Oi vey!

* Always leave them laughing. I got this in an email forward on Monday: Best stock market trader quote of the week: “This is worse than divorce. I've lost half my money but I still have my wife!


Friday, October 24, 2008


Just wanted to let New Jersey homeowners know that the deadline for filing an application for the NJ Homestead Rebate, which can be done either by phone or online, and the NJ Property Tax Reimbursement (PTR-1 or PTR-2) is October 31, 2008.

You can also check on the status of your NJ Homestead Rebate here.

FYI, the income limit for the NJ Homestead Rebate application has been reduced. NJ homeowners with “New Jersey Gross Income” (Line 28 on the NJ-1040) of over $150,000 will not receive a rebate this year. The income limit for tenants remains at $100,000.

Below is the filing information for tenants, from the NJ Division of Taxation website –

- If you are required to file a 2007 New Jersey income tax return, you must complete your tenant homestead rebate application and file it at the same time you file your New Jersey income tax return (April 15, 2008). If you request an extension of time to file your State income tax return, the filing deadline for your rebate application is also extended. File your rebate application with your State income tax return on or before the extended due date.

- If you have already filed your 2007 New Jersey income tax return but did not complete the tenant rebate application even though you are eligible, you have until October 31, 2008, to file the tenant homestead rebate application, Form TR-1040. If you filed a traditional paper income tax return, you can submit a paper Form TR-1040, or you can file your tenant rebate application through
NJ WebFile, the Division of Taxation's free Internet filing system.

2007 Tenant Rebate Application
· 2007 Tenant Rebate Instructions

- If you are not required to file a 2007 New Jersey income tax return because your income is below the
minimum filing threshold, you have until October 31, 2007, to file your 2007 tenant homestead rebate application, Form TR-1040.


Thursday, October 23, 2008



You are all aware, or should be, of my weekly WHAT’S THE BUZZ feature, which appears every Saturday (except during my tax season hiatus). I bring you links to the best blog postings and online articles on tax-related topics from the week that I have come across in my “wanderings” on the web, often providing my own commentary on the subject.

I have created a new free monthly newsletter that does the same thing for personal finance and other topics titled FROM THE DESK OF ROBERT D FLACH. It is sort of a giant Personal Finance Blog Carnival – only I have personally selected the entries.

You can download a free copy of the premiere “issue” (in “pdf” format) by clicking HERE.

Each month as a new issue is published I will provide you with a link so you can download a copy.

And, of course, you are always welcome to suggest posts or articles on the subject that you feel would be of interest to my readers.


While I have you I just wanted to let you know that the “35th Money Hacks Carnival - The 1925 Railroad Edition” is up and running at THE MONEY HACKS (“a place to discuss money for the rest of us”).

My post “Taxes 101 for Politicians” appears under the “Politics” category. Odd choice of category – though there is no “Taxes” category.

While you are there check out “10 Smart State Income-Tax Saving Strategies” from FIX MY PERSONAL FINANCE, included under the “Saving, Frugality and Shopping” heading. The author starts off with the excellent point, “You can’t do serious tax planning unless you take state and local taxes into account, too”.

I found “Are You Stupid for Paying Your Mortgage” from KIRBY ON FINANCE under “Dealing With The Economy” interesting, and also recommend “529 College Savings Plan” from PASSIVE FAMILY INCOME under “Investing”.

As somewhat of a train buff myself I enjoyed his pictures.


Wednesday, October 22, 2008


This question was originally submitted as an unrelated comment to an earlier TWTP post.

Q. If a man (age 24) lived with and provided over half the support for his girlfriend (age 22) and her child (age 2) all year, can he claim them as dependents and file as Head of Household? Between her short job and interest earnings, the girlfriend didn't make quite $3,400.

A. First question – can the taxpayer claim his girlfriend as a dependent?

To be claimed as a dependent one must be either a “qualifying child” or a “qualifying relative”.

The first test for a “qualifying child” is that “the child must be your son, daughter, stepchild, foster child, brother, sister, half brother, half sister, stepbrother, stepsister, or a descendant of any of them.” I assume that the “girlfriend” does not meet this test (are we talking about Arkansas?) – so she is not a “qualifying child”.

The tests for being a “qualifying relative” are –

1. The person cannot be your qualifying child or the qualifying child of any other taxpayer. We have shown that the girlfriend is not the taxpayer’s “qualifying child”, and let us assume she is not the “qualifying child” of anyone else (no info to the contrary provided) – so we assume she passes this test.

2. The person either (a) must be related to you or (b) must live with you all year as a member of your household (and your relationship must not violate local law). It is stated in the question that the girlfriend lived with the taxpayer, and we will assume that it was for the entire year – so she passes this test. If she moved in with the taxpayer in February she would not pass the test. The comment about “must not violate local law” has to do with common-law marriages – which I will say is not an issue in this situation.

3. The person's gross income for the year must be less than $3,400. The question indicates that her income was less than $3,400 - so she passes this test. The $3,400 mentioned here represents the amount of the personal exemption for 2007. For 2008 the amount to use is $3,500.

