Saturday, May 30, 2009


As someone who takes great pride in his "product" (1040s) it irks me when others do not.

I am sending out a Client Update newsletter to, among other things, review the 1040 changes for 2009 that resulted from the February “recovery” tax act. I need to get it in the mail today.

I took the newsletter to Staples on Thursday afternoon to be printed, collated and stapled - 3 pages, both sides, the pages numbered.

When I picked it up on Friday afternoon a quick look showed me it was collated + stapled. But when I got home I found that Pages 5 and 6 were reversed! It went Page 1, 2, 3, 4, 6, 5! There was no time to take it back to be fixed as it must get it in the mail today (Saturday).

A sincere apology to my clients for Staples’ FU.

The bottom line - certainly no more printing at Staples, and perhaps a nasty letter to management.

A word to the wise – when you pick up your printing at Staples (or anywhere for that matter) be sure to check closely that it has been done properly.


* Anon posed a question in a comment to my post “This Just In - 2009 Standard Mileage Allowance Rates”. I answered the question in a responding comment. Scroll down to bottom of comment section of the post to see the question and my answer.

* The Tax Brain, a twit I follow, reports that
Credit and Debit Card Fees Related to Tax Payment are Deductible over at the TAX BRAIN ONLINE TAX PREPARATION NEWS blog.

TB tells us that, “In reassessing a previous position, the IRS decided that the convenience fees associated with the payment of federal tax, including payment of estimated tax, can be included as a miscellaneous itemized deduction. However, only those miscellaneous expenses that exceeded 2 percent of the taxpayer’s adjusted gross income can be deducted.”

* Twit follower/followee Cindy Morus of MEND YOUR MONEY gives us the word on the Credit Card Accountability Responsibility and Disclosure Act of 2009 (CCARD) aka the Credit Cardholder’s Bill of Rights in her post “
Are Credit Cardholders Finally Getting A Break”.

Here is some of the “good news” in the Act -

· Overlimit charges can only be charged when a purchase, rather than a fee or interest charge, causes the credit limit to be exceeded.
· Overlimit charges can only be applied once during a billing cycle.
· No interest can be charged on fees (such as late fees or overlimit fees)
· Your bills must be sent out 21 days before the payment due date (current requirement is 14 days)
· No one under 21 can get a credit card without a co-signer or proof that they are able to repay the credit (a job)
· You can pay your bill by mail, phone, electronic transfer or online without additional cost unless you need to pay at the last minute

* The NATP TAXPRO Weekly email newsletter reports that “West Virginia Storm Victims May Qualify for Disaster Relief”.
Following severe storms, flooding, mudslides, and landslides in West Virginia on May 3, 2009, the President declared Mingo and Wyoming counties federal disaster areas qualifying for individual assistance.

As a result, the IRS is postponing certain deadlines for taxpayers who reside or have a business in the disaster area until July 2, 2009. The postponement applies to return filing, tax payment, and certain other time-sensitive acts otherwise due between May 3, 2009, and July 2, 2009.

In addition, the IRS will waive the failure to deposit penalties for employment and excise deposits due on or after May 3, 2009, and on or before May 18, 2009, as long as the deposits were made by May 18, 2009.

Additional information is available on the IRS

* Pete Pappas puts forth an excellent idea in his post “IRS Wastes $19.5 Million of Taxpayer Money” at THE TAX LAWYER’S BLOG.

After telling us that the IRS has scrapped plans to create a new website after investing $19.5 million dollars of taxpayer funds in it he suggests, “We should put a moratorium on tax increases until current levels of waste are substantially reduced.”
Right on, my brother!
* NJ senior and disabled homeowners should check out my post "Well It's About Fekking Time" at my NJ TAX PRACTICE BLOG.

Friday, May 29, 2009


A comment from Lynn on yesterday’s post “A FLAT TAX FOR NJ – SOUNDS GOOD TO ME!”, which I have published, included a request for clarification on how a 2.98% on the first dollar would work.

Can you explain what it means when there is a flat tax on the first dollar of income earned? Does that mean I will only pay 2.98% of $1.00? Of course it can't mean that. I could only wish. I wouldn't mind a flat tax on 2.98% of all income. How would that work for those of us that work in NYS? I wish they would come up with an easier tax return. I hate the NJ 1040 since I work in NY and my husband works in NJ.”

The Lonegan for Governor website page on the
Flat Tax does not provide any examples of the application of the tax. I assume it will work similar to Pennsylvania’s flat tax system. Sol, Lynn, here is how it would work, based on the existing Pennsylvania tax system.

You have W-2 income of $50,000, interest and dividends of $1,000, and a $2,000 net capital loss from the sale of securities. Your NJ state taxable income would be $51,000. Since, as is already the case with the NJ-1040, losses in one category of income do not reduce income in other categories, the $2,000 net capital loss would be “lost” and you would only be taxed on your combined positive income of $50,000 + $1,000.

There would be no deduction for personal exemptions or, and here I am not sure, medical expenses or property taxes (actual or, as with a tenant, assumed). Your tax would be $51,000 x 2.98%, or $1,520. Under the current NJ system the tax would be $1,220 (assuming the $50 Property Tax Credit instead of a Property Tax Deduction and no medical expenses) for a single filer.

I do not know how the new flat tax system would handle pension income and the Retirement Income Exclusion. I do believe that PA does not tax pensions.

So I assume that you would take the New Jersey Gross Income reported on Line 28 of the NJ-1040 and simply multiply it by 2.98% to determine your NJ tax.

FYI under Lonegan’s plan the flat rate would decrease to 2.5% the following year, and further to 2.1% in the third year. So in the above example the tax would be less than the current NJGIT in the third year - $51,000 x 2.1% = $1,071.

I certainly expect that there would continue to be a credit for taxes paid on the same income to other states. So if the $50,000 was earned, and already taxed, in New York State a credit would be allowed on the NJ state return.

New Jersey and Pennsylvania have a reciprocal agreement. Residents of NJ are not taxed by PA on wages earned in Pennsylvania, and residents of PA are not taxed by NJ on NJ source wages. If you live in New Jersey and work in Pennsylvania your employer should not be withholding PA state income tax from your wages. He should be withholding New Jersey Gross Income Tax. It is the same if you live in Pennsylvania and work in New Jersey – PA state income tax should be withheld. There is no similar reciprocity for business income or other types of state-specific sourced income.

This will never happen with New York and New Jersey. Since New York’s state income tax is for the most part higher than that of New Jersey no NYS legislature would ever agree to reciprocity.

Any more questions?


Thursday, May 28, 2009


A good piece recently appeared in the Wall Street Journal’s Opinion Journal titled “New Jersey's Flat Tax Debate: Christie's cheap shots can hurt everyone” (no author credited).

The item discusses a proposal by Republican gubernatorial candidate Steve Lonegan, former Mayor of Bogota, to replace Jersey's graduated income tax that has rates running from 1.4% to 8.97% with a 2.98% flat tax on the first dollar of income earned. The “flat tax” is opposed by rival Republican candidate Chris Christie.

This is like Pennsylvania’s current flat tax on all taxable income of 3.07%. The PA state income tax system is similar to the NJ Gross Income Tax (actually PA came first – we stole it from them) in that it is a “gross” income tax with minimal deductions. It does not allow losses in one category of income to offset income in other categories. If you have $10,000 in wages and $3,000 in stock market losses you are taxed on $10,000. However in PA income is taxed from “dollar one” – there is no personal exemption or filing threshold. PA does have a special “Tax Forgiveness” credit for lower income filers.

According to the piece, “If ever a state were ripe for bold economic reform, it would be New Jersey, which is shedding jobs and is in perennial budget crisis despite one of the highest tax burdens in the land”.

Candidate Christie’s ads claim that the flat tax isn't fair because it would raise taxes on "almost 70% of working families." But “Mr. Lonegan counters that only 40% would pay more -- by an average of less than $300 for a family earning $20,000 -- and their tax liability would still be lower than in New York and Pennsylvania. The average New Jersey family's tax bill would fall by $1,000 a year.”

In defending his flat tax on the first dollar Lonegan says what I have been saying for quite a while now about the federal income tax – “every working New Jersey resident should pay something -- on the principle that everyone should bear at least some of the cost of government”.

