Friday, August 31, 2012


Let me end a week of tax history with a brief overview -

1643: The colony of New Plymouth, Massachusetts levies the first recorded income tax in America.

1861: Congress passed the first income tax law as an emergency measure to fund the Civil War.

1872: Congress repeals the income tax law.

1894: As a response to complaints that excessive reliance on tariffs as a source of revenue resulted in an increase in the cost of imported goods, Congress again passed an income tax law.

1895: The US Supreme Court ruled that the income tax law was unconstitutional.

1913: In February the 16th Amendment was ratified by the necessary 3/4 of the states. On October 3rd Congress passed the Revenue Act of 1913, which created the first permanent US income tax.  In the first year only 1 out of every 271 American citizens were taxed and $28 Million in revenue was raised.

1916: The Federal Estate Tax was enacted to help generate additional revenue to fund America's anticipated entry into the first World War.

1917: Congress raised tax rates in response to the increasing cost of the war and approved credit for dependents and deductions for charitable contributions.

1918: The maximum combined basic and super income tax rate reached 77%.

1922: For the first time preferential tax treatment was provided for capital gains.

1932: The tax law was amended to provide that US presidents were liable for federal income tax on their salaries. Franklin Roosevelt was the first president since Abraham Lincoln to pay federal income tax on his presidential salary.

1935: The Social Security tax, 1% on the first $3000 of wages, was enacted.

1941: Tax tables for low-income taxpayers were introduced, simplifying the calculation of tax liability.

1942-1945: New tax laws, in response to the cost of World War 2, created withholding on wages, more tax brackets for lower income taxpayers, the standard deduction, a personal exemption for dependents, a deduction for medical expenses, and increased tax rates. By the end of the war the maximum tax rate was 94%.

1953: The Bureau of Internal Revenue becomes the Internal Revenue Service. And Robert D Flach, who would eventually become the internet's WANDERING TAX PRO, is born.

1954: Congress completely revised the Tax Code, changing rates, redefining Adjusted Gross Income, and adding credits for retirement income and dividends and new itemized deductions.

1961: Taxpayers were required to provide their Social Security or other taxpayer identification number to banks and other financial institutions so they could report interest and dividend payments to the IRS.

1964: Tax rates were reduced from a range of from 20% to 94% to from 16% to 77%. The Income Averaging method of tax computation was introduced.

1970: Congress created a Minimum Tax so high-income individuals could not completely avoid paying taxes through the use of preferential tax shelters, loopholes and deductions.

1972: Robert D Flach, who would later become the internet's WANDERING TAX PRO, prepares his first Form 1040 as a paid preparer.

1974: Congress created the deductible Individual Retirement Account (IRA) for taxpayers not covered by employer pension plans.

1975: Low-income taxpayers were allowed to claim a refundable Earned Income Credit (EIC).

1979: Unemployment compensation was made partially taxable.

1981: Tax legislation reduced tax rates by 25% over 3 years, indexed tax brackets for inflation, and applied the same tax rates to earned and unearned income.

1984: For the first time recipients of Social Security and Railroad Retirement benefits were subject to tax on up to 50% of the benefits received, depending on the recipient's income.

1986: The largest revision of the Tax Code since 1954, the Tax Reform Act of 1986, was enacted. The law reduced the number of tax brackets from 14 to 2, decreased the maximum tax rate from 50% to 28%, repealed the dividend exclusion, Income Averaging, the itemized deduction for sales tax paid and the preferential treatment of long-term capital gains, introduced the passive activity rules, the Kiddie Tax, the deduction from gross income for health insurance premiums paid by self-employed individuals, and the 2% of AGI limitation on most miscellaneous itemized deductions, phased out the itemized deduction for personal (credit card, auto loan, etc.) interest, limited the deduction for business meals and entertainment to 80%, and replaced the additional personal exemption s for age 65 and blind with an increased standard deduction.

1987: For the first time taxpayers were required to list the Social Security number of dependent children, age 5 and over.

