Thursday, May 26, 2011


I heard on Jay Leno last night that Donald Trump discussed his best orgasm in an interview with Rolling Stone magazine. I do believe it occurred while he was watching a taped episode of THE APPRENTICE.

Needless to say perhaps the very last thing anyone, except the Dumpster himself, would be interested in reading about is Tronald Dump’s orgasms! What an idiot!

While I have you – FYI I will be locked away working on the GD extensions for the rest of the month. No posts and no tweets.

“Talk” to you in June!


Wednesday, May 25, 2011


Over at DON’T MESS WITH TAXES Kay Bell tells us that “House Panel to Examine Improper Refundable Tax Credit Payments

2011 is the year of finding every possible penny of revenue. As part of that effort, the House Ways and Means Oversight Subcommittee is today looking into refundable tax credit payments that shouldn't have been made.”

As Kay points out we are talking about the Additional Child Tax Credit, the American Opportunity Credit, the Earned Income Credit, the First-Time Home-Buyers Credit, and the Making Work Pay Credit. Reports by TIGTA (Treasury Inspector General for Tax Administration) and other agencies and organizations have proven that the administration of these credits has resulted in billions of fraudulent payments annually.

Kay quotes Republican Rep. Charles W. Boustany, Jr., chairman of the Oversight Subcommittee, as stating "Rampant abuse and misapplication of these credits has cost taxpayers an estimated $106 billion."

The biggest offender in the pack is the Earned Income Credit. Kay tells us -

The Government Accountability Office reported that in 2010, the Earned Income Tax Credit was the fourth largest source for improper payments among all federal government programs, with an estimated $16.9 billion in improper payments.”

I have been saying for years, and had reiterating here last week, that, while the reasons behind some of these credits may be good, they should be taken out of the Tax Code and more properly administered as direct payments through the appropriate government agencies.

I look forward to reading more about this hearing – and will report back to you on it in future posts.


* Over at KIPLINGER.COM Jane Bennett Clark explains that defaulting on your student loans can ruin your financial life and shows how to repair the damage in “The Dark Side of Student Debt”.

* As a result of a “tweet” I discovered the American Society of Tax Problem Solvers (ASTPS), a national, not-for-profit organization of Attorneys, CPA's, and Enrolled Agents specializing in representing taxpayers before the IRS. Non-licensed professionals hold an associate membership with the society. Taxpayers can use the ASTPS website to locate a qualified tax resolution specialist in their area, and tax professionals can take advantage of the Society’s education program.

ASTPS is a member of the newly created Tax Problem Resolution Services Coalition (TPRSC), which was formed to promote and ensure the protection of taxpayers from unfair and deceptive advertising claims by unscrupulous delinquent tax debt representation providers (i.e. “pennies on the dollar” claims). They seek the enactment of legislation to rein in questionable practices, create more disclosure, cause greater transparency of services, and provide redress for taxpayers.

While I certainly assist my clients in audits of returns I have prepared I do not offer “problem resolution” services to the public.

* The ASTPS site has a good monthly newsletter of general tax information for taxpayers under the “Public Area” section. The May issue includes an item on 2011 tax info titled “
Check Out Exemptions and Deductions for 2011”.

* This week’s Monday Map at the Tax Foundation’s TAX POLICY BLOG compared “State Corporate Income Tax Rates”.

The map shows the top marginal state corporate income tax rate in each state. Topping the list with the highest tax rates is Iowa at 12.25%. Of course New Jersey is up there at 9%. For some states, like Nevada, the rate is “None”.

* At BLOOMBERG.COM Sara Forden and Jeff Bliss report that “H&R Block Sued by U.S to Stop TaxAct Deal”.

The (US Justice) department claimed in an antitrust complaint filed today in federal court in Washington that the deal would eliminate a company that has competed aggressively with H&R Block and ‘disrupted’ the U.S. digital do-it-yourself tax- preparation market through low pricing and product innovation.”

The Justice Department believes, I expect rightfully so, that “the principal purpose of the transaction was to eliminate a competitor”.

* Kay Bell shows us “How To Help Minneapolis, Joplin (and other) Tornado Victims” at DON’T MESS WITH TAXES.

* Beancounter Dona Bordeaux proves that “brevity is the soul of wit” with her post “
Hate Tracking Mileage? There’s An App For That”. The post basically links to a page that lists and describes mileage tracking “apps” for your iphone.


Saturday, May 21, 2011


* A tweet from an IRS employee twit reminded me that “You can check the status of your 2010 IRS tax refund on the IRS website”. If your federal refund is late in coming don’t call or email your tax preparer with a “Hey, Dude. Where’s my check?”! Go to the IRS website’s “Where’s My Refund” feature.

Before calling check your return to see if direct deposit was requested. If you request direct deposit of your federal, and/or state return, you will not receive any notice from the government or the bank that the money has been deposited – it will just show up in your account. Check the bank statement.

Most states also have a process for checking on the status of a refund. I get more queries from clients about state refunds than federal refunds. NJ does not provide an online status check, but has a phone number to call. If your state refund is late go to the website of your state’s Department or Division of Taxation or Revenue to find out what to do.

* Donna Bordeaux, who counts beans with her husband Chad, asks the question “What Do You Do With IRS Notices?” and discusses three possible answers.

Of the 3 possible answers she discusses I certainly agree that #3 is the correct one. However Donna makes the classic common error in her wording. It should read – “fax it to my tax professional and go on with my day”.

* My reaction to the YAHOO NEWS item “Geithner Says Overhaul of Tax Code Must Wait” was, unfortunately, the same as that of fellow tax blogger Joe Kristan in his “tweet” of the article – “I wasn't holding my breath...”.

While 2011 is the perfect year to seriously discuss and enact tax reform legislation, the idiots in Washington will most likely do nothing substantial until after the 2012 election.

I have an idea – let’s vote them all out in 2012 – Go GRIP (Get Rid of Incumbent Politicians)!

* ACCOUNTING WEB reports that “Tax Amnesty Program Surprisingly Successful in Washington State”.

State officials were hoping businesses would pay $24 million in back taxes. Instead, the state received $263.4 million. Local governments were hoping for about $4 million but received just under $57 million.”

State tax amnesty programs have been consistently successful in bringing in big bucks. When will the idiots in Congress realize that a federal tax amnesty program is a good idea?

* Just because you are entitled to a federal or state tax refund does not mean you will get a check for the full amount. If you owe back federal or state taxes, or are behind on child support, or even if you “allegedly” owe money to a non-profit hospital, the IRS, or your state, can raid your refund to collect a multitude of outstanding liabilities.

The IRS provides information on “offsets” in a March Tax Tip titled “Tax Refund Withholdings and Offsets”.

