Thursday, December 31, 2009


My window on Thorne Street (not exactly Main Street) reveals that it is snowing as the end of 2009 approaches. A White New Year’s Eve!

This has indeed been a sad year for me and many friends and clients.

My mother went to her final audit in April. Three long-time friends and clients also lost their mother in 2009. One long-time friend and client lost his wife and another long-time friend, who as a result became a client, lost her husband. With one exception I knew well the departed relatives.

Let us hope that 2010 will be a better year for all – although it looks like my father will be joining my mother soon. It will certainly be a year of changes for me.

As is my custom I will be typing W-2s today. I had hoped to have most of them done on Christmas Eve, but I ran out of ribbon and did not have a replacement on hand. It has been difficult finding a compatible ribbon online and at local office supply superstars, but I found one at Office Depot yesterday.

While I did do 3 years in Times Square in the mid-1970s, I have not been out on New Year’s Eve in 30 years. As another friend and client says, it is “amateur night”.

I will be dining at home on “hors d’oeuvres” – a custom that began years ago when I lived with my “ex-wife” in the “country” – Temptee Whipped Cream Cheese and Ritz Crackers, pigs in a blanket, and pizza rolls. I will, as usual, be celebrating with Nosey (my cat), Jack (Daniels), Dick (Clark) and some cheap cigars!

This year I will add to the list Kenny (Rogers), as I will be watching a rerun of one of the Gambler mini-series (#4 – my favorite because it features guest spots by fictional tv Western characters from the 50’s-60’s) on the Encore Westerns cable channel before joining Dick.

I know where one of my clients will be tonight. The same place he is every New Year’s Eve. He is the person who operates the machine that actually drops the ball at One Times Square in NYC at midnight. As I “tweeted” earlier today – who else, except for Congress, would be paid for regularly “dropping the ball”?

I hope you have a “successful” New Year’s Eve and a “less taxing” 2010!


Welcome to the final BUZZ of 2009.

* I liked TAXGIRL Kelly Phillips Erb’s Christmas Day tax quote –

Christmas is the time when kids tell Santa what they want and adults pay for it. Deficits are when adults tell government what they want and their kids pay for it.” - Richard Lamm

* TAX PROF Paul Caron reports on the release of the IRS Fiscal Year 2009 Enforcement Results, and tell us “IRS Releases 10-Year Enforcement Data: Business Audits Down, Individual Audits Up

* The PTB (powers that be) in New York State are real MFPs (this does not stand for “mighty fine people!”).

First they decide to no longer accept Copy 2 of Form W-2 attached to the state income tax return as verification of withholding. They require us to fill in the information from each W-2 on a Form IT-2, which wastes a lot of my time during tax season.

Then they decide not to send out tax forms and instruction packages to taxpayers and make me pay to get NY state tax forms.

And then they decide that pretty much any tax preparer who prepares NY State income tax returns must pay them $100, regardless of where they are located and even if they have absolutely no physical presence in New York State.

Now fellow tax blogger John Sheeley has told me, via a “tweet”, that NY State is no longer mailing out Form 1099-G - Statement for recipients of State Income Tax Refunds – to report the amount of NY state refund received in 2009. You have to go online to download the form. More time wasted.

The MFPs!

* Trish McIntire, and other sources, has reported what she calls “Bad News Before Christmas” at OUR TAXING TIMES. This is one area where Trish and I disagree – because I consider it good news.

Trish tells us –

On December 24th, Pacific Capital Bancorp announced that they want to sell their tax business to a private equity fund because regulators have barred it from originating any Refund Anticipation Loans in 2010. The thrust of the article is the impact on Jackson Hewitt which relies on Pacific Capital's tax business (Santa Barbara Bank and Trust) for 75% of their RAL funding. Beside Jackson Hewitt, SBB&T has a large part of the independent RAL market.”

I join many consumer protection organizations in saying that Refund Anticipation Loans are bad and that tax preparers should not be allowed to offer such a product. See my posts “One More Reason to Avoid H+R and Their Ilk” and “Testimony from the Consumer Federation of America”.

God forbid Jackson Hewitt should have to rely on its ability to prepare competent and accurate income tax returns, instead of offering usurious loans, to earn a profit – it would certainly go bankrupt. No great loss if that happens.

I see that fellow tax blogger Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG shares my opinion (great minds do think alike!) –

While I fully support the right of consenting adults to engage in finance, however foolishly they may do so, I can't help but smile at reports that Jackson Hewitt customers may lose the opportunity to engage in some of the most expensive borrowing out there -- and that the franchise tax prep firm's stock is taking a beating as a result.”

I do somewhat agree with Trish’s point that some tax preparers feel they must offer RALs to clients in order to remain competitive. However if the only reason a taxpayer chooses a tax preparer is because he/she offers RALs, that taxpayer may not be the type of client you want.

The solution to the issue Trish raises is to ban all tax preparers from offering RALs – or better year force RALs to carry reasonable fees and interest rates so that it will no longer be attractive for any bank to offer the product.

* New Jersey taxpayers - be sure to check my post “What’s New for New Jersey State Income Tax For 2009” over at the NJ TAX PRACTICE BLOG.

* The December 23rd edition of THE KIPLINGER TAX LETTER tells us that “a group wants a court to void the tax exclusion for parsonage allowances and the deduction for real estate taxes and mortgage interest that is available to recipients of these allowances”.

Currently the Tax Code allows ministers to “double dip”. The can exclude from federal income tax the parsonage allowance that they are given by their congregation and they can claim an itemized deduction for real estate taxes and mortgage interest that they pay using the tax-exempt parsonage allowance money.

The group appears to be the Freedom from Religion Foundation (protecting the constitutional principle of the separation of state and church and working to educate the public on matters relating to nontheism), and the case, which “will require the district court to uphold or nix the breaks” is Freedom From Religion Foundation v. Geithener, D.C., Calif.

* A while back a visitor to TWTP asked me if I knew of any tax blogs that dealt with Canadian taxes.

If you are still out there I just came across one – CANADIAN TAX RESOURCE (Canadian Tax Help and Financial Planning Resources) - written by a new twitter “follower

* Russ Fox continues to keep us up-to-date on the issue of gambling losses, reporting on a recent Tax Court case in his post “A Loss for the Taxpayer but a Win for Gamblers” at TAXABLE TALK.

The decision upholds the concept that I have discussed in a couple of earlier posts here at TWTP.

While I have also said this in my gambling posts – Russ’s bottom line bears repeating -

You need good records. By far, the lack of backup documentation is what trips up most gamblers in audits.”

* Over at the Tax Policy Center’s TAX VOX blog Howard Gleckman provides a glimpse of what we have to look forward to tax-wise in 2010 in “2010: Get Ready for a Tax-a-palooza”.

I will be addressing this topic in an upcoming post here at TWTP

* Kay Bell tells us that “Girls Gone Wild Founder Sues IRS” over at DON’T MESS WITH TAXES.

Arsehole Joe Francis committed tax fraud. As Kay reminds us – “This fall, Francis pleaded guilty to two misdemeanor counts of filing false tax returns. The plea deal also mandated that Francis pay back taxes and interest totaling $249,705, as well as a $10,000 fine.”

But he avoided the opportunity to play “who’s got the soap” in a prison shower because “a judge sentenced him to the time he had served while waiting for resolution of the case”.

The IRS apparently froze Francis’ bank account to make sure they would get the approximately $260,000 to which they are entitled, and which Francis has apparently not yet paid – so he is suing the IRS claiming they are “just irked that he got off so lightly in connection with the false returns case”.

He did the crime, but didn’t have to do the time. He should pay-up and get it over with.


PS – Best wishes for a “successful” New Year’s Eve

Wednesday, December 30, 2009


Congress passed three (3) tax Acts in 2009 –

The American Recovery and Reinvestment Act of 2009 in February, referred to as “the most sweeping economic recovery package in the nation’s history”.

The Consumer Assistance to Recycle and Save Act of 2009 in June was not really a tax Act, but it did create the temporary “Cash for Clunkers” program. The program was extended by Congress in August.

The Worker, Homeownership, and Business Assistance Act of 2009 in November, which extended and expanded the First-Time Homebuyer Credit originally created in 2008 and enhanced in the American Recovery and Reinvestment Act.

The House passed the Tax Extenders Act of 2009 in December, which extended the usual popular but temporary tax breaks through December 31, 2010, adding the limited additional standard deduction for real estate taxes (God, and Congress, only knows why), but omitting the annual dreaded Alternative Minimum Tax (AMT) patch, but the Senate did not pass an “extenders” bill in 2009. The House also passed an Estate Tax bill, but again the Senate was too busy to get to it. Senate leaders have promised to deal with these issues in early 2010.

Both the House and the Senate passed separate health care “reform” bills before adjourning for the year. But no more action can be taken until Congress returns in 2010.