1990: The Revenue Reconciliation Act of 1990 added a third tax bracket (31%) and instituted the reduction of itemized deductions and phase-out of personal exemptions for high-income taxpayers.

1993: The Omnibus Budget Reconciliation Act added the 36% and 39.6% tax brackets, increased the maximum tax on Social Security benefits from 50% to 85%, and reduced the deduction for business meals and entertaining from 80% to 50%.

1998: In response to abusive treatment of taxpayers by the Internal Revenue Service, the IRS Reform and Restructuring Act of 1998 was enacted.

2001: Congress passed the Economic Growth and Tax Relief Reconciliation Act of 2001, the largest tax cut in over 20 years, with 85 major provisions. All provisions of this act will expire in 2011. And Robert D Flach begins publishing THE WANDERING TAX PRO blog.

2003: To stimulate the economy, Congress passed the Jobs and Growth Tax Relief Reconciliation Act of 2003, the third major tax bill in as many years, and the third largest tax cut in history.


Thursday, August 30, 2012


I talked about my first 1040.  Now here is a post on the first 1040 –

In February of 1913 the 16th Amendment was ratified by the required three-fourths of the states. The amendment gave Congress the power to “lay and collect tax on incomes, from whatever sources derived, without apportionment among the several states, and without regard to any census or enumeration.” On October 3, 1913, Congress passed the Revenue Act of 1913, which created the first permanent federal income tax.

Congress had made two previous attempts at instituting a federal income tax. The first, in 1861, was an emergency measure to fund the Civil War and was repealed in 1872. In 1894, in response to complaints that excessive reliance on tariffs as a source of revenue caused the price of imported goods to rise, Congress again passed an income tax law, which the Supreme Court ruled unconstitutional in 1895.

Here are some facts about the very first Form 1040:

· The tax applied to salaries and wages, interest, dividends, rents, royalties, pensions and annuities, income from estates, trusts, sole proprietorships and partnerships, and gains from the sale of most types of property.

· The salaries and wages of state and local government employees were exempt from income tax.

· Interest from federal, as well as state and local, government bonds were exempt from income tax.

· Deductions were allowed for “personal” interest, federal excise taxes, taxes paid to state and local governments, casualty and theft losses, bad debts, business expenses, and depreciation of property used in business.

· There was an exemption of $3,000.00 for single persons and $4,000.00 for married couples.

· A “normal” tax of 1% was applied to the first $20,000.00 of taxable income. Dividends were exempt from this “normal” tax. An additional or “super” tax of from 1% to 6% was applied to income, including dividends, in excess of $20,000.00.

· The return was due “on or before the first day of March”.

· There was only one page of instructions!

Over the years the federal income tax has evolved into the complicated “mess” that it is today. According to former Treasury Secretary Paul O’Neill, “Our tax code is so complicated; we’ve made it nearly impossible for even the Internal Revenue Service to understand.”  

Wednesday, August 29, 2012


* See my article "A Letter From the IRS?  Uh-Oh.  But Don't Panic!at THE STREET. 

* Peter J Reilly tells how a gambler was able to take advantage of the “Cohan Rule” in Tax Court in “Weekend Slot Player Wins A Dandy Yankee Doodle Victory In Tax Court” at FORBES.COM.

* Also at FORBES.COM – Robert W Wood provides “Five More Tips To Make Your Hobby Tax Deductible”.

* And Robert W Wood completes a FORBES.COM trifecta with “Three (Incredibly Simple) Rules To Keep The IRS Away”.

Three excellent rules they are.  If I may add a 4th - DON’T ACCEPT TAX ADVICE FROM ANYONE OTHER THAN A PROFESSIONAL TAX PREPARER.  

FORBES.COM is on a roll.  TaxGirl Kelly Phillips Erb doesn’t want to be left out.  She reminds us “Ponying Up for Politics: Campaign Contributions Are Not Tax Deductible”.

