Friday, April 30, 2010


The tax season is over - to which I once again exclaim a hearty Thank God! You have sent in your return with check, or are eagerly awaiting your refund.

Now is the time to look back and learn from this year’s 1040 filing so that you can make next year’s process less taxing.

Did you get too big a refund? You should revise your withholding at work so that less is withheld.

While everyone loves, and hopes for, a big refund, from a strictly financial standpoint when it comes to your tax return it really is better to give than to receive.

Getting a refund, especially a large one, means that you made an interest-free loan to the government. If you want to loan money to Uncle Sam buy Savings Bonds or Treasury Bills.

Interest rates on deposit accounts these days are truly pitiful, and I certainly sympathize with clients who use tax withholding as a kind of “forced savings” or “vacation club”. I also know that if many of my clients got an extra $100 in their paycheck each week it would be gone before the next one arrived. But there are alternatives.

If you belong to credit union at work have the additional amount of your pay directly deposited to your account. Credit unions often pay more than banks. Or you can increase your employee contribution to a pension or thrift savings plan. This way the extra $100 never finds its way into your hands.

You can have the additional money directly deposited to a ROTH, if you qualify, or traditional IRA account.

Another good idea is to use the increased in take home pay to pay down a credit card balance. With finance charge rates as high as 20+% this is truly a good return on your investment.

Did you have a large balance due on your 2009 Form 1040 (or 1040A)? You should revise your withholding at work so that more is withheld.

While it is ok to owe your “uncles”, as long as you have the money set aside, there comes a point when you may be penalized for owing too much. The IRS and the states could charge you a penalty for “underpayment of estimated tax”.

On the federal level you could be subject to a penalty for underpayment if you owe at least $1,000.00. To avoid the penalty you must have either 90% of the current year total tax liability (Line 60 on the 2009 Form 1040), or 100% of the prior year’s total tax, paid in during the year either via withholding or quarterly estimated tax payments. If your 2008 AGI was over $150,000 - $75,000 if filing separately – you must have 110% of the 2008 total tax paid in for 2009 to be covered under the “safe harbor”. The state may have different safe harbor rules.

The penalty for underpayment of estimated tax is calculated on a quarterly basis. Withholding is considered to be made evenly throughout the year – even if more is withheld at the end of the year. If your total federal income tax withholding for the year is $10,000 it is assumed by the IRS that $2,500 was withheld each quarter, even if $5,000 was actually withheld from January through September and $5,000 from October through December.

So, if the total tax liability on your 2009 Form 1040 was $10,000, the safe thing to do is make sure that for 2010 you have $10,000 in federal income tax withheld from your various sources of income.

To change your withholding you must fill out a new Form W-4 and give it to your employer. To have less withheld you increase the number of withholding exemptions (i.e. go from Married-1 to Married-3). To have more withheld you would decrease the number. If you are married you can have more withheld by claiming “Married but withheld at higher Single rate”.

You can try to avoid or reduce the penalty for underpayment, if charged, you can “annualize” your income to show that a larger portion was received late in the year. If you sold an investment or property for a huge gain in October your penalty would be calculated on one calendar quarter.

If you choose to pay quarterly estimated taxes you can download the 2010 Form 1040-ES at the IRS website.

The IRS website also has a W-4 Calculator. And you can go to and use the free Salary Paycheck Calculator or Hourly Paycheck Calculator to review various withholding scenarios.

If you got a refund from Sam but owed your state you may be able to file a separate state Form W-4 to change only the state withholding.

More lessons to follow.


Wednesday, April 28, 2010


As I said in a previous post I missed the wit and wisdom of my tax blogging colleagues during my filing season hiatus. It was good to get back to my internet wanderings.
* Joe Kristan provides another example that the “Turbo-Tax Defense” – aka the “Geithner Defense” does not work in Tax Court in “Garbage In – Garbage Out” at the ROTH AND COMPANY TAX UPDATE BLOG.

The bottom line, as Joe puts it – “just because TurboTax lets you put capital losses on Schedule C doesn't make it right”.

* Trish McIntire reminds us that “You have one week left to take advantage of the First Time Homebuyer's Credit. Then it is gone - hopefully, forever gone.” in her post “Last Chance – Final Week” at OUR TAXING TIMES.

