Monday, October 31, 2011


In today's ZIGGY cartoon by Tom Wilson our hero is sitting at a desk in the offices of the Internal Revenue Service.

The IRS agent tells Ziggy, ". . .and check this box if you want your refund to go to less fortunate taxpayers!"

But Ziggy does not have to check the box - Congress has already checked it for him!  Chances are his refund would be bigger if it were not for the almost half of Americans who, thanks to the idiots in Congress, either pay absolutely no federal income tax or who actually make a profit by filing a Form 1040.

And did you see Tom's comment to my Happy Halloween post?

"Tax classes start Wednesday with 2 hrs of ethics, which means that half the class will be playing on their laptops/notebooks, 1/4 will be reading paperbacks/newspapers, etc. and the other 1/4 will be walking around or taking long smoking/bathroom breaks..."

I am usually in the 1/4 that read newspapers - or other sections of the workbook. 

Actually I think a Congressperson would be scarier.


Saturday, October 29, 2011


I am confused. 

According to the IRS “e-News for Tax Professionals” Issue 2011-42 that I just received via email (highlight is mine)-

The IRS is providing special transitional relief to banks and other payment settlement entities required to begin reporting payment card and third-party network transactions to the IRS on new Form 1099-K.

By law, reporting is scheduled to begin in early 2012 for payment card and third-party network transactions that occurred in 2011. But under new guidance, they will not have to begin reporting until 2013.  Details on the special transitional relief and reporting requirements are in these FAQs, and more information on this relief is in Notice 2011-88 and Notice 2011-89.

I have not found anything in a quick review of the referenced FAQs or Notices that reporting is postponed until 2013.

Under the FAQs it states–

Information reporting for payment card and third party network transactions are due to the IRS by Feb. 28 (March 31, if filed electronically), of the year following the transactions. The first Forms 1099-K will be due for calendar year 2011, and must be submitted to the IRS by Feb. 28, 2012 (March 31, 2012 if filed electronically).” 

And the notices involve relief from back-up withholding and penalties for reporting incorrect information.

I have found nothing else to suggest that the requirement has been postponed.  So it seems the IRS “misspoke”.


+ Don’t forget to check out the NOVEMBER issue of LOIS.

+ William O’Keefe correctly tells us that we must make “Job One: Tax Code Rewrite” in an op-ed piece at Investor’s Business Daily.

O’Keefe points out that Obama’s current $447 Billion “stimulus” plan, like the previous one, “fails to address one of the fundamental factors hindering investment and hiring: uncertainty.”

The solution -

Bottom line: We need systemic reforms to our tax code and regulatory policy.” 

The piece provides some interesting statistics -

"During the last major tax code rewrite in 1986, the IRS instructions for Form 1040 totaled 52 pages. For tax year 2009, those same instructions more than doubled — weighing in at 105 pages.

According to the Tax Foundation, the Internal Revenue Code plus all IRS regulations grew from 5.7 million words in 1986 to 9.1 million words in 2005. And both the Code and regulations have expanded significantly since. Going back further, in 1955 the Code and all IRS regulations totaled just 718,000 words.”

+ An article titled “Top American Earners Paying More Tax” by Leroy Baker of TAX-NEWS.COM tells us –

The income earned by the top 1% of United States taxpayers has declined for the second year in a row while their average tax rate has increased, according to a study by the Tax Foundation (TF).”

The article tells us -

The TF's analysis is based on new data from the Internal Revenue Service on individual income taxes for the calendar year 2009, and shows that the average federal tax rate for those reporting at least $344,000 in income has increased from 22.5% in 2007 to 24.0% in 2009, while the average income for the top 1% has declined from $1.4 Million to $1 Million over the same period.”

And -

The TF discovered that, in 2009, the top 1% of tax returns earned 16.9% of adjusted gross income and paid 36.7% of all federal individual income taxes.”