4. You must provide more than half of the person's total support for the year. According to the information provided the taxpayer did – so this test is also passed.

So the girlfriend is a “qualifying relative” – even though she is not related to the taxpayer.

There are now three (3) more tests to pass –

(1) Dependent Taxpayer Test - If you could be claimed as a dependent by another person, you cannot claim anyone else as a dependent. It appears that the taxpayer boyfriend is not being claimed as a dependent by anyone else, so this test is met.

(2) Joint Return Test - You generally cannot claim a married person as a dependent if he or she files a joint return. We should make sure the girlfriend is not married to someone else and filing a joint return with her spouse. Let us assume she is not (no info to the contrary) and say she passes this test.

(3) Citizen or Resident Test - You cannot claim a person as a dependent unless that person is a U.S. citizen, U.S. resident alien, U.S. national, or a resident of Canada or Mexico, for some part of the year. There is no indication in the facts given that the girlfriend is not a US citizen – so we will assume she meets this test.

So, the girlfriend meets the tests for being a “qualifying relative” and the tests for being a dependent. The taxpayer boyfriend can claim her as a dependent on his tax return.

Next question – can the taxpayer claim his girlfriend’s 2-year old child as a dependent?

The question does not say that the taxpayer has legally adopted the child, so under the test we discussed above the child would not be his “qualified child”.

The first test for “qualifying relative” is that the person cannot be the “qualifying child” of another taxpayer. The child is the “qualifying child” of her mother. However this does not necessarily disqualify the child for the taxpayer boyfriend because according to IRS Publication 501 (Exemptions, Standard Deduction, and Filing Information) – “A child is not the qualifying child of any other taxpayer and so may qualify as your qualifying relative if the child's parent (or other person for whom the child is defined as a qualifying child) is not required to file an income tax return and either:

· Does not file an income tax return, or
· Files a return only to get a refund of income tax withheld

Based on her taxable income as presented, the mother does not have to file a federal income tax return, although she may file a return with no dependents and a “0” tax liability only to claim a refund of any income tax withheld on her small W-2 earnings.

However, if the mother filed a tax return to claim the Earned Income Credit based on her child, as could apply in this example, then the boyfriend could not claim the 2-year old as his dependent. If the boyfriend came to me to have his tax return prepared with the above information I would also want to see if the mother would be eligible for the Earned Income Credit (also available on the NJ state income tax return) and see how much of a credit she would receive.

It the EIC is not an issue then we can assume, based on the limited facts given, that the child would pass the other tests for being a qualifying relative and a dependent.

One must look carefully on the support test. If the mother is receiving child support payments from either the father or a government welfare program perhaps the boyfriend is not paying more than half the support for the 2-year old. We must also find out if the child’s father is claiming her as a dependent on his return using Form 8332. It is important to ask questions and get all the information before making a decision.

So we have determined that the taxpayer boyfriend can claim his live-in girlfriend as a dependent, and maybe the girlfriend’s 2-year old child as well.

Last question – can the taxpayer file as Head of Household?

According to Pub 501 – “You may be able to file as head of household if you meet all the following requirements.

1. You are unmarried or “considered unmarried” on the last day of the year.
2. You paid more than half the cost of keeping up a home for the year.
3. A “qualifying person” lived with you in the home for more than half the year (except for temporary absences, such as school)

The taxpayer boyfriend, it appears, meets the first two requirements.
A “qualifying person” is someone who “lived with you more than half the year, and he or she is related to you in one of the ways listed under Relatives who do not have to live with you on page 14, and you can claim an exemption for him or her.”

Page 14 of Pub 501 lists the “Relatives who do not have to live with you” as

· Your child, stepchild, foster child, or a descendant of any of them (for example, your grandchild). A legally adopted child is considered your child.
· Your brother, sister, half brother, half sister, stepbrother, or stepsister.
· Your father, mother, grandparent, or other direct ancestor, but not foster parent.
· Your stepfather or stepmother.
· A son or daughter of your brother or sister.
· A brother or sister of your father or mother.
· Your son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law.

A person who is your “qualifying relative” only because he/she lived with you all year as a member of your household is not a “qualifying person” for purposes of meeting the Head of Household test.

Publication 501 specifically provides the following example (the highlight is mine)-

Example 3—girlfriend.

Your girlfriend lived with you all year. Even though she may be your qualifying relative if the gross income and support tests… are met, she is not your qualifying person for head of household purposes

So the taxpayer boyfriend cannot file his tax return as Head of Household.
Just a disclaimer - there was really not enough information provided in the question to answer the question with certainty. As I said above it is very, very important that all the "facts and circumstances" be given to your tax preparer so he/she can make an informed decision.
Does anyone have anything to add?

Tuesday, October 21, 2008


Before I get back to work I just wanted to report that the Carnival of Money Stories: Edition #81 is now appearing at SO CAL SAVVY.