The item points out that under current Governor Jon “Big Disappointment” Corzine and his predecessor Jim “Gay American” McGreevey NJ has enacted “103 tax increases, including income and sales tax rate hikes”.

And “from 2001 to 2008, New Jersey lost a net 25,000 private-sector jobs even as public employment grew by 65,000 workers”. Since government workers will vote for the Democratic party this makes good political sense, although horrible public policy. But then we residents of the Garden State all know too well that NJ politicians only care about maintaining the “status quo” and fattening their own wallets, and those of their supporters, and don’t give a horse’s arse about what is best for the state.

I support Steve Lonegan’s flat tax proposal, and am leaning toward voting for Steve in the primary. Christie made his name putting away NJ corrupt politicians – and while he made a good start he barely scratched the surface since most NJ politicians remain in office (if he were able to put all NJ corrupt politicians behind bars we would need to annex Rhode Island as a prison) – but he is basically a “one hit wonder”, so to speak, and he has the backing of the state’s existing Republican leaders, which is not necessarily to his credit.

Another thing I like about Lonegan - he has said that the NJ Homestead Rebate is "a gimmick". Talk about hitting the nail on the head. Let's call a spade a spade - it is a political gimmick intended to buy votes.

One thing is sure – New Jersey needs to “Get a GRIP” (Get Rid of ALL Incumbent Politicians) in the coming election!


Wednesday, May 27, 2009


Earlier this month I received the below question from Murray, submitted as a comment to my post ASK THE TAX PRO - UNUSED FLEXIBLE SPENDING ACCOUNT CONTRIBUTIONS.

It is as good a question as any with which to begin the return of ASK THE TAX PRO Wednesday.

Q. Where does the money go? To the employer? To the government? Or does it just evaporate?

A. The question relates to the unused portion of moneys set aside in an employer-sponsored “Flexible Spending Account” or FSA.

An FSA is a “use it or lose it account”. The employee-participant “forfeits” any unused monies set aside. If he/she sets aside $5,000 for the year, but only submits $4,000 in qualifying expenses, the unused $1,000 is lost. The employee is $1,000 “out of pocket” – although, as I point out in my post, this is not a tax-deductible loss.

A plan year is generally a calendar year. Originally expenses had to be submitted by December 31st to be included. However under new rules for Flexible Spending Accounts you have 2½ months of the following year to submit expenses against FSA monies contributed for the year – if your plan so permits. So participants would be able to submit expenses up until March 15th of 2009 to be applied to monies set aside in calendar/plan year 2008.

So, as you ask, where does any unused FSA money go?

Obviously the money does not just evaporate. And it does not go to the government. Ultimately the money goes back to the employer.

I do not know the specific mechanics of what happens to forfeited FSA monies, as I have never had, or wanted, any direct experience with the administration of an FSA. I would expect that initially the unused money remains in the actual “plan” – and can be used to offset plan losses that can arise from employees whose employment is terminated with a “negative” FSA cash balance.

It is my understanding that FSA contributions are generally made evenly throughout the year via payroll deduction - but expenses can be “reimbursed” as they are submitted, up to the total amount that has been set aside. So it is possible that an employee who has set aside $5,000 can submit $4,000 in dental expenses incurred in February, although only $833 in actual employee payments have been made. If the employee leaves the company at the end of June, with only $2,500 in total payments, he/she does not have to repay $1,500. {Please correct me if I am wrong}.

However, the bottom line answer to the question is that, as said above, ultimately the unused FSA contributions go back to the employer.


Tuesday, May 26, 2009


The more I think about it the more I believe that I will pitch this idea for a new reality show to the networks – HARPER’S ISLAND: CELEBRITY EDITION.

I would take Donald Trump, Tyra Banks, Amy Whinehouse, Richard Hatch (the naked guy - not the actor), New York (is that her name?) and some other “stars” of MTV and VH1 reality shows – people who make no contribution whatsoever to society as it is and would not be missed – and strand them in a hotel on an island. One of them would be secretly chosen to be a serial killer. Each week the audience would vote which “celebrity” (choices provided) would be murdered in a gruesome way – mimicking the way the characters were killed on HARPER’S ISLAND. When the “perp” is the only one left he would be killed while being pursued by a real sheriff and posse, also in a gruesome manner.

I would watch that – wouldn’t you?


I realize that this has nothing to do with taxes – but . . .

NBC has truly become “Nothing But Crap” with its new so-called “reality” show “I’M A CELEBRITY – GET ME OUT OF HERE!”. While not quite the worst steaming pile of excrement of the genre, it is way down there on the bottom. It takes Z-level “celebrities” (at least they did not say “I’M A STAR” or “I’M TALENTED” in the title) such as Spencer and Heidi, Janice Dickerson, and Sanjaya (they tried for Blagojevich) and lets them loose in the jungle of Costa Rica a la SURVIVOR.

Like most of the other feces of this genre the show is based on a European show – from the UK.

Here is how I would tweak the show’s premise. I would have one of the celebrities be a serial killer and viewers could vote each week who would be the next victim via some gruesome death until only the killer is left – who is then shot by police when trying to escape! Of course I would really kill off the celebreties – nothing fake.

The only way I would break my long-standing pledge not to watch any “reality show” is if some freak of nature (volcano, tsunami, whatever) would kill all the “celebrities” – and the producers as well. Now that would be good television!


In his post “Open Government Initiative Soliciting Ideas for Reform from Citizens” at WILLIAM’S TAX PLANNING BLOG William Perez reports that –

There's a new Web site where citizens can suggest ideas to make the federal government more transparent, more responsive, and more efficient. The White House is asking for citizens to submit their ideas for government reform on the
Open Government Initiative site. This site for brainstorming, where citizens can suggest ideas and other people can vote for or against those ideas, and offer comments and feedback.”

National Academy of Public Administration, a Congressionally chartered, non-profit, non-partisan institution, is hosting this brainstorming session, open through May 28th, on behalf of the White House.

According to the website some questions to consider in formulating ideas include:

· How might the operations of government be made more transparent and accountable?
· How might federal advisory committees, rulemaking or electronic rulemaking be better used to drive greater expertise into decisionmaking?
· What alternative models exist to improve the quality of decisionmaking and increase opportunities for citizen participation?
· What strategies might be employed to adopt greater use of Web 2.0 in agencies?
· What policy impediments to innovation in government currently exist?
· What is the best way to change the culture of government to embrace collaboration?
· What changes in training or hiring of personnel would enhance innovation?
· What performance measures are necessary to determine the effectiveness of open government policies?

Bill has “submitted a suggestion repeating the recommendations made by Taxpayer Advocate Nina Olson in her previous reports for the IRS to develop a 'my IRS account' portal for taxpayers to log-in and view their tax information”. I myself plan to submit some of the suggestions I have talked about here at TWTP later this week. I may post my submission after they have been submitted.

Bill's suggestion is a good one. Here is the basic idea –

Data about income and certain deductions are already reported to the I.R.S. The agency could make this data available to taxpayers through a sort of "My I.R.S. account". The data is required to be submitted to the I.R.S. in XML format, so the data is already well-formed. This data could made available to be downloaded into a tax software program, or used to pre-populate the required tax forms. Even better, the entire process could be handled on the I.R.S. Web site, whereby missing information is flagged so the taxpayer will know what additional information needs to be found and added so that their tax returns will be complete.”

Click here to read Bill’s complete submission. Obviously there are security concerns involved with this idea, and there must be adequate safeguards so that an “uninvited” third party cannot access the information. Although there should be a way for tax professionals, with approval from the taxpayer, can view the information.

I echo Bill’s request - “If you have a suggestion for reforming the IRS, or other parts of the federal government, I encourage you to speak up”.


Monday, May 25, 2009


I just couldn’t wait until Saturday’s WHAT’S THE BUZZ to tell you of Trish McIntire’s excellent, well-written post titled “It's Not Easy” at OUR TAXING TIMES.

In the post Trish says, “I have seen an increase in clients switching to online or box tax software and preparing their own taxes.” She is not concerned about losing clients in this matter, as she will “get new clients to replace them”. And, as she says, “sometimes they come back”.

