Sunday, July 31, 2011


I hate to sweat – to the oldies or to anything else! I don’t work out (something you can easily tell if you ever met me). I don’t like traveling to hot climates (my major complaint with the NATP is that its Annual Conference is always held at the height of the summer in the hottest places in the country), and I hate summer weather.

So why did I leave the relative comfort of my air conditioned and heavily “fanned” railroad flat for three days at the shore? It just so happened that I, coincidently, booked three theatrical events for Saturday, Sunday, and Monday, July 23rd – 25th.

Saturday was a performance of XANADU by the
ReVision Theatre in the Carousel building just off the Boardwalk at the border of Ocean Grove and Asbury Park (on the AP side). I had been there last year to see ReVision’s production of THE BIKINIS.

I have never seen the movie (Gene Kelly’s last musical), a famous financial and artistic bomb, and had no intention of paying $100+ to see the Broadway production. But the intimate setting of the Carousel building was a great venue and the show turned out to be a lot of fun. It is more a spoof of the movie than an adaptation, with some new twists thrown in, and its “in-jokes” were a big part of the fun. The cast was great, especially Kira (the muse Clio, who as part of her human disguise, decides to adapt an Australian accent).

I actually didn’t mind joining the rest of the audience in porcine imitations. Hand fans were given out with the playbills, which helped a bit, and I was able to cool off during intermission by standing in front of a large electric fan.

Unfortunately the last performance was July 24th, so it is no longer playing. The next ReVision production at the Carousel building is RUDE AWAKENING, perhaps the last musical I would ever want to see.

FYI, before the evening’s performance I had my usual lobster bisque and Veal Sinatra at
Giamano’s in Bradley Beach. Between courses the lights went out, some kind of selective brown out (the light on the men’s room sign and apparently the electricity in the basement was working – but lights in other buildings on the street, and the street lights, were also out). The brown out did not affect the ability to cook, and I was able to finish my, as usual, excellent dinner entree. But with no air conditioning it was getting too uncomfortable to stay for dessert and coffee, so I managed to save some money and avoid some calories as well.

Sunday was a matinee “community theatre” performance of SOUTH PACIFIC at the
Axelrod Performing Arts Center in the Jewish Community Center of Greater Monmouth County, just off Route 71 in Deal.

This was one of three new (to me) theatre companies I discovered in a recent NEW JERSEY magazine article on what to do down the shore. The others were the NJ Repertory Company in Long Branch, where I saw THE JUDY HOLIDAY STORY a few weeks back, and a theatre in Spring Lake, where I will be seeing THE SOUND OF MUSIC in mid-August.

I was somewhat disappointed with the “Our Gang” community theatre in Ocean County earlier in the year, but was very pleased with this company. The semi-professional, although not Equity, leads, and the rest of the cast, were excellent, as was the orchestra (often a bit “iffy” in community theatre). It was as professional a production as any I have seen at any Equity house.

The Sunday matinee I attended was the final performance of the run, so again you will not have the opportunity to see it. You can click
here for a YOU TUBE “ad” for the show. No future theatrical productions are currently advertised, though there are some good concert offerings (see end of post). I look forward to returning here in the future.

Saturday and Sunday I stayed in Neptune, and managed to get two loads of laundry done while there. Despite, or perhaps because of, the excessive heat the shore was “chock-a-block”. After breakfast on Monday morning I headed south on the Parkway to Beach Haven on Long Beach Island for my third performance.

It was a bit cooler on LBI, and I was able to enjoy bay breezes while reading my latest mystery book in one of the gazebos in the park behind the Bay Village mall.

My reason for visiting LBI was a 6:00 pm performance by the
John Pizzarelli Quartet at the Surflight Theatre. The quartet is made up of, as Jonathan Schwartz introduces them each year on his Christmas show, “everybody in the world named Pizzarelli” – John, his brother Martin on base, and, a surprise addition, his father Bucky – and drummer Tony Tedesco. It is the ultimate cabaret act, and they did their cabaret act of American popular standards. Bucky, at age 85, is still a nimble guitarist showing no signs of aging.

It was a reunion of sort for John – in the audience was his, and his brother’s, 5th grade teacher, a fellow musician with whom he played in the eighth grade, and a member of his high school class. Also in the audience was Jo Anne Worley, who will soon be appearing at Surflight with Cindy Williams in the female version of the ODD COUPLE.

As expected the quartet did the long version of I LIKE JERSEY BEST, including the various “cover” versions by Bob Dylan, the Beach Boys, Lou Reed, Paul Simon, and Billy Holliday among others. During the song John commented, “it is good to have an audience that understands the song”.

During the early years of my tenure at the Summit Art Center (now the Center for Visual Arts of New Jersey) John and Bucky appeared together at one of the Sunday jazz concerts. Unfortunately I was the receptionist that day and could not watch their performance as I had to stay in the office and answer the phones. Now, some 25+ years later, I finally get to see the show.

It was a perfect ending to a 3-day week-end of great performances!

FYI, the Axelrod Center will host John Pizzarelli in concert (“A Special Evening Featuring the Songs of Frank Sinatra With the Swing 7 Band”) at 8:00 pm Thursday, August 18th. If you go you may see me in the audience.

Unfortunately when I got back to my home office the GD extensions were still waiting to be done!


Saturday, July 30, 2011


* Check out my article “What Unemployment Does to Your Taxes” at!

* New Jersey homeowners should check out my post “NJ Property Tax Relief Programs Update” at the NJ TAX PRACTICE BLOG.

* My last reminder to check out the July 2011 issue of LOIS. A new issue will be available next week.

* Kelly Phillips Erb reports that “Back to School Sales Tax Holidays on Tap for Many States” at FORBES.COM.

For those of you who are super shoppers – and manage to buy school supplies before school actually starts – you may be able to benefit from a number of back to school related sales tax holidays this summer.”

* And, in “Five Things You Need to Know About the Current Airline Ticket Tax Controversy”, Kelly tells us –

If you paid for tickets on or before July 22, 2011, for travel beginning on or after July 23, 2011, you may be entitled to a refund of ticket taxes already paid.”

However, as Kelly points out, it ain’t going to be easy.

Kay Bell also discusses the issue in “IRS, Airlines at Odds Over Issuing Ticket Tax Refunds” at DON’T MESS WITH TAXES.

* Speaking of Kay Bell, she has been attending the annual IRS Nationwide Tax Forum in Dallas and has been offering random observations on each day’s activities. See Day 1, Day 2, and Day 3. She will be posting on what she learned at the educational sessions in the weeks to come.

I am not attending the Forum this year because they moved the northeast location from New York City to the Washington DC area.

I like the quote she provided from veteran Forum presenter Larry Gray, another Missouri tax guy and former president of NATP, on Day 2 -

"We're all talking about Congress not doing anything about the debt. But If Congress wouldn't do anything in tax law for while, we might figure out how to do the returns."

As part of my new Tax Code I have proposed that, once passed, there should be a statutory prohibition from any change to the Code for a period of ten year.

* TIGTA (the Treasury Inspector General for Tax Administration) continues to find fraud and FUs in the disastrous First Time Homebuyer’s Credit.

It’s latest findings are reported in “Control Weaknesses Over Amended Returns Allowed Some Inappropriate Claims for the First-Time Homebuyer Credit to Be Allowed”.

* Joe Kristan responds to my “Here We Go Again” post with “Costs of Regulation: What Robert Is Missing” at the ROTH AND COMPANY TAX UPDATE BLOG. Be sure to read the comments.

Joe and I disagree on the need for registration and licensure of tax return preparers – but here is one thing we do agree on (from another Roth and Company post) –

If the tax law itself were drafted competently, preparer competency wouldn't be an issue. Yet competency testing for Congresscritters and Treasury Secretaries doesn't seem to be on the table.”

* Joe Arsenault of CAFÉ TAX fame provides a “Guest Post: Mid-Year Personal Tax Planning Tips from Cafe Tax” at TAX RESOLUTION UNIVERSITY.

* If you ever needed proof of my contention that the members of Congress are idiots just look at the current inability of the fools to work together on a vital issue.

Come the next election we should vote against all incumbent "Congresscritters" and show the idiots that their behavior is unacceptable!


Friday, July 29, 2011


Back when I accepted new work (FYI - I no longer accept new 1040s, or even returning lost lambs, and do not accept any corporate or partnership work, period) the first thing I would ask a new 1040 client was to bring me was copies of the previous three (3) years’ federal and state income tax returns.