The blog’s host is “newly married and out-of-work. On one income I’m making our bucks stretch and still enjoying everything Southern California has to offer us. I want to save a buck, but also enjoy life as a twenty-something in the city. It’s a process, but I want to share what I’ve learned and get feedback from others!”

My post on “Taxes 101 for Politicians” is included – the only entry under the “Taxes” category.


{As this is still a busy time – finishing up the last two GD extensions – it is a good occasion to bring you a “rerun”. Here is a post from December 26, 2006 - my father's birthday - that is still relevant today}

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

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

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

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

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

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

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

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

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

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

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

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

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


Sunday, October 19, 2008


I Just wanted to let you know that the WHAT’S NEW FOR 2009 Page, with the various new amounts for deductions, credits phase-outs, etc that will apply to the 2009 Form 1040, is now “up and running” at

This Page includes the 2009 personal exemption, standard deductions, pension plan contribution limits, Section 179 and long-term care insurance premium deduction limits, Social Security and Medicare information, annual gift tax exclusion, etc. You can also download the 2009 Tax Rate Schedules.

I will add new information for 2009 to this page as it becomes available.


I currently subscribe to “Digital Cable” through COMCAST, which more than doubles the cable stations that I can watch. I can now watch BBC America, the Hallmark Channel, the Travel Channel and Disney, among others. I have about 200 channel choices.

I swear in the “olden days” before cable tv (which was portrayed in “PSAs” shown in movie theatres as a “monster in your living room”) when there were only 7 broadcast channels to choose from (for me 2, 4, 5, 7, 9, 11, and 13) there were more varied choices than there are today with 200 channels - and I never had any trouble finind something entertaining to watch! I often find myself singing a revision of the Bruce Springsteen song, now “200 Channels and Nothin’ On!”

While the remaining broadcast channels do often come up with some good shows, their schedules continue to be chock-a-block with the steaming piles of excrement called “reality tv”, brain-dead game shows and cloned talent contests, as do the various cable stations.

MTV, VH-1 and E are full of unwatchable soft-core porn reality shows – with absolutely no socially redeeming value and also no entertainment value. E’s only saving grace is THE SOUP.

TLC (The Learning Channel) should be called the “Circus Side-Show Channel”. With the exception of WHAT NOT TO WEAR and reruns of WHILE YOU WERE OUT (two shows which actually are excellent for what they are) this station is all about freaks and geeks – from the “tree-man” to the “man without a face” to the “tattooed lady” (HOLLYWOOD INK).

BRAVO, TNT and A+E run constant reruns of the LAW AND ORDER and CSI franchises – how many times can you watch the same episode?

BBC America does have PRIMEVAL, TORCHWOOD, occasional mystery series like WIRE IN THE BLOOD, GAVIN AND STACEY, and GRAHAM NORTON - but its schedule is mostly made up of reality shows – which are more outlandish than the copied American versions. When I first got Digital Cable BBC America had daily reruns of the old SAINT and AVENGERS series, but they disappeared within a month.

The Hallmark Channel’s series of original mysteries (somewhat reminiscent of the days of McMILLAN AND WIFE, McCLOUD, BANACEK, etc – although certainly not as good) have original entries only very rarely. And, like TNT, BRAVO and A+E with L+O and CSI, how many times can you watch the same Perry Mason movies and Murder She Wrote and Matlock episodes?

The Travel Channel still has an hour of new Samantha Brown (now doing week-end getaways) almost every week, but fills much of its prime-time schedule with a show about a fat guy eating fried bugs and cooked animal testicles in exotic places, someone who makes “No Reservations”, and poker tournaments.

The Disney tween-targeted sitcoms and movies are ok on occasion for killing time – but not as a steady diet.

Oi vey! Thank God for FANCAST and NETFLIX.


Saturday, October 18, 2008


It seems that I used up most of the good Buzz in my Hump Day bonus entry. There are still a few good items left -

* Kelly “TAXGIRL” Erb brings us some good news from the Supreme Court in her post “The Tribe/Supreme Court Has Spoken: Fat Naked Guy Stays in Jail”. “Fat Naked Idiot” Richard Hatch, poster boy for the multitude of complete idiots who abandon all self-respect to appear on a steaming pile of excrement that we call “reality tv”, “has lost his final challenge: the U.S. Supreme Court has declined to hear his appeal on tax evasion charges”. Kudos to the Court for a wise decision.

* Oops - they did it again! In its post “Fact Checking Tax Policy Discussion in the Final Presidential Debate” the Tax Foundation’s TAX POLICY BLOG tells us that “both candidates did make many of the same dishonest and misleading statements they've made in the past two debates and on the campaign trail” in Wednesday night’s debate.

* Bruce the TAXGUY ended the week with a guest post in his ongoing series on choosing a tax professional by Anonymous (is this the same person that posts so many comments on blogs) titled “
Things Your Tax Pro May Not Tell You”. Be sure to read my lengthy comment on this post.

* Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG points out that it was 77 years ago yesterday (Friday) that Al Capone was convicted of tax evasion.

* Just about every other tax blog is talking about “Joe the Plumber” (who TAXGIRL tells us is not really a plumber) from DON’T MESS WITH TAXES to TAXGIRL to MAULED AGAIN to the TAX POLICY BLOG to TAX PROF to the ROTH AND COMPANY TAX UPDATE BLOG and on and on. Pick one or two and read about Joe and his apparently more than fifteen minutes of fame.

* Thanks to Michael Rozbruch of the TAX RESOLUTION UNIVERSITY blog for the kind words in introducing my guest post on “5 Ways to Avoid IRS Tax Problems”. It is nice to know that I am thought of by my peers as “one of the blogosphere’s best tax bloggers”! If you haven’t already done so be sure to check out my post.


Friday, October 17, 2008


Check out my guest post “5 Ways To Avoid IRS Tax Problems” today at the TAX RESOLUTION UNIVERSITY blog. I was “returning the favor” to blog author Michael Rozbruch who had written a guest post for TWTP during my recent GD extension hiatus.

Thanks, Michael, for having me, and thanks for the kind words – “one of the blogosphere’s best tax bloggers”!


Yesterday (Thursday) the IRS and the Social Security Administration announced some of the various inflation adjustments for 2009. Here is the word -

* The value of each personal exemption, for the taxpayer, spouse and dependents, is $3,650 for 2009, up $150 from 2008.

* The new standard deduction amounts for 2009 are -

· $11,400 for married couples filing a joint return (up $500),
· $5,700 for singles and married individuals filing separately (up $250), and
· $8,350 for heads of household (up $350).

* The maximum Earned Income Tax Credit (EITC) for low and moderate income workers and working families with two or more children is $5,028, up from $4,824. The income limit for the credit for joint return filers with two or more children is $43,415, up from $41,646.

* The 2009 annual contribution limits for retirement plans are:

· $16,500.00 (plus an additional $5,500.00 if age 50 or older at the end of 2008) for 401(k) and 403(b) plans
· $16,500.00 (plus an additional $5,500.00 if age 50 or older at the end of 2008) for 457 plans (Deferred Compensation for state and local government employees)
· $11,500.00 (plus an additional $2,500.00 if age 50 or older at the end of 2008) for SIMPLE plans
· $49,000.00 for Defined Contribution KEOGH plans
· $49,000.00 for Self-Employed SEP plans (allowable contribution equal to 25% of net earnings up to $245,000, which translates to 20% multiplied by the total of "net earnings from self-employment" from Schedule C, Schedule C-EZ or Form K-1 less the deduction for 50% of self-employment tax)

* The compensation limit for participation in a SEP is $550.00.

* The annual gift exclusion rises to $13,000, up from $12,000 in 2008.

* Monthly Social Security and Supplemental Security Income benefits will increase 5.8% in 2009, the largest COLA increase since 1982, effective with benefits received in January 2009.
Social Security and Supplemental Security Income benefits increase automatically each year based on the rise in the Bureau of Labor Statistics' Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W), from the third quarter of the prior year to the corresponding period of the current year.

* Based on the increase in average wages, the maximum amount of earnings subject to the Social Security tax (taxable maximum) for 2009 will increase to $106,800 from $102,000. The maximum Social Security tax to be withheld from wages in 2009 will increase to $6,621.60 from $6,324.00. The maximum amount of the Social Security portion of “self-employment tax” will be $13,243.20.

* For most Social Security beneficiaries the standard monthly Part B premium will be $96.40 in 2009.

The monthly premium will be higher if you filed a 2007 individual tax return and your modified AGI for 2007 was more than $85,000, or if you are married (file a joint tax return) and your annual income is more than $170,000. The premiums for the “higher income” beneficiaries will be as follows-

Premiums - - Income of:
$ 96.40 - - - $85,000 or less
$134.90 - - - $85,001-$107,000
$192.70 - - - $107,001-$160,000
$250.50 - - - $160,001-$213,000
$308.30 - - - Above $213,000
Premiums - - Income of:
$ 96.40 - - - $170,000 or less
$134.90 - - - $170,001-$214,000
$192.70 - - - $214,001-$320,000
$250.50 - - - $320,001-$426,000
$308.30 - - - Above $426,000
Premiums - - Income of:
$ 96.40 - - - $85,000 or less
$250.50 - - - $85,001-$128,000
$308.30 - - - Above $128,000

For more info on the IRS increases click here and here – click here and here for info on the Social Security changes – and click here and here for more info on the Medicare Part B premiums.

I will report on additional 2009 numbers of interest here as information becomes available. Within the next two weeks I will be creating a WHAT’S NEW FOR 2009 Page on my website at I will let you know when it is “up and running”.


Thursday, October 16, 2008


A while back the Director of Publications for the National Association of Tax Professionals asked me to contribute to an article for the association’s quarterly TAXPRO JOURNAL, for which I had written in the past, on what would be my proposals for changing the Tax Code if I were running for president. I received the “proofs” last week.