Over the years, both in my mentor’s tax practice and in my own, we have lost clients for a year of two for a variety of reasons. This was before “the box” (packaged tax software) or online preparation was available.

Sometimes we were truly glad for the loss of a particular client. In most cases they would come back – generally due to the level of quality of the service (low) and the cost (high) of other preparers (CPA and “fast-food” chains alike) that they encountered. We referred to them as “lost lambs” and always welcomed them back into “the fold”. Actually my mentor said that every client should “stray” for one year so they would truly be able to appreciate our superior level of service and extremely reasonable fees.

But that is not the real issue of her post. “The real problem {with those who turn to packaged software or online services is} the taxpayers who don't want to do the homework necessary to do the job correctly.”

It isn't just taxes. You see the same issue in bookkeeping, playing the stock market, starting a business or taking a vacation. They learn enough to be dangerous. When they run into a problem, they ignore it or patch over it. They don't prevent or solve the issue. How many businesses die because the owners don't really understand payroll, labor laws, health laws or something easily preventable? How many vacations are a disappointment because the trip planner didn't check on attraction times or what the weather is usually?

And, the heart of the matter, “How many taxpayers have received a heart stopping letter from the IRS because they didn't fully understand what the software was asking?"
Trish’s excellent bottom line – “Just because there is a computer program or app that will help you complete a task doesn't release you from making sure you understand the choices you make with that program.”
In his post “E-file Hits Record 90 Million” Bruce the TAXGUY reports that, “By April 24, the IRS had accepted 31.2 million returns filed from home computers, up 19.3 percent from the same time last year.” That is an increase of more than 5 Million “self-prepared” returns using tax software or an online service. That means 5 Million+ more potential incorrect returns for the IRS to deal with.
When I say this it is not because I am looking for new 1040 clients, because I definitely am not, but because it is the truth – Paying a competent tax professional to do your return is ultimately much cheaper than taking a chance with a tax software package or a cheap online service!
PS - Happy Memorial Day!

Saturday, May 23, 2009


* Singer Ray Stevens has a point – “If 10% is Good Enough for Jesus it Ought to be Enough for Uncle Sam”!

* Roni Deutch explains “
Lien? Levy? What’s the Difference?” at her TAX LADY blog.

* TAX GIRL Kelly Phillips Erb is up to Colorado in her series on state taxes.

* William Perez reviews the Good, the Bad and the Ugly (more bad and ugly than good) of the BO tax proposals that were recently published in the Treasury Department’s “Greenbook” in a two-part post “Obama's Proposed Tax Changes” at ABOUT.COM: TAX PLANNING.

* Peter Pappas provides us with the first installment of his The Tax Lawyer’s Tax Lexicon” at THE TAX LAWYER’S BLOG.

Pete hits the nail on the head with his definitions of Tax Policy and Earned Income Credit. And I like how he describes the difference between Good Tax Planning and a Tax Loophole.

* And speaking of THE TAX LAWYERS BLOG, Pete ends the week with a review of the tax benefits for small business contained in "ARRA" in his post “IRS Announces Special Tax Breaks for Small Business

* Considering that a horse named “Tax Ruling” recently won the National Hunt Cup, Prof Jim Maule wonders why more horses haven’t been given tax-related names – and comes up with a good list of suggestions in his post “Horsing Around with Tax” at MAULED AGAIN.

Perhaps the most appropriate name for a race horse is “Tax Shelter”. Or, depending on the horse’s “track” record, “Tax Loss”.

His sample race announcing at the end of the post is a classic!

* The Professor ends the week with “Pay Taxes, Be Happy
in which he discusses several recent items that deal with money and happiness.

He starts off with a study by the Organization for Economic Cooperation and Development that finds, “the nations whose people ranked the happiest in a new survey are those with tax rates among the highest. Thomas Kostigen suggests that the reason may be that these particular nations provide so much for their citizens that their taxpayers feel that they get something in return and know what it is, whereas in the United States people ‘are never really quite sure of what we get in return for paying them, other than the world's biggest military.’ People who worry about being able to get health care and other services tend not to be happy, according to Kostigen.”

* Thursday’s “TIP OF THE DAY” at the Small Business Taxes and Management website gave some good advice -

Get a change notice from the IRS? . . . If it's correct, don't forget to file an amended return with your state. The IRS and the states exchange information regularly and, if you don't file with the state, you'll most likely get a notice from them too. In some cases a federal adjustment won't precipitate a change on your state return. Filing the amended return may keep the interest and penalties down. The reverse may also be true. Get a notice from your state; file an amended return with the IRS.”

Of course I must point out that, in my experience, more often than not a change notice from the IRS or a state tax department is wrong. Do not automatically pay any additional tax, penalty or interest billed. But also do not ignore any notice from a tax authority. As soon as you get a notice of any kind from any of your “Uncles” send it to your tax professional immediately!

* TAX RESOLUTIONARY Baby Boomer quotes an article from the Washington Times to report “
Obama's Plan Could Hurt Senior Citizens”.


Friday, May 22, 2009


Sorry for the lack of posting this week – I have been working away on the GD extensions, with acceptable success.

* Here is an interesting twit (tweat?) I received last week that should be RT to BO and NJ Gov Jon Corzine - “They tell us that high taxes on smokers will induce them to quit - so I guess they already know what high taxes on business will do.”

* It appears that the IRS realizes the mucking fess that BO’s Making Work Pay credit has made of the federal withholding tax tables, especially for retired taxpayers who use the tables to determine withholding from pensions.

NATP reports in its weekly email newsletter that, “The IRS released an optional procedure for adjusting withholding on pension plans in 2009. The changes to the withholding tables that the IRS made for the Making Work Pay Credit affected pension plan withholding even though pensions are not considered earned income for credit purposes. The IRS has issued Notice 1036-P, Additional Withholding for Pensions for 2009, that pension providers can use to calculate additional withholding for pension payments. A withholding adjustment calculator is available on the IRS

While I do give the IRS kudos for attempting to deal with the problem, the use of these additional tables, which are used to “calculate additional withholding amounts for pension payments” is a bit confusing for the average taxpayer. This “procedure” adds another step to the “normal” process, as the withholding amount determined from the tables is “added to the amount of withholding determined from the percentage method, the wage bracket method, or other allowable method”.

* My mother went to her final audit at the end of April. The funeral home notified the Social Security Administration of her passing. In the beginning of May her regular monthly Social Security benefit check was directly deposited to my folks’ joint checking account. On May 7th BO’s $250 “ERP” (Economic Recovery Payment) for both my mother and father was directly deposited.

I just noticed at the beginning of the week that a “DOTS” miscellaneous deduction was made from the account. This withdrawal equaled the total of my mother’s Social Security benefit check and the $250 ERP. I assume that “DOTS” refers to Department of Treasury S(omething).

I am confused why the ERP was returned to Social Security. My mother was entitled to this payment as she was eligible for Social Security benefits for all of the three months before February 17, 2009 (the date of enactment of ARRA) - only one month of eligibility is required.
I emailed my contact at SSA who told me he would look into it, but that SSA employees “have had little training on this”. I checked the appropriate FAQ pages on both the SSA and IRS websites, but could not find a question or answer that dealt a deceased SS recipient.

I suppose it is very possible that the bank returned both checks in error. I will have to check with Wachovia next time I am out and about.

Can anyone out there provide any guidance on this matter?


Monday, May 18, 2009


A twit (tweat?) by TAX GIRL Kelly Phillips Erb led me to a great piece from the Wall Street Journal - “Soak the Rich, Lose the Rich: Americans know how to use the moving van to escape high taxes” by Arthur Laffer and Stephen Moore.

The commentary reports that - “With states facing nearly $100 billion in combined budget deficits this year, we're seeing more governors than ever proposing the Barack Obama solution to balancing the budget: Soak the rich. Lawmakers in California, Connecticut, Delaware, Illinois, Minnesota, New Jersey, New York and Oregon want to raise income tax rates on the top 1% or 2% or 5% of their citizens. New Illinois Gov. Patrick Quinn wants a 50% increase in the income tax rate on the wealthy because this is the "fair" way to close his state's gaping deficit.”