* Bruce, the MISSOURI TAX GUY, gives good advice in "Management Tips for Small Business.”

While at Bruce’s blog be sure to check out his Product Page.

* John Tozzi talks about two bills introduced in Congress that would affect the taxes of Schedule C filers in “Tax Break for Self-Employed Likely to Vanish” at BUSINESS WEEK.

(1) HR 880: Equity for Our Nation’s Self-Employed Act of 2011 would make permanent the deduction for health insurance costs in computing self-employment taxes (the deduction would reduce income tax and self-employment tax), which was available for tax year 2010 only.

(2) HR 1827: Home Office Deduction Simplification Act would create a “standard home office deduction” of the standard home office deduction is “the lesser of 1,500, or the gross income derived from the individual’s trade or business for which such use occurs”.

The first bill is great – and should be passed. This will permanently fix a discrepancy on the treatment of health insurance premiums between corporations and sole proprietorships, and should greatly reduce the number of small business corporations, and all the extra paperwork and agita that the corporate entity creates.

I have doubts about a “standard deduction” option for the home office. To be honest it would not save me any tax preparation time – as I would need to calculate the home office deduction in the “old” method each time to compare to the standard deduction to determine which provides the better tax benefit. And one of the benefits of the home office deduction, when limited by net self-employment income, is that the portion of the home office deduction attributable to real estate tax and mortgage interest can be used to create a Schedule C loss, which in turn reduces Adjusted Gross Income, which can positively affect a multitude of other tax benefits.

* Jean Murray provides an excellent “bottom line”, practically taking the words out of my mouth, in her post “4 Reasons You Should Incorporate Your Business” at ABOUT.COM” US BUSINESSLAW/TAXES.

Don't incorporate just because your attorney says it's a good idea. Attorneys make money helping you incorporate, and they make no money if you stay a sole proprietor or create a do-it-yourself LLC. Review all the alternatives and consider what's best for your business at this time and into the future. Remember, it's always possible, and easy, to change from a sole proprietorship to an LLC or a corporation. It is almost impossible to un-incorporate your business and go back to being a sole proprietor.”

While there are reasons, based on specific facts and circumstances, for a small one-person business to incorporate, there are many, many, many more reasons NOT to incorporate.


* I realize this has nothing to do with taxes – it is just some “fine whine”. Why do “twits” feel compelled to constantly “tweet” their physical location – i.e. “I’m at Joe’s CafĂ©”? Do they really think we care? I am expecting to see the following tweet one day – “I am sitting on the jake taking a dump”.


Friday, May 20, 2011


A “tweet” from NATP led me to “IRS Can’t Tell Who Deserves Energy Tax Credits” by Michael Cohn at ACCOUNTING TODAY.

According to the item -

The Internal Revenue Service cannot determine whether taxpayers claiming Residential Energy Credits are actually entitled to them, according to a new government report {from the Treasury Inspector General for Tax Administration, aka TIGTA – rdf} that found the tax credits going to hundreds of prisoners and minors.”

Why? Because “the IRS does not require individuals to provide any third-party documentation to support the purchase of qualifying home improvement products and/or costs associated with making energy efficiency improvements and whether these qualified improvements were made to their principal residences.” Not so much that the IRS does not require documentation – Congress did not require it as part of the legislation creating the credit.

Michael tells us that -

More than 6.8 million individuals claimed more than $5.8 billion in Residential Energy Credits on tax year 2009 tax returns processed through December 31, 2010.”

In a “statistically valid” random sampling of returns claiming the credit TIGTA “identified 362 ineligible individuals who were allowed to erroneously claim $404,578 in Residential Energy Credits on their tax returns. These individuals, including 262 prisoners and 100 individuals under the age of 18, were allowed to erroneously claim these credits because the IRS did not develop a process to identify prisoners or individuals who are too young to buy a home. The IRS has data that could have been used to identify these erroneous credits.”

The problems sound similar to those encountered with the First-Time Homebuyer Credit before Congress required back-up documentation be submitted with the claim. In fact the problems discussed in the TIGTA report are common to most tax credits, and, for that matter, tax deductions. Applying for these benefits is as easy as entering a number on your 1040 – there are no checks and balances.

The only check and balance is the integrity of a tax professional if the return is done by a paid preparer. This puts an added burden on tax preparers, who must not only gather information from the client and put it on the return properly, but must also determine if an individual is entitled to a government welfare or other benefit.

In a recent post at DON’T MESS WITH TAXES Kay Bell, the Yellow Rose of Taxes, reminds us - “There are many, many tax expenditures -- losses to the U.S. Treasury from certain tax deductions, exemptions or credits -- that account each year for an estimated $1.1 trillion in forgone government money.” Discussions on, and proposals for, tax reform have concentrated on eliminating many, or most, of these “tax expenditures” from the Code.

However, the initial purposes behind these various tax expenditures that overpopulate our current tax system are not necessarily bad. What is bad is the use of the Tax Code to distribute these benefits.

There is nothing wrong with the basic concept of “rewarding” or “assisting” low income individuals for working – the Earned Income Credit. It is “more better” to have an individual with a family work at a lower paying job then to sit home on their arses and continue to partake of the public trough.

Continuing education, beyond the basic K-12, be it in college or a trade school, should be encouraged – the various education tax benefits. The more educated the populace the better decisions they will be able to make socially and politically (or so we assume) and the more money they will be able to earn, and put back into the economy.

The purchase of energy efficient equipment and materials helps to save the environment. But if only certain equipment and materials, with specified energy efficiencies, are encouraged it is more effective to have a direct “grant” or “discount” applied to the purchase of qualified equipment and materials at the point of purchase, when the specific efficiencies are easily determinable based on model number, then to require a tax professional to waste valuable time pouring though government regulations and product lists to determine if an item qualifies when the client/taxpayer has not received or saved a “Manufacturer’s Certificate”, and in the end give up and claim the credit just in case it qualifies and leave its verification to the possibility of an audit.

If the Tax Code were to be “cleansed” of offending tax expenditures it does not mean that the government will automatically put an additional $1.1 Trillion in the bank. It just means that a lot more individuals will pay their share of federal income tax, and yet many will at the same time continue to receive government subsidies or benefits for specific “encouraged” activities. But the benefits will be distributed through the proper channels as student financial aid, Aid to Families with Dependent Children, upfront discounts for energy-saving purchases, etc.

The benefits that had previously been distributed via the Tax Code will be distributed directly to beneficiaries or providers out of the budgets of the appropriate departments, with the appropriate safeguards and required documentation - as they should be.