* I begin by stating that I would repeal the dreaded Alternative Minimum Tax (AMT). I expect that this would be high on the list of most tax professionals.

*I would do away altogether with the “marriage tax penalty” by making the filing status “Married Filing Separately” equal in every way to that of “Single”. No longer would any tax benefits be unavailable to married taxpayers choosing to file single – and the Tax Rate Schedule (and corresponding Tax Tables) for MFS would be the same as the one for Single. The filing status would be renamed “Married, But Filing as Single”.

What I do not say in the article, an afterthought, is that I would probably reduce somewhat the “marriage tax benefit” so that the Tax Rate Schedule for MFJ is closer to that of Head of Household. I would probable balance this out by allowing a slightly higher personal exemption deduction, perhaps $500 or $1,000 more, for dependent children, similar to what NJ does on the NJ-1040 (the exemption for the taxpayer and spouse and age or blindness is $1,000 each while for dependents it is $1,500).

A couple choosing to file separately would be able to file a “2-column” Form 1040 (or 1040A) – so that they could report their individual items of income, deduction and credit separately, but end up with one net refund or balance due amount. This is similar to the way I remember the New York State income tax return to be when I first started out in the business.

* Another proposal, which I first put forward in 2002 when George W was first looking for ways to “stimulate” the economy, is to allow taxpayers to “carry back” as well as “carry forward” net capital losses in excess of the annual maximum deduction (which would now be annually adjusted for inflation) to apply against gains in prior years. I would probably have a three-year carry back period. I discussed this idea in detail in my post “Dear George”.

This idea came about because many of my clients had reported and paid a substantial amount of federal, and state, income tax on six-figure capital gains, most short-term, in 1999 and 2000, but when everything turned around in 2001 and 2002 they had six-figure realized capital losses. The bottom line was that over a 2 or 3 year period of investment activity they had a net capital gain of “0” or a minor net gain or net loss. But they had been highly taxed in the years they had gains – and were only able to deduct a maximum of $3,000 in the years they had losses, with the excess loss “carried forward”. Unless these taxpayers would have a big score in future years they would never be able to fully claim all of the losses in their lifetime.

I do believe that one of the reasons we ended the Clinton years with a budget surplus was because of the taxes paid on excessive capital gains during the “” boom.

* I would make all items of deduction indexed annually for inflation. If we are going to index some items we should index them all. As I point out in the article, I believe the $25 limit on business gifts has remained unchanged for as long as I have been doing taxes – over 35 years – and the $3,000 limit on deductible net capital losses has been the same for decades.

* One current inequities in the law is that a person who wins a legal settlement, award or judgment, except in the case of a claim for unlawful discrimination, must report the gross amount as income on Page 1 of the 1040, which increases AGI and adversely affects a multitude of deductions and credits, and deduct the associated legal costs as a miscellaneous itemized deduction subject to the 2% of AGI reduction. In these cases a person could be awarded $300,000 but only end up “in pocket” $100,000-$150,000 after the lawyer takes his chunk.

In the case of claims for unlawful discrimination the associated legal fees and court costs are allowed as an “above-the-line” adjustment to income, so that the AGI properly reflects the true economic reality. I would allow the same adjustment to income for the corresponding costs of all settlements, awards and judgments.

*I would permanently do away with the first George Bush’s “read my lips” taxes – the phase-out of personal exemptions and itemized deductions based on AGI. And I would also repeal the 2% of AGI reduction of miscellaneous itemized deductions.

While I did not address the issue in my proposals for the article, several of the other contributors mentioned increasing, or doing away with, the phase-out ranges for various tax benefits, stating (1) it discourages ambition and (2) it discriminates against residents of certain high cost-of-living states (like California and those in the northeast). I would most likely do away with all phase-outs of deductions, credits, etc based on income. If an item has merit as a deduction or credit it should apply to all taxpayers. If you want to increase the tax on “high income” individuals that just raise the rate!

If there must be a phase-out or cut-off I would opt for one much higher cut-off MAGI amount (no more bothering with phase-outs) for all tax benefits – say $150,000-200.000 for an individual taxpayer (including Married Filing As Single) and $300,000-$400,000 for a joint return.

I would certainly, as a fellow tax professional suggested, remove all of the income and “employer plan covered” restrictions on deductible IRA and contributions and ROTH contributions.

* One minor item that irks me is that the standard mileage allowance deduction for using your car for doing volunteer or charity work is not set by the IRS along the same lines as the SMA for business, medical and moving use – but is set by Congress. Except for a recent increase restricted to driving related to Hurricane Katrina relief, this number, currently only 14 cents per mile, has not been raised in years. It should be the same as the allowance for medical and moving travel.

*I ended my list of presidential tax proposals by calling for a Federal Tax Amnesty Program similar to the type of program that has been successfully used by many of the states to raise tax revenue quickly. I discuss this in my post “Tax Amnesty”. I also said I would call for reinstating the “President’s Advisory Panel on Tax Reform” and take their findings seriously.