One reason was so I could check for errors made by the previous preparer that I could “fix” by preparing amended returns. My mentor and I found that you would get the new client for life if you could amend a prior year’s return for an additional refund. This worked a lot better back in the day of Income Averaging and other “rabbits” we could pull out of hats. (This review of prior years' returns is that on which I base my contention that over the years I have found more errors on returns prepared by CPAs than on self-prepared returns.)

But the most important reason to review at least last year’s returns was to see if there were any unique deductions and credits to look out for and any carryovers that would affect the current year’s return. There are a multitude of reasons why a preparer may need information from past years returns of new clients in the process of completing current returns.

I cannot imagine a taxpayer going to a new preparer for the first time and not being asked to provide copies of prior returns.

But there apparently are many preparers out there, especially those employed by fast food tax preparation chains, who do not ask for past returns. When reviewing the 1040s of lost lambs who had returned to the fold in the past I have discovered that carryovers from returns I had prepared were not “carried over” to the returns of the new preparer, resulting in an overpayment of tax.

Several years ago a representative of the Government Accountability Office spoke at the IRS Tax Forums about the sting operation it ran which resulted in a report to Congress titled “Paid Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors” (one of the initial factors that led to the current tax preparer regulation regime). The GAO sent undercover agents with two different tax scenarios to a total of 19 offices of 5 “fast-food” commercial tax chains in a metropolitan area. In only 2 instances was the correct refund calculated, but all 19 returns contained errors.

I asked the presenter if any of the alleged “tax pros” approached in the study had asked the GAO undercover “client” for a copy of the previous year’s return. I was told that in none of the 19 instances did the fast food preparer want to see the prior return.

As an aside comment, the GAO agents also discovered unethical sales practices related to Refund Anticipation Loans (RALs).

The most common carryover is the capital loss carryover. The maximum deduction for a net capital loss is $3,000. Net losses in excess of $3,000 can be carried over, and deducted at up to $3,000 per year until all used up.

A recent article in one of the National Association of Tax Professionals publications I was reminded that if a tax preparer forgets to carryover a net capital loss all is not lost, even if the omission is discovered for a “closed” year.

Generally a taxpayer has three (3) years from the due date of a return to amend that return to claim an additional refund. At this writing the 2010, 2009, and 2008 Form 1040s are “open”. One can no longer amend a 2006 return to claim an additional refund.

According to TC Memo 1983-318 a taxpayer who did not claim a capital loss carryover in a closed year, either the year the loss was created or a subsequent year, can claim a carryover deduction in open years.

The example used in the NATP article stated that a taxpayer had a $20,000 capital loss in 2005 that could have been carried forward (apparently a net loss of $23,000, $3,000 of which had been claimed on the 2005 return) but was not. No deduction was claimed in the subsequent years.

In this case tax years 2006 and 2007 are now closed. If we assume there were no capital gains, or capital gain distributions, reported in 2006 and 2007, the taxpayer would have to reduce the $20,000 by the $6,000 that could have been deducted in 2006 and 2007 (although they were not) and enter a $14,000 capital loss carryover on the Schedule D of a 2008 amended return.

The taxpayer would not only get the benefit of at least a $3,000 reduction in gross income, but, as the capital loss deduction would reduce AGI, could also increase a laundry list of credits and deductions that are phased-out or lost altogether based on AGI.

Another important carryover is the “tax basis” from non-deductible contributions to a traditional IRA reported on Form 8606. Once you file a Form 8606 for the first time to report a non-deductible contribution you should continue to file a Form 8606 each and every year thereafter, even if no non-deductible contributions are made in a year, to maintain the carryover balance so that it is readily available when you begin to take distributions from an IRA.

You may have made a non-deductible contribution to an IRA in 2004. No additional non-deductible contributions were made in 2005 through 2010. If no Form 8606 was included in the 2005 through 2010 Form 1040 filing, to carryover the IRA basis amount, then when you change to a new tax preparer for your 2011 return, a year in which you took a distribution from an IRA account, the new preparer would have no way of knowing about the 2004 non-deductible contribution and would claim the entire IRA withdrawal as fully taxable, causing you to pay unnecessary federal income tax.

So if you happen to change tax preparers for 2011, for whatever reason, be sure to give the new preparer copies of your 2008, 2009, and, most important, 2010 tax returns (and, to be honest, I would also recommend not going to a fast food tax preparation chain)!


Thursday, July 28, 2011


I agree with Joe Kristan, and his convert Russ Fox, that the new tax preparer regulation regime will not stop tax cheating or close the Tax Gap.

Joe recently pointed out in his ROTH AND COMPANY TAX UPDATE BLOG post “CPA: Can’t Prepare Anymore” (Joe, I always thought CPA stood for “Constant Pain in the Arse”) about tax pros who were caught preparing fraudulent returns, which Russ quoted in “I Spilled My Coffee Thanks to Joe Kristan” -

One of the preparers — the one who signed all of the disputed returns — was an Enrolled Agent. That meant he had to pass a competency test that is certainly more difficult than any that will be imposed by the new IRS preparer regulation regime. He also had to take continuing education to maintain that status.”

Having the initials EA after one’s name may mean a person knows his/her stuff when it comes to 1040 preparation, but it doesn’t mean he/she is honest. The idea of regulating tax preparers had its beginnings as a reaction to the Enron scandal. The individuals who prepared the fraudulent tax returns for Enron all had the initials CPA after their names.

And I do agree with Russ’s comment that –

“. . . it’s relatively easy for an incompetent preparer to obtain CPE. Just go to courses, doodle on the materials presented, and go home still believing that petting your dog is deductible. As long as you attend the full course (typically, your badge is scanned upon entering and leaving) you will get CPE. Attend enough CPE and your license can be renewed.”

I admit that I have “doodled” and read the paper during many of the repetitive ethics presentations that are tacked on to most CPE offerings. And I have not always paid attention to topics that were not applicable to my practice or of interest to me. On a day that provided me with 8 hours of CPE credits perhaps I only had 5 or 6 hours of actual education (not counting the fact that an hour is only 50 minutes).

I will continue to state that if a tax preparer is not already ethical then sitting through a 2 hour sermon every year ain’t going to make him/her so. While I would support perhaps a 1 hour update every other year, 2 hours every year is a waste of time and money.

The main value of the new regulation regime to the IRS is providing a central registry of tax return preparers, via the PTIN.

The main value of the new regulation regime to the preparer is the recognition of previously unenrolled serious tax preparers through the RTRP designation. Having the initials RTRP after one’s name puts the previously unenrolled, like myself, on par with CPAs and EAs when it comes to 1040 preparation, and will somewhat remove the unfair, and unearned, advantage that CPAs have had over the years, based on the public misconception that a CPA is automatically a 1040 expert.

Currently any Tom, Dick or Mary can hang out a shingle as a tax preparer. I have seen signs advertising “Taxes Prepared Here” in some awfully strange places – including the window of a barber shop. The RTRP designation elevates the true previously unenrolled tax preparer to the status of a tax professional.

The main value to the taxpaying public is to identify individuals who have passed a competency test and take required annual CPE in federal taxation, and have not just purchased a flawed tax preparation software package and hung out a sign. The initials EA have identified educated and current tax professionals for years. Now the initials RTRP will also identify individuals who at least know their arse from a hole in the ground when it comes to preparing 1040s. The initials CPA do not.

Joe has said in the past that the new regime will add unnecessary costs for tax preparers, and materially increase tax preparation fees. Horse pucky. $65.25 per year is a pittance, less than $1,00 per 1040 client (in my case at most 20 cents more per client). While there will be a one-time fee to take the competency test (which I still firmly believe should have some kind of grandfathering exemption), it is a one-time fee. And, as I have said time and again, if a serious tax preparer is not already taking at least 15 hours per year of CPE in federal taxation he should be. For calendar year 2011 I will have 32 hours in federal tax CPE and 8 hours in state tax CPE (better make that 30 hours of federal CPE, as I will be doodling through the ethics portion).

Joe has also said that the new regime will force many of the more “casual” preparers out of business. This is not a bad thing. Would you go to a “casual” dentist? Or have your house wired by a “casual” electrician?

So we all agree that the registration and licensure of tax return preparers will not stop the unethical from preparing fraudulent returns. But it does make things better for the IRS, the profession, and the taxpaying public.