Having a benefit directly distributed via the appropriate government agency (other than the IRS) is “more better” for the beneficiary – it is better to get a subsidy up-front than to have to pay the money out of pocket yourself and wait a year or two to get the money back via a tax refund. If a student qualifies for a $2,500 tuition and fee “subsidy” it is better to have the money paid directly to the school by the government, and reduce the need to borrow.

And having a benefit provided at the “point of purchase” allows the appropriate government agency to more adequately and properly verify that the “purchase”, and the purchaser, does indeed qualify for the benefit – so it is also “more better” for the government.

The Cash for Clunkers program proved that government benefits to encourage desired behavior could be successfully distributed through the “proper” channels – channels other than the Tax Code - and with a lot less fraud (this is my perception/assumption – I have not done extensive research on the program).


Thursday, May 19, 2011


If the victims of the many “pennies on the dollar” tax debt resolution scams, who apparently have paid millions to firms that make promises they cannot keep - firms who seem to have in many cases just took the money and ran - had instead given the money to the Internal Revenue Service as partial payment of the outstanding debt, both the taxpayers and the Internal Revenue Service (and therefore the government) would have both been better off.

And what if the payments had been made as part of an installment agreement offered under a federal tax amnesty program, which would totally eliminate accrued penalties and substantially reduce accrued interest? In many cases what makes tax debt unmanageable is the excessive accumulation of penalties and interest, which can end up being more than the actual outstanding tax liability. Under such a program actual tax debt would not be eliminated, and the government would collect that to which it is entitled at a minimal expense.

For those who are faced with tax debt, and tempted to throw their money at these scam artists, what the ads refer to is the IRS Offer In Compromise program. Ask your tax preparer about this program. He/she will be able to either help you submit an offer or refer you to a legitimate and responsible tax professional who can – for a substantially lower fee then what you would pay to the scam firms promising, but ultimately unable to deliver, “pennies on the dollar” settlements.


Wednesday, May 18, 2011


Sorry I have not posted this week so far – but I have been working away on the GD extensions. I hope this meaty edition of the BUZZ makes up for my absence.

*Right on Christopher Bergin! I couldn’t have said it better myself.

Writing about the mucking fess that is the various First-Time Homebuyers’ credits, which Nina Olsen has credited for making the past tax filing season the worst yet at TAX.COM, Bergin, in "What's Wrong With the Tax Code? Those That Write It", says –

The truth is that a Congress that would pass such a provision may be made up of the worst lawmakers yet. And please don’t tell me our representatives were trying to do the right thing. That excuse has worn-out its welcome.

The Internal Revenue Code should do what it says: collect revenue. And the IRS should do what it is meant to do: collect revenue, not administer social programs. The politicians want to make the voters think they care. Fine; do it somewhere else. Because they have given us the worst tax code yet.”

I have been saying for the past couple of years that the members of Congress are idiots. Glad to hear someone else agrees.

* Happy Anniversary to Professor Annette Nellen! Her 21st CENTURY TAXATION blog turned 4 on May 14th. I look forward to many more years of insightful posts.

TWTP will be celebrating its 10th Anniversary next month!

* Kay Bell asks the question “How Did $250,000 Become the Tax Definition of Rich” at DON’T MESS WITH TAXES, and provides some interesting answers.

She very wisely comes to the following conclusion -

The figures that politicians use are as often as not for appearances rather than for any real bottom line effect.”

I have always pointed out that income levels have different meanings based on geography. A family earning $250,000 in, say, Kansas is sitting pretty, while the same couple in New Jersey, New York or California may be just getting by.

* Trish McIntire continues her series on Starting a Business at OUR TAXING TIMES with “Do Your Homework” – good advice indeed. She lists some good online resources and provides a good required reading list.

* BOSTON.COM has a good article on “What to Do If You Inherit an IRA” by Cheryl Costa a few weeks back.

I came across the item from the blog post “Inherited IRAs Demystified” from CUT YOUR TAX, the blog of the Illinois firm of Hedeker & Perrelli, Ltd, which mentions a recent court case on the issue. I came across the blog post at

* Peter Reilly summarizes the Richard Hatch story in “U.S. v. HATCH, Cite as 107 AFTR 2d 2011-XXXX” at PASSIVE ACTIVITIES AND OTHER OXYMORONS.

Peter quotes the comments of the Court in the appeal decision -

Hatch's approach appears to be that if he reiterates long enough and loud enough his misguided belief that he is innocent of his tax offenses, his claims may somehow be deemed true. He is mistaken. As the First Circuit noted, the record contains compelling evidence of Hatch's guilt on the offenses for which he was convicted.”

Hatch, by definition of a person who willingly participates in a reality tv show, is a self-absorbed idiot. Reality television, regardless of the premise, purposely steers and edits its proceedings to highlight and reward the most egregious participants – so winning the “competition” on Survivor is nothing to brag about. Reality tv may be “unscripted” - but that does not mean it does not have a “book”.

This fool has had way much more than his undeserved 15 minutes of fame.

* Jean Murray reports on a new spam scam in “Fraudulent Emails from NACHA” at ABOUT.COM: US BUSINESS LAW/TAXES.

Her advice if you find this email in your in-box (highlight is hers) -

If you receive a suspicious email from NACHA, forward it to them at

And DON'T OPEN the file in the email!

* Thank God for small favors. TPM reports the news that “Donald Trump Is Not Running For President”.

Tronald Dump, as the Capital Steps comedy troupe would call him, is a self-absorbed, arrogant arsehole. This is evidenced by his statement- “I maintain the strong conviction that if I were to run I would be able to win the primary and ultimately, the general election." But while he may be an idiot, he is not necessarily stupid. There is no benefit to him personally in running for President.

His ego is better stroked by the arrogance that he would win if he ran, but he elects not to do so. This is better than being utterly “trumped” in his first primary election, and eventually laughed out of the race, as would certainly be the result.

Political cartoonists and comedians all over the world are, I expect, saddened by the announcement.

* You may be receiving a 2010 Form 5498 information return in the mail around now. Do not be concerned – you do not have to amend your 2010 tax return. This is a purely information return.

William Perez has created a good piece explaining “Form 5498” at ABOUT.COM TAX PLANNING:US.

Bill has a good idea in introductory post “What’s Form 5498” –

I like to cross check the Forms 5498 I receive.”

You should compare the information on the 5498(s) to your records to make sure that any contributions are credited to the correct tax year.

Recently I discovered on a Form 5498 a $400 contribution to an IRA that the client did not mention anywhere in her explanatory notes. When first questioned she said she did not make any contributions for 2010; but upon further research she discovered that this represented a “cash-back” award from a credit card that was automatically deposited to her IRA account. She could not deduct the contribution due to her level of income and employer plan coverage, but it meant that I had to prepare an 8606 to identify a non-deductible contribution.