+’s TAX GIRL Kelly Phillips Erb is worried about a possible change of attitude at the IRS based on a recent client-related telephone interaction with a representative of the Service, and talks about her concerns in “IRS Gone Bad: Are Things About to Get Even Worse?

It was the first of a number of incidents that I would have previously considered to be out of character for IRS.  Shocked by what appeared to be a change of direction from the ‘kinder, gentler IRS’ in the 90s, I asked my colleagues on twitter whether they had noticed a difference in the IRS treatment of taxpayers:

The answer was a resounding yes.”

In my almost 40 years in the business I can count on the fingers of one hand (and have fingers left over) the number of times I have discussed a client issue with the IRS over the phone.  I do not trust what I am told via telephone.  I respond to client issues by written correspondence only.  It takes more time to resolve the issue, but I have found that I get “satisfaction” most of the time.

+ Russ Fox reminds those of us who do e-file (I do not – because I cannot do so without purchasing flawed and expensive tax preparation software) that “Irene E-File Deadline is Halloween Morning”.

+ Daniel Stoica quotes an old IRS “Summertime Tax Tip” in his post “Five Tax Tips for Recently Married Taxpayers”.

The first item of the STT is especially important, and timely, if you got married in 2011 and changed your last name to take that of your spouse.

Notify the Social Security Administration. Report any name change to the Social Security Administration, so your name and Social Security Number will match when you file your next tax return.”

+ The Tax Foundation’s TAX POLICY BLOG reports “The Latest on Property Taxes”.

The post includes a chart of the average annual change in state and local tax revenue since 2007 from the U.S. Census Bureau.  Property taxes show the highest increase – at 5%.

This is obviously no surprise for residents of the Garden State of New Jersey.

+ Bruce, the MISSOURI TAX GUY, “tweeted” a great quote from Albert Einstein -

The difference between genius and stupidity is that genius has its limits.”  

For some reason it makes me think of Congress (and they certainly do not fall into the category of genius).

+ Check out the interview with fellow tax blogger Prof Annette Nellen of 20th CENTURY TAXATION – “TAX MAVENS:  Annette Nellen: Tax Reform Advocate” – in the Summer 2011 issue of “The Contemporary Tax Journal” published by the San Jose State University Masters of Science in Taxation (MST) Program in the Lucas Graduate School of Business

The issue also has a good article on “Real Estate Professionals Beware”. 

+ Some “horn tootin’” - I just discovered that THE WANDERING TAX PRO is on Prof Jim Maule’s list of “Mauled Again's 10 Favorite Tax Blogs”!  Jim is a Professor of Law at the Villanova University School of Law.

Thanks for including me, Jim!

+ Over at the MISSOURI TAX GUY we learn that “Small Business Retirement Benefits Will Face Trouble With New Tax Reform” in a guest post by Tim Chen of NERDWALLET.

The post also takes a look at some of the most common choices for small business owners.

+ Just an observation – Kelly Phillips Erb mentioned in one of her posts last week that “Romney is rich. As in ├╝ber rich. Romney’s net worth is estimated to be northwards of $250 million. He is thought to earn close to $10 million in income per year with some speculation that the number is closer to $40 million”.  Why would someone with all that money want all the agita that comes with running for office, and if winning actually having to be President? 

JHC – if I had $250,000 Million in investments, and made $10 Million per year in income, the last thing I would want to do is be President.  I would just enjoy myself.  If I had 1/10th of that in investments and annual income - i/20th even - I would do nothing but just enjoy myself.

If I had Romney’s money I would probably start a foundation for animal welfare and arts charities to keep me busy. 


Thursday, October 27, 2011


A flat tax, like the 20% one proposed by Republican Presidential candidate Rick Perry, is not as simple as it may sound – despite how simplistic his one-page (not quite a postcard) “Sample Tax Return” appears.

Under Perry’s flat option, one begins with “everything is table” and adds “except Social Security and Railroad Retirement benefits, qualified dividends, and long-term capital gains”.