Wednesday, July 27, 2011


Sorry no posts so far this week. I spent Saturday through Monday night at Jersey shore for three great performances (XANADU, SOUND OF MUSIC, and John and Bucky Pizzerelli), about which I will post on Sunday. When I got back the GDEs were still in the box – and I have been working on the last of them.

* If you still haven’t done so, also check out the premiere issue of my new FREE monthly (except February and March) newsletter
LOIS (Lots Of Interesting Stuff). It is full of, well, lots of interesting stuff. While it says it is dated 2010 this is a FU – it is really dated 2011.

* Kelly Phillips Erb’s fellow blogger at FORBES.COM, Robert W Woods - THE TAX LAWYER, tells us that a “Kinder Gentler IRS Lifts Innocent Spouse Barrier

But now the IRS says its rigid two-year rule for equitable relief is out the window. (The two-year rule for innocent spouse claims under other provisions continues to apply.)

Innocent Spouse relief is not to be confuses with Injured Spouses (although it often is). As an item at explains –

An injured spouse can get relief when the IRS withholds a joint refund due to debts or obligations of the other spouse. An innocent spouse can get relief when the other spouse makes false reports on a joint return.”

* Scott Hodge asks a good question at the Tax Foundation’s TAX POLICY BLOG – “Shouldn't Nonpayers Also Share in Cost of Deficit Reduction?” (highlight is mine) -

During his speech {Monday} night, President Obama spoke about the need for shared sacrifice in any plan to reduce the nation's debt. He insisted that some taxpayers were not paying their fair share of taxes and that they should pay more taxes as part of a balanced approach to deficit reduction.

While the target of the President's remarks were those taxpayers earning over $250,000, he could have just as well been talking about the record 51 percent of Americans who now pay no income taxes and, thus, contribute nothing to the basic cost of government. While some of these households don't earn enough to file a tax return, millions of others have been knocked off the income tax rolls because of the generosity of the credits and deductions that have been created in recent years to help ‘middle-class’ taxpayers.

IRS data for 2009, the most recent available, shows that more than 50 million tax filers had no income tax liability after credits and deductions. This amounts to 36 percent of all filers

I have been saying for years that (1) these credits do not belong in the Tax Code, and (2) there should be a true “minimum tax” of at least $100.00 for every non-dependent taxpayer over the age of 21.

* Another good question asked, and answered, by the “Show Me” state’s TAX GUY – “Are You Enjoying a Hobby – or Running a Business?”.

* A belated few items that may be of interest to some taxpayers (and tax preparers) from NATP’s weekly membership email newsletter -

High-Low Method Discontinued:
Announcement 2011-42, the IRS announced that it is discontinuing the high-low method for substantiating lodging, meal and incidental expenses incurred while traveling away from home. Last year, the IRS asked for comments on this method and it received none. Later this year the IRS will publish a revenue procedure that provides guidelines for substantiating travel expenses; it will then no longer publish annual updates.”

And -

Extension for Highway Vehicle Use Tax:
We mentioned in the last TAXPRO Weekly that we were waiting for news on the Heavy Highway Vehicle Use Tax and this week the IRS provided
IR-2011-77 in which they announced the Form 2290, Heavy Highway Vehicle Use Tax Return due date was extended three months from August 31 to November 30, 2011. The IRS issued this extension in an attempt to alleviate any future confusion. Currently, the highway use tax is scheduled to expire on September 30, 2011, and the extension should prevent multiple filings if Congress decides to reinstate the credit or modifies the tax.”

FYI, in 40 tax seasons I have never used the high-low method nor have I ever filed a Form 2290.


Saturday, July 23, 2011


A sincere Thank You to my fellow tax-bloggers and fellow “twits” for sending congratulations on the 10-year anniversary of TWTP, and for the kind words they had to say about my blog.

I begin my 11th year or blogging with the BUZZ – which has only been around for about 5 years.

* If you still haven’t done so, also check out the premiere issue of my new FREE monthly (except February and March) newsletter
LOIS (Lots Of Interesting Stuff). It is full of, well, lots of interesting stuff. While it says it is dated 2010 this is a FU – it is really dated 2011.

* Trish McIntire discusses the hierarchy of “Tax Authority” tax professionals use to interpret tax law at OUR TAXING TIMES

Trish ends her post with –

By the way, did you notice that the list of authorities did not include ‘this guy at work’, ‘my hairdresser’, ‘my realtor’, ‘my other preparer’ or other backdoor experts. Just sayn’.”

* The latest TAXPRO MONTHLY, one of the several print and online publications that the National Association of Tax Professionals sends its members, reported that, as per IRS Announcement 2011-14 –

The IRS has concluded that breast pumps and supplies that assist in lactation are deductible as medical expenses under Section 213.”

If you are a tax preparer, or a future tax preparer, and you do not belong to NATP – you should. Email me at and I will send you membership information.

* Thanks and a tip of the hat to Russ Fox of TAXABLE TALK for his recent help in educating me to the specific rules for keeping track of gambling wins and losses. Russ is the “go to guy” when it comes to the tax issues relating to gambling.

* Professor Annette Nellen, of 21st CENTURY TAXATION, talks about “What Tax Reform Should Really be Focused On” at FRANCHISE HELP.

Annette wisely points out –

Discussions of tax reform today often include the need to reduce the deficit. However, if tax reform is focused solely on that purpose, we are unlikely to see real change. Tax reform should address structural and operational weaknesses in the tax system and ensure that the system supports rather than works against our economic and societal goals.”

* Kay Bell continues the saga of the First-Time Homebuyer’s Credit with “Homebuyer’s Credit’s Value? Not Much” at her BANKRATE.COM blog.

She does explain that –

The first-time homebuyer tax credit did, however, achieve a few things.

The credit's many changes and requirements confused and infuriated taxpayers.

It also ticked off the Internal Revenue Service, which is still having trouble processing the credit, especially the original $7,500 loan version.

And it secured housing industry financial support for the representatives and senators who voted to create the tax credit and keep it on books for longer than it should have been.

Those first two accomplishments were unintended (I hope!), but that last one was probably the main reason for the legislation in the first place

* Bruce, our favorite MISSOURI TAX GUY, asks the question “Do You Need to Pay Estimated Tax?” and provides the answer.


Friday, July 22, 2011


I first learned about “blogging” at a presentation on “The Future of Easy Web Site Design” by Internet Consultant Lenny Charnoff at the National Association of Tax Professionals National Conference in New Orleans on July 13, 2001. My first blog posting was published on Sunday, July 22, 2001.

I originally decided to write a blog to provide year-round advice and information to my existing clients and to promote my tax preparation and accounting services. Back then I was still soliciting new clients. Currently, as you know, I do not solicit or accept any new 1040 clients, nor do I accept any corporate or partnership clients.

I continue to blog to provide a source of updated federal and state tax information for my 1040 clients, to attempt to market my various special reports and forms compilations, to provide easily accessible samples of my writing for potential publishers, and, quite frankly, because I just enjoy it. My blog has given me a national exposure and recognition and led to my “gig” writing on taxes for MAINSTREET.COM.

Below is a rerun of my very first post –


+++ The ECONOMIC GROWTH AND TAX RELIEF RECONCILIATION ACT OF 2001, signed into law by President Bush on June 7, 2001, has made Section 529 state college savings plans (named for the section in the Internal Revenue Code) an even better way to save for your child’s education.

Earnings on the money invested in Section 529 Plans grow tax-free. Beginning in 2001, withdrawals from state-sponsored plans will be tax-free if the money is used to pay qualifying college expenses.

For more information on Section 529 Plans, go to the LINKS page at
{the link no longer exists – rdf} and click on the link for SAVING FOR COLLEGE.

+++ I recently returned from the annual conference of the NATIONAL ASSOCIATION OF TAX PROFESSIONALS, held at the Hilton Riverside in New Orleans, where the keynote speaker for the opening session was IRS Commissioner Charles Rossotti.

This was the first time I traveled without having a paper airline ticket in advance. I had no problem at check-in.

As I was walking down Bourbon Street heading for dinner at Tony Moran’s PASTA & VINO I passed a nude bar where the hostess was offering passers-by the opportunity to “wash a girl of your choice”. Good clean fun, “Nawlins” style!

While in the Crescent City, I saw CHERRIES JUBILEE, a delightful comedy written by four local women, at the intimate and very comfortable SOUTHERN REP theatre in the third level of the Shops At Canal Street upscale mall. The show had the funniest and most innovative way to dress the set between scenes.