I like Kay Bell’s description of Congressional behavior in 2009 from her Christmas Day post “Congressional Tax Wrap-Up” –

Overall, the House did a better job of at least getting something done. Whether you like or dislike what Representatives did, at least they passed legislation.

The Senate, on the other hand, got bogged down in bitterly partisan battles that slowed every piece of legislation, with many measures coming to a grinding (halt).

The Worker, Homeownership, and Business Assistance Act (WHABAA) included a provision that requires any tax return preparer who prepares more than 10 individual income tax returns during a calendar year (this includes returns for estates and trusts) to electronically file all such returns. This requirement is effective for tax returns filed after December 31, 2010. So it does not apply to the upcoming tax filing season. It will start in 2011 for the filing of 2010 returns.

While it was a common belief among tax professionals that such a requirement was coming, it was not expected to come so soon. We all thought that this mandate would be included in the eventual legislation that would require the IRS regulation of all paid tax preparers.

I have no problem with filing returns electronically. However if I am required to do so I must be able to do so free of charge, without having to buy expensive and flawed tax preparation software, via the IRS website, similar to NJWebFile, and clients must be able to “opt-out” of electronic filing if they so choose.

NATP has reported that – “At this time, there is no guidance on how clients can 'opt out' or otherwise file their returns on paper”. There is no information other than the basic requirement. We will need to wait for the IRS to issue proposed regulations.

In June IRS Commissioner Douglas Shulman announced that “by the end of 2009, he will propose a comprehensive set of recommendations to help the Internal Revenue Service better leverage the tax return preparer community with the twin goals of increasing taxpayer compliance and ensuring uniform and high ethical standards of conduct for tax preparers”.

The topic of regulating tax professionals was nothing new. As fellow tax blogger Trish McIntire pointed out, “Nina Olson, the National Taxpayer Advocate, has been recommending licensing for years now. In fact, there have been bills before the last 3 Congresses which would require licensing. They have all died when that Congress ended because there were other more pressing issues distracting lawmakers.”

The IRS held a series of public forums on the issue, soliciting testimony from a wide variety of sources, including the NATP, NSA, AICPA and ABA membership organizations, commercial and independent tax preparers, tax preparation software companies, federal and state government agencies, and consumer agencies. I reported on the testimony at these forums here at TWTP (do a search for “Testimony” above) The Service also put out a call for comments from the public, and I responded (see my post “Dear IRS”).

Several states also took up the issue of regulating tax professionals. In Maryland “all persons offering individual tax preparation services must become licensed with the State Board of Individual Tax Preparers by June 1, 2010”.

In New Jersey State Senator Barbara Buono of Edison has a bill calling for the licensure of paid tax return preparers throughout the state. This bill establishes licensing requirements for tax preparers that prepare only individual income tax returns (i.e. NJ-1040 and NJ-1040NR). It exempts Circular 230 practitioners, presumably CPAs, EAs and lawyers, requires 60 hours of up-front education, passing an exam, a high-school diploma or equivalent (first time I have heard of this as a requirement for licensure), but, unlike other recently-introduced state licensing bills, does not allow for “grandfathering” of long-time preparers. The NJ legislature is currently out of session, and the proposed bill will not be forwarded to the appropriate committee until it reconvenes in 2010.

The DFBs (while the clean version is Damned Fool Bureaucrats, that is definitely not what I mean) in Albany passed a law that now requires all individuals who will prepare New York State individual income tax returns in 2010 as a tax return preparer, or help to issue or administer a refund anticipation loan or refund anticipation check, to register with New York. Tax preparers who were paid to prepare 10 or more New York State individual tax returns in 2009 and will prepare at least one personal income tax return in 2010 must also pay a $100 fee. This applies regardless of where your practice is located, even if you have absolutely no physical presence in the State of New York. A tax preparer that lives and works in Alaska will have to register and pay the fee if he/she prepares New York State individual income tax returns!

Certified Public Accountants and attorneys, regardless of location, Public Accountants (PA) currently licensed in New York State, employees who are preparing tax returns under the direct supervision of a CPA, attorney or PA licensed by New York State, and volunteer tax preparers are exempt from registering and paying.

As far as I know none of the membership organizations, like NATP, NSA or NAEA, plan to contest in court New York’s authority to charge a fee to preparers with no physical presence in the state because it would be too expensive, although the NY State Society of Enrolled Agents is campaigning to have New York based EAs exempt from the law.

Speaking of New York State, this year it decided not to send out forms to resident or non-resident filers – forcing me to purchase bulk copies. I am still mad at NY for making me write the information from W-2s on its IT-2 form instead of just attaching a copy of the W-2 to the return, as every other state and the IRS does.

As for my practice, I ended the season with 32 federal GD extensions filed, and 2 state returns waiting for additional information. About 2/3 of the GDEs were either specifically requested by clients who needed more time to get their “stuff” ready, or returns that were not “in my hands” by March 31st, or returns that needed more information to properly complete. A dozen were received by March 31st, but either arrived during the last week of March or close thereto.

I made it a point this season to finish all returns received in February, for which I had all the information necessary to complete the returns, before beginning any of the returns received in March. I completed returns as they were received, instead of putting off more involved ones until the end of the season and then finding I had to file a GD extension because I did not have enough time to properly devote to them. I finished “red-filed” (need more information) returns as soon as the missing information became available, so there were no returns “hanging over my head” throughout the season. And I strictly enforced my “read my lips – no new clients” policy this year, although I did accept two “lost lambs” back into the fold.

While the filing of federal returns went relatively smoothly, it was “déjà vu all over again” with the NJ Division of Taxation this year! Back in 2006 all of my clients whose 2005 NJ-1040 I had filed via NJWebFile with a balance due, and who had paid the balance due by the April deadline using the payment voucher that NJWebFile had provided, were billed by the NJ Division of Taxation in September for the tax they had already paid plus penalty and interest. It seems that the NJDOT applied the 2005 payment to tax year 2004.

Guess what? It happened again this year! NJDOT applied the payments for all of my clients for whom I filed a balance due 2008 Form NJ-1040 via NJWebFile were billed for the tax they had already paid in July and August.

This time I was prepared. I contacted a person at NJDOT who had spoken at the NJ-NATP January seminar and reported the problem. He was very helpful and the matter was promptly resolved. I even got the NJDOT to issue letters of apology to my clients!

I also emailed the Executive Director of NJDOT, Cheryl Fulmer, about the problem – and, to my complete surprise, she promptly responded! She explained what had happened -

It seems that neither the software vendor nor my staff realized that the scan band had not been corrected to reflect the new tax year. The consequence was payments being applied to the prior year. I've been assured that this error will not occur again, we hope.”

You can be sure that I will not be filing any balance due 2009 Form NJ-1040s via NJWebFile in 2010!

Such was the tax year in review. Did I forget anything important?


Tuesday, December 29, 2009


As we count the days until the end of 2009 it is once again time to look back on the year in taxes. .
Luckily Congress had passed its “extender” bill early enough in 2008 so that there were no unnecessary delays in processing income tax returns, as there had been in past years. We must be thankful for small favors.

The last few years Congress has provided us with special tax “gimmicks” which have required those who do not normally file a tax return to do so in order to get a special refund or rebate. This year’s “gimmick” was a “second chance” at last year’s George W Bush “stimulus” rebate fiasco via the refundable “Recovery Rebate Credit”.

The rebate checks sent out in 2008 were based on information reported on the 2007 tax return. If an individual or couple’s situation changed for 2008 – i.e. the birth of a child, a reduction in Adjusted Gross Income, or an increase in taxable income that resulted in a positive tax liability – it was possible to add an additional rebate amount in the “Payments” section of the tax return and either increase the 2008 refund or reduce the 2008 balance due. I had several clients who were able to take advantage of this “second chance” for all of the named reasons.

Last year an IRS representative reported that the economic “stimulus” rebate check program had overwhelmed every aspect of the Service. Because of the rebate checks everything that would normally have taken the IRS 60 days would take 120 days. It appears that there is still some “hangover” from the rebate mess. Almost every inquiry I sent to the IRS in 2009 regarding a client return or issue still received as the first response, on average 2 months later, a form letter stating that the IRS needed more time to research the issue and that they would get back to me in 45 days. When the 45 days had passed a second letter arrived saying exactly the same thing!

In a 2008 guest post at another tax blog I said of the Economic “Stimulus” Rebate -

"I can guarantee that after all is said and done when I write about the affect of the 2008 economic ‘stimulus’ checks I will be once again saying, ‘These checks cost the IRS a fortune, created tons of confusion, and resulted in millions of errors on 2008 tax returns! And it is doubtful that they did anything to stimulate the economy'."

A 2009 TIGTA report on “Evaluation of the Planning, Computation, and Issuance of the Recovery Rebate Credit” proved me right. According to the report summary –

However, taxpayer confusion in calculating the recovery rebate credit and programming errors presented significant challenges. Despite education and assistance efforts by the IRS, taxpayer confusion in computing the recovery rebate credit resulted in a significant number of errors. Of the 114.3 million tax returns processed as of April 17, 2009, 16.7 million (14.6 percent) included at least 1 error that needed to be addressed by the IRS Error Resolution function (8.4 million had a recovery rebate credit error).”