* TAXGIRL Kelly Phillips Erb, writing for FORBES.COM, provides a laundry list of what to do now that it has been a month since April 18th in “The Month After: Refund Status, Lost Checks, and Tax Planning".

Just one comment – for me there is definitely NOT “a little bit of a lull in business right now”. And, while I did partake of a brief “well-deserved post tax season vacation”, I am not tanned and looking for something to do. I am working away on the GD extensions and do not want to be bothered.

* A “Fiscal Fact” from the Tax Foundation reports what those of us who live there are well aware of – “New York, New Jersey Lead Nation in Property Tax Burden”.


Saturday, May 14, 2011


* Kay Bell tells us that National Taxpayer Advocate Nina Olsen thinks this was the “Worst Tax Season Ever” at her other blog at BANKRATE.COM.

Why? The First-Time Homebuyer’s Credit.

I have to say this has been my worst filing season because the stories are heartbreaking," Olson told the tax attorneys. "You see this whole debacle that came from this provision that in my estimation had no business being in the Internal Revenue Code in the first place."

Kay correctly explains –

Congress' insistence, following much pressure from the housing industry, to extend and expand this tax has been an administrative nightmare, both for taxpayers and the IRS.

The tax break was plagued by fraud, which prompted tougher verification standards, which made filing harder (no e-filing allowed for first-time homebuyer credit claimants), which produced IRS processing problems, which has left taxpayers waiting months for refunds

I only had one homebuyer credit during this tax season. I had more clients who took advantage of it, but did so by filing amended 2009 returns at the time of the purchase. I personally did not encounter any problems with the IRS processing of the claims.

But I do agree with Nina that, like many other refundable credits (i.e. Earned Income Credit), this provision “had no business being in the Internal Revenue Code in the first place”.

* And at DON’T MESS WITH TAXES Kay says “Representatives Ask IRS for Mid-Year Hike of Standard Mileage Rates”.

Led by Rep. James Sensenbrenner (R-Wis.), the bipartisan group wants IRS Commissioner Doug Shulman to
reevaluate the mileage rates taxpayers can use to calculate certain deductible costs of operating an automobile.”

The IRS standard mileage allowance is always a year behind the times, as it is determined “after the fact”. The current, for example, 51 cents per mile for business travel certainly does not reflect the actual current cost of operating a car. But I am wary of mid-year changes – because it means that clients have to give me two separate mileage numbers for the year. However, as this was done a couple of years ago, some clients were still giving me mileage numbers for Jan-June and July-Dec of 2010.

* Joe Kristan follows up on this issue and tells us there will be no change to the standard mileage allowances for 2011 in “IRS: Mileage Rates Staying Put” at the ROTH AND COMPANY TAX UPDATE BLOG.

* TAX GIRL Kelly Phillips Erb, writing for FORBES, reports that “IRS Asks for Input on Health Care Law”.

I agree with Kelly’s introduction –

For as long as I’ve been banging away on the keyboard about tax and tax policy, I don’t believe I’ve seen anything more polarizing than the “new” health care act which was signed into law last year. From the so-called Cadillac plans to the increased 1099 reporting requirements, no single piece of legislation has generated as much email, comments and downright hullabaloo, as the Patient Protection and Affordable Care Act.”

Kelly tells us that, in Notice 2011-36, -

The IRS has announced that they are requesting public comment on the shared responsibility provisions included in the health care act that are slated to take effect in 2014. You may recall that under the new law, “large” employers – those with 50 or more full-time employees – that do not offer affordable health coverage to their full-time employees may be required to make a shared responsibility payment. Employers under 50 employees are exempt from this requirement.”

* The king of the tax bloggers, TAX PROF Paul Caron, brings us word that “The Top 400 Taxpayers: Incomes Fell 21.5%, Tax Rates Rose 8.2% in 2008”.

He lists some other interesting facts from “
The 400 Individual Income Tax Returns Reporting the Highest Adjusted Gross Incomes Each Year, 1992-2008” recently released by the Statistics of Income Division of the IRS.

* Robert W Wood, Forbes’ THE TAX LAWYER, lets us know that “IRS To Give Innocent Spouse A Facelift”.

In a rare–some would say uncharacteristic–show of tenderness, though, the IRS Commissioner has announced an IRS review of its bright line rule that calls for denying innocent spouse relief anytime the poor woman–the requester is almost always the wife–asks for innocent spouse treatment more than two years after the first IRS attempt to collect tax.”

* The IRS has a “Tax Relief in Disaster Situations” web page with links to information on tax relief for victims of recent natural disasters.

* Bruce MacFarland, the MISSOURI TAXGUY, talks about what to do if you “Haven’t Filed an Income Tax Return”.

His bottom line -

It’s important to understand the ramifications of not filing a past due return and the steps that the IRS will take. Taxpayers who continue to not file a required return and fail to respond to IRS requests for a return may be considered for a variety of enforcement actions.”

At the very least the IRS will eventually construct a return for you, based on information in its matching system, using the absolute worst scenario – married filing separately if married, no dependents, no deductions or credits – regardless of how previous returns were filed, and pile on penalties and interest, including penalties and interest on the penalties and interest.

Hey, while you are at Bruce’s blog be sure to check out the Products Page.

* Chad Bordeaux takes some time off from counting beans with his wife (who for some strange reason feels compelled to tweet wherever she is at any given moment – as do other twits) to give us “Tax System - Explained With Beer”.

I, too, had seen, and probably blogged about, this analogy before – but it bears repeating because, as Chad puts it, “it is way too true”.

* A tweet from fellow “twit” Trish McIntire led me to the news that “Tax Lady to Shutter Business, Give Up Law License”.

I have had no personal experience or contact with Ms Deutch’s business, other than skepticism about her “pennies on the dollar” tv ads, so I cannot comment on this development. I had been warned about her by other tax bloggers. And I do believe that firms claiming “pennies on the dollar” settlement of tax debt are for the most part scam artists.

I do know that her two tax blogs had often contained accurate and interesting information, and she was occasionally referenced here in the BUZZ. She had “returned the favor” by referencing TWTP posts on her blog, and a few years ago her publicist did send me a complimentary copy of her book on taxes, which I confess I have not yet read.

I do know, from the personal experience of a client, that it is very, very expensive to defend your honesty when the state or federal government, for whatever reason, are after you - even if they cannot find any actual malfeasance or chargeable activity.

The classic political example is Slick Willy. A special prosecutor could not find any wrong-doing by Hillary’s law firm, but it had to justify its existence by finding anything they could on either Clinton spouse – at tremendous cost, financial and otherwise, to the taxpayers and the country. The Slick One was charged with doing basically what just about every other President before him, except perhaps Jimmy Carter, as well as probably at least 2/3 of sitting members of Congress (I am being conservative), had done, only with more discretion.