+++ My website for the ROBERT D FLACH TAX PLANNING INSTITUTE has been given a new look. Go to to check it out. Take a brief survey and receive a free gift

Things haven’t changed much in the past 10 years. The second post, dated July 23, 2001, talked about the “advance refund checks” – Dubya’s first rebate check – and also included the following –

“+++ I hate extensions! I long for the days when the tax season truly did end on April 15th! It is extremely difficult to get motivated to do more 1040s after April 15. Unfortunately, this year I had lots of extensions. I am down to the last 5, and am busy working away. I hope to have all returns out of my office by July 31st.”

The same item applies today – I am down to the final 5 GD extensions (for which I have information) and hope to have all these returns out of my office by July 31st!


Wednesday, July 20, 2011


The BUZZ is chock-a-block today!

* If you still haven’t done so, also check out the premiere issue of my new FREE monthly (except February and March) newsletter LOIS (Lots Of Interesting Stuff). It is full of, well, lots of interesting stuff.

* Did you read my post from last Friday on “Keeping Track of Gambling Activity”? Did you also read the comments? If not, please go back to read the comments from fellow tax blogger Russ Fox of TAXABLE TALK.

* Bruce, the MISSOURI TAX GUY, tells you how to “Save for College Tax Free”.

This is very important, considering the fact that, as Bruce points out –

College tuition and fees are on the rise. Shockingly, the cost for 4-year private schools now tops $36,000 per year on average.”

And, as Bruce also points out –

But the investment is well worth it. According to the U.S. Census Bureau, individuals with a bachelor’s degree earn more than double those with just a high school diploma.”

As I learned from the experience of one client this past year, there are several perhaps morally wrong (in my opinion) but apparently perfectly legal ways to “juggle” your funds to qualify for additional financial aid. If you have kids who will be college age soon it may pay to meet with a “financial aid consultant”.

* In her blog at BANKRATE.COM Kay Bell, the Yellow Rose of Taxes, gives us the word that “Homebuyers Still Waiting on Refunds”.

The poster child for why such social program payments masquerading as credits should not be in the Tax Code, the First-Time Homebuyers Credit, in its several incarnations, has proven to be a real mucking fess.

In discussing the latest chapter in this farce Kay reports -

The problem primarily affects homebuyers who claimed the original 2008 tax year credit, which wasn't really a credit. It was an interest-free $7,500 loan, with payback beginning this filing season. Many of those folks made the payments, some even paid more than the minimum $500 repayment, and that complicated return processing even more.”

Due to poor timing the taxpayers who qualified for the first so-called “credit”, as Kay says really an interest free loan, have been doubly screwed. First they have to pay back the money they got from Sam, and now, when they begin the payback, their refunds are held up. At least, as the post explains, the IRS is paying interest on the late refunds.

* And at DON’T MESS WITH TAXES Kay brings us up to date on “Hacking, Phishing, and Tax Scams, Oh My!”.

Kay’s message, one that I and other fellow tax bloggers have also been giving you for years, can never be repeated too often -

Two things, folks.

First, the Internal Revenue Service doesn't send out emails to taxpayers. How many times do we -- and by we, I mean the IRS, tax bloggers, traditional media, tax professionals and even your mother -- have to remind you of this fact?

So please, write it down, tape it to your computer screen or, if you must, have it tattooed somewhere you'll see it every day. Whatever it takes, do not fall for an email from a criminal purporting to be the IRS.

The second thing you must remember is another fact that all of us listed above have told you time and time again: If it sounds too good to be true, it probably is.

The IRS, although it's taken steps over the years to be
more considerate of taxpayers, doesn't personally alert everyone of tax breaks. That's your responsibility and I and plenty of others do our best to help out here. But again, not usually on a one-to-one basis.

So when someone, aka a con artist, comes to you out of the blue with a great tax deal, chances are very good that that person is up to no good, at least no good for you

* A “tweet” led me to The OBLIVIOUS INVESTOR’s look at “Long-Term Care Insurance: Should You Buy It? And If So, When?”.

OI quotes the US Department of Health and Human Services (the highlight is mine) –

At least 70 percent of people over age 65 will require some long-term care services at some point in their lives. And, contrary to what many people believe, Medicare and private health insurance programs do not pay for the majority of long-term care services that most people need.”

LTC insurance is not for the rich, who can afford to pay for long-term care out of their savings. LTC is also not for lower-income individuals, who, based on their level of income and assets, will be “on the tit” (i.e. eligible for Medicaid) from day one. It is for the middle and upper-middle class, who have retirement income and significant, but not excessive, savings, and who could be bankrupted if they need to be in a nursing home or receive home health care for an extended period of time.

A nursing home could cost $10,000 per month and the home health care alternative perhaps half that.

* Another tweet led me to “Court Shuts Down Husband and Wife Tax Preparers” at ACCOUNTING TODAY.

The couple literally claimed everything but the kitchen sink (and may have claimed that as well) as business expenses for Shaklee distributors. The article quotes the opinion of U.S. District Court Judge John Jarvey –

To the Musins, the ownership of a small business has been treated as a license to convert almost any of one’s personal expenses into business deductions. According to them, if you believe that looking successful helps make you successful, your clothes, hair care, and manicures are deductible. If your dog barks while you are away from your home based business, it’s deductible. If your child’s nanny ever answered the business phone, the nanny is deductible. If you visit a business associate while on vacation, it is deductible. If you pay rent to yourself, or even if you don’t, it’s deductible. If you have a six year old child, payments to the child are deductible employee expenses. If you have used your living room television in a business meeting, it’s deductible. And your hobbies, like scuba diving, pet cats and flying, easily deductible. It is not any one client or any particular deduction that is at issue here. It is a wholesale pattern of taking deductions without justification that entitles the government to injunctive relief.”

Many tax scams and multi-level marketing scams advertise that you can use your home-based small business to legally deduct a multitude of personal expenses. Ain’t so!

* Martin A Sullivan has an interesting and thoughtful post on “What the Debt Limit Debacle Teaches Us About Tax Reform” at TAX.COM.

* I just discovered that Dr Jean Murray, who provides excellent advice for the small business owner at ABOUT.COM, has another small business blog – DR JEAN MEANS BUSINESS (Let’s get Serious About Your Success).

Check out her post “Starting a Business - Take Yourself Seriously”.

I certainly agree (as per a past battle with an offending blogger) with this advice –

I advocate business owners, even sole proprietors, getting a separate business checking account. For businesses that could run into problems with the IRS as “hobby” businesses (like craft businesses), having a separate business checking account helps maintain that separation. It may not convince the IRS your business isn’t a hobby, but it might help.”

* Joe Arsenault provides a good primer on “Tax Credits vs. Tax Deductions” at CAFÉ TAX.

Joe’s bottom line –

If one or more of these credits apply to you, make sure you are eligible for the credit. If your AGI is expected to be higher than the limit, explore some tax planning opportunities to reduce your AGI and qualify for the credit. Examples like this magnify the importance of tax planning before tax-season, not after!

While I firmly believe that many of the credits Joe discusses should not be in the Tax Code, as long as they are there I have no problem with my clients, and other taxpayers, who qualify taking advantage of them.

Hey, Joe, I miss the Beans.

* Also at CAFÉ TAX a guest post by EA Elizabeth Ruh titled “I’m Inheriting Money, What Now?” provides “a basic introduction to what happens in the tax world when a loved one passed away”.

* Professor Jim Maule repeats a message he has given before in “It’s Not the IRS, It’s the Congress
”. Basically – don’t shoot the messenger.

While it does occasionally “interpret” tax law via regulations and other methods, the IRS does not write tax law. We must remember that it is the idiots in Congress who think up and write the various, and often nonsensical, additions to the Tax Code.

* It seems the BUZZ is read round the world! An email from David of TAXFIX.CO.UK brought to my attention “an infographic which shows the average tax rate around the world”. Check it out if you want to know “Which Countries Pay The Most Tax”.

* I love USA TODAY TV Critic Robert Bianco’s frequent digs at the steaming pile of excrement known as “reality tv”.

No statement of fact could be truer than his comment about two back-to-back “droppings” starring foul-mouthed Brit egotist Gordon Ramsey on FOX last Monday night –

Those are two hours you can more profitably spend elsewhere.”