Or does it begin with “everything that is currently taxable continues to be taxable” except Social Security and Railroad Retirement benefits, etc?  I expect that is where it would begin.

The “Sample Tax Return” that Perry has suggested would need more than just one line for “Your 2014 Income”.  What makes up this income?  W-2 wages, interest (currently taxable and exempt, or just currently taxable), net income from self-employment, rental income, income from partnerships, S-corporations, and estates, short-term capital gains, alimony, etc, etc, etc?  And would these categories of income continue to be taxed as they currently are?

There would need to be a page 2 to identify the sources of “Your 2014 Income”.  And we would still need Schedules C, D, E and F to report the income.  Or does Perry mean gross income from all sources is taxed, with no Schedule C, E, or F deductions?  And a Schedule SE would be needed to report the self-employment tax.  Unlike Cain, Perry does not mention abolishing the FICA payroll tax, so I expect he also means to continue the self-employment tax.

He then goes on to say “nothing is deductible” and adds “except mortgage interest, charitable contributions, and state and local tax”.  Is that mortgage interest on your primary principal residence only, or also on a second personal residence?  Is there a cap on the principal amount on which mortgage interest can be deducted?  Is mortgage interest limited to interest on “acquisition indebtedness”?  And does “state and local tax” also include real estate tax, which is a local tax?

Presumably there would be no deductions for alimony paid, retirement plan contributions, self-employed health insurance premiums, ½ of self-employment tax.  Or are these deductions, currently allowed “above the line” to be included in the determination of “Your 2014 Income”?  Is Perry’s “Your 2014 Income” the same as the current Adjusted Gross Income (AGI)?

These are all questions that need to be answered.

So you see – a flat tax, while certainly infinitely simpler, and “more better”, than our current mucking fess, is not necessarily simple. 

Perry’s flat tax system, even if it is the only system and not an “option” as he stupidly suggests, would not put tax professionals like me out of work.  We would still be needed for the supplemental schedules C, D, E, F, and SE. 

As I have always said –

(1)  Regardless of how simple the tax return is taxpayers will still seek out a tax preparer to avoid the inconvenience of preparing it themselves, and

(2)  I would make more money, experience substantially less agita, and have limited GD extensions if I did nothing all day during the tax season but complete a Form 1040A or 1040EZ type form.

Once I have completed the remaining 2010 GD extensions I will, as previously promised, compile my proposed new Tax Code into an outline and make it available.


Wednesday, October 26, 2011


To quote an Alan Jay Lerner lyric from MY FAIR LADY – “Damn, damn, damn, damn! continues to FU the formatting of my blog posts.  This is very frustrating, and I waste too much time trying unsuccessfully to fix the FUs.  Will I have to change my blog host?

A “shedfull” of BUZZ again this installment.

+ Don’t forget to check out the OCTOBER issue of LOIS – or the new NOVEMBER issue!

+ Tax attorney Robert W Wood, Kelly Phillips Erb and Peter J Reilly’s tax blog colleague at FORBES.COM, talks about the effects of the Tax Reform Act of 1986 in “Reagan’s Law Redux”.

Robert states that - “Of the myriad changes made in 1986, most were good. Some were not.”  He goes on to correctly note that perhaps the worst outcome of TRA 86 is the monster that the dreaded AMT has become -

When enacted in 1969, the AMT targeted tax shelters used by a few wealthy households. The 1986 reform unleashed the AMT in ways aimed at virtually every kind of deduction. Indeed, for all the good the 1986 Act did, the grasping hand of the AMT arguably took away what the other hand gave. The AMT today lacks theory and equity and cries out for repeal.”

+ And Len Burman joins Robert and I (click here for my FORBES guest post) with FORBES’ theme of the 25th Anniversary of TRA 86 by providing some personal reminiscences about his personal involvement (as a then Treasury staffer) with the passage of the Act in “Fundamental Tax Reform Is Essential, Inevitable and Impossible”.