Specifically –

You cannot deduct contributions made to a political candidate, a campaign committee, or a newsletter fund.”

And -

Advertisements in convention bulletins and admissions to dinners or programs that benefit a political party or political candidate are not deductible.”

* Professor Nellen continues the debate on the mortgage interest deduction in “Equity, Improve Investment and Reduce the Mortgage Interest Deduction” at 21st CENTURY TAXATION.  

I am still awaiting comments on geographic inequity in the Tax Code.  See my post “What About the Mortgage Interest Deduction”.

* Joe Kristan states the obvious in discussing a court case at his Monday “Tax Roundup” installment at the ROTH AND COMPANY TAX UPDATE BLOG – “Being a landlord is so much easier without tenants.”

But there is a downside –

If you have a Schedule E property that year after year shows little or no rental income and lots of expenses, the IRS computers are likely to notice.  That’s especially true if you find a way deduct those losses, which will normally be non-deductible “passive” losses absent other passive income.

Of course, there are times in real life when commercial properties go a long time without being rented.  Residential rental properties, though, aren’t likely to sit empty for three years in most markets.”

* TAX PROF Paul Caron quotes the “Tax Planks in 2012 Republican Platform”.

There is much here that I agree with.

* TAX MAMA Eva Rosenberg states the obvious at Market Watch’s TAXWATCH - “IRS Tax Credits Make Tempting Fraud Targets”.

Eva tells us that –

Within the past month, the Treasury Inspector General for Tax Administration (TIGTA) has released two reports revealing billions of dollars of tax fraud by criminals using identity theft and fake identities.”

Why is there so much fraud?  Eva explains –

Because of all the tempting free money available from refundable tax credits. Whenever there are refundable tax credits on the table, criminals try to tap into them. Some of them even do it right from jail.”

Both TIGTA and Eva have suggestions on how to reduce this tax fraud.  But both have missed the most obvious solution – do away with refundable credits! 

If the idiots in Congress want to provide welfare assistance and incentives for continuing education, home purchase, and energy efficiency it should do so directly via the appropriate government agencies and NOT through the Tax Code.

In discussing this item in a daily TAX ROUNDUP at the ROTH AND COMPANY TAX UPDATE BLOG Joe Kristan correctly reminds us –

Just remember that they aren’t ‘IRS’ tax credits.  It’s Congress that enacts them, and it’s Congress that makes the multi-billion dollar industry of stealing from you via tax credit fraud possible in the first place.”

* TAXPRO TODAY referenced one of my THE TAX PROFESSIONAL posts in "Boost or Burden? Enrolled Agents Debate Taking the RTRP Test".

Tuesday, August 28, 2012


The first Form 1040 that I did as a paid preparer was the 1971 model (I can actually tell you the name of the taxpayer on the very first 1040 I worked on). There have been tons of changes to the 1040 over the years.

On Page 1 of the 1971 Form 1040 one would indicate name, address and Social Security numbers of the filer(s). In the case of a return for a married couple the names were listed as “Richard and Mary Taxpayer” on one line instead of a separate line for the name of each spouse. The filing status was checked and exemptions were claimed. The taxpayer and spouse could each claim an additional exemption for being 65 or over and blind. The names, but not Social Security numbers, of dependent children were listed, with no indication of whether they “lived with you” or “did not live with you”. The names, but again not Social Security numbers, of “other” dependents were listed on Page 2 of the 1040.

Income was reported on Lines 12 through 18 on Page 1, with lines for wages, dividends (no designation of “qualified”), interest (taxable only – no reporting of tax-exempt interest), and “income other than wages, dividends and interest”, the sub-total, total “adjustments to income” and Adjusted Gross Income. The Line for dividends include (a) for gross dividends and (b) for an exclusion amount. If gross dividends and/or total interest exceeded $100 one would have to complete and attach Schedule B

The net tax liability was reported on Lines 19 through 23. Federal Income Tax withheld, Estimated Tax Payments, and “Other payments” were deducted and a balance due or refund was indicated.