There are two additional proposals that I did not include in the article but probably should have –

(1) Do away with the deduction for depreciation of real property. I discussed this idea in detail in the post “Here Is Something to Think About” last year. I suggest that you go back and read that post in full to see what I am talking about. I was very disappointed that I did not get many comments on the topic at the time from my “peers”.

(2) I would also do away with “refundable” tax credits, such as the ones for Earned Income Credit and the Child Tax Credit. I would actually take a long, hard look at the Earned Income Credit, which is really a welfare program. You can read my thoughts on the EIC here.

So there you have it – the proposals of the Flach for President tax plank (click here for more details on some of the above). What do you think about my ideas – and what tax changes would you propose if you were running for the White House?

Wednesday, October 15, 2008


{Oi vey! Something in the system FU-ed my Hump Day Bonus Buzz post. The following items were supposed to be included in the original post – and were when I originally published the post. I have absolutely no idea what happened.}

* Bruce of TAXGUY continues his series on “Mistakes Made When Choosing a Paid Tax Preparer” by adding more of his own 2 cents on the subject in the post “
Paying Too Little OR Too Much. . .” and adds a guest post this morning from Russ Fox, author of the TAXABLE TALK blog.

* Speaking of the “stimulus” rebate – some good news for a change. Late yesterday (Tuesday) Kelly the TAX GIRL reported that “IRS Changes Gears on Rebate Checks” with regards to “couples who did not received a rebate check due to an error matching your spouse’s married name and Social Security number”. Like the clients in my post “Royally Screwed”. The topic is also reported here.

Kelly points out – “Last month, the IRS was adamant that rebate checks would only be mailed to those who showed a perfect match. But now, without additional comment, the IRS has announced that it mail checks this month to an additional 260,000 married taxpayers whose names did not match Social Security numbers. Letters announcing the change of position will be mailed to affected taxpayers in a few days; checks should arrive by the end of the month.”

Actually, this is not news to me. As I reported in my post “From the Horse’s Mouth” Lyle Lauterbach, the head of the NJ office of the IRS Taxpayer Advocate Service, told the NJ chapter of the National Association of Tax Professionals’ Annual Meeting and Conference last month that “the IRS has been dealing with the problem of a non-matching name and Social Security number as it relates to the economic ‘stimulus’ rebate and expects to have a solution by October – so those who had been RS-ed could possibly receive a rebate check in November.”


Lots of timely buzz so far – so I thought I would bring you an extra entry this week:

* First and foremost – Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG reminds us what today – October 15th – is in his post “It Tolls For Thee”.

* Pete Pappas of THE TAX LAWYER’S BLOG gives us some first-hand examples of how the IRS is not always as “kinder and gentler” as they would like you to believe in “Horrifying Tax Tales”.

* Pete also has begun a 10-post series on the 2 full opinions and 8 Memorandum opinions issued by the Tax Court through October 10, 2008. He begins with Patrick S. Arnold v. Commissioner in the post “Tax Court Update - October 2008”.

* TAX GIRL Kelly Phillips Erb provides a good overview of the tax treatment, old and new, of mortgage debt forgiveness in the appropriately-titled post “Foreclosures, Debt Forgiveness and Mortgage Losses Explained”.

* The Tax Foundation has set up a special page on its website titled TAX FACT CHECK. As the Foundation explains –

Tax talk is filled with statistics, and everyone knows the old Mark Twain saying about the three types of lies: ‘lies, damned lies, and statistics.’ Taxpayers, voters, the media, and even elected officials often have a difficult time sorting through all the information—and misinformation—on taxes that circulates on the internet, in the media, in political speeches, and in election debates and ads. Tax policy is a complicated, often confusing subject, and it's no wonder that so many people have trouble understanding it.

The Tax Foundation helps sort through the facts, lies, nuances, and half-truths with its Tax Fact Check publications, blog posts, and podcasts. Tax Foundation scholars analyze political speeches, debates, campaign advertisements, websites, and other sources to separate the tax facts from the falsehoods and help taxpayers understand and evaluate what they read and hear

Be sure to check out this page tomorrow morning to discover the tax-related factual FUs from tonight's final Presidential debate.

* I just came across the October 3rd “Friday Tax Quote” from the TAX LAW FORUM blog written by attorney Rob Teuber (the highlight is mine) –

My father has a great expression: ‘The capital gains tax has created more millionaires than any other government policy.’ The capital-gains tax tends to make investors hold longer. That is almost always the right decision.” Chris Davis

Something for those who call for the repeal of the special capital gains tax rates to think about.

* Kay Bell of DON’T MESS WITH TAXES quotes former Bush Treasury official
Bruce Bartlett in her post “Another Stimulus Package? Say It Ain’t So”, who, after the first rebate was approved in January, wrote in a Wall Street Journal op-ed piece (the highlight is mine) -

In short, there is virtually no empirical evidence that tax rebates are an effective response to economic slowdowns. The increased personal saving doesn't help the economy because the federal budget deficit, which can be thought of as negative saving, offsets all of it in the aggregate. The main benefit of a tax rebate would seem to be political -- giving politicians a way of appearing to be doing something about the nation's economic problems that is superficially plausible.”