And –

We identified 399,099 tax returns (0.4 percent) for which our calculation of the recovery rebate credit and the IRS’ calculation did not agree. Our analysis indicated that 258,850 taxpayers did not receive $84.6 million to which they were entitled and 140,549 taxpayers received $60.6 million more in credits than they were entitled to receive.”

And one more –

Finally, legislation did not provide the IRS with math error authority {allowing the IRS to systemically disallow certain taxpayer claims at the time a tax return in processed – rdf} to prevent individuals without valid Social Security Numbers from receiving the recovery rebate credit. . . As a result, the IRS erroneously provided more than $27 million in recovery rebate credits to more than 44,000 taxpayers who did not have a valid Social Security Number.”

TIGTA did give the IRS credit for doing a good overall job – “the IRS successfully planned for the implementation of the recovery rebate credit”. The Service certainly did rise to the occasion and do a relatively good job in dealing with the excessive job thrust upon it without much notice. The problem is, as usual, with the cafones in Congress who initiated the rebate checks, and the recovery rebate credit, in the first place.

Another kind of “gimmick” for 2008 returns was the refundable “First-Time Homebuyer Credit” of up to $7,500. It was not really a true credit but really an interest-free loan, as it had to be paid back over an extended period of time beginning in two years. I had four clients who took advantage of this “gimmick” – two on the same property (non-married co-owners). The credit was enhanced and improved effective for new home purchases which closed between January 1 and November 30, 2009 in February, and expanded and enhanced again in November, but those who purchased in 2008 were stuck with the old rules.

I also took advantage of the weird one-time only additional standard deduction of $500 or $1,000 for real estate taxes paid on quite a few returns. As I predicted in most cases this added deduction benefited retired taxpayers.

In March Obama appointed Paul Volcker, of the President's Economic Recovery Advisory Board, to head a panel that will make recommendations for reforming our tax laws. The panel was charged with “three tasks: one is tax simplification; the second is closing tax loopholes and reducing tax evasion; and the third is reducing corporate welfare. And it's worth noting that with regard to that first category, one of the key things that the Volcker board will be examining is ways of unifying, streamlining, making more consistent the various credits that are out there: Making Work Pay, the Earned Income Tax Credit, the Child Tax Credit, and what have you. And in addition, with regard to the tax gap, there are hundreds of billions of dollars in uncollected taxes each year." It was scheduled to make recommendations to the President by December 4th, 2009.

You may recall the last time we had a Presidential panel to investigate how to “reform” the Tax Code was in 2005. That panel made some drastic, and by the way very good, recommendations on how to truly simplify our current system. However, either because of Dubya’s short attention span, because the Panel did not suggest what he wanted to hear, or because more important things began to occupy him, the recommendations were totally ignored by the President and the Panel just faded away.

The Volcker Panel called for suggestions and recommendations on how to “reform” the Tax Code from the public, and I answered the call.

Days before the December 4th deadline, Volcker reported that the panel needed more time to review the over 500 public comments that had been submitted. So we will have to wait until 2010 to hear the panel’s report. Let’s hope that they have some good ideas, and, if so, that they will be listened to and acted upon.

It appears that, according to the Tax Foundation, TAX FREEDOM DAY 2009 - April 13th - occurred before TAX DAY 2009 (April 15th). Unfortunately I was too busy to stop and celebrate. It was eight (8) days earlier than 2008, when TAX FREEDOM DAY was April 21st, and two weeks earlier than 2007. There are two reasons for the earlier celebration - (1) the recession has reduced tax collections even faster than it has reduced income, and (2) the stimulus package includes large temporary tax cuts for 2009. Nevertheless, Americans still pay more in taxes than they do on food, clothing and housing combined.

New Jersey’s TAX FREEDOM DAY was April 29, 2009 – more than 2 weeks after the national day. NJ is #2 (appropriate) on the list of most taxed states – behind Connecticut, whose TAX FREEDOM DAY was only one day later.

As I had said in last year’s tax year in review post by the fall of 2008 the economy had become a real mucking fess, with banks and brokerages failing left and right and bankruptcy threatening the big three automakers. There were calls for a second “stimulus” package, which was passed in 2009.

While one could say there has been progress, 2009 will end with the economy still “shaky.

To be continued . . .


FYI – Part II will be posted tomorrow (Wednesday). The BUZZ will appear on Thursday this week. There will be no BUZZ this coming Saturday.

Monday, December 28, 2009


One of the entries in Kay Bell’s recent Tax Carnival was “Fourteen Tax Management Techniques”, a guest post from Marotta Wealth Management at the FREEMONEYFINANCE blog. As I always say, bloggers love to make lists.

The post does indeed discuss 14 good tax planning techniques. The introduction to the list includes some great words of wisdom - “Don't file your taxes in April and then forget about them for the next 10 months. By investing a little time throughout the year, you can create compounded value.”

I want to call your attention to some especially good advice – item #10 on the list:

Putting investments in the correct investment accounts can also generate significant savings. Fixed-income investments belong in traditional IRA accounts. Interest is taxed at ordinary income tax rates, but the entire value of an IRA account is taxed at ordinary income tax rates anyway upon withdrawal. Appreciating assets should be in taxable investment accounts where the growth will be at a 15% capital gains rate, which is likely much lower than your ordinary income tax rate. Additionally, any foreign tax paid on foreign stock investments is tax deductible in a taxable account. Finally, those investments with the greatest potential for growth belong in Roth accounts where no tax will ever be paid. This tax management alone may boost your after-tax returns by as much as 1% annually.”

You will, as MWM says, increase the net after-tax yield on your investments if you put the correct investments in the correct types of account.

Let’s look at the types of investment accounts available to the average taxpayer.

First there is the currently taxable, liquid investment account. Interest, dividends and capital gains on this type of account are currently taxable, except for statutory tax-exempt securities like municipal bonds or muni bond funds.

You then have “retirement” accounts, traditional and ROTH IRAs and traditional and ROTH 401(k)s, and other types of accounts available to the self-employed. With “traditional” accounts, current earnings are “tax-deferred” until withdrawal. The eventual withdrawals are usually fully taxed in the year the distribution is made. If there is a “basis” in the account from “non-deductible” contributions the distributions will be partially tax free. However the accrued earnings on these accounts are fully taxable. With ROTH accounts the current earnings are exempt, and there is no tax on withdrawals. “Premature” withdrawals from retirement accounts, traditional and ROTH, can result in a 10% tax penalty. Excess contributions are also penalized.

Now let us look at how different types of investment income are taxed.

Interest and dividends are generally taxed as “ordinary income”. The tax on this type of income depends on your regular income tax rate. If you are in the 25% federal tax bracket you will pay $250 in tax on income of $1,000. If you are a victim of the dreaded Alternative Minimum Tax (AMT) you will pay either 26% or 28% tax on this income.

Under current law certain “qualified” dividends are taxed at special “capital gains” tax rates, as are “capital gain distributions” from mutual fund investments. For 2009 the special rates are 0% or 15%, depending on your level of income. The 0% rate becomes 5% in 2010.

“Long-term capital gain” on the sale of investments are taxed at the special capital gains tax rates. A “long-term” gain is realized if you hold the investment for more than one year – at least a year and a day. Investments that you hole for one year or less are taxed at ordinary income rates.

Qualified dividends, capital gain distributions, and long-term capital gains are also taxed at the special rates under AMT, but the amount of income in these categories do increase net taxable income, and therefore Alternative Minimum Taxable Income, and may cause one to become a victim of the dreaded alternative tax.

And of course earnings (but not capital gains from the sale) from tax-exempt municipal bonds or funds investing in tax-exempt municipal bonds are exempt from federal income tax. However, some otherwise tax-exempt interest and dividends, those from “private activity bonds” may be taxed under the dreaded AMT. And it is possible that the amount of tax-exempt interest can cause more of your Social Security or Railroad Retirement benefits to be taxed at ordinary income rates.

Taxable distributions from retirement accounts, like IRAs and 401(k)s, are taxed at ordinary income rates, regardless of the source of the income that has accumulated within the account. Qualified dividends, capital gain distributions, and long-term capital gains earned within a tax-deferred retirement account are taxed at ordinary income when the money is withdrawn from the account.

So you can see it is important to put the correct types of investments in the correct types of account.

As the post points out, both tax-deferred and tax-exempt retirement accounts (i.e. traditional and ROTH) should, for the most part, contain “fixed income” investments that will generate income that is taxed at ordinary income tax rates. This way you do not lose any tax benefit from reduced tax rates.