But soaking the rich is not the answer. As Laffer and Moore put it, “It never works because people, investment capital and businesses are mobile: They can leave tax-unfriendly states and move to tax-friendly states.”

Not surprisingly, the guys found that “from 1998 to 2007, more than 1,100 people every day including Sundays and holidays moved from the nine highest income-tax states such as California, New Jersey, New York and Ohio and relocated mostly to the nine tax-haven states with no income tax, including Florida, Nevada, New Hampshire and Texas. We also found that over these same years the no-income tax states created 89% more jobs and had 32% faster personal income growth than their high-tax counterparts.”

They are right on in their discussion of my home state of New Jersey (The highlights below are mine) -

Or consider the fiasco of New Jersey. In the early 1960s, the state had no state income tax and no state sales tax. It was a rapidly growing state attracting people from everywhere and running budget surpluses. Today its income and sales taxes are among the highest in the nation yet it suffers from perpetual deficits and its schools rank among the worst in the nation {FYI the biggest and most influential political contributor in the state is probably the NJEA – rdf} -- much worse than those in New Hampshire {No state income or sales tax and less spending per child - rdf}. Most of the massive infusion of tax dollars over the past 40 years has simply enriched the public-employee unions in the Garden State. People are fleeing the state in droves.”

I will be one of those fleeing the Garden State when my father goes to his final audit – not only because it is one of the highest taxed states (I do not consider myself among the rich that is being primed for soaking) but also because it is probably the most politically corrupt. Despite protestations at election time that they have the best interests of the people at heart, NJ state and local politicians in reality are only looking for more ways to fatten themselves and their “peeps”.

While a popular proposal among the “great unwashed masses”, soaking the rich is not the answer to all our financial problems – whether on the state or federal level.



My post on “Something to Think About” is in the "Carnival of Financial Planning – May 16, 2009 Edition" at THE PERSONAL FINANCIER. It is the first of two items under TAXES – which, as seems to be the case in many personal finance Carnivals, the last category.

While you are there be sure to check out “
Gallows Humor: 21 Economy Inspired Cartoons” posted by Pick the Brain at SCHOOL LOANS (actually THE MONEY STUDENT). I especially liked the "Dogbert at the Bailout Hearings" and "Preferred Stocks" cartoons.


Saturday, May 16, 2009


* Trish McIntire picks up on Jim Maule’s post on the increased capital loss deduction proposal and reminds us that the income levels used for calculating taxable Social Security and Railroad Retirement benefits have never been increased for inflation in her post “Index for Inflation for All” at OUR TAXING TIMES.

Her title says it for me. If some threshold items in the Tax Code are indexed for inflation then why not index all items?

* Peter Pappas continues his series on “tax protester wackzoidery” with the post “Volume # 7- Absurd Tax Protestor Arguments - Paperwork Reduction Act” over at THE TAX LAWYER’S BLOG.

* Out of the mouths of babes! Bill Sheriden quotes from a speech in the post “'This Country Needs a Big Dose of Financial Literacy'” at the Maryland CPA Society’s CPA SUCCESS blog. The speech included a story that bears repeating –

During his Dallas speech, he told an eye-opening story that speaks directly to the importance of financial literacy.

He and his 9-year-old daughter were watching the news one evening when a reporter began telling the story of a homeowner who was in danger of losing her home. She had made the first two $4,000-per-month mortgage payments but couldn't afford to make another.

Her income? About $30,000 per year.

Niederauer's daughter paused, did some quick calculations in her head and said, "Daddy, I'm confused. Isn't four times 12 more than 30?" She had simply multiplied the woman's mortgage by 12 months and realized the result exceeded her income.

Here's a fourth-grader who figured out what so many Americans don't know -- or choose to ignore: If you buy something you can't afford, you're going to get into trouble

It seems that most of the great unwashed masses don’t have the intelligence of a fourth-grader.

* The WebCPA article “Tax Preparer Proposals in Budget Greenbook” reports that BO’s “Greenbook”, which contains a “general explanation of the administration’s fiscal year 2010 revenue proposals”, may require electronic filing by tax return preparers who file more than 100 tax returns in a calendar year, effective for tax returns required to be filed after Dec. 31, 2010.

As a tax return preparer who files more than 100 tax returns in a calendar year (I prepare about 400) how does the government intend for me to file my returns electronically if I do not use tax preparation software to prepare tax returns? Will this requirement exempt those who do not use tax preparation software (like, I believe, New York State does)? Will the IRS provide free tax preparation software packages to all tax preparers? Or will the IRS provide a free online filing system at its website, much like the NJ Division of Taxation does with NJWebFIle?

Can anyone who has read the 130 pages of the Greenbook provide an answer to these questions?

* Returning to Peter Pappas - he gives us another blog list with “59 Tips for the Self-Employed” at THE TAX LAWYER’S BLOG.

No disrespect meant to Pete, but I am not surprised that a lawyer would list “incorporate” as #1. As a general rule lawyers often get a huge fee for having their secretary type up some proforma papers and selling a corporate “kit”. Incorporation is not always the best way to go for the self-employed – what is wrong with the one-man LLC. Incorporation involves a lot of extra, often unnecessary, paperwork and federal and state filings and corresponding expense. And, like marriage, it is a lot more expensive to get out of then it is to get into. Lawyers also love it because they make themselves the “registered agent” and charge an unnecessary annual fee for so doing.

Item #2 is a good idea if you have a more involved activity. I believe that it should read “Hire a good accountant” instead. And item #3 is unnecessary if you do item #2 as I have amended.

I do wholeheartedly agree with items #6, 8, 11, 13, 16, and 19 (although 19 and my #2 should be the same). And, of course, #42.

Why #10 – if your business, and home, is so suited. I would say it depends on the type of business. Working at home works for me.

Pete has a good point in another post – “My Rules: No 1”. I certainly can’t argue with his logic here.

* Roni Deutch provides some good advice and information in “Top 10 Tax Planning Tips for Families with Children” at her TAX HELP BLOG. Her #1 and #2 would certainly top my list.

* Joe Kristan informs us at the ROTH AND COMPANY TAX UPDATE BLOG that reality show idiot Richard Hatch (although calling someone who appears on a so-called “realty tv” program an idiot is redundant) “was released five months early on his 51-month tax evasion sentence for good behavior”.

Friday, May 15, 2009


* The Spring 2009 issue of the National Association of tax Professionals’ quarterly TAXPRO JOURNAL included an item on member comments on the tax provisions of the American Recovery and Reinvestment Act of 2009 (I was too busy preparing 1040s to submit my 2 cents worth – although I was asked to by the editor).
One recurring comment concerned the revisions to the First-Time Homebuyer Credit. To quote one member who seems to sum up the complaint of most participants, the credit, “as it has been revised, has left buyers from the previous law feeling cheated – not so much out of the additional $500 credit, but in the repayment provision.”
The poor schmuck who closed in December 2008 is royally screwed because he/she has to pay back the credit, while those who closed just days or weeks later get to keep the money as a gift from “Sam”!
* I had a chance to look over some of the 1040 proposals for 2011 included in BO’s “Greenbook” (this has nothing to do with the savings stamps of old given out by supermarkets – dating myself again).
It appears that the Obama Administration has no interest in simplifying the Tax Code. The Greenbook proposals only add more complexity and confusion.
The proposals continue existing and add new “refundable” credits – and therefore invite widespread tax fraud. First there was the refundable First-Time Home Buyer Credit, followed by BO’s Making Work Pay credit. And then the American Opportunity Credit refundable education tax credit, which the Greenbook makes a permanent replacement for the HOPE Credit. Now BO wants to revise the Retirement Savings Credit and make it refundable as well.
To get a refundable credit of $7,500 on the 2008 Form 1040 all a person had to do was fill out a form that did nothing more than ask “How much money, up to the maximum, do you want us to send you?” There was no additional information or attachments required, nor any need to separately sign off, under penalty of perjury, on the fact that one qualifies for the credit. I await the IRS statistics on the number of fraudulent Form 5405s filed.
I do agree that the American Opportunity Credit is a superior tax benefit to the HOPE credit, especially in expanding its potential recipients by increasing the income thresholds. And I also somewhat like the fact that the revised saver’s credit would permit depositing the credit directly to the retirement account that creates it - according to the Greenbook print-out the proposal “would provide for the credit to be deposited automatically in the qualified retirement plan account or IRA to which the eligible individual contributed”. As the print-out puts it, “Making the saver’s credit more like a matching contribution would enhance the likelihood that the credit would be saved”.
Here's a thought. If BO wants to give $2,500 to college students to help pay for the cost of tuition why not just make it a direct grant based on the FAFSA application instead of a refundable tax credit?
When will politicians understand that refundable credits are not good tax policy? Unfortunately such credits, like the disastrous rebate checks, provide a political benefit and will probably continue regardless of the cost.