Trish McIntire does comment on the issue in her post “'Tax Lady’ Closes Office” at OUR TAXING TIMES.

I do agree with her assessment of the “pennies on the dollar” issue –

They prey on taxpayers with a big tax bill with a promise to get the tax authority to accept a much lower payment. The problem is they charge a large up front fee and do very little. In some cases, they do nothing. Most good tax professionals can help more and at a lower fee.”

And I support her final statement –

Roni Deutch, American Debt Relief, J.K. Harris and Tax Masters have all spent millions to publicized they tax debt relief services and are in trouble with a variety of Federal and state agencies for misleading advertising and fraud. So, hopefully, the word is getting out that there is no easy fix to tax debt.”

* It seems that the State of Virginia offers several “sales tax holiday” periods from May through October.

From May 25-31 “purchases of items designated by the Department of Taxation as hurricane preparedness equipment, including portable generators, will be exempt from the Virginia sales tax”.

For complete information go to Virginia's Sales Tax Holiday Information Center.


Friday, May 13, 2011


Oh, oh! I have begun to notice symptoms of “manana” disease. Twice this past week I have told myself, “I will get up early and put in 10 hours at the desk tomorrow” as I spent an afternoon in front of the “tube” – but did not follow through when tomorrow came.

It was bound to happen once I was away from the desk (however much needed) for a few days. When I return I have lost most of my motivation to go back. After doing one thing, and one thing only – that is prepare 1040s - 12 hours a day, 7 days a week, for almost 3 months there comes a point when you don’t want to look at another 1040.

As of this writing there are 15 GD extensions in the “to be done” box. I have been completing "red-filed" returns as the missing information is provided. I do believe that I can motivate myself to do 2 sets of returns a day, every day (with one day a week off) between now and the end of May, and end the month with nothing but “red files”.

Wish me luck!

Thursday, May 12, 2011


Over the past 40 years I have, at one time or another, belonged to just about every membership organization for tax preparers, except, of course, the AICPA and NAEA. Currently I am a member of the National Association of Tax Professionals (NATP) and the ncpeFellowship.

The ncpeFellowship is “an organization of tax professionals dedicated to being the best educated and technically proficient tax professionals in the business of tax” that is run by continuing professional education provider the National Center for Professional Education (NCPE).

Beanna Whitlock, EA is the Fellowship’s Executive Director, and the reason for my membership. She has been a tax professional of 42 years (she beat me by 2 years). She was the Director of National Public Liaison for the Internal Revenue Service and, upon leaving the IRS, the Executive Director of the National Society of Tax Professionals (NSTP) - leaving when discovering and opposing apparent greed among the Board of Trustees that has just about destroyed the viability of that organization.

It was Beanna who, when I raised my hand in answer to her question of “who still prepares tax returns by hand” at an NSTP conference several years ago, asked to shake my hand and announced to the audience that I was the only one in the room who really knew how to prepare 1040s.

The Fellowship, or actually Beanna, produces a monthly newsletter titled TAXING TIMES that is available to members online. Like the newsletter of NSTP back in the days when it was written by Tom Cooke and later Beanna, it is chock-a-block with information and statistics of interest to the tax preparer.

The May 2011 issue discussed, among many other items, the following -

+ The IRS has published preliminary date on the 140.5 million individual federal income tax returns that were filed for tax year 2009.

The numbers show the financial carnage wreaked on individual households by the economic downturn that began in 2008 and accelerated in 2009. However, retirement income was up, reflecting the first wave of baby-boom retirees, and, perhaps, the forced early retirement of many individuals.”

Here are how some of the significant numbers for tax year 2009 compared to those for tax year 2008:

· Adjusted Gross Income was down 6.9%
· Taxable Income was down 9.3%
· Total Income was down 15.4%
· The dreaded Alternative Minimum Tax (AMT) was down 9.1% (“the first time AMT has fallen since tax year 2001”)
· Salaries and Wages were down 3.7%
· Net Capital Gain was down 46.1%
· Ordinary Dividends were down 22.3%
· Taxable Interest was down $24.8%
· Charitable Contributions were down 8.2%
· Taxable Pension and Annuity Income was up 3.1%
· Taxable Social Security was up 3.8%

+ Former IRS officer Al Drucker of Manalapan NJ has created, “a website that allows informants to alert the IRS anonymously about suspected tax fraud”.

This new site allows informants to “fill out an easy-to-use form written in plain English. then forwards the information to the IRS and erases from its computer system information about the person making the allegation.”

Those who turn in tax cheats via this website will not be eligible to collect a “reward” from the IRS, since they are, in effect, blowing the whistle anonymously.

Methinks this site will be used more by angry ex-wives or ex-husbands and others who just want to cause agita for someone, and not by true whistleblowers.

+ The IRS has issued final regulations relating to the electronic filing “mandate” for tax return preparers.

The IRS has ridiculously equates “filing” a return with “mailing” a return – so that if I prepare a paper return for a client and actually put the sealed envelope, containing the signed return, in the mailbox at the Post Office I have “filed” the return. However, under the final regs –

Acts such as providing filing or delivery estimates, an addressed envelope, postage estimates, stamps, or similar acts designed to assist the taxpayer in his efforts to correctly mail or otherwise deliver an individual income tax return to IRS do not constitute filing by the tax return preparer or specified tax return preparer as long as the taxpayer actually mails or otherwise delivers the paper individual income tax return to the IRS.”

And the newsletter tells us that “Under Reg. S 301.6011-7(a)(4), an individual income tax return isn’t treated as filed by a tax return preparer or specified tax return preparer if the tax return preparer or specified tax return preparer who prepared the return obtains, on or before the date the return is filed, a signed and dated written statement from the taxpayer stating that the taxpayer chooses to file the return in paper format, and that the taxpayer, and not the preparer, will submit the paper return to IRS. If it’s a joint return, only one spouse needs to sign.”

So it appears that as long as I have such a signed statement on file I am “off the hook” and do not have to waste tons of money on flawed tax preparation software to be able to submit returns to the IRS electronically.

This issue of TAXING TIMES also included my end of tax season answering machine message under the category “Fellowship Members with Creativity” (see my April 17 post here at TWTP).

Now, back to the GDEs!


Wednesday, May 11, 2011


* Have you seen Bruce, the Missouri Tax Guy’s new tax product “store”? Click here to check it out.

* Joe Kristan is right on when he quotes from “The best summary of the ills of the federal income tax” in his post “How the Tax System Has Gone Off the Rails” at the ROTH AND COMPANY TAX UPDATE BLOG.