Line 31 of the Form 1040, and not Schedule B, was where the taxpayer was asked about foreign accounts.

Page 2 of the Form 1040 consisted of Part I where other dependents were listed, along with relationship, months live in taxpayer’s home, did dependent have income of $675 or more, amount taxpayer furnished toward support, and amount furnished by all others, including the dependent, but not the dependent(s)’ Social Security number(s).

Specific items of income, adjustments to income, credits, other taxes, other payments, and the actual Tax Computation were reported on Lines 34 through 64 in Parts II through VII.

Social Security, Railroad Retirement, and Unemployment benefits were totally exempt from federal income tax. One could use the “3-year” rule for recovering employee contributions to determine the taxable portion of pensions and annuities. This was calculated on Part I of Schedule E.

Adjustments to income included –

* “sick pay”,

* Moving expense,

* Employee business expense, and

* Payments as a self-employed person to a retirement plan, etc.

The only credits indicated on the 1040 were –

* Retirement income credit,

* Investment credit, and

* Foreign tax credit.

The personal exemption amount was $675. Tax could be calculated by “using Tax Rate Schedule X, Y or Z, or if applicable, the alternative tax from Schedule D, income averaging from Schedule G, or maximum tax from Form 4726”. Other taxes included a line for “Minimum tax”, not yet alternative.

On Schedule A –

* medical and dental expenses were reduced by 3% of Adjusted Gross Income (this was the only item on the Form 1040 that was reduced based on AGI),

* taxes included state and local gasoline tax (from gas tax tables), general sales tax (from sales tax tables) and (not or) state and local income tax, with an additional deduction allowed for sales tax paid on “major purchases”,

* contributions were deductible pretty much as they are now, except there was no strict requirement for documentation,

* interest expense included not only home mortgage interest (fully deductible – no principle restrictions) but also interest on installment purchases and credit cards, and

* miscellaneous deductions were not reduced by a % of AGI; certain employee business expense, as mentioned earlier, were deductible as an “above-the-line” adjustment to income.

Schedule D allowed for a 50% deduction for net long-term capital gain – only half of such gains were included in AGI. So if net long-term capital gain (or net combined long-term and short-term gain if smaller) was $10,000, only $5,000 was reported as income on Page 2 of Form 1040. The maximum net capital loss deduction was $1,000.

The starting tax rate was 14% and the top was 70%, although the rate for “earned income” such as wages was capped at 50% - hence the “Maximum Tax” calculated on Form 4726.

The 1971 standard deduction was $1,050 for both a single person and a married couple. The standard deduction was originally 10% of AGI up to a maximum of $1,000. It wasn’t until 1975 that the standard deduction for married was more than that for single. Click here for a chart of historical standard deduction amounts for single persons and married couples.

Obviously the 1971 tax returns were prepared by hand. We didn’t even have photocopies back then (at least where I worked). The returns were written, or sometimes typed, on 3-copy carbonized forms purchased from Accountants Supply House in Valley Stream, New York State.

So tax rates were higher back then – but there were a lot more deductions allowed. And one could also use either Income Averaging or 10-Year Averaging to cut thousands off a large tax bill.

How do I remember all this? My memory is good – but not that good. I have a client, originally a client of my mentor Jim Gill, for whom I have a copy of every single Form 1040 filed since 1970 in the file.

So do you think the Tax Code is better now, or was it “more better” back then?


Monday, August 27, 2012


Every now and then a tax-related blog post, article or news item will take me back to my early days in the tax business.

A recent post by Professor Jim Maule on Income Averaging, referenced in Saturday’s BUZZ installment, did just that.  So I thought I would rerun two posts from the past on the Golden Age of 1040s -

Those were the days, my friend -

* when a savvy tax preparer could "pull a rabbit out of a hat" and save a client literally thousands of dollars in federal income tax with "Income Averaging" or "10-Year Averaging" (and in doing so be assured a client for life),

* when credit card interest, auto loan interest and personal loan interest, as well as our tax preparation fees, were fully deductible,

* when "Employee Business Expenses" were an adjustment to income and not an itemized deduction subject to a 2% of AGI exclusion,

* when there was no such thing as an Adjusted Gross Income exclusion or threshold or the "phase-out" of a deduction or credit,

* before all the acronyms (PIG, PAL, ACRS, MACRS and so on),

* and when one-half of long-term capital gain just disappeared from the tax return.