Saturday, July 16, 2011


* If you still haven’t done so, also check out the premiere issue of my new FREE monthly (except February and March) newsletter LOIS (Lots Of Interesting Stuff). It is full of, well, lots of interesting stuff. AND IT'S FREE!

* Mary Beth Franklin of KIPLINGER gives us an “Insider Interview: IRS Taxpayer Advocate Nina Olson”.

Here are some of the questions asked (highlighted) and part of Nina’s answers -

What’s the most frustrating part of your job? At the moment, it’s dealing with the First-Time Homebuyers’ Tax Credit.

Tell us about one of your recent successes. New rules requiring tax preparers to register with the IRS and pass a competency exam took effect this year

What’s wrong with the current tax code? It’s too complex. It leads to innocent errors and creates opportunities for smart people to exploit loopholes. It also favors people who can afford representation and counsel and discriminates against people who can’t afford to pay for advice.

What’s the biggest myth about tax reform? Narrow tax breaks certainly exist, but the reality is that the biggest “special interests” are us -- the vast majority of U.S. taxpayers. We must under­stand that in exchange for lower tax rates, some tax breaks will be eliminated

* Kay Bell explains what to do if you find yourself exclaiming “Hey, dude. Where’s my check?” in her post “Tracking Down Your Tax Refund” at DON’T MESS WITH TAXES.

* California is offering a different kind of Tax Amnesty with its “Voluntary Compliance Initiative 2”, which is available from August 1, 2011 to October 31, 2011

Voluntary Compliance Initiative 2 (VCI 2) is an opportunity for taxpayers who underreported their California income tax liabilities, through the use of abusive tax avoidance transactions (ATAT) or
offshore financial arrangements (OFA), to amend their returns for 2010 and prior tax years and obtain a waiver of most penalties.”

* TAX GIRL Kelly Phillips Erb tells it like it is regarding the exemption of attorneys from testing and CPE under the new tax preparer regulation regime in her post “IRS Targets 100,000 Tax Professionals for Noncompliance” at FORBES.COM.

The problem – and my counterparts are eager to point this out – is that while tax geeks like me rush to sign up for tax-related continuing education hours, there is nothing that requires that I do so. In fact, I could attend 15 hours of criminal law continuing education hours in order to meet my own state’s requirements and still be exempt from the IRS requirements without a single drop of tax law.

Further, while the three (and in some states, four) days of testing required to pass the bar examination test you on a wide range of legal issues, it’s not tax-specific. On the essay portion, some of the questions may be related to tax but then, some may not. The test questions for the MBE (Multistate Bar Examination) portion focus on Constitutional Law, Contracts, Criminal Law and Procedure, Evidence, Real Property and Torts. Tax is not a focus

The same could be said of CPAs, although I expect the initial CPA exam would have a few more tax questions than the Bar exam (though nowhere near enough to show 1040 competence).

* Eva Rosenberg, the internet’s TAX MAMA (Where’s Poppa?), gives good advice in her post “Tax Preparer Errors".

It seems a reader’s tax preparer made significant errors in her 2010 tax return, which she didn’t discover until too late because she didn’t get to see it before the preparer e-filed it. Mama’s opening remarks (highlight is mine) -

I am so sorry your preparer was so careless. However, it IS good that you have become familiar with the importance of reviewing your tax returns before they are filed. Never let anyone file anything for you until after you have seen it.

Do NOT sign the Form 8879 until you have reviewed your tax return

My cover instructions to clients, which I include with each set of finished returns, states the following (the highlights are as they appear on the instruction memo)-

Please examine these returns carefully to be sure all items of income and deductions have been accounted for properly. You are responsible for all the information reported on the returns. If you find anything that is not in order, or that you do not understand, contact me immediately. It is extremely important that you verify the accuracy of all Social Security numbers on the returns before mailing.”

The issue in Eva’s post also raises a concern about e-filing. Apparently the tax preparer “filed” – in reality submitted - the return without first showing it to the taxpayer. In my case I prepare a manual return and give it to the client to mail. It is impossible for a client to say he/she did not have the opportunity to review the return before mailing.

* Right on! “Restaurant Bans Young Children”. Too bad it is outside Pittsburgh. And I would up the cut-off age to at least 10 years old.

I am a firm believer in the old adage – “Children should be neither seen nor heard!”.


Friday, July 15, 2011


Do your vacation plans this summer include a trip to the casinos in Las Vegas, Reno, Atlantic City, New Orleans, St Louis, Bethlehem or Mt Airy PA, etc, etc, etc, (Gott in Himmel – they are everywhere!) to play the slots?

If the answer is yes be sure to keep proper track of your gambling activity for tax purposes, just in case you come home a winner.

The first thing you should do is join the casino’s “Players Club” and get a membership card, which you can use to track your slot activity at that casino.

You will receive a Form W-2G for each individual slot machine win of $1,200 or more. But you do not have to report as gross income on your Form 1040 the total on all the Form W-2Gs you receive for the year, as had been done in the past.

The Tax Court, in
TC Memo 2009-226 (Ann L Laplante v Commissioner of Internal Revenue) has agreed that a gambler’s aggregate (i.e. “net”) winnings for the day per casino are includible in income rather than individual winnings on a slot machine.

Gambling winnings are included in Adjusted Gross Income, which can affect a multitude of other tax deductions and credits and can increase the portion of your taxable Social Security or Railroad Retirement benefits. Gambling losses, to the extent of winnings, are deducted as Miscellaneous Expenses on Schedule A, but are not subject to the 2% of AGI exclusion. The smaller the amount you report as winnings on Page 1 of the 1040 the better.

According to the Tax Court decision referenced above –

Respondent nonetheless agrees with petitioner’s theory of recognizing slot machine play on the basis of net wins or losses per visit to the casino. Specifically, respondent states the following:

[T]he better view is that a casual gambler playing a slot machine, such as the petitioner, recognizes a wagering gain or loss at the time she redeems her tokens. The fluctuating wins and losses left in play are not accessions to wealth until the taxpayer redeems her tokens and can definitively calculate the amount above or below basis (the wager) realized. See Commissioner v. Glenshaw Glass Co., 348 U.S. 426 (1955).”

The Court decision also states-

No valid reason exists for taxpayers engaged in wagering transactions not to maintain a contemporaneous gambling diary or gambling log”.

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

When you enter a casino have your money in two separate pockets – one pocket for your gambling activity and the other pocket for your other purchases (food, beverage, souvenirs, etc). Keep the money separate for the entire day.

Let’s say you spend this week-end in Atlantic City. On the morning of July 16th you began your gambling at Bally’s Wild West on the Boardwalk. Make the following entry in your notebook –

7/16/2011 – Atlantic City NJ

(1) Bally’s Wild West

Beginning Cash = $200.00
Ending Cash = $315.00
Net Win/(Loss) = $115.00

You may have won $1,300.00 in one slot pull while at Bally’s on July 16th, but you put $1,185.00 back into the machines before leaving the casino. So instead of $1,300.00, as appears on the Form W-2G you got from Bally’s, you would report only $115.00 as actual gambling winnings on your 1040.

On the same day you also gamble at Ceasar’s. You would make the following entry -

(2) Ceasar’s Palace

Beginning Cash = $315.00
Ending Cash = $290.00
Net Win/(Loss) = ($25.00)

Net Daily Activity

Wins = $115.00
Losses = $25.00
The next day you return to Bally’s -

7/17/2011 – Atlantic City

Bally’s Wild West

Beginning Cash = $290.00
Ending Cash = $240.00
Net Win/(Loss) – ($50.00)

Net Daily Activity

Wins = 0
Losses = $50.00

You did not win enough in one pull to receive any additional Form W-2Gs at Ceasar’s or the next day at Bally’s. The $75.00 in net losses would be deducted as a gambling loss on Schedule A.

By reporting $115.00 as gambling winnings on Page 1 of your Form 1040 instead of $1,300 you reduce your AGI by $1,185.00. While your net taxable income would be the same whether you reported $115 or $1,300 on Page 1 and were able to deduct all of your losses on Schedule A – your actual tax liability may very well be less by claiming the lower amount of winnings. And if you are not able to itemize and claim losses you will certainly pay less federal income tax by claiming only $115.00 as your winnings.

You would make similar entries each time you visit a casino during the year.

Not being a gambler I do not know how detailed is the information you get from using your Player’s Club cards. It is possible that print-outs would support the individual activity by date that you have entered in your book. Do not, however, assume the print-out of card activity is enough proof – you should still maintain your own contemporaneous gambling log.