There is another good reason to have investments that will not substantially increase in value over the years, like growth stocks, in traditional retirement accounts. Not only do you take full advantage of the tax benefit resulting from the special capital gains tax rates, but your retirement savings will not be hit by economic hard times. If you contribute $200,000 to a retirement account over the years you should have more than $200,000 available at retirement. As we saw in the recent financial mucking fess, retirement account values dropped by as much as 50% and individuals ended up with balances that were less than the amounts they had actually contributed.

Appreciating assets should be in taxable investment accounts”, as should investments that produce “qualified” dividends and capital gain distributions. This way you will be able to take advantage of the special tax benefit provided by the special capital gains tax rates.

Of course you should never invest retirement account money in tax-exempt municipal bonds or mutual funds that invest in tax exempt municipal bonds. This income is, for the most part, exempt from federal income tax, although such earnings accrued within a traditional retirement account will be taxed at ordinary income rates when money is taken out of the retirement account.

You can actually invest ROTH account monies in any type of investment, except muni bonds. Having income totally exempt from tax is better than paying tax at capital gain rates.

I must point out that the above advice is based on tax law as it now exists. There will no doubt be some substantial changes to the Tax Code in 2010 or 2011. If all dividends once again become taxed at ordinary income rates, or the capital gain tax rates are substantially increased or done away with altogether, then the advice I, and Marotta Wealth Management, have provided may no longer apply.

One final word – it is important to run investment recommendations made by your broker past your tax professional before making decisions. Don’t assume that a broker or a banker knows his arse from a hole in the ground when it comes to the tax law.


Saturday, December 26, 2009


Today is my father’s 90th birthday – so it is back to the rehab facility at the Jersey Shore to celebrate.

* TAX PROF Paul Caron reports on some good news in “Senate Pledges to Retroactively Restore Expiring Tax Breaks in 2010”.

Senate Finance Committee Chair Max Baucus (D., Mont.) and Ranking Member Chuck Grassley (R., Iowa) today pledged to pass the tax extenders legislation early in 2010, retroactive to Jan. 1, 2010. Interestingly, Sens. Baucus and Grassley did not mention the retroactivity of any estate tax bill.”

While I have learned to take anything a politician says with several grains of salt, I have no reason to believe this “pledge” is not a true one.

* Dan Meyer adds too more women to the tax bloggers to his “Twelve Blogs of Christmas” honor roll – TAX CPA Marilyn Lawver and TAX MAMA Eva Rosenberg. Click here to view a recap of the entire 12.

I am very glad that the “new girls on the block” – Marilyn, Stacie and Mary – have been chosen for the honor. They are truly excellent additions to the tax blogosphere!

* Some good news from the IRS! As reported in the NATP weekly email newsletter -

No Penalty for Under Withholding Due to MWPC

The IRS released the 2009 version of Form 2210, Underpayment of Estimated Tax By Individuals, Estates, and Trusts. In the instructions, the IRS states it will waive the penalty for an underpayment caused by the adjustments made to income tax withholding tables in Spring 2009. The adjustments were made to the withholding tables in anticipation of the Making Work Pay Credit (MWPC) on 2009 income tax returns

* I normally advise clients to get married early in the year and have babies late in the year. As the marriage tax penalty is still alive and well, as long as you are going to “pay the price” of being married for the entire year you might as well “enjoy the benefits(?)” for as much of the year as possible.

Joe Kristan provides some examples when just the opposite might be true and a couple may want to tie the know before year end in “The Newlywed Game, Year-End Tax Planning Edition!” at the ROTH AND COMPANY TAX UPDATE BLOG.

* The year-end best/worst lists have begun. As bloggers love lists I am sure there will be a multitude published during the next week.

The TAXVOX blog of the Tax Policy Center starts the ball rolling with “Tax Vox’s Lump of Coal Award: The Worst Tax Ideas of 2009”. This is the third annual Lump of Coal Award. As the post explains – “So many choices. So little time.”

Number 9 is The “Bo-Tax” and the “Tanning Bed Tariff”. “This is what happens when you need money and won't talk seriously about revenues”. I have already posted my opinion of this kind of tax.

Numbers 8 and 7 sought of go hand-in-hand –

8. Obama’s Middle-Class. This is a rerun from last year, but it is too good to leave out. The President thinks we will somehow reduce the deficit and fix the tax code without raising taxes by a dime for those poor souls making a quarter million dollars-a-year or less. Unfortunately, that's 95 percent of us. Can’t wait to see how he does it.

7. Taxing the Rich. Why not let a handful of wealthy taxpayers finance all your new ideas. So let’s drive the top rate north of 45 percent, even though no one will really pay it. On the other hand, except for Barbra Streisand and those other Hollywood types, they are mostly Republicans anyway

I certainly do not think that taxing the rich “because they can afford it” is the answer. What about turning some of the 40+% of Americans who are “non-taxpayers” – pay absolutely no federal income tax (and often actually make a profit by filing a tax return) - back into actual tax-payers?

Number 3 is the fraud magnet known as the First Time Homebuyers’ Credit – “Congress started the year by giving away $8,000 in subsidies to "first-time" homebuyers, as many as 74,000 of whom, it turned out, never quite got around to buying a house. Then, it extended the boondoggle to current owners who buy up. Bottom line: People who were already going to buy will get billions of dollars in government subsides. But you gotta make those real estate agents happy.”

I will have to give this some thought and perhaps present some additions to the list in a future post.

* Don’t miss Kay Bell’s “T3” (aka “Tax Twitter Tuesday 12.22.2009”) at DON’T MESS WITH TAXES.

* And speaking of Kay – the yellow rose of taxes finishes off her 12 Tax Tips of Christmas series with perhaps the best tip of all - "#12 Hire a Pro”.

Kay tells us, “every taxpayer's situation is unique and, to paraphrase Animal Farm, some are uniquer than others. You may have some wrinkles that need ironing out by someone who is formally trained to do so.”

Wrinkles? Boy, could I show you wrinkles!

When looking for a tax pro do remember that I am not for hire.
Click here for a complete list of Kay's 12 Tax Tips of Christmas.
* The Treasury Inspector General for Tax Administration (TIGTA) has been busy lately, and has issued two reports with disturbing findings.

For one, as WEBCPA reports, “Millions of IRS Tax ID Numbers Could be Fraudulent”.

A new report by the Treasury Department’s Inspector General for Tax Administration found that millions of people may have improperly received Individual Taxpayer Identification Numbers from the IRS that could be used to fraudulently claim tax refunds.

TIGTA reviewed a sample of ITIN applications and found that almost 70 percent contained significant errors or raised concerns that should have prevented the issuance of an ITIN. The IRS estimates that it has issued more than 14 million ITINs as of December 2008

WEBCPA also reports that “IRS Can’t Verify Eligibility for Stimulus Tax Breaks”.

In this report TIGTA “found that the IRS cannot verify taxpayer eligibility for 13 of the 20 benefits and credits for individual taxpayers and 26 of the 36 tax provisions benefiting businesses {from the American Recovery and Reinvestment Act of 2009 – rdf} at the time a tax return is processed.”

You may remember that an earlier TIGTA report “identified $636 million in fraudulent or erroneous First-Time Homebuyer Tax Credits, many of which were tied to difficulties in verifying the credits”.

As is often the case, Joe Kristan’s comments hit the nail on the head in “Let's Give the IRS More To Do! Oh, Wait...” at the ROTH AND COMPANY TAX UPDATE BLOG.

It's hard enough for the IRS just to determine the correct taxable income and collect the tax of millions of individuals and businesses. When you ask the IRS to also to run economic stimulus, coordinate national energy policy, function as the national directory of industrial research, act as national low-income welfare administration, and now act as national health care administration, it's not going to work out well.”


Friday, December 25, 2009





Thursday, December 24, 2009


It is Christmas Eve already!

As is my custom I will be typing W-2s today. I already have the W-2s for three companies under my belt, and hope to finish four more today – leaving only one to do in January (as the payroll runs through year-end).

My company “office party” is tonight. And since my “company” consists of me and my office is in my home it is a small, inexpensive affair. I am allowed a guest, so I will bring my cat Nosey.

Tomorrow will be Christmas with the family (sister and father) at the Manor by the Sea rehab facility in Ocean Grove.


Wednesday, December 23, 2009


* A “tweet” from taxtweet (aka Kay Bell) led me to “How to Make Your Home Based Business Look More Professional” by Upon Request at EHOW.COM.

As a person with a “home-based” business I especially like item #6. You don’t want clients, or potential clients, wanted or unwanted, knocking on the door of your home at all hours of the night without warning.

* Remember the online debate on taxing unnecessary plastic surgery. Well the Los Angeles Times reports in “Senate Plan Would Tax Tanning Services”, stating that “Democrats replace the 'botax' on cosmetic procedures with a 10% sales tax on the use of tanning beds, citing skin cancer concerns”.

So they have replaced a tax on an unnecessary indulgence of the wealthy with a tax on an unnecessary indulgence with a wider usage.