Len also muses on the possibility of a “Tax Reform Act of 2014” -

Everyone agrees that the tax system is complex, unfair, and inefficient. And it doesn’t come close to raising enough revenue to pay for the government, whose needs will only grow as the baby boomers retire and health care costs continue to rise.”

However -

The only problem is that tax reform is really, really hard and the political process in Washington has eroded far more than the tax code since 1986.”

I tend to agree when Len concludes -

“My bottom line: tax reform has never been more necessary, it’s hard to see a solution to our budget problems without it, and it’s just impossible.”

BTW, Kelly Phillips Erb (click here) and Peter J Reilly (click here) also continue the theme.

+ I will put the subject of TRA 86 to bed with Joe Kristan’s “Tax Reform Carnival”.

+ The National Society of Accounts (NSA) is making a “Special Limited-Time Only NSA Trial Membership Offer”.

"Main Street" tax and accounting professionals are invited to join the National Society of Accountants with a free trial membership through 12/31/11!

Take advantage of this opportunity to experience the national tax and accounting professional community absolutely free of charge- no payment is required to participate in the trial.”

I was a member many years ago.  Maybe I will try the free trial.

+ Thanks to Twitter I came across a new (to me) tax blogger – Kathy Bylkas of Colorado Springs – who writes the YOUR TAXLADY blog (not to be confused with former “just plain” TAX LADY Ronnie Deutsch).

Here recent posts have concerned real estate issues, such as “Tax Guide for Vacation Rentals”.

+ Even a crazy person can say something sane every now and then.  According to KFGO (the Mighty 790) “Bachmann On Taxes: Everyone Should Pay Something”.

During the Las Vegas debate she said every American should pay some amount in taxes “even if it's a dollar.''

For some time now I have been, in response to the fact that half of Americans pay absolutely no federal income tax, calling for a true “minimum tax” – every non-student taxpayer with income age 18 or over should pay a minimum tax of $100.00.

+ Daniel Stoica, fellow twit and frequent “retweeter” of my TWTP post tweets, had provided an excellent and comprehensive post to answer the question “Can a Husband and Wife Run a Business As a Sole Proprietor Or Do They Need to Be a Partnership?

Thanks, Daniel, for the retweets!

+ Trish McIntire explains what to do to “clean up your files and make sure you have documented your work” in “After the Audit” at OUR TAXING TIMES.

+ A “tweet” from @IRSnews led me to a great resource on the IRS website titled “Life Events That Can Affect Retirement Savings”.


Tuesday, October 25, 2011


Republican Presidential candidate Rick Perry has announced “My Tax and Spending Reform Plan” in an op-ed piece in the Wall Street Journal.

Perry begins his piece with a statement of fact -

The folks in Washington might not like to hear it, but the plain truth is the U.S. government spends too much. Taxes are too high, too complex, and too riddled with special interest loopholes. And our expensive entitlement system is unsustainable in the long run.”

And goes on to propose a “’Cut, Balance and Grow’ plan to scrap the current tax code, lower and simplify tax rates, cut spending and balance the federal budget, reform entitlements, and grow jobs and economic opportunity”.

The portion of Perry’s plan that concerns 1040 filers includes the following provisions -

·   Give Americans “a choice between a new, flat tax rate of 20% or their current income tax rate. The new flat tax preserves mortgage interest, charitable and state and local tax exemptions for families earning less than $500,000 annually, and it increases the standard deduction to $12,500 for individuals and dependents.  This simple 20% flat tax will allow Americans to file their taxes on a postcard.”

·   Eliminate the tax on Social Security benefits, boosting the incomes of 17 million current beneficiaries who see their benefits taxed if they continue to work and earn income in addition to Social Security earnings.”

·   Eliminate the tax on qualified dividends and long-term capital gains to free up the billions of dollars Americans are sitting on to avoid taxes on the gain.”

·   Abolish “the death tax once and for all, providing needed certainty to American family farms and small businesses”.

·   Repeal ObamaCare.