So, Russ, did I get it right?


Thursday, July 14, 2011


So what it left to re-write in the new simple, fair, and consistent Tax Code?

Contributions? I would not change the current rules for deducting contributions to church and charity – except to make the standard deduction for charitable miles equal to the standard deduction for all other miles (the amount currently used for medical and moving mileage) and have it indexed for inflation annually. This deduction would be determined annually by the IRS and not the idiots in Congress, who have not increased the amount in years.

Casualty and Theft Losses? I think I would limit this deduction, without any AGI exclusion, to “out of pocket” casualty losses from Presidentially-declared natural disaster areas and “theft” losses from Madoff-like Ponzi schemes.

Moving Expenses? I would keep the current rules, but make it an “employee business expense” deductible on Schedule A.

Medical Expenses? This is the only area where I have considered maintaining a % of AGI exclusion. I would want to limit the deduction to “excessive” medical expenses. As an alternative to the AGI-based exclusion I have thought about allowing a deduction for expenses in excess of a flat exclusion amount of $5000 for a single taxpayer or $10,000 for a married couple. What do you think about this?

I would once again make taxpayers age 65 or older eligible for an additional personal exemption, and not an additional standard deduction amount. And I would do away with the special tax treatment for legally blind taxpayers. I see no reason why blind taxpayers should be treated differently than any other disabled or handicapped taxpayer.

I have decided that I would not have a “dependent credit” - but instead double the personal exemption for dependent children under age 19.

Before I begin to put my proposals for the new Tax Code into summary format – is there anything I forgot?


Wednesday, July 13, 2011


* Check out my tax tip “How to Take a Deductible Vacation” at the MAINSTREET.COM Tax Center.

* And if you still haven’t done so, also check out the premiere issue of my new FREE monthly (except February and March) newsletter LOIS (Lots Of Interesting Stuff). It is full of, well, lots of interesting stuff. (It lists the date as 2010, but that is a FU - it is actually 2011)

* Some more wise words of advice from Professor Jim Maule in “Surprise! Congress Puzzled By Tax Code Complexity” at MAULED AGAIN. Though I expect they will fall upon deaf ears among the idiots in Congress.

Congress is responsible for what’s in the Internal Revenue Code, and one example of its many contributions to unnecessary tax complexity is recounted in
Objections Raised to Elimination of Legislative Tax Deceit. For whatever political points are scored by standing up and criticizing one’s own handiwork, the members of Congress should shut down the yapping and grandstanding and crank up the doing. Fix the Code. It’s a technically easy thing to do, and the obstacles, chiefly political, can be overcome with courage. Courage. If they need to have a hearing on the definition of courage, that might be a useful expenditure of Congressional staff time. It won’t take long. Courage is doing what is right for the nation while disregarding the benefits, political and otherwise, of catering to the small groups that want the tax law tailored to their preferences.

But I think the Congress will continue as it has, complaining about complexity and doing nothing to fix it while piling on more complexity. Does it not remind us of the five-year-old who trashes his or her room and then complains that the room needs to be tidied up, all the while continuing to pull more toys onto the floor without putting any away? Here’s a challenge for Senator Baucus. The next time someone proposes a tax law change that adds complexity contributing to the tax gap, stand up, explain why it is wrong, and vote against it.”

* Bob Cusack gives us “A Rundown of What Could Be Put in the Obama-GOP Debt Deal” over at THE HILL.

The item speaks of “Tax Loopholes and Reform”. Once again we will see the laziness of the idiots in Congress in action.

There is a looming deadline – the federal government is facing shut-down. Congress will, true-to-form, react to the problem by hastily putting together a mish-mash of poorly thought-out provisions as a quick fix.

The members of Congress are truly idiots!

* Some timely tax tips from TAX GIRL Kelly Phillips Erb – “With Job Losses Soaring, Ten Tax Tips for the Unemployed”.

* “Yes I do!” is my answer to Kay Bell’s question “Do You Have the Highest Property Taxes in the United States?” over at DON’T MESS WITH TAXES. The reason, as Kay points out, is because I live in New Jersey.

While, living in an apartment, I do not pay property taxes directly, it is certainly a factor in my rent.

* From Jean Murray of ABOUT.COM; US BUSINESS LAW/TAXES – “Announcing A New Online Course - Guide to Types of Business”.

The course describes each basic business type, from simplest (sole proprietor) to most complex (corporation) and gives you lots of details on the factors to look for when you are considering which business type to select.

If you sign up, you will receive an email a day for seven days. By the time you have completed the "Guide to Business Types" course, you should have all the information you need to narrow down your search and talk to your tax and legal advisors, armed with facts about each business type

* The latest word on compliance with the new tax preparer regime – “IRS Identifies 100,000 Preparers Who Failed to Follow New PTIN Rules”.

Starting July 7, 2011, the IRS began sending letters to about 100,000 tax return preparers who either used outdated PTINs or used social security numbers as identifying numbers on returns they prepared this filing season. The letters explain the new oversight program, inform preparers of how to register for a new PTIN, or renew an old PTIN, and where to get assistance.”

In addition, “the IRS later this year also will send letters to taxpayers who appear to have had assistance with their returns but lack tax return preparer signatures. The letter will inform taxpayers how to file a complaint against preparers who failed to sign returns and explain how to choose legitimate tax preparers. The goal of the letters is to protect taxpayers by ensuring that all paid federal tax return preparers are registered with the IRS, and sign tax returns they prepare and use an identifying number when required to do so.”

I am glad the IRS is contacting taxpayers who used preparers who did not sign the return. I would, however, hope that the letter would inform taxpayers of the penalties they will be charged by the IRS if they continue to use a paid preparer who is not “in the system” and does not sign the return. The taxpayer as well as the offending preparer should be fined – as had been discussed by David Williams in his presentations last year.


Tuesday, July 12, 2011


My new fair, simple and consistent Tax Code will continue to allow taxpayers to claim Miscellaneous Deductions on Schedule A for employee business expenses, investment expenses, tax preparation costs, and legal fees for the protection and collection of income. They would all be deductible in full – there would be no 2% of AGI exclusion.

Some employees receive a salary and are reimbursed in full for any and all “employee business expenses” via an “accountable plan”. Others, generally outside salesmen, receive a base salary and/or commissions, and perhaps a flat monthly “expense allowance” which is included in W-2 wages, and any and all employee business expenses are truly “out of pocket”. Allowing a deduction for unreimbursed employee business expenses assures that the true net economic benefit is being taxed.

I would, however, make some changes to the current rules for deducting business use of an automobile – which would apply to both employee business expenses and Schedule C, E and F.

For the most part, taxpayers who use their car for business, other than commuting, would own a car whether or not one was needed for business. The business use, however extensive, is basically secondary to personal use.

I own a car. I have always owned a car, even when I was an employee (many, many, many years ago). Although a large percentage of my current driving is business related (because, as I work out of a home office, I have no “commute”), I own the car primarily for personal and not business reasons, and would own a car whether it was needed for business or not.

If you use your car for business, either as an employee or a self-employed individual, the standard mileage allowance for business miles would not include a factor for depreciation. Basically the standard mileage allowance for business miles would be the same as the standard mileage allowance for medical and moving miles. This standard mileage allowance would also be used for miles related to doing volunteer work for a church or charity – the standard mileage allowance for charitable driving would no longer be determined by Congress.

There would be one standard mileage allowance for all deductible travel, which would be indexed annually for inflation in the same manner as everything else in the Tax Code is indexed for inflation, and not based on a separate calculation.

Taxpayers using their car for business would continue to have the option of using the appropriate business use percentage of actual expenses, but without depreciation. Those who lease a car and use it for business could also use the standard mileage allowance or actual expenses, but this deduction would not include the monthly lease payment.

In the case of motor vehicles used 100% in a business – trucks, vans, limos, cars that are leased out to others (including one’s corporation) or used exclusively by couriers or for deliveries – a deduction will be allowed for 100% of the actual costs of maintaining and operating the vehicle, including depreciation. The standard mileage allowance would not be allowed, and there would be no Section 179 deduction.

Deductible investment expenses would be limited to investment advisory fees charged by brokerages and consultants, subscriptions to investment advisory services, fees to collect dividends and interest (often reported on Form 1099-DIV), including service charges paid as part of a dividend reinvestment plan, investment management software, although there would be no deduction for actual computer usage, and certain pass-through investment expenses from partnership K-1s.