As usual, Trish makes some good points in her post –

- “There have always been people who have cheated on their taxes but now there seems to be a cottage industry in tax fraud. The frauds which gain the most attention, and are the most lucrative, are based in the credits. Inflating Sch A deductions could get a taxpayer more of their own money back, but the refundable credits let you tap into other people's money for a big take.”

- “If Congress insists on using the tax system to social engineer, they need to approach new credits and deductions from a cheater's point of view. Then ask what needs to be built into the law to deflect some of the fraud.”

- “Even if there is little chance of fraud, Congress needs to think a law through. Not just benefits and administration but who is it going to hurt. Collateral damage should not be a tax term. If you doubt me, ask all the people who got hurt by the Making Work Pay Credit.”

* Professor Nellen ended the tax season with two interesting posts on April 14 and 15 – “Time to Demand a Simpler Income Tax System” and “Signs of Tax System Problems - Serious Ones!” at 21st CENTURY TAXATION.

I agree with her when she says –

“. . . the federal income tax will only get simpler if we honestly demand it of lawmakers. They have no incentive to do it on their own. I think the public has come to expect and perhaps admire politicians with campaign promises of new tax breaks. Such breaks just complicate the system and usually are not needed. A lower rate without the special tax breaks would be a lot easier and save us a lot of time and money preparing returns and keeping records.”

* Jean Murray provides a brief overview of the Value Added Tax (VAT) in “Is a European-Type Value Added Tax Coming to US?” at Jean's Business Law / Taxes: U.S. Blog.

FYI – I am against a VAT.


Tuesday, April 27, 2010


Turn-round time was a few days during the first two weeks of the tax season. Returns received from February 14th on were generally completed within two weeks, expanding to three weeks as the month ended. But those received in March had an average 4-week turnaround time. I did, at least at first, attempt to maintain a FIFO – first-in, first-out – system of preparing returns, but things got hectic in March and I did not keep good track of when returns were received. I need to work on developing a better system for next year. I did manage to again stay “on top” of “red files” (needed more information), completing the returns as the missing information was received.

I strictly enforced my “read my lips – no new clients” policy.

Because of the season-end problems I had to extend more returns than usual. This included a number of returns received in early March that under normal circumstances would have been completed on time. Once again all returns received in February were completed.

However, as planned, while April 15 and 16 were totally 1040 free (I do not work on April 15th) I did begin on the GD extensions on April 17th and worked through the 24th, getting, I am pleased to say, a good number completed and in the mail. As of this writing I have 34 GDEs in the box, 6 of which are for clients who have either not sent me anything at all yet or who are waiting for additional info from a 3rd party.

I began my post-season recuperative visit to the Jersey shore on Sunday, and will be away through Thursday.

As for the great “Garden State” of New Jersey . . .

I am required by state law to submit all my full-year resident NJ-1040s “electronically”, unless the client chooses to “opt-out” by signing a form. As I do not used flawed tax preparation software, and am not a federal ERO (electronic return originator) my only option is to submit my returns via the free online NJWebFile system offered by at the NJ Division of Taxation.

NJ state tax law changed slightly for 2009. Taxpayers with NJ Gross Income between $150,000 and $250,000 had to limit their property tax deduction to $5,000 – half the usual maximum. Those with incomes over $250,000 got no deduction, although they could claim a $50.00 property tax credit.

In the past, while there were various situations where I could not use NJWebFIle, there was never any income limitation to cause me to file manually. At the beginning of February while entering the information for a married couple with NJ income in excess of $150K I received an error message that said I could not continue to use NJWebFile for the client because their gross income was over $150,000.

The State of New Jersey was too lazy, or more properly too cheap, to pay someone to revise the NJWebFile software to reflect the change in the state law. I thought that NJ wanted everyone to file electronically to cut costs. What idiots!

Another new item on the New Jersey state front for 2009 was adding a payroll deduction for “Family Leave Insurance” contributions, similar to the SUI and SDI withholding. As with the SUI and SDI there is a per worker maximum contribution.

For many years now NJ workers who pay more than the maximum SUI or SDI due to multiple employers can receive a refund of the excess contributions as part of their NJ-1040 via Form 2450. The maximum NJ Family Leave Insurance contribution for 2009 was $26.01. However the Form 2450 was not revised to include excess FLI contributions. Employees who have paid too much into the FLI fund because they had more than one employer during the year must file a special form separately with the Department of Labor to get a refund of the overpayment.