* And check out Joe’s post “Learning at the Feet of the Master” which illustrates how “The boss sets the office culture”.

* I almost missed this item from back in April. Russ Fox tells us “Another List, Another Bad Score for California”.

Another list of business climate, this one from
the Small Business & Entrepreneurship Council, ranks the best and worst states for small business owners”.

Russ mentions that California is on the bottom - #48. But New Jersey is #50 – the absolute worst business climate for small business owners New York is #49). Only the District of Columbia is worse. No surprise there.

South Dakota and Nevada are #1 and #2.

Russ points out “the top six states share a common factor”. Check out the post to find out that factor.

* “High-Earning Households Pay Growing Share of Taxes”, a WALL STREET JOURNAL article by John McKinnon, tells us –

A 2008 study by the Organization for Economic Cooperation and Development, for example, found that the highest-earning 10% of the U.S. population paid the largest share among 24 countries examined, even after adjusting for their relatively higher incomes. ‘Taxation is most progressively distributed in the United States,’ the OECD study concluded.

Meanwhile, the percentage of U.S. households paying no federal income tax has been climbing, and reached 51% for 2009, according to a new analysis by the Joint Committee on Taxation. That was the first time since at least 1992 that more than half of households owed no federal income tax, according to JCT estimates.”

And further the JCT analysis “concludes that about 30% of taxpayers received money from the government through tax credits”.

* Andy at SAVING TO INVEST discusses the oft-asked question “Should You Pay Off Your Mortgage Early or Invest The Extra Cash?

Personally I have always tended toward paying off your mortgage early.

I have also had clients in the past who actually took out a home equity loan to get money to invest in mutual funds. While this may work if you can get a return on the investment that is several points higher than the mortgage rate, and if the return is realized via capital gain distributions and long-term capital gain taxed at the lower rate, and if the market doesn’t suddenly tank, it is a dangerous game and one that is not for the serious and experienced investor.

I must point out that an addition to the CON about losing the tax deduction is the fact that interest on acquisition debt is deductible up to $1 Million of principal, while interest on home equity debt is deductible only up to $100,000. Once you pay off your mortgage in full you no longer have acquisition debt (unless you borrow to substantially improve the residence) and if you need to borrow against the property again interest will be deductible only on up to $100,000 or principal.

* The IRS provided a good reminder to taxpayers in “Five Tips if You Changed Your Name Due to Marriage or Divorce”.

If you have changed your name due to marriage or divorce, and used the new name on your Form 1040 (or 1040A), but did not change your name with the Social Security Administration you are open to much potential agita from the IRS.

* Trish McIntire has announced she is "Starting A Business Series" of blog posts at OUR TAXING TIMES.

This series should provide insight into the basics of starting your own business. It won’t answer all of your questions but it will point you to resources and give you things to think about.

I will be focusing on a 'mom and pop' type startup. The owner could be a guy starting his own repair service after years of working for someone else, the great cook who wants to open a catering business, the local retail shop, or a tax preparer. Full or part time, the basics are the same. And this series will stick with the basics

I look forward to following the series as it unfolds.


Tuesday, May 10, 2011


Over the past 40 tax seasons perhaps the biggest obstacle to promptly and correctly completing a client’s Form 1040 has been getting cost basis information for stocks or mutual fund shares sold by clients during the year. It is the rare client indeed that keeps good records in this area and provides me with an accurate cost basis for all sales.

Some year-end consolidated brokerage statements include purchase information, and I have always attached copies of this info to my copy of the return. So there are occasions when I can look the cost basis up by going through past year copies, although this can be time consuming.

In recent years most year-end reports include a gain and loss report that for the most part will tie in to the 1099-B. I admit that I take these reports at face value; I assume they are correct and do not spend time verifying the cost numbers. (I will, however, compare mutual fund Average Cost Basis numbers to “first-in, first-out” numbers, if available, or in some cases required, to see which method is better.) But if all the purchase were not made through that particular brokerage house cost basis info may not be available for all transactions, and there are occasionally gaps.

Clients are usually loyal to a particular broker, as they also are to a particular tax preparer, and follow him/her as he/she goes from “house” to “house”. One would think that as long as the client has had the same individual broker over the years that the broker would bring cost basis information with him/her on each move and enter this info into each new broker’s system – but this is not always true.

Tax law now requires brokerage and mutual fund houses to report cost basis information on the Form 1099-B – but it will take many years for this practice to fully phase in and become inclusive of all transactions.

I often find myself having to contact a client’s broker to get cost basis information. Initially I found them generally lazy. Looking up cost basis info does not produce a commission, so it was not a priority. I would get answers like, “he bought 100 shares of XYZ for $5¾ per share in 1987”. For one thing he did not buy 100 shares for $5¾ per share. The transaction included various fees, charges and taxes, so the per share cost was actually more than $5¾. And the client reinvested dividends over the years and now has 426 shares.

I have been able to develop a good relationship with most of the brokers of my more active investors (a few with up to 50 pages of sales transactions per year), who provide me with gain and loss reports and will email me copies of the year-end consolidated statements (original and one or two corrected) as soon as they are available. If I have a question about a sale they promptly reply to my email. I appreciate the attention and assistance I am given by these brokers, and applaud them for providing good customer service.

This year a client gave me with her tax “stuff” a 1099-B for the sale of her entire investment in a mutual fund. There was no accompanying Average Cost statement, and, of course, the client had no idea of the cost basis. The most she knew was that her mother had opened the account for her about 20 years ago with $500.00 and never added anything else, but let the dividends be reinvested over the period.

The account statement referenced a broker and investment firm. The client was not an investor, and her only relationship with this broker was the purchase of the fund by her mother about 20 years ago. But I thought I would give it a shot, and wrote to the broker identifying myself and explaining the information I needed.

I did not hear anything back for a week or so, and assumed my inquiry had been ignored. But about three weeks after the mailing I received a package from the broker with a photocopy of every single annual statement for the account from the day of the original $500.00 purchase through 2010, showing all of the dividends and capital gain distributions that had been reinvested for the 20-year period. This was perfect – exactly what I needed. I couldn’t have asked for more.

So this broker is my MVB (Most Valuable Broker) for the 2011 tax filing season. I would like to be able to thank this person publicly, so she gets the credit she deserves, but I am afraid if I mention the name of the broker I will receive a comment accusing me of breaking client privilege and federal privacy laws.

If you are reading this, and you know who you are, my sincere thanks for your help with my clueless client’s 2010 return. Your efforts, above and beyond the call of duty, were very much appreciated. All my clients’ brokers should be this cooperative.


Monday, May 9, 2011


I'm back!!!

Spring is the time Americans usually clean out their closets, attics, basements, and garages to get rid of “stuff” they no longer need or want.