* Speaking of the online debate on taxing plastic surgery, Stacie Clifford Kitts, who started the ball rolling on that debate, weighs in on the change of target in “An Interesting Rewrite for the Vanity Tax H.R. 3590 Looks As if Congress Found a Vanity Product with Enough Sin to Justify a Tax” (now there’s a mouthful!) at STACIE’S MORE TAX TIPS.

In response to my argument, it would appear that our lawmakers did find a vanity procedure that fits the sin criteria. The new vanity target - tanning salons.”

* Before we leave Stacie and her MORE TAX TIPS, congrats to her on being named one of Dan Meyer’s 2009 “Twelve Blogs of Christmas” at TICK MARKS - “Stacie's Got It Going On (in a Tax Sense): Stacie's Tax Tips is the Fifth Tax Blog in the ‘Twevle Blogs’

Four of the first five (of eventually seven) tax blogs that Dan will honor are written by women – in addition to Stacie there is Linda Beale’s A TAXING MATTER, Mary O’Keeffe’s BED BUFFALOES IN YOUR TAX CODE, and Roni Deutch's TAX LADY BLOG. The “thorn among the roses” is Jack Townsend of FEDERAL TAX CRIMES.

* TAXGIRL Kelly Phillips Erb answers an oft-asked question this time of the year in her post “Ask the taxgirl: Reporting Year End Income”.

Even though the paycheck is for work performed during the two-week period ended December 30, 2009, if the check is dated January 2, 2010 it is taxed in 2010. It will be included in the 2010 Form W-2 and not the 2009 Form W-2.

* New York resident and non-resident taxpayers – check out my post “What’s New For 2009 For New York State Income Tax Returns?” over at the NJ TAX PRACTICE BLOG.

* I just got an email telling me that TWTP is included in a list of the “Top 50 Blogs for Accountants” at the BIZ-LEARNER blog of the Online Accounting Colleges site. I am in good company in the “Tax Issues” category. Check it out.

* Earlier this year, in the course of my “wandering” the internet, I came across the blog. I think I was originally led there via a “tweet”. I seem to recall that I referenced a post from the blog here in the BUZZ.

I have not been able to access the blog for a while. When I tried I was informed by that access to was restricted to “members” or “followers” or some such category.

Now I discover, from Russ Fox in “April 15th No More”, that, “according to an affidavit from an IRS Special Agent, the proprietor of the blog has admitted to embezzling $8.5 million”.

You can get all the details from Russ at TAXABLE TALK.

* The title of Russ’ post on the Senate version of the health care “reform” bill sums up the behavior of Congress in general, and not just with regard to health care – “It’s Unpopular, Unworkable, and Insane, So Naturally They’re in a Hurry to Pass It”. Sometimes what they pass is popular, but the rest of the description still applies.

The post tells us what new taxes we may be faced with if/when the law is finally passed.

* Did I miss another Tax Carnival? I came across “Tax Carnival #61: Stocking Stuffers 2009” at DON’T MESS WITH TAXES yesterday morning, again via a “tweet”.

Wait – my post “Deducting Expenses for Rental of a Mixed Use Vacation Home” from the INTERNET GUIDE TO IRS SCHEDULE E, which I had submitted to the last Tax Carnival but got “lost in the shuffle” due to a system FU, is here. I guess it finally did find its way to Kay after all.

Lots of good “stocking stuffers” indeed in this Tax Carnival.

* Another item discovered through a “tweet”. Freelance writer Bruce Fraser discusses his recent experience with an IRS audit of his tax return in “Manhattanite Bruce Fraser 'Selected' for Audit, Then is Face-to-Face With Tax Man” at the DAILY NEWS.

His biggest mistake – “I waved away my tax preparer when he offered to accompany me. Oh, no, I can handle it.”

Bruce was questioned on his home office deduction. He was lied to about the home office rules by the IRS agents conducting the audit and was told his deduction was disallowed.

But his tax pro came to the rescue, explaining, “The examiners had misinformed me, he said, about having to have a separate room with a separate entrance”. “Misinformed” sounds nicer than “lied to”. But, unless the agents really did not know tax law, lying to Bruce is exactly what they did. Anyway, Bruce went back to the IRS, this time with his tax pro, and was eventually allowed his home office deduction, although the Service did manage to get their pound of flesh elsewhere.

* As this is the time of the year for gift giving, let’s end the BUZZ with TAX GIRL Kelly Phillips Erb’s post “Taxes, Donations and Lending a Hand”.


Tuesday, December 22, 2009


As the end of 2009 approaches I wanted to bring to your attention some important IRS and Tax Court rulings applicable to the Form 1040 that were issued during the year.

+ Credit and Debit Card Fees

The Tax Code says that expenses paid or incurred by an individual in connection with the “determination, collection, or refund of any tax” can be deducted as a miscellaneous itemized expense on Schedule A.

The IRS recently reversed its earlier position and ruled that this deduction includes "convenience" fees, including those associated with estimated tax payments, charged when taxpayers use a credit or debit card to pay their taxes electronically can be claimed as a miscellaneous itemized expense. Of course, miscellaneous expenses are deductible only to the extent that they exceed two percent of a taxpayer's Adjusted Gross Income (AGI).

+ Energy-Saving Purchases

Section 25D of the tax code provides a tax credit for individuals who buy qualifying "residential energy efficient property". Certain energy standards must be met to qualify for the credit, which is generally equal to 30% of the purchase price.

The IRS has, in Notice 2009-41, 2009-19 IRB 933, announced that a manufacturer of property may certify to a taxpayer that the property meets these standards and that the taxpayer may rely on this certification to claim the credit. If it is later determined that the property does not meet the appropriate standards, any property purchased before that determination will remain eligible for the credit. Obviously taxpayers should retain the manufacturers’ certifications with his/her tax records me.

+ Home Mortgage Interest -

The Schedule A deduction for mortgage interest is limited to “qualified residence interest” on “acquisition debt” of $1 Million (actually $1.1 Million as per another recent IRS ruling). In CCA 200911007 the IRS ruled that the $1 Million cap applies to all owners of a single personal residence collectively and not to each owner separately. It is “per home” and not “per taxpayer”.

A home was transferred from a single owner to a joint ownership with another individual who was not the owner's spouse. The new co-owner was made jointly liable on the home's mortgage, which exceeded $1 Million, and paid a portion of the mortgage interest. The taxpayers argued that the $1 million limit should be interpreted to allow each owner to deduct the interest on up to $1 million of acquisition debt on which the individual owner is personally liable. But the IRS said that the Code states that acquisition debt is debt incurred in acquiring a qualified residence of the taxpayer, and not debt incurred in acquiring the taxpayer's portion of a qualified residence.

+ IRA Distributions

Premature distributions from an Individual Retirement Account (IRA) before age 59½ are generally subject to a 10% penalty tax. There are exceptions to the penalty, such as for distributions that are part of a series of “substantially equal periodic payments”, and distributions for qualified higher education expenses. Under the “SEPP” exception, if the series of substantially equal periodic payments is modified (reduced or increased), other than by reason of death or disability, then the 10% penalty is applied retroactively to prior distributions made before the IRA owner attained age 59½.

A taxpayer, prior to reaching age 59½, elected to receive equal IRA distributions each year amounting to $102,311. A couple of years later the taxpayer also withdrew $22,500 to pay for her son's qualified higher education expenses. The IRS contended that this additional withdrawal was a prohibited modification of the substantially equal requirement, thus triggering the retroactive penalty tax.

The Tax Court, in Benz, 132 T.C. No. 15, ruled that the taxpayer did not "modify" her substantially equal periodic payments by also withdrawing funds that qualified for the higher education exception. Distributions can qualify under more than one exception. A distribution that satisfies the exception for higher education expenses is not a violation of the substantially payment equal requirement. The Tax Code specifically provides that the amount of distributions attributable to higher education expenses does not include distributions qualifying as substantially equal periodic payments. An IRA owner only has to rely on the higher education exception to the extent that distributions exceed the substantially equal periodic payments.

+ Investment Losses

In response to the Bernard Madoff scam, the IRS issued Rev. Rul. 2009-9, 2009-14 IRB 735 to outline the tax consequences for investors who suffer losses from investing in fraudulent Ponzi-like schemes.

A loss from criminal fraud or embezzlement in a transaction entered into for profit is a theft loss claimed on Form 4684 and not a capital loss. The loss can be deducted against ordinary income without regard to the $3,000 capital loss limit. A theft loss from a transaction entered into for profit is also not subject to the 10% of Adjusted Gross Income deduction threshold that applies to theft losses of personal use properties.

A loss will be considered from a fraud or embezzlement if -

(a) the lead figure, or one of the lead figures, was indicted under state or federal law with the commission of fraud, embezzlement, or a similar crime that would meet the definition of theft,

(b) the lead figure was the subject of a state or federal criminal complaint resulting from an admission by the lead figure, or

(c) the lead figure was the subject of a state or federal criminal complaint and a receiver or trustee has been appointed to administer the assets or the assets have been frozen.