Because the amount of potential excess FLI contribution is relatively small I expect that 99% of those who overpay will not take the time to get and submit the necessary separate form. It is hardly worth the effort to get a $3.00 to $10.00 check from Trenton. It certainly does not make sense to pay me, or any tax pro, to prepare this form – the fee would eat up all of the potential refund. But if the refund request were a part of the Form 2450 just about everyone who overpaid would get their money back.

I do seriously believe that the DFBs in Trenton did this purposely – so they could keep the excess contributions in the state Treasury to use for continued political pork. A $3.00 - $6.00 refund may not seem much to the individual worker, but multiply this by the tens if not hundreds of thousands of workers who have overpaid and it adds up.

And, oh yes, this tax season the NJ Division of Taxation decided not to make copies of the NJ-1040 package, with instructions, forms and a payment voucher, available at local Post Offices or the IRS office. Oh course this was the year that I was forced to file more manual returns than usual. I have to purchase blank NYS forms from Albany, and will probably soon also have to purchase blank NJ forms from Trenton.


Monday, April 26, 2010


Once again – THANK GOD IT’S OVER!
This was my 39th tax filing season.
It seems that each tax season in the past few years has had a “gimmick”. Like the telephone excise tax refund and the two George W “stimulus” rebates. This season’s “gimmick” was BO’s “Making Work Pay” credit, with its accompanying unintended problems resulting from screwing around with the withholding tables.

I did see several occasions where retirees and dependents were under-withheld due to the FU – although not to the extent that it would cause the assessment of underpayment penalties (which I can get abated anyway if assessed because of the FU).

This “gimmick” apparently caused much confusion among taxpayers - and apparently at the IRS also. A few of my clients have told me that their 2009 refund was reduced by $250 and attributed to the MWP Schedule M. I have yet to investigate the individual returns to see where the IRS, or possibly I, went wrong.

On occasion I have found a “theme” in a particular tax season. One year when I still had the storefront office it seemed that every third person in the door had won something in the lottery or a raffle. A few years ago just about every homeowner refinanced a mortgage at least once during the year. I also noticed a “theme” this season – death.

Between January 2009 and the end of the season last week the Grim Reaper took far too many of my clients, several of them personal friends as well. I “inherited” close to 75% of my current clientele from my mentor - who had been in practice about a dozen years before I did my first 1040 for pay - and many of these clients had been with JP for 30-40 years before continuing on with me at his retirement. So I do have many elderly clients. But not all of the passings were due to advanced age. Several were victims of cancer.

My family did not escape GR’s touch. As many of you are aware my mother passed last April (after the tax season ended) and my father went to his final audit on New Year’s Day 2010 (before the tax season began).

GR took a lot of good people in 2009 and early 2010. I hope he balanced the scales a bit by also taking some not-so-good ones as well.

And each year something goes awry that forces me to take valuable time away from 1040 preparation. This year it was my GDMFPOS computer – on two occasions. In mid-season the thing was so damned slow as to be inoperable – but was fixed by a long-time friend and client. And then during the heavy rains at the end of March both the phone, which is through the internet via VONAGE, and internet access went down. I was eventually able to get the phone working again – which indicates that my actual connection was working – but still could not access the internet.

While it is a known fact that I am proud to do all my returns by hand – I have never in 39 seasons used tax software to prepare a 1040 – I still heavily rely on the computer in my practice. The internet is invaluable – to download federal and state forms, to research stock basis and other preparation issues, to email clients with questions, to receive faxes (I get my faxes via email and special software), to submit NJ returns online via NJWebFile, and so on. I could do none of this at my home office during the last three weeks of the season – the absolute worst possible time – and had to rely on the public computer at Global Mail for an hour at least every other day to get some of the more important stuff done.

Of course I did not want to enter the personal financial information necessary for online filing of NJ returns via NJWebFile on a public computer. So all NJ-1040s prepared in the past 4 weeks have been done “the old-fashioned way” – by hand. But all of them were not done manually due to the inability to access the internet – more on this later.

I finally scheduled COMCAST to come to my home/office to get me back online last. I thought I would have to sacrifice my VONAGE telephone service - I would rather have no phone and internet access than no internet access and a working phone – but the service person was able to fix it so I continue to have both.