* When will they ever learn? Kay follows up the above post with a report that the Democrats, led by candidate Obama, want more rebate checks. Their thinking – find an idea that doesn’t work and keep doing it! In her post “Second Stimulus Plan in the Works” Kay states –

In announcing his new economic policy plan today, the Democratic presidential nominee called on Congress ‘to pass a plan so that the IRS will mail out the first round of [Obama's proposed] tax cuts as soon as possible.’ Yep, that's the second rebate, which I argued against just this morning.”

I recently saw a musical about dorm life in which the college kids sang that Democrats are idiots and Republicans are evil. While I do not believe that all Republicans are evil (just Cheney and George W’s other advisers) it looks like Democrats may indeed be idiots!


Tuesday, October 14, 2008


{ IMPORTANT REMINDER – Before I begin my post I just want to remind you that tomorrow, October 15th, is the final deadline for filing your 2007 Form 1040 on time. If you owe “Sam” it is very important that you get your completed Form 1040 (or 1040A) signed and in the mail by October 15th – even if you cannot pay all or any of the tax due on the return. If “Sam” owes you it is not an issue – there is no penalty or interest (other than for underpayment of estimated tax) if “he” owes you. }

Now on to the business at hand -

Can you guess what provision of the recently signed kitchen sink “don’t call it a bailout” Act is my absolute favorite?

No it is not the one that “fixes” the standards imposed on tax prepares so that they now conform to the standards imposed on the taxpayer. This issue never really concerned me all that much.

And no, I do not ride my bike to work. I work out of my home, so my commute consists of walking from the living room to the office.

I am obviously “pleased as punch” that the annual AMT fix was included – but that is not my favorite “sweetener”.

Of course it is the provision that brokers will be required to report (to the taxpayer and to the IRS) the adjusted cost basis of publicly traded securities, and identify the gain or loss as short-term or long-term, in addition to the gross proceeds on Form 1099-B.

Actually many brokerage houses already do include a Profit and Loss statement, showing both sale and purchase information and indicating the amount of gain or loss, in their Consolidated Year-End Statements, and most mutual fund houses will provide an Average Cost Statement for fund shares sold during the year – although this information is not also sent to the IRS.

This information is essential for we tax professionals to properly complete a return that involves the sale of investments. It is the rare client that keeps complete and accurate records of the purchases, splits, dividend reinvestments for all his/her stocks and mutual funds.

The biggest culprit for the delay in the timely completion of a 1040 - and the cause for many a GD extension - is missing cost basis information!

Often the Profit and Loss reports in the Consolidated Year-End Statements are incomplete. Mostly this is because the initial purchase, and/or some of the dividend reinvestment, was made while the taxpayer was a client of a different brokerage firm. The YE Statements will only reflect cost basis information for purchases made by that firm – except on the very rare occasion when either the client or the broker, who has moved over from another house, has provided the firm with the appropriate missing cost basis information.

As is common today with stockbrokers, there is frequent moving from firm to firm as upward mobility. A broker may start out with Oppenheimer and then move to UBS for awhile and then move again to Merrill Lynch (or should I now say Banc of America) as they are enticed by signing bonuses and increased income opportunities. Many of these brokers will take their clients with them from house to house, as the enticing firm hopes will happen. While the broker, who has purchased all of a taxpayer’s stocks and funds over his investment life, should know the correct cost basis for each investment purchased, this information does not always make it to the new firm’s computer data base (mostly due to the laziness of the broker).

And then there are still brokerage firms whose year-end 1099 statements do not include a P+L – only the Gross Proceed information required to be reported on a 1099-B.

Many mutual fund houses will only report the cost basis of shares purchased within the past five or so year period (and only on an “Average Cost” basis and not using “FIFO”). A taxpayer may have purchased his initial shares of a Fidelity fund a dozen years ago, and have done so directly from Fidelity, but apparently the Fidelity data base does not go back that far.

While I may have some of the information available to me from documentation I have copied over the years and attached to prior year tax return copies in my files, and some information can be determined or “estimated” via online resources, I really do not have the time during the tax filing season to waste doing excessive research for one return.

If the client contacts me during the “regular” year, say in November or December, with his/her investment sales for that year I would have no problem doing the necessary research, for an hourly fee of course (although probably less than the fee that I would be charging if forced to take precious time in the tax season to do the work). But I can count on the fingers of one hand the number of clients who have done just that over the past 35+ years.

No, the best source of cost basis information is the broker who purchased the investment for you in the first place.