While some items are true garbage and need to be thrown away, many others still have a useful life – and can be put to good use by someone else.

What do you do? You can have a sidewalk, yard or garage sale and try to make some extra money. Not what I would do. Do you really want the great unwashed masses tramping through your yard or garage, and possibly your house as well? This activity usually wastes a full day, is loaded with potential for agita, and in the end you never get what your stuff is really worth. During the last hour of the sale you often end up almost giving away what is left just to get rid of it.

A better idea is to donate your unwanted, but still usable, items to a church or charity. With this method you may ultimately end up with about 1/4 to 1/3 of the value of the stuff in your pocket (depending on your federal and state tax brackets) – which is probably not much less than you would end up in a yard sale anyway – you avoid the agita, and you get to help out a needy cause.

If you itemize you can deduct the “fair market value” of used items donated to charity. According to the IRS, fair market value is the price a “willing, knowledgeable buyer would pay a willing, knowledgeable seller when neither has to buy or sell.”

You are responsible for determining what the items you are donating are worth. The charity is not required to, and in most cases will not, provide you with a value. There are several online guides to help you come up with a number. Click here for the Salvation Army valuation guide.

Whenever you make a contribution of used items you should always make and keep a detailed listing of the items you are donating with the condition and value of each set of items (i.e. 6 pairs of men’s pants, good condition, $60.00, 5 pairs of men’s shoes, good condition, $75.00). You may want to attach a copy of the listings to your tax return.

You cannot deduct the contribution of a used item unless it is in at least "good" condition. Donations of clothing and household items with a minimal monetary value, such as used socks or underwear, are also not deductible

When using a local charity’s bin at the mall to make your donation be sure that what you are dropping off on any one day is not worth more than $250.00. If the total value of items donated to a charity in a single day is more than $250.00 you must have a written acknowledgement from the charity with its name and address, the date of the contribution, and a description of the items donated. The acknowledgement must also indicate whether you received any goods or services from the charity in exchange for the donation.


Wednesday, May 4, 2011


Here is a special “post-tax season” Where the Fakawi installment as I prepare to leave for Long Beach Island on my “official” post tax season recuperative trip (a change from Ocean Grove). I plan on seeing BYE BYE BIRDIE at a new (to me) theatre in South Jersey on Friday night. It has got to be better than the Broadway revival of a few years ago. And, of course, some gourmet dining.

(1) I have made a good dent in the GD extensions. There are currently only 15 sets of returns left in the “to be done” box that I can do, or at least start, when I return (I concentrated on quantity and not quality this past week – leaving the projects for when I get back refreshed), and 7 “red files” (need more information). And then there are 7 or 8 returns that have been extended but I have received absolutely no “stuff” for yet. It looks like only 1 of these is waiting for a Form K-1 that will not appear until September.

(2) I am up-to-date on all payroll tax returns and filings for my few remaining business clients (long-time friends and/or clients to whom I cannot say good-bye).

(3) I have caught up on all tax-related correspondence that needed current attention. I am just waiting to hear back from uncles “Sam” or “Chris”.

So once again – “It’s off to the shore. 1040s no more. At least for a while.”


Not much BUZZ today – but some BUZZ is better than no BUZZ.

* Right on, BO! POLITICUSUSA tells us “Obama Makes Trump His Bitch At White House Correspondents’ Dinner”. He truly put Tronald Dump in his place by trivializing the trivial fool.

The same site also tells us “Donald Trump Booed At White House Correspondents’ Dinner”.

Homer Simpson would make a better President than this idiot.

* Did you see my Tax Tip “Lessons From Your Tax Return” at the MAINSTREET.COM Tax Center?

* Kay Bell’s “Tax Carnival #86: May Day 2011” at DON’T MESS WITH TAXES contains lots of interesting and informative entries. Unfortunately, due to my tax season posting hiatus none of them are mine. Since this edition of the BUZZ is a bit abbreviated you may want to go to the Carnival for more tax BUZZ.

* A tweet led me to DESIGNATION CHECK. What is it?

Have you ever been confused by all of those letters that appear after the names of financial advisers? There are literally hundreds of designations in use today, and some represent a higher level of education and training than others. Helping you determine which credentials are most meaningful is a core component of our overall mission to benefit the public by raising the professionalism of financial advisers, and we hope this site serves as a helpful resource for you and your family.”

Who does it? is sponsored by The American College, a non-profit, accredited educational institution with an 84-year heritage. The American College is the nation's leading educator of financial advisor.”

I looked up CPA and it told me “Certified Public Accountant”. I always thought CPA stood for “Constant Pain in the Arse”. I didn’t find DFB on the site.

* An accountant joke from Donna Bordeaux of B

A patient was at her doctor’s office after undergoing a complete physical exam. The doctor said, ‘I have some very grave news for you. You only have six months to live’.

The patient asked, ‘Oh doctor, what should I do?’

The doctor replied, ‘Marry an accountant’.

‘Will that make me live longer?’ asked the patient.

‘No,’ said the doctor, ‘but it sure will SEEM longer’

* Mary O’Keeffe tries to answer the question “
How Much Are Your Kids Worth on Your Tax Return?” at BED BUFFALOES IN YOUR TAX CODE. The answer, just like the answer to any question about taxes, is “it depends”.


Tuesday, May 3, 2011


All too often this past tax season my explanatory memo to clients included the following phrase –

Because of the way Social Security benefits are taxed for every additional dollar you receive you are taxed on $1.85!

Whether or not your Social Security, or Railroad Retirement, benefits are taxed depends on the amount of the other income reported on your 1040 (or 1040A) – and this includes otherwise tax-exempt interest from investments in municipal bonds and muni bond funds.

To determine the taxable portion of Social Security, or Railroad Retirement, benefits you first begin with half of the gross benefits paid for the year (not the net amount actually received after deducting Medicare Part B or D premiums). You then add all the other income reported on Page 1 of your tax return – including any tax-exempt interest reported on Line 8b. If this amount exceeds $25,000, or $32,000 for married couples filing a joint return, up to 50% of your benefits will be taxed. If the excess exceeds $34,000 or $44,000 respectively up to 85% of your benefits could be taxed.

And if your income is such that part of your benefits may be taxed don’t even think about filing separately.

So you can see how an additional $1.00 of income can end up being effectively taxed as $1.50 or $1.85.

To look at this another way – a person in the 15% tax bracket would not pay $15 on an additional $100 of income, they could pay $28!

The $25,000, $34,000, $32,000 and $44,000 figures have never been indexed for inflation.

There comes a point when your level of income is such that you are being taxed on the maximum 85% of your gross benefits. In such a case additional income does not increase your taxable Social Security or Railroad Retirement – and $1.00 is taxed as $1.00.