There would be no deduction for minor pedestrian expenses like safe deposit box rental fees, subscriptions to Smart Money or the Wall Street Journal, and basic account maintenance fees.

Losses on IRA investments (if all IRA accounts have been liquidated and the total amount received is less than the “tax basis”) and losses on deposits in an insolvent or bankrupt financial institution would be claimed on Schedule D. A theft loss deduction would be allowed for losses in Madoff-like Ponzi schemes. Repayments of Social Security and other taxable benefits received in prior years would be treated as an adjustment to income.

Gambling losses, to the extent of reported gambling winnings, would also now be deductible “above-the-line” as an adjustment to income. This way individuals would not be paying tax on net gambling activity for the year of 0, or a loss, as is currently possible.

A taxpayer winning a legal settlement in the hundreds of thousands of dollars will usually pay a substantial percentage of the award in legal fees, so that the resulting economic benefit to the “winner” is much less. Taxpayers receiving taxable legal judgments and settlements include the gross settlement in taxable income. While the legal fees relating to awards for claims of unlawful discrimination, and certain other claims, are currently deductible “above-the-line”, in all other cases these fees are claimed as a Miscellaneous deduction on Schedule A. In my new Tax Code all contingent legal fees would be fully deductible “above-the-line” as an adjustment to income.

If the Estate Tax were to remain in the Tax Code in some form I would continue to allow a Miscellaneous deduction for estate taxes paid on income that is taxed on both the Form 706 and the Form 1040 (i.e. retirement plan distributions).


Monday, July 11, 2011


++ When discussing the fact that almost half of Americans do not pay any income taxes some folks say that they are not off the hook altogether because they are paying federal, and sometimes state, “payroll taxes”, like the FICA tax.

That argument doesn’t cut it with me. FICA “tax” is made up of payments to Social Security and Medicare. These are not true “taxes”.

Payments to Social Security are contributions to a retirement and disability fund. Individuals who pay into Social Security will receive a pension for life upon retirement, with benefits also available to surviving spouses and children, and are eligible to receive benefits if they become permanently disabled.

Payments to Medicare are a form of health insurance premium, the benefits of which are available upon reaching age 65.

State “payroll taxes” usually consist of contributions to an unemployment, disability or family leave fund that provide specific benefits in specific situations.

Regardless of how the mechanics of the Social Security and Medicare “funds” actually work, payments for FICA is not an income tax. The way the Tax Code is currently written, the cost of government is truly born by only half of those receiving its benefits.

++ I have been a vocal supporter of the concept of licensure and registration of 1040 preparers from the very beginning. However I do take exception with some of the individual regulations and requirements that are or will be in place.

It now appears that in addition to having to take a test to prove to the IRS that I know what I have been doing, without incident, for almost 40 continuous years now, and pay to waste two (2) hours each and every year sleeping through a repetitive sermon on ethics (if I am not honest and ethical at this point 2 hours a year of preaching ain’t going to make me so), in order to continue to practice my chosen profession, I will also be required to send my fingerprints to Washington.

Do the members of all professions that require a federal license have to provide their fingerprints as part of the initial application process? Will CPAs and attorneys who apply for a PTIN be required to submit their fingerprints?

I seem to recall hearing somewhere that once the fingerprints are submitted they will be compared to a national database to see if the applicant is a convicted felon, and that once this check has been completed the fingerprints will be destroyed. If this is truly the case I suppose it is another one-time inconvenience that I will simply have to “grin and bear”. But if the fingerprints will be kept forever in some kind of federal file then that is another thing altogether – something that I oppose.

So, what is the story on the fingerprints?

++ With recent talk of balancing the budget leading once again to the simple solution of “tax the rich, because they can afford it”, let me quote from a TWTP post of a few years ago with my thoughts on this solution -

I am also against taxing the rich simply ‘because they can afford it’. Recent studies have shown that the ‘rich’ already pay more than their share of taxes. The Tax Foundation’s TAX POLICY BLOG recently posted “
Tax Burden of Top 1% Now Exceeds That of Bottom 95%”.

I do not believe in a highly ‘progressive’ tax system that ‘punishes’ such positive behavior as ambition, entrepreneurship and just plain hard work with a higher tax rate.

It is argued that the rich should pay more because they ultimately get more benefit from the programs and protections of the government (although those who pay absolutely no income tax seem to me to be getting much more benefit from government). With a relatively flat tax system the rich would still pay more than the not so rich – 25% of $1 Million is a lot more than 25% of $50,000.”

Close the loopholes and do away with all the various special interest deductions and credits – yes (as I have done in my series on re-writing the Tax Code). But do not just automatically raise the tax rate of the successful.


Saturday, July 9, 2011


* Have you seen my new FREE monthly (except February and March) newsletter LOIS? Click here to download the premiere issue.

* Trish McIntire reminds us of the basic “Energy Credits for 2011” over at OUR TAXING TIMES.

She points out something very important to remember –

The maximum credit is $500. Of that, only $200 can come from windows. And this is the maximum lifetime credit. So if you took this credit anytime after 2005, you have to include the prior credit in the calculation. Say in 2007 you took a credit for windows for $200, that only leaves you $300 possible credit left and none for windows. Those new windows/ doors, heat pump in 2010 that got you a $1500 credit back when you did your 2011 tax return, maxed you out. No more credit no matter the cost of the new improvements.”

I would like to add to her comments that not all storm windows and doors or water heaters and boilers qualify for the credit. To be eligible the item purchased must meet certain standards. As I point out in my June posting on the subject –

When you purchase any of the listed items ask the salesperson for a Manufacturer’s Certification Statement - a signed statement from the manufacturer certifying that the product or component qualifies for the tax credit.

If you have already purchased an item that you think may qualify but do not have a Manufacturer’s Certification Statement go back to the salesman and ask one. You can also go to the website of the item’s manufacturer and download a Certification Statement."

You can go to the Energy Star website to find out what the specific qualifications are for individual items.

You are not required to attach a copy of the Manufacturer’s Certification Statement to your tax return – but you need to keep one “on file” with your 2011 documentation in case you are questioned. And you will need to give a copy of the Certification Statement to your tax preparer at tax time to verify that your purchase qualifies for the credit.”

* Trish also reports on a recent Tax Court decision in “Personal Caregivers”.

The post proves that “brevity is the soul of wit” – and is so concise that I think I will reprint it in its entirety. Her “bottom line” (aka “best suggestion”) is an excellent point.

The Tax Court has held that payments to individuals for personal care can be a medical deduction. The case in question (Estate of Baral, 137TC no. 1), centered on the IRS disallowing the medical deduction for payments made to individuals who provided personal care to the taxpayer. These were not professionals who provided medical care for the taxpayer but employees who came into take care of a patient who could no longer care for herself. The goal was to keep the lady in her home as opposed to a medical care facility.

The Tax court ruled that personal care services can be classified as qualified long term services if they are prescribed by a licensed physician as part of a plan of care for someone who is chronically ill.

Best suggestion for taxpayers, or their families, who are paying for sitters and attendants; get a Doctor’s statement that the expense is necessary for the proper care of the patient (taxpayer). Then it can be a deducible medical expense

* As 2011 recently passed the half-way mark, Kay Bell gives us a “slide show” of “10 Mid-Year Tax Moves to Make Now” at her BANKRATE.COM blog.

It's summer, the best time of the year to think about your taxes. Really.”

Some good moves on the list –

· Adjust Your Withholding
· Evaluate Estimated Tax
· Get Organized

You may need patience to view all of Kay’s moves. I don’t know if it was just my GDMFPOS computer, often FSAM, but it took an awful long time to view the entire slide show (I almost gave up half way through).

* TAX PROF Paul Caron brings us a list of “
The 25 Documents You Need Before You Die” from a Wall Street Journal item.

Having been the Executor for my parents’ estates I know the importance of having these documents organized and readily available place before going to your final audit.

* At BNASoftware Diane Freda tells us “
Tax Preparers' Comments Run Gamut on IRS Competency Testing

Some tax preparers who will be affected by official competency testing with the Internal Revenue Service take the most extreme view that IRS should force return preparers to get an accounting degree, while others say anyone preparing taxes for five years without problems should be grandfathered, according to recent comments to the agency.”