Over the years I have gotten many of my clients’ brokers properly trained – and to their credit I must admit that for the most part they have been ready and willing to be of help in this area. I actually have several brokers who send me directly (via postal mail or as email attachments) copies of the clients’ Consolidated Year End Statements, with any missing cost basis information filled in by hand. This includes the various several corrected copies that have become common lately. Other brokers have provided me with their email address so I can contact them directly to request missing information, and I usually get a prompt and thorough response. This is a big help to me in properly preparing the tax return, and is greatly appreciated.

This issue was on my mind recently as one of the GD extensions I worked on had lots of cost basis.

For one thing, the client has three separate brokerage accounts with the same firm – all in the client’s name only. During 2007 the broker moved to a new firm and took the client with him, opening three accounts at the new firm. So I have six (6) sets of Consolidated Year-End Statements to contend with. And I am not talking about a handful of trades. Each of the six different accounts had a multitude of trades. All-in-all there is pages and pages and pages of trades to report! While both the old and the new firm include a P+L report in the year-end statement, there are a great many sales that do not have purchase details.

The client has confirmed that he has had the same broker since day one, so it was the same broker that made each and every purchase.

Without questioning why the need for three separate accounts, and without accusing the broker of “churning” the accounts to generate commissions and fees (if the broker has college age children I certainly know who paid the tuition last year), the bottom line is that since there was only one broker who made all the purchases over the years there is absolutely no reason why that one broker cannot provide me with the missing cost basis information.

Unfortunately for we tax preparers, this new important requirement does not take effect for a few years. It begins with stock acquired in 2011, mutual fund shares acquired in 2012, and “other securities” acquired in 2013. Too bad it did not begin with all investments acquired in 2009 – I see no reason why it could not. Oh well. I plan to put in 50 tax seasons before retiring - I have 13 more to go - so I will be able to benefit from this provision.

This new requirement will not absolve taxpayers from the need to keep good investment records! And note that it only applies to shares of stock purchased on or after January 1, 2011. So if in 2012 you sell stock that you purchased in 1993 the broker has no obligation to report the cost basis. My special report MY BEST ADVICE has a section on “Keeping Track of Investment Cost Basis”. Click here to order.
A major problem in the calculation of cost basis for stocks sold comes when the company whose stock is initially purchased has gone through a multitude of splits, mergers, spin-offs and buy-outs over the years – the most infamous example being AT+T. I hope the information required to be reported by brokers will be correctly adjusted for such items.
And what of inherited investments – will the brokerage houses be required to determine the date of death value?

Any questions?


Monday, October 13, 2008


Couple A lived comfortably, but within their means. They have listened to the voices of many financial and tax advisors (mine included) and each year contribute the maximum to their employer’s 401(k) plans, including the “catch-up” amounts. They have over the years paid down their mortgage. While they have, on occasion, refinanced to get a lower rate, they have not taken additional cash out in any of the refinances.

Couple B purchased a home for an original appropriately proportionate mortgage of about $150,000. As the market value of their home increased over the years they have constantly refinanced to take out additional cash equal to the jump in value, using some of the money to pay off credit card debt, which, once paid off, they promptly begin to build up all over again. The mortgage, and home value, had grown to in excess of $300,000. They obviously lived above their means.

Couple A received their recent 401(k) account statements and discovered that, due to the current financial FU, their investment for retirement has been cut in half. They are “out of pocket” in excess of $100,000 each!

Couple B got to the point that they could not afford to pay their mortgage. The value of their home plummeted, so they could not refinance again to get more cash. It got to the point where they just packed their car and drove away from the property, abandoning it and the mortgage. The home was eventually sold (to one of my clients – so you know this part is a true story) for a little over $100,000 in a foreclosure sale. The bank wrote off $200,000 in mortgage debt as uncollectible, and Couple B were “forgiven” some $200,000 in mortgage debt.

Couple A did everything right. Through no fault of their own, but as a result of the actions of Couple B, and many, many more like them, they have lost over $200,000.

Couple B did everything wrong. Yet they have walked away from $200,000 in debt. They are basically $200,000 “in pocket”

Generally when debt is forgiven the amount of the forgiveness is fully taxable as ordinary income. As Couple B was forgiven $200,000 in mortgage debt they would pretty much have to pay federal income tax on $200,000 (although not quite that simple – there is a calculation). However, George W and his colleagues in Washington in their infinite wisdom have passed a law that exempts the $200,000 in mortgage debt forgiveness for Couple B from federal income tax (actually there were provisions in the Tax Code prior to the Mortgage Forgiveness Debt Relief Act of 2007 under which they could avoid tax on all or part of the debt forgiven – for a good overview of the appropriate tax law check out TAX GIRL Kelly Erb’s post “Foreclosures, Debt Forgiveness and Mortgage Losses Explained”).

Plus the same politicians have also decided to bail out the irresponsible bank(s) who continued to allow Couple B to refinance and repeatedly take out more and more cash.

So the moral of the story – do not conduct your financial life in a responsible and prudent manor. Be irresponsible and reckless. If anything happens you can count on the government to bail you out.

As Yakov Smirnoff would say, “What a country!”.