·   Give “younger workers the option to own their Social Security contributions through personal retirement accounts that Washington politicians can never raid. Because young workers will own their contributions, they will be free to seek a market rate of return if they choose, and to leave their retirement savings to their dependents when they die.”

My reactions –

1)   I support his flat tax proposal, keeping only the deductions Perry suggests.  But I would not limit the deductions based on AGI.  I do not see why we should offer taxpayers a choice between a flat tax and the current tax – shred the current tax system completely and establish the flat tax.  This is not the first time a choice has been suggested, and I opposed it the first time around.  And, as I have said when this idea was first proposed (I think by Obama), I doubt a “postcard” tax return would be sufficient to properly report income.  At best there would be a one-page 1040-EZ.

2)   While I am not against exempting Social Security and Railroad Retirement benefits from taxation if it fits into the plan, I have in the past suggested that we instead tax these benefits the same as any other retirement plan distribution under the current Simplified Method.

3)   I do not support completely eliminating tax on “qualified” dividends and long-term capital gains.  As I have said in the past, I would allow corporations a “dividends paid deduction”, tax all dividends received by individuals as ordinary income, and allow a 50% “capital gain deduction”.

4)   I would support abolishing the so-called “death tax” as long as we maintain the stepped-up basis of inherited property.  Keeping the stepped-up basis is more important to me than repealing the estate tax altogether.

5)   I do believe that the current “Obamacare” system is too convoluted and would support its repeal, as long as Congress looked at other ways to provide relief for high health insurance costs.

6)   I am all for allowing new workers entering the Social Security system to “own” their accounts.  I would support employee and employer contributions to Social Security being deposited into an actual account, untouchable until age 62, which allows workers to select either a money market, US Treasuries, or an index fund, or a combination thereof, and allows balances to be transferred to the separate Social Security accounts of beneficiaries upon death.    

So what do you think?


Hey, Neil Patrick Harris - what’s the story?  I thought you assured us that “it’s not just for gays anymore”!  Broadway, that is.

The new revival of ON A CLEAR DAY YOU CAN SEE FOREVER starring Harry Connick Jr, which is coming to the St James Theatre in November, has the cogliones to rewrite Broadway legend Alan Jay Lerner’s original book, turning the story gay.  The new book replaces flake Daisy Gamble with fruit David Gamble, still “affianced” to “perfect” boyfriend Warren.  At least they have kept the “past life” persona, who Connick Jr’s character falls in love with, a female - which adds a new dimension to the song “What Did I Have That I Don’t Have?”!

I could consider trying to understand the updating of the Melinda character from Victorian England to the 1940’s jazz scene – although it would appear that this could cause the loss of the witty song “Don’t Tamper With My Sister” (“A sin is not a sin until a sin is seen.  So let us misdemean where lights are low.”).  But I see no reason at all for gaying it up.  I say, “if it ain’t broke, don’t fix it”.  And AJL’s script was certainly not broken.

I saw the original Broadway production of OACDYCSF, with Barbara Harris, John Cullum, and William Daniels, when I was 12, and it was my Senior Play in high school (I was in the chorus and had two small parts).

The same thing was done with Rodgers and Hammerstein’s FLOWER DRUM SONG, which I also saw on Broadway as a child, a few years ago.  The revival rewrote Oscar Hammerstein’s book.  However, I did not see that production, so I cannot properly comment on the changes.

I do intend to see the OACD revival – to see how badly the original has been FU-ed.


Monday, October 24, 2011


Beginning with tax year 2011 payments made to businesses by credit card companies and “third-party networks” (resulting from customers using a credit card or PayPal to pay a vendor for merchandise or services) during the calendar year must be reported to the business, and to the IRS, on new IRS information return Form 1099-K.  