I started my career in February of 1972, preparing 1971 tax returns, when a deduction was really worth something and everyone itemized. As we used to tell clients, "Uncle Sam will reimburse you for up to half of our fee!"

In 1971 the top tax rate was 70%. There was a "minimum tax", not yet alternative, and a "maximum tax" (i.e. the maximum tax on "earned income" was 50%). While we did prepare a few maximum tax forms, I do not recall ever preparing a minimum tax form. The Alternative Minimum Tax did not begin to affect out clients until the 2nd half of the 1990s.

I went to work for James P Gill, my uncle's tax preparer, during my first year of college, with no experience preparing tax returns. I had never prepared a tax return before, not even my own! My education consisted solely of the freshman semester of "Accounting 101".

I learned the business the absolute best way possible - by actually preparing returns. On my first day of work I was given a briefcase containing a client's current year "stuff" and a copy of the previous year's return and told to "jump in and swim". If I had a question I would ask Jim, blessed with the patience of a Saint (a trait I soon learned was essential for a tax preparer), who would stop what he was doing to explain the answer to me.

I worked in a true "storefront" office on the fringe of Journal Square, Jersey City's equivalent of Times Square (made famous in the "Jersey Bounce", which "started at Journal Square"), where we dealt with what Jim affectionately referred to as "the great unwashed masses" on a daily basis.

There were no computers in those days. During my first few years we did not even have a copy machine in the office. Returns were prepared by hand on 3-page carbonized forms purchased from Accountant's Supply House. To this day I still prepare all my 1040s manually - in 35 tax seasons I have never used tax preparation software to prepare a return.

As I started out in the tax preparation business the matching of 1099s to 1040s had just begun. I remember a client who came into the office during my first or second year with a humungous print-out from the IRS listing by source all the interest and dividends that he had failed to report on his previous year's 1040.

Back then a tax preparer was truly in many ways also a "father confessor". One day a widow came into the office dressed in her black mourning outfit and waited to see Jim. Once in the "inner sanctum" she confessed that while her husband was alive she filed a joint return with him, prepared by our office, claiming only his income, and she also filed a single return, elsewhere, under her own Social Security number to report a small pension she received in her maiden name. In those days only the Social Security number of the husband was required to be entered on the return - and not that of the spouse. After giving her "absolution" Jim commenced to fix the situation.

During my early years you were also not required to list the Social Security number for dependents claimed on your return. One year a married client, let's call him John and call his wife Mary, left his "stuff" off at the office, which included a handwritten sheet listing, among other deductions, "dependents" John, Mary, Paul and George. The college student who prepared the return that year (not me) listed as dependents John, Mary, Paul and George. The client received the refund requested on the return without question.

The next year John came in and stayed while I prepared the return. I asked if he was still claiming his four kids, John, Mary, Paul and George, and he told me that he only had two children - Paul and George! The John and Mary he had listed on the sheet the previous year was apparently he and his wife. It appears that the student who had prepared the earlier return had forgotten our first, and most important, rule of tax preparation - always review the prior year's return when preparing the current 1040.

At the recent IRS Tax Forum it was reported that in the first year you were required to list a Social Security number for all of your dependents about 5 Million dependents disappeared from tax returns.

Over the years, due to our proximity to New York City, we prepared the returns of some "semi-famous" taxpayers. One year in the late 1970s we prepared the 1040 for the then captain of the New York Giants football team, who was partner in a local restaurant with one of our long-time clients. This was well before the days when professional athletes all had multi-million dollar contracts, but I do recall being surprised that his W-2 was only $100,000+. FYI, this person was one of the rare clients, I can count them on the fingers of one hand, who "stiffed" Jim over the years.