The loss is deductible in the year it is discovered. The amount of the investment theft loss deduction is the basis of the property (or the amount of money) that was lost reduced by any claim for recovery or reimbursement which has a reasonable prospect of success. When a loss deduction is reduced by the claim, recoveries on the claim in a later year are not includible in the investor's gross income unless the recovery exceeds the reduction that had been claimed.

+ Rental Losses

Rental activities are generally treated as passive activities, even if the owner is actively involved in the operations, and therefore subject to the passive loss deduction limitations. A special exception allows an active participant in a "real property trade or business" – a “real estate professional” - to deduct rental losses as long as he or she materially participates in the rental activity. A "real property trade or business" is defined as any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.

The Tax Court, in Agarwal, TC Summary Op. 2009-29, ruled that an individual can qualify as a "broker" for the special exception for real property trade or business even though he or she is not classified as a broker under state law. A real estate agent or salesperson who sells property, negotiates the terms of a real estate contract, secures prospective buyers, and performs similar broker-like activities is considered a broker, and therefore a “real estate professional”, for purposes of the passive loss exception.

If you think any of the above rulings apply to you I suggest you consult your tax professional.


Monday, December 21, 2009


+ The Self Employment tax, the equivalent of the FICA (Social Security and Medicare) Tax for the self-employed, will only be assessed if your net earnings from self-employment x 92.35% is $400 or more – or $433 and over. But it is an “all or nothing” tax. If your net earnings are $425 you pay no self-employment tax. But if your net earnings are $450 you pay self-employment tax on the entire $450. So a deduction of $2 could save you between $51 and $57, depending on your income tax bracket.

+ Most tax credits, like the Child Care Credit, the Retirement Savings Credit, the Energy Credits, and the HOPE and Lifetime Learning Credits, can be taken only against income tax. If the total of these credits is more then your tax liability, then you lose the tax benefit of the excess credit. Only “refundable” credits like the Additional Child Tax Credit, 40% of the American Opportunity Credit, the Earned Income Credit, and the Making Work Pay Credit can be applied against other taxes, such as the self-employment tax and the 10% penalty for premature distributions from a pension plan.

+ The Tax Court, in Singleton-Clarke, TC Summary Opinion 2009-182, provided another “yes” example to add to my popular post “Is An MBA Deductible?”. The obvious correct answer to that question is “it depends”, as it is to most tax questions.

In this recent example an experienced nursing qualify control coordinator acquired an MBA in Health Care Management. She showed the Court that the courses improved the skills needed in her current position, and, upon graduation, she continued in the same line of work. In this situation the purpose of obtaining the MBA was not to qualify her for a new trade or business.

+ As the end of the year fast approaches I just want to remind you of the rules for claiming a tax deduction in 2009 for a qualifying item that was charged to a credit card in 2009, with the charge being paid in 2010.

If you use an American Express, Discover, VISA or MasterCard, any bank credit card, you can claim the deduction in 2009. What you have done is borrowed the money from the “bank” to purchase the item. The vendor from whom you purchased the item received payment from the bank almost immediately.

The same is true if you use a bank debit card, as the money for the purchase is withdrawn from your account at the time of the purchase. It is the same as if you paid cash for the item.

If you use a retail store credit card, a Sears or Macy's card for example, to purchase the item from Sears or Macy's you can claim a deduction when you pay Sears or Macy's for the charge. What you have done is made an installment purchase directly from the vendor. The vendor gets the money when you make your credit card payment.


Saturday, December 19, 2009


Since I was unable to connect to the internet for 2½ days, and my “wandering” time was therefore cut way short, today’s BUZZ is limited to the old faithfuls.

* Joe Kristan asks the question “Should You Prepay Your Taxes Due Next Year?” over at the ROTH AND COMPANY TAX UPDATE BLOG, and proceeds to provide some help in coming to an answer. Of course we all know that, just like any other tax question, the answer is “it depends”.

* Joe also leads us to a great Christmas gift for your tax pro in his well-titled post “I've Seen Returns Where This Would Be Appropriate”.

* In between entries in her “The 12 Tax Tips of Christmas” and “Year-End Moves” series Kay Bell takes time to report that “Senate Pulls the Estate Tax Plug” at DON’T MESS WITH TAXES.

Kay, who admits to having “witnessed a lot of curious {inept jaw-droppingly stupid} dubious Congressional actions” over the years, tells us –

Although almost all lawmakers agree it would be better for most taxpayers (not to mention the federal treasury) to keep the estate tax on the books rather than let it expire on Jan. 1, 2010, the Senate opted to let the tax die.”

Max Baucus has promised that the Senate will address the issue next year and make the Estate Tax reinstatement retroactive to January 1, 2010. If the law is reinstated retroactively in early 2010, there shouldn't be too many problems. My concerns involve the “step-up” in basis of inherited assets that will die with the Estate Tax on December 31st. Hopefully there will be no interruption in this concept. I also want Congress to once again make the Gift Tax exclusion equal to the Estate Tax exclusion.

* Trish McIntire, who is very involved in a local amateur theatre, discusses “A Business Melodrama?” at OUR TAXING TIMES.

The title of her melodrama, which deals with telemarketers, is “Know Your Vendors; or Just Because Someone Says They Are One of Your Vendors Doesn't Make It So”.

I never have to worry about telemarketers. During the “regular” year my phone is not on. And during the tax season, and on the occasional times it is on during the “regular” year, I never answer the telephone without first screening the call via my answering machine. I never pick up the phone unless I know it is someone to whom I want to talk.

* Dan Meyer of TICK MARKS also asks a question – “Income Tax Preparation: How Much Does a ‘Typical” Client Pay?”. He quotes a recent survey which determined that “the average charge for a Form 1040 plus Schedule A plus state tax return was $229; a return without the itemizing of deduction run exactly $100 less.”

The survey found that the cost varied based on the size of the firm preparing the return and the geographic region where the return was prepared.

Gee, I would love to get $229 for a basic itemized return!

BTW, thanks to Dan for dropping my name.

* More questions from a tax blogger! I sense a theme. This time it is Stacie Clifford Kitts, of STACIE’S MORE TAX TIPS, doing the asking in “Is Your Employer Provided Auto Creating a Tax Problem for You?

If you have an employer provided automobile Stacie tells you about some things you should know.

* Mary O’Keeffe’s last post on the Rachel Porcaro situation, which I referenced in Wednesday’s BUZZ, received a comment from who Mary believes was Rachel’s lawyer in her dealings with “Sam”. She quotes the comment in her post BED BUFFALOES IN YOUR TAX CODE post “Comment from Rachel Porcaro's Attorney?” (it seems all tax blog posts I read yesterday ended with a ?).

Included in the comment is the following (as usual, the highlight is mine) –

Rachel tried to get help from Block first, but they refused to help. Anyone relying on Block's "Peace of Mind" product should read the contract very carefully. IMO it protects Block as much as or more than the taxpayer.”
Let’s hope my internet connection FU, which apparently fixed itself, stays fixed so the next BUZZ is bulging with items from a wide variety of sources.


Thursday, December 17, 2009


I am sure there are many of you out there who are wondering what to get me for Christmas. Well how about more visitors to THE WANDERING TAX PRO!

Think about this -

If I told 10 friends to visit THE WANDERING TAX PRO –

And they each told ten friends to visit THE WANDERING TAX PRO –

And they each told ten friends to visit THE WANDERING TAX PRO, and it stopped there - that would mean 1000 new visitors to my blog!

But if it didn't stop - and each ten in turn told ten more - than eventually everyone in the US with internet access would have checked out THE WANDERING TAX PRO!

Why not give it a try!

If you find THE WANDERING TAX PRO interesting and/or helpful please email 10 friends and ask them to check out the blog. You may want to suggest a particular post that you found especially helpful. And ask them to email 10 of their friends about THE WANDERING TAX PRO if they like what they find. And so on.



Wednesday, December 16, 2009


* Mary O’Keeffe revisits the tale of the single working mother in Seattle who was screwed by the IRS in “More Thoughts on Rachel Porcaro” over at BED BUFFALOES IN YOUR TAX CODE.

Here are two interesting items from the post -

(1) Rachel spent $8,000 on a CPA/attorney to represent her in the audit. The IRS originally wanted $16,000 in tax, interest and penalties (which is ridiculous when her income for the year was just under $19,000) and the CPA/attorney knocked it down to $1,600, which Mary pointed out in an earlier post on the subject was not the correct amount that would be due.

According to the press coverage, Rachel Porcaro made $10 per hour cutting hair at SuperCuts. At that rate, it would take her 800 hours of cutting hair to pay off the legal bills run up during her audit.”

(2) Mary tells us, “The Seattle Times reported that H&R Block prepared Ms. Porcaro's original tax returns. The H&R Block website states that it will provide a substantial amount of free assistance and support to any of its customers who are audited. They will also pay for any penalties and interest that resulted from errors made by their preparers.”