As a result of this new requirement the IRS has revised the 2011 Schedule C, in its current draft version, to break down gross receipts into three (3) separate categories -

Line 1a = Gross merchant card and third party network receipts and sales (see instructions)

Line 1b = Gross receipts or sales not entered on Line 1a

Line 1c = Income reported to you on Form W-2 if the “Statutory Employee” box on that for was checked
Line 1d = Total Gross Receipts

The instructions for Line 1a state –

Enter on this line payments you received in your trade or business through merchant cards and third party networks.  These payments should have been reported to you in Box 1 of Form 1040-K, Merchant Card and Third Party Network Payments.  Also include on this line payments received through merchant cards and third party networks that may not have been reported on Forms 1099-K that you received.  Merchant cards include, but are not limited to, Visa and MasterCard.  Third party networks include, but are not limited to, Paypal and Google Checkout.”

FYI, the draft instructions for Form 1099-K have not yet been released.  However Box 1 of the Form 1099-K is identified as “Gross amount of merchant card/third party network payments”.

The separate reporting of income directly from Box 1 of Form 1099-K will cause problems to many Schedule C filers.  As fellow tax blogger Russ Fox EA points out in his TAXABLE TALK post “What the New Form 1099-K Hath Wrought: Changes on Business Tax Forms” –

“. . .the amounts on the Form 1099-K’s will not match true sales. First, these amounts will include sales tax, shipping, and other non-sales charges. Second, the amounts on the Form 1099-K’s will be reported using cash basis. Any business that is accrual basis will have matching issues. Third, the reporting will likely be meaningless for any business that reports on a fiscal (non-December year-end) year {although I should point out that a monthly breakdown of gross receipts is included on the draft 2011 Form 1099-K Boxes 5a – 5l - rdf}.”

I expect that, for expediency sake, Schedule C filers, and tax professionals should do as Russ suggests -

The solution that I expect most businesses to use is to just use the Form 1099-K to populate this line. It’s simple, and guarantees that there will be no matching problems. Of course, that puts the cart before the horse but if you’re a business owner or a tax professional this solution is likely the one that lessens the risk of an audit.

I expect this is what I will do for the very few clients where this will apply.

If a business determines that it has $100,000 of gross sales for 2011, and it receives Form 1099-Ks whose Box 1 total $48,000, it would enter $48,000 in Box 1a, $52,000 in Box 1b, and $100,000 in Box 1d on Schedule C. 

This method is not strictly a true reporting.  As Russ mentions, the amount entered in Box 1 of Form 1099-K will be the gross payments made by the third-party, and will include sales tax and other charges.  While shipping and other charges can be deducted out in the expense section of Schedule C, sales tax collections, and the remittance thereof, should not be reported anywhere on the Schedule C. 

If the amount reported in Box 1 is $50,000, and this includes $3,200 in sales tax collected, the true amount entered on Line 1a should be $46,800.  But if the lower amount is entered the number would not “match” the Form 1099-K received by the IRS, and could result in an inquiry or an audit.

I do not know if all third party payers have sufficient information to identify sales tax assessments included in gross payments, so correcting the Form 1099-K to report gross payments less sales tax, or also separately report sales tax included in the Box 1 amount, may not be the answer.

Similar changes have been made to 2011 corporation and partnership returns, and the 2011 Schedule E.  Lines 3a and 3b on the Schedule E are similar to Lines 1a and 1b on the Schedule C, and the instructions for Line 3a are basically the same as for the Schedule C.  While corporations and partnerships will experience the same problems as Schedule C filers, this should not cause problems for Schedule E filers, as there is no sales tax collected on monthly rental payments.

Another problem presents itself.  What about a customer who issues a vendor a Form 1099-MISC for “nonemployee compensation” in the amount of $5000, which was paid via credit card, or PayPal.  The business will receive a Form 1099-MISC from the customer and a Form 1099-K from the credit card processing company, or PayPal, for the same income!  How will this affect the IRS “matching” program?


Saturday, October 22, 2011


Tons of BUZZ today!

BTW – I do apologize for the inconsistency of the type in recent posts here at TWTP.  For some reason seems to be a bit FU-ed – and I have trouble when I “cut and paste” blog posts from Word to Blogger.  Can anyone provide any guidance for how to fix, or avoid, the FUs?