Thursday, May 14, 2009


William Perez of WILLIAM’S TAX BLOG at “turned me on” to the article “The 5 Best Tax Changes We Won't See” by Bill Bischoff at

Here are Bill Bishoff’s five tax proposals -

· Stop Double-Taxing Social Security Benefits
· Eliminate ‘Refundable’ Tax Credits
· Get Rid of Deceptive Phaseouts
· Dump the Alternative Minimum Tax (AMT)
· Let Employees Deduct Health-Insurance Premiums

These are some pretty good proposals, Bill. I have been touting most of them for years now. Here is my 2 cents worth -

1) Bill says that Social Security is currently “double-taxed”. I suppose to some extent this is partially true. Here is a suggestion - Mandatory employee contributions to Social Security (and Medicare) are not considered “pre-tax” for federal income tax purposes, as are most employer pension plans (and health insurance premiums). So why not make the FICA tax paid by employees “pre-tax” – and the self-employment tax fully deductible – and treat Social Security benefit payments the same as any other pension distribution. I don’t think I have ever heard this proposed anywhere.

2) Bill hits the nail on the head when he says of “refundable” credits – “This is disguised welfare being laundered though the tax system. Plus, it encourages tax fraud.” I certainly agree with Bill when he says, “If Congress wants to create welfare programs without any monitoring, that’s a political decision. But they should dole out the payments in transparent ways, not by sneaking them through the tax system.”

3) If a tax deduction or credit is appropriate it is appropriate for all taxpayers and should be allowed for all. The phase-out of deductions and credits is just a back door way of raising tax rates. As Bill says, “If higher tax rates are deemed necessary, then politicians should raise them in a straightforward and transparent way.” He is again right on the money when he says, “Deception and lack of transparency make for horrible tax policy and, unfortunately, your elected representatives won’t change their behavior until you make them.”

4) Everyone hates the dreaded AMT. I can’t think of any politician in either party who publicly supports it as good tax policy. But yet it lives on. As I have said before, the existence of the dreaded Alternative Minimum Tax is a perfect example of the laziness of Congress. Instead of fixing the problems in the Tax Code Congress just created a “quick fix” by establishing an alternative tax system. And the dreaded AMT does not hit truly high-income taxpayers – none of my millionaire clients pay the tax – but middle and upper-middle class taxpayers. One reason that has been put forward as to why the Republicans are not in a great hurry to repeal this tax is that most of its victims are in high-income and high-tax “blue” states. The dreaded AMT must be destroyed!

5) Many taxpayers who pay for all or part of their health insurance premiums get to treat their payments as “pre-tax” if the employer has a “Section 125 cafeteria plan”. And self-employed individuals can deduct 100% of their health insurance premiums. So what not let employees whose payments are not treated as “pre-tax” on their W-2 also claim a deduction – so that all taxpayers are treated equally?

So what do you think about Bill’s “Big Five” tax change proposals?

FYI – any highlights in the above quotes are mine.


Wednesday, May 13, 2009


I just got the word -"Money Hacks Carnival #64 - As American As Apple Pie"is now up at MY LIFE ROI. The title was chosen because today, May 13th, is National Apple Pie Day.

My post HERE’S SOMETHING TO THINK ABOUT is way down near the bottom, listed under “Misc”.

There are a lot of interesting and helpful entries on the way to finding mine. Check it out.

My HSTTA post was also in yesterday’s “Carnival of Everything Money #14” at THE PENNY DAILY – although I did not receive an email so announcing. Here I am the very last entry – the sole entry under TAXES. Well they used to say if you can’t get top billing it is better to be last then buried in the middle.


Let’s face it – everyone loves, and wants, a tax refund!

And as a tax preparer, very few things give me more pleasure, at least during the tax filing season, then writing in the explanatory email or memo that precedes or accompanies a finished return, “Your Uncle Sam owes you tons of money this year!”

It is certainly better than beginning with “Oi vey!” or “Now don’t shoot the messenger”.

If everyone loves a refund it only follows that everyone hates paying their “uncles”.

For some the hatred is more deep seated than others. Some of my clients really hate to pay additional taxes with a passion. In their mind they paid more than enough during the year. They would rather get a refund of $1.00 than pay anything to Sam or Jon or Dave (over the years I have on occasion had a return with a refund of only $1.00 – in the old days of the NYC payroll tax if your refund was $1.00 you had to write a letter to the City and request they send you the $1.00).

However, from a strictly financial point of view, when it comes to taxes it is truly “better to give than to receive”. A tax refund means that you have made an interest-free loan to the federal, or state, government.

If you owe Sam, or your state, a balance due on your return that, by way of the various “safe harbor” rules, avoids a penalty assessment for “underpayment of estimated tax” it is you who have received an interest-free loan from the government. You have had full use of your money during the year!

Quite a few of my clients receive rather substantial refunds on purpose, and have been doing so for years. It is a form or “forced savings” - somewhat like a vacation club. They plan to use the refund to pay for their annual family vacation, or to make needed home improvements, or pay for college, or pay off credit card debt.

I, and they, know full well that if they had an extra $100-$200 in their pockets each week they would spend it – and not necessarily wisely.

And, considering today’s interest rates on temporary investments, just what would they earn on the money if they invested it each paycheck instead of giving it to Sam or Jon or Dave for “safekeeping”?
$10,000 invested at 1½% evenly throughout the year would earn about $75.00 in interest. As I said when reacting to BO’s $10-$13 per week in Making Work Pay Credit advance – “big whoop”! Even at 2% or 2½ % the earnings are certainly not impressive.

Back in “the day” when ordinary passbook savings accounts paid 5.25%, and short-term CDs paid more, the earnings was worthwhile – and I would recommend to clients that they have the excess withholding automatically deposited in a credit union account so it would not pass through their hands.

And during the Carter years, when interest rates even on money market accounts were double-digit, a refund was truly a sin.

But today this lost interest is a small price to pay for removing the temptation of having the money available for drawing upon during the year.
Wait - here’s a thought. Have you accumulated excessive high-interest credit card debt? Using the $100-$200 per week to pay down such debt is like getting a double-digit return on your money and certainly worthwhile. But, just like with using home equity borrowing to pay down credit card debt, this idea only pays if you do not turn around and build the credit card debt back up again.
So while I do, on occasion, point out that a large refund = making an interest free loan to the government, I do fully understand why clients choose to do so, and even encourage the practice.


Tuesday, May 12, 2009


A new “follower” on Twitter is fellow tax blogger Monica – “THE TAX CPA”.

She also writes the blog “CONFESSIONS OF A CPA” - a tax manager's thoughts on life in public accounting. However I have no interest in public accounting anymore (been there – did that), so only THE TAX CPA has been added to my list of daily blog wanderings.

Taking a cue from Peter Pappas’
THE TAX LAWYER’S BLOG Monica has published her tax philosophy “in a nutshell” in her post “Bias Disclosure”.

Here is her philosophy -

Everyone should pay their taxes. “Taxes are what we pay for civilized society.” (U.S. Supreme Court Justice Oliver Wendell Holmes). “Taxes, after all, are dues that we pay for the privileges of membership in an organized society.” (Franklin D. Roosevelt)

· No one should pay more than they are required. “The legal right of a taxpayer to decrease the amount of what otherwise would be his taxes, or altogether avoid them, by means which the law permits, cannot be doubted.” (US Supreme Court, Gregory v. Helvering, 55 S Ct. 266, 1/7/1935)

· Figuring out your taxes shouldn't be so hard. The average taxpayer should be able to figure out their taxes, since the average taxpayer has to pay them.