So where were the minions of Henry and Richard when Rachel was audited? Did they pay any of the penalties and interest included in the $1,600 final assessment? Why did she shell out $8,000 to a CPA/attorney when H+R is supposed to “stand behind” clients in the event of an audit?

The IRS was not the only party that screwed Rachel.

* While Kay Bell, the yellow rose of taxes, is off to Wash DC to attend meetings of the Taxpayer Advocacy Panel she is running a series on “The 12 Tax Tips of Christmas” over at DON’T MESS WITH TAXES. She begins with “#1 Sell Assets”.

She will also be running a series on “Year-End Money Moves”.

Knowing Kay’s work, both series are well worth following.

* Trish McIntire describes the “evolution” of the tax preparation business over the past 20 years in her post “Paying the Piper” at OUR TAXING TIMES.

* Russ Fox echoes my sentiments in “Cutting Spending” at TAXABLE TALK.

When you or I run into cash flow problems, what do we do? We’re forced to cut spending, of course. It’s not as if we have a choice: We can’t print money, and robbing banks is usually not a good idea.

Congress, though, can spend money even if they don’t have any: It’s called deficit spending. But when the voting public starts complaining even Congress knows they have to do something. Of course, we have Democrats in control of Congress so the idea of cutting programs is anathema to them.

What Congress should do is cut programs, cut regulations, and cut the bureaucracy

And speaking of Russ, thanks for mentioning my post on the ROTH IRA Conversion Trap in “Links from the Blogosphere”.

* Russ gets the BUZZ Trifecta – three links in a single BUZZ – with his identification of bad blog advice in “Bad Advice: Holding the Check ’til 2010”. The post discusses the concept of “constructive receipt”.

A payment is received when it is in your hands, not when it is deposited in the bank.

* Here’s a thought – “Fight the Deficit Monster with Tax Reform”. Over at BUSINESSWEEK.COM “Simplifying the U.S. code could lower overall income tax rates and raise more revenue, says Bloomberg BusinessWeek columnist Chris Farrell”.

Leaders of both parties should embrace major tax reform with an emphasis on simplification. In essence, eliminate all or most tax credits and tax deductions, income phase-ins and phase-outs, exclusions and exemptions. A dramatic broadening of the tax base can allow for both lowering overall income tax rates and raising more revenue. It would make it far easier to match federal tax revenue with federal spending obligations.”


* A tweet told me that the IRS has a new “virtual” Small Business Tax Workshop to help business owners. I haven’t had time to check it out in detail, but you may find it helpful if you are starting, or thinking about starting, a small business.

* Did you know “Feds Owe Uncle Sam $3B in Unpaid Taxes”? This story is nothing new – report similar statements each year.

At a time when the White House is projecting the largest deficit in the nation's history, Uncle Sam is trying to recover billions of dollars in unpaid taxes from its own employees.

Federal workers owe more than $3 billion in income taxes they failed to pay in 2008. According to Internal Revenue Service documents, 276,300 federal employees and retirees owe $3,042,200,000.

The IRS tracks the voluntary compliance rate of federal employees and retirees each year, and each year feds come up short. The one bright spot in this year's report is that after several years of a steady increase, the amount owed by feds is down from the previous year

I hope the IRS is going after delinquent federal employees with the same “zeal” that it applies to pursuing single working mothers in Seattle!

* Several sources, including the print publication BOTTOM LINE PERSONAL, have indicated that the capital gain distributions issued by mutual funds, usually in the last quarter of the year, will be minimal this year. BLP reports that, “As of October 31, only about 250 stock funds have declared capital gain distributions, compared with more than 1,600 at the same time last year. And the average distribution was cut in half.”

* And in a related item - Joe Kristan gives us a good reminder in “Don't Buy Somebody Else's Mutual Fund Tax Liability” at the ROTH AND COMPANY TAX UPDATE BLOG.


Tuesday, December 15, 2009


Here are some suggestions for paying for or saving for your children’s college education.

* Many grandparents want to help pay for, or pay in full, the college education of their grandchildren.

Instead of paying the tuition upfront, or giving money directly to the student(s), what they should do is have the grandchild(ren) pay for college using student loans, and then pay-off the loans once the student has graduated. This way they know that the money is actually used for education, and not squandered on wine, women, song, sex, drugs, rock and roll, or a fast car, and that a degree is actually earned.

If there is any interest charged on the student loan it can be deducted by the student (if recorded under the student’s name and Social Security number and not that of the parents), even though it is paid by the grandparents.

Be advised that in such a situation the pay-off of the loan will be treated as a gift and subject to the federal Gift Tax rules and limitations. If the grandparents pay the tuition directly to the college the payment is not subject to the Gift Tax annual exclusion limitations. But that should not be a problem if timed properly.

This is a good idea for parents as well as grandparents.

* Instead of contributing to a Section 529 plan, parents with young children, and the appropriate Adjusted Gross Income, should consider using ROTH IRAs (one for each parent) to save for college.

Because distributions from a ROTH are treated as coming out of “basis” (i.e. contributions) first, if the parents only withdraw up to the amount of their total contributions over the years to pay for college there will be no tax cost. The parents should leave the earnings on their contributions in the accounts for their retirement.

This way if their child (or children) does not attend college, or gets sufficient scholarships or other financial aid, or otherwise does not need any or all of the money that has accumulated to pay for post secondary education, there is no need to worry about tax consequences, as there would be if there was excess money left in a Section 529 account.

In either the best case (full scholarship all 4 or more years) or worst case (no education beyond high school) scenarios the parents will have a nice tax-free nest egg socked away for retirement. Even with scenarios that are “in between” there will be some tax-free accumulation for retirement or to pass on to beneficiaries.

Parents can also use a combination of Section 529 and ROTH IRA contributions to save for college.

* And one final thought. If parents do contribute to a Section 529 Plan for their future college student(s), while the child will be the “beneficiary” of the account, the “owner” of the account should be the parents. This way they can maintain control of the money.

As usual, if you have any questions about any of these suggestions you should consult your tax professional.


Monday, December 14, 2009


I am getting tired wasting valuable time deleting the multitude of spam posts that are constantly being submitted to both THE WANDERING TAX PRO and the NJ TAX PRACTICE BLOG.

I have disabled the COMMENT process on these two blogs.

If you want to make a legitimate comment on a post you can do so by sending an email to with “THE WANDERING TAX PRO COMMENT” or ‘NJ TAX PRACTICE BLOG COMMENT” in the “Subject Line”.

I will periodically publish a “mailbag” post with all legitimate and appropriate comments and my responses thereto.

Please do not abuse my email address by sending me specific tax questions that should be addressed to your tax professional. I do not provide free tax consultations via email. And, so that you know, I am not accepting any new clients.

The criteria for “legitimate” and “appropriate” comments have not changed. To refresh your memory reread the following –


Thank you for your patience and cooperation.


Not too long ago I posted about a Tax Court case involving gambling winnings and losses (see my post “A LITTLE THIS-A AND A LITTLE THAT-A – WITH THE EMPHASIS ON THE LATTA”). The NATP year-end tax update seminar I attended in Atlantic City recently brought my attention to an IRS Chief Counsel Advice on the issue with a similar conclusion.

Chief Counsel Advice EMISC 2008-011, issued December 5, 2008, as did the Tax Court discussed in my post, addressed the question - “How does a casual gambler determine wagering gains and losses from slot machine play”.

Here are the facts in the situation that prompted the CCA –

Taxpayer, a retired woman with a fixed income, limits her slot machine play to $100 per visit to the casino. During the year in question she went to the casino on 10 separate occasions. On 5 she lost the entire $100. On 5 she cashed out (left the casino) with $20, $70, $150, $200, and $300. When she cashed out with $20 and $70 she actually had net losses of $80 and $30, after deducting her $100 initial “investment”. On the other 3 visits she had net gains of $50, $100, and $200.

According to the CCA, the taxpayer had reportable gambling winnings of $350 for the year, the total of the $50, $100 and $200 net gains. The amount she would report as taxable income on Line 21 of her Form 1040 is $350, regardless of the amount of winnings that had been reported on any W-2G forms. She would also be able to deduct $350 in gambling losses if she itemized on Schedule A.

It is very possible that she could have won $1000 in a single “pull” during one of her visits, but continued to play. In such a case she would have received a Form W-2G from the casino for $1,000. But she would still report only $350 in “gross” taxable winnings.

The Chief Counsel Advice, like the Tax Court decision, stated that a taxpayer only recognizes a wagering gain or loss at the time he or she cashes out.