+ Don’t forget to check out the OCTOBER issue of LOIS!

+ Click here check out my guest post on the Tax Reform Act of 1986 at Peter J Reilly’s blog at FORBES.

+ Trish McIntire gives a detailed answer to the question “Can You Give Away an Exemption?” at OUR TAXING TIMES.

+ KIPLINGER.COM has a tool to help you determine “How Your Income Stacks Up”.

Are you in the top 25% of all earners? The top 10%? Plus, find out what portion of the tax burden you bear according to your income status.”

The accompanying article “Where Do You Rank as a Taxpayer?” has a breakdown of income and taxes paid by category which indicates that for 2009 the top 1% paid 37% of federal income taxes collected, the top 50% paid 98%, and the bottom 50% paid 2%.

+ Joe Kristan talks about a recent Court case in “Rental Home Deduction Disaster” at the ROTH AND COMPANY TAX UPDATE BLOG.

His bottom line offers good advice for just about all tax situations –

The moral? Keep good records, and watch out for high water.”

+ The Chicago Tribune tells us what the Treasury Secretary said about tax reform in “U.S. Cannot Overhaul Tax Code in 2 Months: Geithner”.

Constipation, Mr Holmes!  So why did you not start earlier in the year?  And when are you going to start seriously working on the overhaul?  I am tired of hearing every politician say we must reform the Tax Code.  Do something about it!

+ Over at SMARTMONEY.COM Bill Bischoff has some good advice for employees in “3 Tax-Savings Deals At Your Job”.

+ The Phoenix Business Journal reports that “First Class Stamp Will Rise to 45 Cents in 2012”.  Oi vey!

The Postal Service will also raise the cost of a post card 3 cents to 32 cents.

The new prices go into effect Jan. 22, 2012.

+ “Dr Don” deals with an oft-asked question in “Mortgage Refinance Taxing with 401(k)” at BANKRATE.COM (highlight is mine).

A 401(k) account held with your employer isn't a piggy bank you can crack open and raid. While some plans offer in-service withdrawals, it's not common. The 401(k) plan may have loan provisions allowing you to borrow against the plan, but it isn't required to have a plan loan option.”

While some plans offer a loan option, this can result in tax problems if you terminate your employment before paying off the loan.

Your 401(k) account is “retirement savings”.  You should use it to save for retirement.  It should be the absolute last place you turn to for money, and only if you do have a true emergency or hardship. 

As a related aside - depending on your emergency you may be able to avoid the premature penalty on some of the withdrawal if you first transfer the money to an IRA.

The person posing the question says that he will use the money from reduced mortgage payments to “rebuild” the 401K9K account.  In response Dr Don makes a good point –

I'm not a huge fan of people raiding their retirement accounts with the promise they'll rebuild them with future savings. Yes, you can make the math work, but you have to have the financial discipline to actually replenish the savings. Do you truly have that discipline?

+ A comment to the last BUZZ installment by “Knobby” took me to “AICPA Pushed for Disclaimer in Tax Preparer Ads” at ACCOUNTING TODAY.

The American Institute of CPAs convinced the Internal Revenue Service to require registered tax return preparers under the new IRS’s regulatory program to add a special disclaimer to any of their advertising to avoid the appearance of an IRS endorsement.”

I am glad the AICPA is worried that the new RTRP initials will help dispel the urban tax myth that a CPA = tax expert.

The item did not quote the actual disclaimer.

Thanks, Knobby!

+ I am constantly referencing lists here at the BUZZ that verify the high taxes NJ residents are subject to.  However there is one list where NJ is at the bottom.

Boost Would Put Maryland In Top 10 States For Gas Tax” from JOHN HANCOCK’S BLOG at the Baltimore Sun indicates that NJ is #48 on the list with a total of 14.5 cents per gallon in gasoline tax. 

FYI, California is #1 with 47.7 cents per gallon and Alaska is #50 with 8 cents.