· Raising taxes won't fix all our problems. If we are to encourage innovation, industry, and entrepreneurship, we must let people keep most of their income

A pretty good philosophy, if you ask me. I have never actually sat down and written out my tax philosophy, but if I did it would certainly include the above items.

I would change the first item to read "Everyone should pay taxes". As I have blogged many times before, under BO about 50% of Americans will become “tax non-payers” (it was about 40% under GWB – so the blame is not limited). And many of this group will actually “make a profit” by filing a tax return - due to refundable credits like the Earned Income Credit. The Alternative Minimum Tax should be replaced with a “True Minimum Tax”. Every American should pay something – say at least $100 - in federal income tax.

The second item reflects basically what I do for a living – making sure that my clients pay the absolute least amount of federal, state and local taxes possible under the law for their individual situation.

One might think that item #3 is not in my best interest as a tax preparer. You might say that if the average taxpayer is able to figure out their own taxes then there would be no need for tax preparers. Not so.

As I have written in the past, I am not worried about how a simpler tax system would affect the tax profession. I do not believe that such a tax system would put me out of business, or even reduce my net income. I actually welcome such a tax system.
If I were to spend each day during the tax season preparing only 1040A forms I guarantee that I would bill more fees, spend less money, reduce my potential liability, and have less agita to deal with both during and after the tax season. While I obviously charge a higher fee for more complicated returns, I make less profit per hour on these returns. I honestly believe that a true 1040-SIMPLE form would increase both my efficiency and my bottom line.

I do not see my clients leaving me en masse to do their own returns if the system is simplified. A majority of my current clients are fully capable of preparing their own tax returns under current law. They come to me because they do not want to be bothered with the task of doing it themselves. Because my fees are reasonable it is easier, and more cost and time effective, to have me do it. Plus they want to be sure they do not miss anything.
While a flat tax system would include a great deal of simplification, there would still remain enough complexity in certain areas of the tax code to keep me busy. I expect I would still need to prepare some kind of Schedule C for business income, Schedule D for capital gains and losses, and Schedule E for rental and pass-through income.

As for the last item – like Monica I do not feel that the answer to all problems is to raise taxes. While everyone should pay their fair share I do not believe in a progressive tax system. Everyone should pay their fair share of taxes, but no one should be excessively penalized for being financially successful.

My philosophy would also contain some of the items included in the Tax Foundation in “Ten Principles of Sound Tax Policy”. Several of the principles are included in Monica’s philosophy. My philosophy would add these principles –

"2. Be neutral. The fundamental purpose of taxes is to raise necessary revenue for programs, not micromanage a complex market economy with subsidies and penalties. {The Tax Code should not be used to “redistribute” wealth - rdf}.

5. Stability matters. Tax law should be not change continuously, and tax changes Should be permanent and not temporary.
{No more need for temporary one or two-year extensions of tax benefits. If a tax deduction is appropriate it should be permanent. And no more need for an annual AMT fix. Fix it for good once and for all - rdf}."

So what is your “tax philosophy”?


Monday, May 11, 2009


In my experience most taxpayers who itemize and elect to deduct state and local income tax instead of state and local sales tax (and their tax preparers) usually deduct the full amount of state tax withheld and/or paid in the year withheld or paid and claim any refund as income on the next year’s return under the tax benefit rule.

For example, they would claim the total tax withheld on 2008 W-2s and/or 1099s on Schedule A of the 2008 Form 1040, and claim the refund from the 2008 state tax return as income on Line 10 of the 2009 federal income tax return.

This is done under the general rule of “when in doubt- defer”. It is better to pay tax on income next year than this year. You will increase the current tax year refund, or reduce the current year amount due. But this is merely a “loan” – as you must pay the tax savings back on the next year’s return.

However this action should not be automatic each year.

The reason is that a state tax refund claimed as income increases the taxpayer’s Adjusted Gross Income (AGI), and in doing so could negatively affect a multitude of deductions and credits.

For example –

* An additional $1.00 of gross income could mean the difference between a $4000 deduction for tuition and fees and a $2,000 deduction for tuition and fees, or a $2,000 deduction for tuition and fees and no deduction at all.

* The allowable Child Tax Credit will be reduced $50 for every $1,000 AGI exceeds the appropriate threshold amount.

* Because of the way Social Security and Railroad Retirement benefits are taxed every additional $1.00 of gross income could be taxed as $1.85.

In the first example above a $10 taxable state income tax refund could cost $500 in taxes to someone in the 25% tax bracket! In the second example the same $10 could cost the taxpayer $50. And in the third a $400 taxable refund would cost $111 in additional tax to someone in the 15% bracket and not $60.

If at all possible you should prepare the state income tax return first (easier to do in some states than others) and claim an itemized deduction for the actual amount of the current tax year’s state income tax liability instead of the total amount of state income tax withheld and/or paid via estimated tax. This way any state tax refund will not have provided a tax benefit.

Or more better - compare the actual current tax year’s state tax liability to the allowable state and local sales tax deduction, and if the allowable sales tax deduction is greater than the calculated liability, though not greater than the actual amount withheld or paid, claim a deduction for state and local sales tax.

You should keep in mind that if you are a victim of the dreaded Alternative Minimum Tax (AMT) for the current tax year you receive no tax benefit from deducting any kind of tax (or at the very least a reduced tax benefit – depending on the amount of AMT you pay), and therefore there is no, or a reduced, tax benefit from any state tax refund.

And only that portion of a state tax refund that provides a tax benefit is included in income. Let us say that a married couple filing a joint return claimed an itemized deduction of $4000 in state income tax withheld on their 2008 Schedule A. This brings the total deductions on the 2008 Schedule A to $12,300. The applicable standard deduction for 2008, including the additional $1,000 for real estate taxes paid, is $11,900 – so the tax benefit from the $4,000 state income tax deduction is only $400 ($12,300 - $11,900 = $400). If the 2008 state income tax refund is $650, only $400 is includable as income on the 2009 Form 1040.


Saturday, May 9, 2009


* First Bruce the taxguy announced, in a twit (or is that tweet) that he is too busy with other matters to continue regular blog postings. And now it seems that Gina Gwozdz of TAX TIPS BLOG is calling it quits. At least that is the impression I got from her latest post “New Tax Resources”.

Gina is not leaving us without her continued guidance. Her post provides links to search her blog archieves and FAQs, and to a new series “Tax Tip of the Week” on her website, for answers to your questions.

At least Bruce is not gone for good. He will post sporadically. A recent post joins fellow tax-bloggers in warning about the unintended consequences of BO’s “Making Work Pay Tax Credit”.

Gina’s was one of the first tax blogs I followed when I discovered the “tax blogosphere”. And I apparently was a kind of inspiration and mentor to Bruce when starting his blog.

* TAXGIRL Kelly Phillips Erb tackles the oft-asked question of whether a gift is taxable in her post “Ask The Taxgirl: Income Tax Consequences of a Gift”. Her answer starts off with, as I have posted in the past, the correct quick answer to just about any question you can ask about the taxability or deductibility of an item – it depends.

* Prof Jim Maule makes the perfectly sensible statement “Tax Law Ought to Make Sense
Jim is discussing BO’s recently proposed changes to the income tax rules applicable to international transactions. Most of these proposals deal with corporate taxes, and TWTP is generally limited to 1040 issues, but the concept applies to all tax law. BO has not been, in my humble opinion, correct in many of his 1040 proposals, but, as Jim points out, these changes do actually make sense and, a rarity in tax law, are actually fair.

Tax law really ought to make sense. And politicians should always put what is best for the country and its citizens first. And women should always mean yes when they say yes. And claims made about products in tv ads should always be true. And life should be fair.

But as long as the second of the above statements continues to be the opposite of what is true Jim’s, and my, hope will never be realized.

* Speaking of BO and taxes, it seems that he has created a real mucking fess with his MAKING WORK PAY credit.

Just about every tax blogger, and many personal finance bloggers, have posted recently about this disaster and the many unintended consequences of the revisions to the federal income tax withholding tables as a result of this credit. I do believe I started the ball rolling with my post “
The American Recovery and Reinvestment Act of 2009 – What’s New for 2009 – Part II” back at the end of April.