Let us look at two situations where the inequity of this method of calculating taxable benefits is especially obvious.

(1) As I am from New Jersey, many of my senior citizen clients take advantage of the free, or almost free, buses to Atlantic City on a regular basis. I am reminded of the little old Irish man who when stopping into our storefront office years ago to pick up his finished return announced – “Just got my Social Security check. I am off to Atlantic City.” Occasionally these clients receive a Form 1099-G for winnings from the slot machines.

Case in point – one of the GDEs this year for a Social Security recipient included a Form 1099G for $1,500. The taxpayer was able to itemize and get a full tax benefit for deducting $1,500 in losses, even though her total gambling losses for the year from all sources exceeded $1,500 (losses are deductible only to the extent of winnings). The net results of her gambling activities for 2010 was “0” (actually less than 0) – so she technically did not pay any income tax on the winnings. But because of her level of income she paid tax on $1,275 more of her Social Security benefits. So her 0 dollars of net gambling winnings cost her $191 in federal income tax!

(2) We are told that the maximum tax on qualified dividends, capital gain distributions, and long-term capital gains is either 0% or 15%, depending on one’s level of income. However a net long-term capital gain of $1,500, or additional $1,500 in qualified dividends, for a Social Security recipient in the 15% tax bracket could cost the same $191 in federal income taxes – so the tax rate on the gain is about 12.75% and not 0%, or 21.25% and not 15% for someone in the 25% bracket.

How do we fix this problem?

One solution would be to tax Social Security benefits the same as any other retirement benefit with after-tax employee contributions. Use the “simplified method” to allocate a portion of each monthly benefit payment to the total employee Social Security withholdings, or for a self-employed taxpayer the Social Security share of self-employment tax, as a “return of contribution”. So a portion of each monthly payment would be tax free.

Accompanying this treatment could be a limited basic “Social Security Benefit Exclusion”, similar to the pension exclusion available on most state income tax returns, so lower income beneficiaries would continue to exclude 100% of their Social Security or Railroad Retirement benefits from federal income tax.

Under this solution additional income in other areas would not increase taxable benefits.

What do you think?


Monday, May 2, 2011


Here is a real life tax tale – taken from the GD extensions.

I have this couple (the husband was originally a client of my mentor Jim Gill from back in my early days who left and returned to me years later as a “lost lamb”) – the husband is in his early 70s and the wife is 20 years younger.

2009 was a bad year for the couple. The husband had a stoke and the wife lost her job. It was thought that the husband would need to go into a nursing home, but as it turns out he, thankfully, apparently recovered much better than originally expected.

The wife was told that before the husband could be covered under Medicaid for his nursing home expenses she would have to close out and exhaust her pension monies. She took a partial distribution in 2009 and again in 2010 to cover medical and living expenses.

Because the wife was under age 59½% (actually under age 55) the 1099-Rs she received in 2009 and 2010 reported the withdrawal as Code 1 – a premature distribution subject to the 10% penalty. However I was able to avoid the penalty for both years.

While the purpose of the distributions was the disability of the husband it appears to me that the exception for disability would not apply – as the monies came from the wife’s rollover IRA account.

IRS Publication 590 (Individual Retirement Arrangements) states (highlights are mine) –

If you become disabled before you reach age 59½, any distributions from your traditional IRA because of your disability are not subject to the 10% additional tax.

You are considered disabled if you can furnish proof that you cannot do any substantial gainful activity because of your physical or mental condition. A physician must determine that your condition can be expected to result in death or to be of long, continued, and indefinite duration

But there were other exceptions available to the wife.

For 2009 I used a combination of 2 exceptions to avoid the penalty.

The wife, having lost her job, was able to take advantage of health insurance coverage under COBRA. Pub 590 tells us that –

“. . . you may not have to pay the 10% additional tax on distributions during the year that are not more than the amount you paid during the year for medical insurance for yourself, your spouse, and your dependents. You will not have to pay the tax on these amounts if all of the following conditions apply.

· You lost your job.
· You received unemployment compensation paid under any federal or state law for 12 consecutive weeks because you lost your job.
· You receive the distributions during either the year you received the unemployment compensation or the following year.
· You receive the distributions no later than 60 days after you have been reemployed

In 2009 the wife lost her job and received about $20,000 in unemployment.

The amount of COBRA insurance paid did not cover the entire distribution for 2009, so I also used the exception for “qualified higher education expenses”. The couple’s son, claimed as a dependent, was an undergraduate college student in 2009.

Pub 590 explains –

Qualified higher education expenses are tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. In addition, if the individual is at least a half-time student, room and board are qualified higher education expenses.”

The IRA distribution did not have to actually be used to pay the education expenses. There is no “tracking” requirement like the one for classifying interest payments.

When determining the amount of the distribution that is not subject to the 10% additional tax, include qualified higher education expenses paid with any of the following funds.

· Payment for services, such as wages.
· A loan.
· A gift.
· An inheritance given to either the student or the individual making the withdrawal.
· A withdrawal from personal savings (including savings from a qualified tuition program)

So the tuition and fees could have been paid using a student loan and not the IRA distribution and the exception would still apply.

Between the health insurance paid and the qualified higher education expenses I was able to wipe out the entire penalty.

For the 2010 distribution I used the qualified higher education expenses exception again – this time for college tuition, fees and costs paid for the daughter. And I also used the exception for “unreimbursed medical expenses”.

Even if you are under age 59½, you do not have to pay the 10% additional tax on distributions that are not more than:

· The amount you paid for unreimbursed medical expenses during the year of the distribution, minus
· 7.5% of your adjusted gross income . . . for the year of the distribution

For 2010 the couple’s deductible medical expenses were well in excess of 7½% of their AGI, and were claimed as an itemized deduction. This exception did not apply for tax year 2009.

Once again I was able to wipe out the entire penalty.

While I have always told my clients that the last place you should go to if you need money for any reason, especially if you are under age 59½, is a retirement account – because you could end up paying 40% or more of the distribution in federal and state taxes and penalties – when there is no way to avoid it you may be able to reduce the cost by using one of the exceptions.

FYI, here is the complete list of exceptions to the 10% penalty for early withdrawal from a “traditional” IRA –

· You have unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.
· The distributions are not more than the cost of your medical insurance.
· You are disabled.
· You are the beneficiary of a deceased IRA owner.
· You are receiving distributions in the form of an annuity.
· The distributions are not more than your qualified higher education expenses.
· You use the distributions to buy, build, or rebuild a first home.
· The distribution is due to an IRS levy of the qualified plan.
· The distribution is a qualified reservist distribution.

All of the exceptions are discussed in detail in Publication 590.