The Tax Court decision has stated -

"[T]he better view is that a casual gambler playing a slot machine, such as the petitioner, recognizes a wagering gain or loss at the time she redeems her tokens. The fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate the amount above or below basis (the wager) realized."
It is "more better" to report a smaller amount of "gross" gambling winnings on Line 21 of the Form 1040 - even if all of the losses will be wiped out by a Schedule A deduction so that the net taxable affect = "0". The amount of gross winnings reported on Line 21 will increase one's Adjusted Gross Income (AGI) and can therefore reduce a multitude of tax benefits that are phased-out or totally eliminated based on AGI.
In describing the situation that prompted the CCA, the NATP indicated that the taxpayer in question, “properly substantiates all gains and losses incurred in her wagering transactions according to (IRC Section) 6001 and Revenue Procedure 77-29”. NATP goes on to say, “That means keeping an accurate diary or similar record that is regularly maintained by the taxpayer, supplemented by verifiable documentation, which is kept with the tax return records until the close of the statute of limitations on a tax return”.

It is extremely important that a “casual” gambler (or a “professional” one for that matter) keep a detailed diary of the net gambling activity from each visit to a casino or racetrack or whatever. If you play the slots at a casino you should join that casino’s “rewards” club and use the club card to document your activity as an additional back up. This should not take the place of an actual diary.

I do not know if the print-out provided by using the club card will indicate net activity for each visit. Do any of you regular gamblers out there know if it does?

As I suggest in my earlier post –

Just as a person who uses his/her car for business must keep a contemporaneous record of business mileage, a gambler must keep a contemporaneous record of daily activity. A simple pocket notebook will do. You would indicate the date, the name of the casino, and the net activity from that casino for the day. For example:

November 19, 2009 – Bally’s Wild West - $115.00; Ceasar’s Palace – ($25.00)

November 20, 2009 – Bally’s Wild West – ($50.00)

You may have won $1,000 in one slot pull while at Bally’s on November 19th, but you put $885.00 back into the machines before leaving the casino. So instead of reporting $1,000 you would report only $115.00. The additional $75.00 in losses could be deducted as a Miscellaneous itemized deduction not subject to the 2% of AGI exclusion

When giving your tax professional Form W-2Gs you have received for the year also be sure to give him your gambling diary. He will need to attach to your Form 1040 a statement to reconcile the amounts reported on the W-2G forms to the amount reported on Line 21. If such a statement of reconciliation is not included with the return you will no doubt get a CP 2000 notice and bill from the IRS.


Sunday, December 13, 2009


It is Sunday, so I am allowed a non-tax topic.

All this ridiculous press about Tiger Woods infidelity has me thinking.

I have never understood the concept of a professional athlete, individually or as a member of a team, being a role model or “heroic”.

Why is one’s ability to catch, block, hit, or throw a ball considered heroic?

Is being highly proficient, or perhaps only lucky, in sports any more heroic, or worthy of adulation, than someone who is highly proficient as an architect, or carpenter, or firefighter, or secretary, or even tax preparer? Or a parent who works two jobs in order to support his/her family or to pay for a good education for his/her children?

If I had children I would much prefer that they emulate Bill Gates or Oprah Winfrey, or some of my friends who are proficient and ethical in their chosen non-celebrated profession and work hard to honor their responsibilities, than any golfer or tennis player or member of any professional sports team.

And while I am on a rant - Barbara Walters is getting senile! Including Kate Gosselin on a list of the “10 Most Fascinating People of 2009” is utterly ridiculous. Adam Lambert is bad enough.

Kate Gosselin in one of many, many self-absorbed idiots who sacrifice their self-respect, and in Gosselin’s case also her marriage and the future mental health of her children, for a totally unearned 15 minutes (unfortunately much more in Gosselin’s case) of fame as the subject of a “reality tv” show. Kate Gosselin craves attention, which is more important to her than her family. She is not fascinating – she is just sad!

I will never understand why the great unwashed masses watch such crap week after week. As I recently commented on a blog post related to the garbage known as MTV’s “The Jersey Shore” –

I wish someone would explain to me the entertainment value of a show about self-important people with no talent, no self-respect and minimal, if any, intelligence making complete fools of themselves on a regular basis.

So-called ‘reality tv’ shows have absolutely no ‘redeeming social value’.

MTV and VH1 started out being innovative. Now they just show poor soft-core porn.

As HL Mencken said – ‘Nobody ever went broke underestimating the intelligence of the American public’!

It is a serious question that I ask – and wish someone would answer it for me.


Saturday, December 12, 2009


I somehow lost my first draft of today’s BUZZ (a real PITA). I hope I haven’t forgotten anything good in my attempted recreation, although something tells me that I have.

* TAX PRO Paul Caron, the most scholarly of all tax blogs, gives us an interesting side item on the recent online debate on taxing plastic surgery in “Jerry Springer & Chesty Love Discuss Tax Court Decision Allowing Depreciation of Her Breast Implants”.

FYI, Ms “Love” appeared as her own counsel in the Tax Court.

* The Center for Tax Justice discusses an item from the just passed House extenders bill that I had originally missed in its post “Study in House "Extenders" Bill Would Provide Valuable Info on Many Tax Breaks” at the TALKING TAXES blog.

While multiple theories exist as to why these provisions aren't simply made permanent, it is clear that relatively little thought has been given to their effectiveness in promoting the multitude of goals for which they've been supposedly been enacted. The House bill seeks to remedy this problem by requiring that the Joint Committee on Taxation (JCT) conduct studies of each of these provisions using 10 different criteria explained in the bill's language.”

This is surprisingly intelligent of the House. The criteria, which the post identifies, would be good for the periodic review of the Tax Code I talk about in my Friday TWTP post “TO EXTEND OR NOT TO EXTEND (TAX LAW NOT TAX RETURNS THAT IS)”.
* A tweet led me to the post "Refund Anticipation Loans (RALs) - The Facts" at the PAYDAY RESOURCE BLOG.
Here are some of "the facts" (pay close attention to the last one) -
• “Consumers paid an estimated $833 million in RAL fees in 2007 to get quick cash for their refunds

• In addition to RAL fees, consumers paid another estimate $68 million ‘application’, ‘administrative’, ‘e-filing’, ‘service bureau’, ‘transmission’ or ‘processing’ fees — an estimated 20% of RAL borrowers are charged this fee. The price of a typical RAL of $3,000 can range from $62 to $110.

• The effective APR for RALs based on a 10-day loan period ranges from 50% (for a loan of $10,000) to nearly 500% (for a loan of $300). The APR for a typical RAL of about $3,000 can be from 77% to 140%.

• An IRS study found a significant correlation between RALs and “noncompliance” – RAL users are 27-36% more noncompliant than taxpayers who do not use a financial product
Let us hope that when the IRS releases its final proposals for regulating tax preparers it includes a ban on offering these usurious RALs.
* The money printing machine may be turned on again soon. The government apparently has more to throw around. YAHOO.COM reports “Cash for Caulkers Could Mean $12K Per Home”.

Let’s hope, if it is done, it follows the example of the Cash for Clunkers program and is not administered as a refundable tax credit. Otherwise it will be just an open call for tax fraud.

* New York State has passed an Amnesty Program for older tax debts. Check out my post about it at the NJ TAX PRACTICE BLOG.

* Kay Bell gives the word to waiters/waitresses, bartenders, and other tipped employees in her post “Food Server Tip: Report Your Gratuities” at DON’T MESS WITH TAXES.

Many folks may be new to the job, though, having signed up for a part-time gig to make some extra cash during the holidays. So I want to make sure they understand their tax obligations when it comes to gratuities.”
* And Kay also provides those of you who still exchange gifts (I do not) some ideas on what to get your tax pro (I take checks - but cash is good, too) in her post "Holiday Gifts for Tax Geeks".
* Want to know “How Much Stimulus Funding is Going to Your County?”. You can find out at PRO PUBLICA (journalism in the public interest).

* Mary O’Keeffe keeps us up to date on the working single mother from Seattle who got screwed by the IRS in her post “More Information on Rachel Porcaro in Seattle” at BED BUFFALOES IN YOUR TAX CODE.

Mary provides some interesting information on the settlement. And I was “interested” to learn that the tax professional who represented her, and who did not keep the IRS from overstepping its boundaries and who did not secure a proper resolution of the matter, was “both a CPA and a tax attorney”.
* TAX GIRL Kelly Phillips Erb provides us with a "Lesson Learned: Even Madams Pay Their Taxes”. Some even issue 1099s“!

While I do not find the fact that Tiger Woods shags every blonde who smiles at him, or more appropriately catches some of the gold-diggers who throw themselves at him, is not newsworthy, I agree with KPE that this is an interesting tax-related item.

As I have tweeted – who gives a rat’s arse if TW is getting some on the side? It is a private matter between him and the wife.

* Joe Kristan warns businesses about “The Mid-Quarter Trap” at the ROTH AND COMPANY TAX UPDATE BLOG.

* The tax blog quote of the week, from Prof Jim Maule of MAULED AGAIN’s post “Tax Law Going to the Dogs in a Fishy Proposal” –

It’s high time that members of Congress stopped using the tax law as a pawn in their trolling for votes. It’s tawdry. It’s offensive. It’s wrong. It endangers the republic.”