I also lost some 1040 preparation time this season due to my daily week-day tax tip column at The internet inaccessibility also caused this to take more time during the last weeks. Next year I plan to write and submit just about all of my column entries in January – before the season actually begins.

I didn’t have many home-buyers – either “first-time” or “long-time” – claiming the $8,000 or $6,500 credit this season. There have only been 2 so far – one a 2009 purchase and one a 2010 purchase – both “long-time” homeowners.

I did have many clients who were able to claim BO’s new American Opportunity Credit for college tuition. Several were able to get a bigger tax benefit than had been available in the past - $2,500 maximum “in pocket” instead of $2,000 – and some whose income had always exceeded the AGI phase-out or elimination limits for either a credit or deduction were able to finally get some tax relief. A few benefited from the “refundable” portion and others were able to use books and materials to increase the credit amount.

A few clients took advantage of the special sales tax deduction on new car purchases – either as an additional standard deduction or an itemized deduction in addition to state and local income taxes.

I also had several clients who, whether on purpose or just by luck, took good advantage of the 0% tax rate on long-term capital gains on the sale of investments, real estate and, in one case, a business. These clients paid absolutely no federal income tax on $20,000+ to $50,000+ of capital gains! I don’t know how much longer this special rate will be around.

I had some real surprise “early birds” this season – pleasant surprises indeed. But at the same time many clients continued to be forced to wait until mid-March to send me their “stuff” due to late mailing of brokerage-related 1099s and, still common, corrected brokerage 1099s.

To be continued . . .


Friday, April 23, 2010



The tax filing season is over and I took a few days much-needed and well-deserved rest. Now I am working away on the GD extensions, and back at my computer eager to resume posting to THE WANDERING TAX PRO.

I have missed the wit and wisdom of Kay, Kelly, Mary, Monica, Stacey, Bruce, Jim, Joe, etc, and am glad to be back to wandering the web. I promise to have a WHAT’S THE BUZZ entry up soon.

I am a bit late in my return to blogging because for the past 4+ weeks I have been unable to access the internet on my office computer. COMCAST came this morning and fixed me – so here I am.

I hope you followed my daily week-day tax tips column at during the tax season hiatus. That series has ended, but I will continue to contribute tax-related items to during the “normal” year, and will let you know when these items appear.

And did you see my interview at

Before I embark on my annual review of the filing season I want to voice my agreement with the editorial in last Friday’s USA TODAY.

Titled “When 47% Don’t Pay Income Tax, It’s Not Healthy for USA”, the editorial responded to a report by the Tax Policy Center which estimated that 47% of Americans are “non-taxpayers”, at least when it comes to the federal income tax. This is up from the approximately 38% during the Bush years.

USA TODAY rightfully points out that “the fact that 47% pay no income tax is nonetheless disturbing – not for what it says about the nonpayers but for what it says about the nation’s broken tax system and how hard it will be to fix it”.

The editorial tells us that the fault does not lie with the non-payers. “The people who pay no income tax aren’t freeloaders or evaders; virtually all are simply doing what the law allows. That there are so many of them is the result of decades of deliberate, bipartisan tax policy.”

I have no absolutely no problem with my clients, or any other American, taking full advantage of all the exclusions, deductions, credits, and loopholes in the current Tax Code, and gladly assist them in doing so. My problem is with the cafones in Washington who write the Code.

I agree with the editorial when it says - “It’s not healthy for society if somewhere between a third half of all potential tax filers don’t help share the cost of most of government, from defense to highways to national parks. Everyone above the poverty level should have at least a minimal stake in financing the nation.”

I have been saying for some time now that we should replace the dreaded Alternative Minimum Tax with a true “Minimum Tax” – every American citizen above the age of 18 who is not a full-time student should pay a minimum tax of $100.00.

USA TODAY hits the nail on the head when it observes – “The fact that so many people have no income tax liability is a reflection of a leaky, dysfunctional tax system. The code is absurdly complex. . . It’s riddled with loopholes and excessive social engineering. It’s undermined by spending programs that masquerade as tax credits. It even fails at its basic function of raising revenue, taking in barely $1.00 for every $2.00 the government spends.”

Please check out my post “THERE HAS GOT TO BE A BETTER WAY!” for a detailed review of my thoughts on the matter.


Thursday, April 15, 2010


1040S NO MORE.

Coming Soon - the return of the Wandering Tax Pro!