The bottom line is that taxpayers with more than one job, who are claimed as dependents, and who use the tax tables to determine federal income tax withholding from pensions and annuities should take a good look at how their withholding has changed as a result of the revisions and probably file a new W-2 or W-4P.

* Kay Bell discusses a long overdue tax proposal in her post “Capital Loss Deduction Increase Proposed” at DON’T MESS WITH TAXES.

Kay reports that Republican Sen. Orrin Hatch “has introduced a bill would increase the annual capital loss deduction from $3,000 to $10,000 and index the deduction for inflation”.

The current $3,000 maximum capital loss deduction has been in effect 1978! Hatch points out that "had this limitation been indexed for inflation back in 1978, the $3,000 limit would instead now be about $9,700."

Kudos to Hatch. It’s about time increasing the capital loss deduction limit was seriously discussed.

* CCH reports that “
Administration Proposes to Terminate Advanced Earned Income Tax Credit Program”. In 37 tax seasons I have never seen anyone who had an advanced EITC.

Now if only BO would consider eliminating the Earned Income Tax Credit itself!


Friday, May 8, 2009


I just checked my father’s bank account online and found that BO’s $250.00 “Economic Recovery Payment” (ERP) for both my father and mother were directly deposited yesterday (5/7).

So be on the look-out for these checks – so you can run out and save the economy!


Yesterday’s post discussed the “new and improved” First Time Homebuyers Credit.

I had several clients this past tax filing season who claimed the original credit – a married couple, a single taxpayer and two unrelated individuals who jointly purchased a residence. I did not have any clients who purchased in 2009 and claimed the credit on a 2008 return.

Below is a copy of the memo I included in the folder that I sent to these clients with their finished returns:

Dear Tax Client-

You claimed the “original” First-Time Homebuyer’s Tax Credit on your 2008 federal income tax return.

This is not a true tax credit – but in reality an interest-free loan from Uncle Sam. Because you purchased your home in 2008 you must repay the amount of the credit allowed.

The repayment will be made as an adjustment to your federal income tax return evenly over a 15 year period beginning with the filing of your 2010 Form 1040.

If you claimed the full credit you must increase your tax liability by $500 each year beginning with 2010. If you were not allowed the full credit the adjustment is less. For example, if your credit was $5000 your annual adjustment is $333.

If you stop using the home as your personal residence, i.e. the property is converted to a vacation home or rental property, all remaining annual installments become due on the return for the year that the use is changed.

If you sell your home before repaying the credit all remaining annual installments become due on the return for the year of sale. However, the repayment is limited to the amount of gain on the sale.

Let me know if you have any questions.

Those of you out there who claimed the credit on a 2008 home purchase – did your tax preparer, or tax software, provide you with a similar memo or explanation? Do you have any questions?


Thursday, May 7, 2009


The biggest tax break for 1040 filers in ARRA 2009 is the enhanced First Time Home Buyer Credit.

· The maximum amount of the credit has been increased from $7,500 to $8,000.

· The enhanced credit is available on home purchases which close between January 1 and November 30, 2009. Home purchases which closed in 2008 must follow the original rules for the credit.

· The allowable credit for personal residences purchased in 2009 does not have to be paid back, unless within 36 months of the date of purchase the property is sold or longer used as the taxpayer's principal residence (i.e. converted to vacation home or rental property). The "credit" for 2009 purchases is no longer an interest free loan from the government but an outright gift from Sam!

Many of the provisions of the “original” credit, enacted in the Housing and Economic Recovery Act of 2008 (see my post "
THE HOUSING BILL AND THE 1040"), remain the same.

· The home must be physically located in the United States. A home located in a U.S. Territory does not qualify.

· A “first-time homebuyer” is a taxpayer who has not owned another principal residence at any time during the three years prior to the date of purchase. According to the IRS website “a taxpayer who owned a principal residence outside of the United States within the last three years is not disqualified from taking the credit for a purchase within the United States.”

· The credit is phased out for Modified Adjusted Gross Income (MAGI) of between $75,000 and $95,000 for single filers and $150,000 and $170,000 for joint filers. To determine MAGI you must add excluded foreign income and deductions related to foreign income back to AGI.

· The credit is fully “refundable”. It is treated the same as federal withholding or estimated tax payments on the Form 1040 (or 1040A).

· You can elect to claim the credit for a 2009 home purchase on your 2008 federal income tax return.

· The amount of the credit that must be repaid if the home is sold is limited to the gain on the sale of the property. When determining the gain you must reduced the “adjusted basis” of the home by the amount of the credit claimed. The repayment must be made in the year of the sale.

If you purchased a home in early 2009 and had already filed your 2008 tax return to claim the old $7,500 credit you can amend the 2008 return to claim the additional $500 credit.

According to the IRS, “You can not claim the credit in anticipation of a purchase that has yet to happen. Until you have finalized the purchase of your home, which for most purchasers occurs at the time of the closing, you do not qualify for the credit.”

A principal residence that you build also qualifies. The IRS tell us that “By statute, a residence which is constructed by the taxpayer is treated as purchased on the date the taxpayer first occupies the residence” – so the credit cannot be claimed until you actually move in.

In the above two instances once you close on or move into the home you can file an amended 2008 return to claim the credit.

For more information on the enhanced, and the original, credit you can go to the IRS website First-Time Homebuyer Credit page and check out my post on “


Wednesday, May 6, 2009


I just purchased 6 raffle tickets for the annual Theatre Development Fund raffle. I participate every year. TDF offers some great prizes, including the Grand PriZe of a pair of tickets to five Broadway shows during the “season” (it used to be every show opening during the season).

TDF is a qualified charitable organization to which contributions are tax deductible.

However the cost of my 6 raffle tickets is not deductible as a charitable contribution on Schedule A – even if I do have a hard copy receipt from TDF for my payment as well as documentation via a credit card statement.

By purchasing a raffle ticket from TDF, or any church or charity, I am not making a voluntary charitable contribution to the organization. I am gambling. I am purchasing the chance to win one of the 50 prizes offered by TDF. It is exactly the same as purchasing a NJ Lottery. By purchasing a lottery ticket I am certainly not making a contribution to the Treasury of the State of New Jersey (the last place that I would voluntarily contribute money is the Treasury of the State of New Jersey – NJ politicians are fat enough on graft and pork as it is!).

Many of the lists of charitable contributions, or receipts for charitable contributions, that clients provide me with each tax season include the cost of raffle or 50-50 tickets for their church or a charity. If they itemize I do not include these amounts in the deduction claimed for charitable contributions on Schedule A.

The cost of a raffle ticket may be deductible as a gambling loss if you are also reporting gross gambling winnings on Page 1 of your 1040. Gambling losses, only to the extent of gambling winnings, are deductible on Schedule A as a “miscellaneous” deduction - not subject to the 2% of AGI exclusion.

So if I win $1500 in the slots at Atlantic City I can deduct the $25 I paid for my 6 TDF raffle tickets as a gambling loss on Schedule A. But, to repeat, I cannot deduct the $25 as a charitable contribution.

In addition to purchasing raffle tickets I also make a contribution to TDF as part of their annual fund-raising campaign. I pay by check or via credit card charge. This payment is deductible.
Speaking of both Broadway and gambling - the TONY Award nominations have been announced. HAIR has received 8 nominations including Best Revival of a Musical.
I have tickets for HAIR for the Saturday evening before the TONY presentations. Each year I attend a Broadway show with friends on the Saturday night before the TONY show - and each year for the past few years the show I have seen on Saturday night, or a performer from the show (or both), has won a prominent TONY Award on Sunday night - for example GYPSY, PAJAMA GAME, CURTAINS to name the most recent winners.
Anyone out there willing to take my bet that HAIR will win as Best Revival of a Musical?

Tuesday, May 5, 2009


Again a day late, but again certainly not a dollar short, is the latest Tax Carnival from Kay Bell at DON’T MESS WITH TAXES – “Tax Carnival #53: Cinco Tax CelebraciĆ³n”. Kay comments that “after a few Margaritas, even the Internal Revenue Code is a fun read!”

With that in mind the Carnival starts off with a laugh – “Dear IRS” from Mad Kane's Humor Blog.