When the IRS first began investigating the possibility of regulating tax preparers, and made its initial call for comments on the concept, I recommended a “grandfathering” exemption from testing for those preparers who had earned a certain number of total CPE credits in the five-year period prior to the initiation of the regime. I don’t know if the 5-year look-back mentioned above refers to my input (I did not respond to this particular call for comments), of if other preparers agree with my idea.

Diane points out -

The middle view in comment letters IRS received on Notice 2011-48 was that mandatory testing should be mainly multiple choice, focus on common errors found in the Form 1040 series, make 75 percent to 80 percent accuracy a passing grade, and be offered frequently enough that preparers who fail can take the test again quickly. Preparers also said they did not want to have to travel too far to take the test.”

While I would still prefer being exempt from the test via “grandfathering” as per my suggestion, if I have to take the damned thing I would agree with the “middle view”.

* With all the talk about the need to raise taxes and cut essential services to balance federal and state budgets, Sean Eichenberger, author of the FRESH PERSPECTIVE blog at, lists the “
Fifteen Silliest Uses of Taxpayer Money” on the federal level.

Troubled Asset Relief Program: $700 billion. Project budgeted deficit for 2011: $1.4 trillion. Spending $3 million of taxpayer money on treadmills for shrimp: Shameless!

Here is one of the fifteen -

Study of baby names: $1 million

This study aimed to ferret out trends in baby naming. The astounding conclusion: ‘Popular names are popular with parents’

Hey, I could have told them that for only $25.00!

Let’s face it – any government budget could be easily balanced without raising taxes or cutting services by simply removing pointless pork.

* Professor Annette Nellen brings to our attention the “
Senator Rockefeller Tax Proposal” over at 21st CENTURY TAXATION.

As is usual with the idiots in Congress it is a simple quick fix, not at all addressing the problem of tax complexity and the issue of hiding social programs in the Tax Code but simply making a few changes to raise money. Annette briefly comments on each of the major items in the proposal.

I have not heard the name “Rockefeller” in a long time. I remember his more famous relative Nelson, who was Governor of New York and Vice President under Gerald Ford in the mid 1970’s. I seem to recall that he died “in the saddle”, so to speak, at age 70. And I also recall that his wife’s nickname was Happy.

* BO is a twit! I am not “dissing” our President, just acknowledging the fact that he, like me, is on Twitter. Michael Cohn explains in “
Obama Tweets on Taxes” at ACCOUNTING TODAY.

President Obama took to Twitter for the White House’s first-ever Twitter Town Hall, answering questions from his “tweeps” about taxes, the economy and other subjects.”

Here is one question posed to the President -

What changes to the tax system do you think are necessary to help solve the deficit problem and for the system to be fair?

Would you be surprised to find that the answer basically bragged about his achievements in providing tax relief for middle-class families and totally avoided a proper answer to the question, mentioning his popular corporate jet sound bite (i.e. reading from the Party script)? BO is, after all, a politician.

* Joe Kristan heads to the hills for a “
Summer Break 2011”. Until he returns at the end of July the ROTH AND COMPANY TAX UPDATE BLOG will go with “summer reruns” of past gems of wit from Joe.

I am stuck in NJ for the month of July, finishing the GD extensions and doing corporate returns for the few corporations that I still do (can’t say no), although I do have some theatre outings scheduled for throughout NJ.

So, Joe, enjoy!

* I get my Christmas cards from the American Humane Association each year. Like the birthday cards I send out during the year, they are all cat/kitten-themed, with the occasional dog/puppy. Get a head start on the Christmas season - click
here to check out this year’s selections.


Friday, July 8, 2011


Here is how investment interest would be taxed in my new simple, fair and consistent Tax Code.

(1) When it comes to the question of taxing municipal bond interest I am “bi” – I could go either way. I am not against taxing the interest earned on municipal bonds, and the dividends paid by mutual funds that invest in mutual bonds. But I would also be willing to continue to exempt this income from federal taxation. Or I could tax only the earnings of “private activity” bonds, which are currently taxed under the dreaded AMT.

However, I think at this point I would tend toward taxing municipal bond interest the same as any other kind of interest.

(2) My new Tax Code would do away with “qualified” dividends. All dividends would once again be taxed as ordinary income.

The reason certain dividends were allowed “qualified” status and as such taxed at lower rates was to somewhat alleviate the “double-taxation” of corporate dividends. Corporate profits are taxed on the corporate return, and dividends, which are a distribution of corporate profits, are also taxed on the individual tax return of the shareholder. My new Tax Code would do away with the double taxation of corporate dividends by allowing corporations to claim a tax deduction for “dividends paid”.

If a corporation had a net profit of $100,000, and paid $90,000 out to shareholders in dividends, it would pay federal corporate income tax on only $10,000. The shareholders would pay tax on the dividends received at ordinary income rates.

Coupled with this new “dividends paid” deduction for corporations would be the total abolition of all current special interest corporate deductions, credits and loopholes. A corporation would simply report gross income and deduct “ordinary and necessary” business expenses and come up with a net profit or loss. Dividends paid to shareholders would be deducted from any gain to determine taxable income.

There would be no “special deduction” for dividend income, and charitable contributions would be 100% deductible as a business expense on the Form 1120, regardless of the amount of profit or loss.

One side benefit to doing away with the category of “qualified” dividends on the Form 1040 is that brokerage and mutual fund houses will no longer need until the middle of March to properly prepare year-end Consolidated 1099 reports. The 1099 information can be prepared and sent to taxpayers by January 31st, as was done before qualified dividends were created, and there will be no more need for one or more “corrected” copies.

(3) When it comes to the taxation of long-term capital gains, and capital gain distributions, I would return to my early days in “the business”. I would not have a separate, lower tax rate for long term capital gains (as I would not have a separate, lower tax rate for qualified dividends) – instead my new Tax Code would bring back the 50% “capital gain exclusion”.

When I first started preparing 1040s back in the early 1970s the Schedule D allowed for a 50% deduction for net long-term capital gain – only half of such gains were included in taxable income. So if net long-term capital gain was $10,000, only $5,000 was carried over to Form 1040 as income. There was only one set of tax rates for all income – no special lower rates for capital gains. This 50% exclusion was later increased to 60%.

The result would be that capital gains, and capital gain distributions, would be taxed at a rate half that of the rate for “ordinary income”, without having to create a separate set of tax rates and a separate tax calculation. If net long-term capital gain on Schedule D was $10,000, and the taxpayer was in the 25% tax bracket, the effective tax on the net capital gain would be 12.5% - calculated at 25% tax on $5,000 of income.

I would also increase the maximum net capital loss deduction from $3,000 to $5,000 and index it for inflation. And I would allow taxpayers net capital losses to elect to “carryback” losses for three years to apply against capital gains reported in prior years.

I first proposed this idea in a letter to Dubya back in 2002. Here was my thinking at the time (see my post Dear George) –

During the late 1990s and into 2000, when the stock market was flourishing, many taxpayers realized, and were taxed on, large capital gains, including excessive capital gain distributions from mutual funds. In most cases these capital gains were reinvested in the market and in additional mutual fund shares. In 2001 and 2002 the bear market provided these same investors with substantial capital losses.”

I had clients who had 6-figure gains in one year and 6-figure losses in the next. The net effect of 24 months of investing was basically 0 gains or an actual net loss. However the clients paid tons of tax to Sam on the gains in the first year, but were limited to deducting $3,000 in losses in the next year and a loss carryover that will last for decades and, unless they have a big score in the future, may never be fully deducted.

It seems only fair in such a situation that investors be allowed to carry back the losses to apply against the earlier gains of a bull market and get a refund of the taxes paid on these gains.

FYI, in response to my letter I received a brief form “thank-you for sharing your views and concerns” letter from the “Director of Presidential Correspondence”.

(4) Since the new Tax Code will not allow a deduction for depreciation of real property, I would remove the income and deduction limitations on claiming losses from rental real estate with active participation.

Business, including rental, losses passed through to “limited” partner investors on a Form K-1 would be treated similar to investment interest, with the deduction limited to net K-1 income from all passive activity K-1s. Suspended losses could be deducted in the year the investment is sold or terminates. The “at risk” rules would remain as currently written.

As mentioned above under my discussion of corporations, all current special interest deductions, credits and loopholes for partnerships, limited or otherwise, would be abolished. A partnership would simply report gross income and deduct “ordinary and necessary” business expenses and come up with a net profit or loss to be allocated on the K-1s.

So what do you think about these proposals?