+ On Thursday I discussed Mitt Romney’ tax plan.  Now comes word from CBS NEWS that “Perry Calls for Flat Tax to Replace Income Tax”.

According to the item –

He said he would unveil a proposal next week calling for creation of a flat tax, which would replace the present system of graduated tax rates based on income with a single rate for all taxpayers regardless of income.

Perry told an audience of about 150 Republicans that his plan would also include a ban on congressional earmarks, passage of a balanced budget amendment to the Constitution, spending cuts and entitlement reform. He plans to unveil details in a speech Tuesday in South Carolina.”

Perry would shred "the current 3 million words of the American tax code" and replace it with "something simple: a flat tax."

"I want to make the tax code so simple that even (Treasury Secretary) Timothy Geithner can file his taxes on time."

I am not against a flat tax, and look forward to hearing more details next week (which I will report to you here).

+ According to the “Executive Summary” of Ron Paul’s “Plan to Restore America", his tax plan is –

Lowers the corporate tax rate to 15%, making America competitive in the global market. Allows American companies to repatriate capital without additional taxation, spurring trillions in new investment. Extends all Bush tax cuts. Abolishes the Death Tax. Ends taxes on personal savings, allowing families to build a nest egg.”

+ One would hope that most voters agree that Michele Bachman is too crazy to be taken seriously.  But if you don’t, here is what she has said about her tax plan

And under my tax plan I want to adopt the Reagan tax plan. It brought the economic miracle of the 1980s. Why not go with what works? I want to reinstitute the Reagan tax model from the 1980s.”

+ More proof that social program benefits should not be distributed via the Tax Code.  Ed O’Keefe’s FEDERAL EYE blog at the Washington Post website reports that “Education Tax Credit Mistakenly Claimed by Millions, Report Says”.

According to a report by the Treasury Inspector General for Tax Administration released on Thursday (highlight is mine) –

As many as 2.1 million taxpayers may have erroneously claimed a total of $3.2 billion by taking advantage of the American Opportunity Tax Credit, which provides up to $2,500 in relief for college students paying tuition and related expenses. The tax credit, once known as the Hope Scholarship Credit, was expanded as part of the 2009 economic stimulus program.”

+ Over at the MISSOURI TAX GUY Bruce has a great guest post with great advice from Erin Stamm titled “Tax Record Keeping Advice For Small-Business-Owning Technophobes”.

Are you afraid of Quicken? Do you hate working on your computer? Is record keeping one of your least favorite things to do? If you feel this way but still want to get every tax deduction you possibly can qualify for, you’re not alone.”

Erin provides “tips for getting the most out of your small business tax returns without stressing yourself over software programs and techie stuff”.

+ A “tweet” from NATP took me to an item at the JOURNAL OF ACCOUNTANCY that tells us “Trade Bills Pass Congress With Tax Provisions”.

Section 501 of the U.S.-Korea Free Trade Agreement Implementation Act, HR 3080, increases the EITC due diligence penalty from $100 to $500. The Sec. 6695(g) penalty applies to each failure of a tax return preparer to exercise due diligence in determining taxpayer eligibility for, or the amount of, an EITC.”

And –

Section 502 of the Korea trade act adds (as new Sec. 6116) a requirement that the Federal Bureau of Prisons and state prison administrative agencies annually send the IRS a list of all inmates incarcerated in the prison system at any time during the previous two calendar years and the first eight months of the current year.”

There would be no need for assessing an EITC due diligence penalty if the EITC was taken out of the Tax Code and the benefit was provided as a direct payment by the appropriate federal or state social service agencies!

+ While I could not renew my PTIN online (as I discussed in my post “PTIN Update”) EA Russ Fox was finally able to after much trouble and agita, as he explains in “PTIN Follies, Year 2” at TAXABLE TALK.

+ Submit a comment and help support breast cancer research in TAX GIRL Kelly Phillips Erbs’ annual “Comment for the Cure” at FORBES.