As has been the case with the last few Carnivals there are some new entrants this time around. I recommend that you check out the following carnival entries -

* “Claiming a Parent as a Dependent on a Tax Return” from My Wealth Builder, and

* “Don’t Forget To Make Your Estimated Tax Payment For Self Employment Income!” from Bible Money Matters.


The tax professional community was truly pleased when the annual dreaded Alternative Minimum Tax (AMT) “patch” was passed as part of ARRA 2009 in February. We would not have to wait until the last minute to see if many more of our clients would be falling victim to the dreaded alternative tax – or be faced with unnecessary delays in processing tax returns next tax filing.

The only downside is that early passage of the patch meant that Congress would not be dealing with the issue of doing away completely with, or substantially reforming, the dreaded ATM in 2009. Once again Congress took the easy and lazy way out. We can only hope that when the Tax Code is completely rewritten in 2010, as many of us expect it will, the dreaded AMT is finally put to rest.

As has been the custom with the annual AMT patches the exemption amounts are slightly increased. For 2009 the exemption amounts are –

· $70,950 for married couples filing a joint return and surviving spouses,
· $46,700 for Single, and Head of Household, filers, and
· $35,475 for married taxpayers filing separate returns.

The fix also extends and expands the ability of taxpayers to claim personal tax credits against the dreaded AMT.

CCH reports that the 2009 patch will keep about 26 Million taxpayers from falling victim to the dreaded AMT.

ARRA 2009 also excludes from taxable income up to $2,400 of unemployment compensation benefits received in 2009 only. Surprisingly there is no income limitation and no phase-out based on AGI or MAGI. So if you receive $2,200 in unemployment benefits in 2009 these benefits are totally tax-free. If you receive $3,000 in benefits only $600 will be taxed.

Historically unemployment compensation was always exempt from federal income tax. It first became partially taxable in 1979 and eventually became fully taxable, regardless of one's level of income. When it was first taxed my mentor Jim Gill and I said to each other, “the next thing you know they are going to start taxing Social Security.” And guess what – Social Security benefits became partially taxable in 1984!

The “stimulus bill” also increases the Earned Income Credit, the biggest federal welfare program, for working families with three or more children and extends the availability of the credit for married couples by increasing the beginning point of the phase-out for tax years 2009 and 2010. Also increased for tax years 2009 and 2010 is the “refundable” portion of the Child Tax Credit. So look for increased tax fraud on 2009 and 2010 returns.


Monday, May 4, 2009


An “above-the-line” deduction for state and local sales tax or excise tax imposed on the purchase of a new “qualified” motor vehicle was a last minute addition to ARRA 2009.

This deduction will apply to sales or excise tax paid on a new passenger automobile, light truck or motorcycle with a “gross vehicle weight” of 8,500 lbs or less, or a new motor home, for which the original use begins with the taxpayer. It obviously does not apply to used cars. It is effective for purchases made from February 17, 2009 (the date of enactment of ARRA 2009) through December 31, 2009. Both domestic and foreign vehicles will qualify.

The deduction is limited to the taxes paid on the first $49,500 of the purchase price. So for a car purchased in New Jersey the maximum deduction will be $3,465 (7% of $49,500).

No surprise – there is a phase-out range. It is “modified” AGI from $125,000 to $135,000 for single taxpayers and $250,000 to $260,000 for joint filers.

Taxpayers still have the option of claiming either state and local sales tax or state and local income tax as an itemized deduction on the 2009 Schedule A. You can claim the total actual sales tax paid for the year based on documentation or an amount from the Optional Sales Tax Tables based on your state of residence, income level, and number of exemptions plus the actual sales tax paid on the purchase of an auto, truck, motorcycle, motor home, boat, airplane, or materials to build a home.

However if you elect to deduct state and local income tax you cannot also claim an above-the-line deduction for sales tax on a new car.

As with any situation where you are given a choice you should calculate your tax liability in both scenarios (above-the-line sales tax deduction and state income tax deduction and deducting state and local sales tax on Schedule A) and choose the option that provides the greatest overall federal, state and local income tax savings.

You should keep in mind that if the new car deduction is truly allowed “above-the-line” it will reduce your AGI and therefore has the potential for providing numerous additional “back door” tax savings.

On the other hand, the new car deduction is phased out based on income, while the itemized deduction for state and local sales tax has no income limitation (other than the normal “read my lips” reduction of total itemized deductions).

Will this new deduction cause Americans to run out en masse and purchase expensive new cars? I doubt it. But if you have been thinking about buying a new car anyway in the near future you should do so before the end of 2009 so you can get the tax benefit.

As with any decision that involves tax considerations remember that taxes are only pennies on the dollar. While tax consequences should certainly be considered, financial consequences take precedence. Don’t let the “tax tail wag the economic dog”.


Saturday, May 2, 2009


Again a paucity of BUZZ this week.
* provides “10 Things the IRS Won't Tell You”.

* Some good news this past tax season as reports that “H&R Block Prepares Fewer Tax Returns This Year”. Unfortunately it did not hurt Henry and Richard’s pockets, due to “higher average fees”.

* I recently reported on the upcoming NJ State Tax Amnesty Program. Kay Bell reports on other scheduled state tax amnesties in “Owe State Taxes? Check Out Amnesties” at DON’T MESS WITH TAXES.

* Williams Perez correctly answers a much-asked question in his post “Can Freelancers Write off the Value of Time for Charity?” at WILLIAM’S TAX PLANNING BLOG (

He also points out why it is “more better” for a freelancer to donate his/her time than to charge the charity for the services performed and then turn around and donate the fee back to the organization.

* Peter Pappas of THE TAX LAWYER’S BLOG reports that “Senate Adopts Obama Budget, $750 Billion of Tax Cuts Included”.

Pete points out that the budget includes an extension of the 10% bottom income tax bracket, the child tax credit, marriage penalty relief, education incentives, and all of the other 2001 and 2003 GWB tax cuts, but, as BO had promised, only for those families making under $250,000.


Friday, May 1, 2009


Yesterday, as part of my continuing series on the American Recovery and Reinvestment Act of 2009 (ARRA 2009), I discussed the new “American Opportunity Tax Credit” (AOTC), which replaces the HOPE Education Tax Credit for tax years 2009 and 2010.

Today I would like to bring you, as a supplement to yesterday’s discussion, some reminders of the HOPE carryover rules that will continue to apply to the AOTC.

Continuing for 2009 and 2010, in the case of both the American Opportunity and Lifetime Learning education credits and the “above-the-line” deduction for tuition and fees the amount of qualified tuition, fees (and with ATOC required course materials) paid must first be reduced by 100% of all tax-free scholarships, fellowships and grants, employer-paid educational assistance, veteran’s education benefits, and any other nontaxable payments (other than gifts or inheritances) when determining the expenses eligible for the credit or deduction

In addition to tuition, fees and course materials in many cases the cost of attending college includes room and board, either on-campus or off-campus. Scholarships, grants, fellowships, and assistance payments are not allocated between qualified (tuition and fees and perhaps materials) and non-qualified (room and board) education expenses. To repeat, these payments are applied 100% first to qualified tuition, fee and material expenses.

Say your son’s total qualifying tuition and fees for the year is $10,000, and you pay $5,000 a year for room and board. If he receives a scholarship for $7,000 only $3,000 is eligible for a credit or deduction ($10,000 - $7,000 = $3,000). If you receive a scholarship of $12,000 then you are not eligible for any credit or deduction ($10,000 - $12,000 = $0.00).

In this situation qualified expenses paid from student loans do not affect the availability of the credit or deduction – regardless of whose name the loan is under. Monies from student loans, gifts from or payments made by relatives, and payments made from the student’s own funds are all considered to be payments made by the taxpayer(s) claiming the credit, which in most cases are the student’s parents.

FYI, expenses qualifying for tax-free distributions from a Section 529 “Qualified Tuition Program” include required books, supplies and equipment and “reasonable” room and board costs.
You also cannot “double-dip”. You cannot claim an education credit or tuition and fee deduction for qualifying expenses paid for by a tax-free distribution from a Coverdell Education Savings Account or a Section 529 plan. You cannot claim a Deduction for Tuition and Fees if an education credit is claimed for the same student.

Any questions?