When the drummer for the original off-Broadway production of ONE MO' TIME became sick and a local union musician, whose return we prepared, took his place we welcomed as new clients most of the members of the cast, who came up to New York from New Orleans where the show had originated. It was the first year we added the Louisiana state income tax return to our repertoire. I remember having complimentary tickets for the show upstairs at the Village Gate and going backstage after the performance to deliver finished returns. We also did the tax returns for the road company.

Our clients were extremely loyal. If they moved out of state they would continue to mail their tax returns to us. We had one client who had retired to the Netherlands and still had us prepare her 1040!

Some clients were also compulsively consistent, coming in to have their returns done on the same day each year. Back when Abe Lincoln had his own separate legal holiday February 12th was a busy day for us, especially with teachers. We also had our share of clients who would wait until the very last day of each tax season, generally April 15th, to come in. When we saw Wally Weinmann, usually the last person on the last day, we knew that it was over! We even had a tv repairman who was always a year and a day late - he would come in on April 16th of 1975, for example, to have his 1973, not 1974, tax return prepared!

Of course in the "good old days" we never filed an extension. We finished all the returns on April 15th - even if we had to stay up until 3 am to do so!

A lot has changed since those days. Reagan completely rewrote the tax code with the Tax Reform Act of 1986, doing away with a lot of the loopholes and deductions we had used to work magic. Jim decided to retire when he turned 75 and handed his practice and office over to me. He would come in to help during the last weeks of the season until he passed away three years later.

As you may know, I now work out of a home office and no longer take on new clients. While I do not miss dealing with the "great unwashed masses" I do miss the "good old days". Every now and then a long-time client, faced with a large balance due to "Sam", will ask if we can Income Average and I think back to the days when we could "pull a rabbit out of a hat".

And of course, most of all I miss the days when come April 15th it was truly over - and we didn't have to spend the next six months dealing with GD extensions!

Tomorrow I will tell you about MY FIRST 1040.


Saturday, August 25, 2012


* Jason Dinesen of DINESEN TAX TIMES ends his series on the experiences of a client who was victim of identity theft in “Taxpayer Identity Theft – Part 7”.

* And on the same subject, Bruce McFarland, the MISSOURI TAXGUY, gives some good advice in his comprehensive post “Avoid Identity Theft”, who also had a client that fell victim to this crime.

Fortunately, and thankfully, I have never had a 1040 client with an identity theft issue.

Bruce makes an important point that I have been saying for years and that needs constant repeating –

Generally, the IRS does not send unsolicited e-mails to taxpayers. Further, the IRS does not discuss tax account information with taxpayers via e-mail or use e-mail to solicit sensitive financial and personal information from taxpayers. The IRS does not request financial account security information, such as passwords and PIN numbers, from taxpayers.”

I would be stronger in the statement and say that the IRS never sends unsolicited emails to taxpayers.

* Joe Kristan discusses the Tax Court problems of fellow tax blogger Kerry Kerstetter, aka the TAX GURU, in “Even Tax Bloggers Need Good Records for Their 1040s”.

I used to follow Kerry’s blog years ago, but haven’t visited in years.

Joe always has a good bottom line to his posts –

Regardless of the ultimate outcome, we can draw some lessons from this case:

- File your return on time.  There is little or no additional risk of being audited for filing an extended return, but the chances of getting examined go way up when you blow the extesion deadlines.

- Keep your old records.  The taxpayers failed to produce records of their loss carryforwards to the court’s satisfaction.  Keep the tax records for loss years as long as the carryforward years to which you applied the losses remain open.”

* A good question was raised at the ROMNEYOMIC$ blog (All about Romney's Plans for your Money) in “Advice to Republican Congressmen: Shut Up”.

Which makes be wonder, is there no minimum IQ requirement to be elected to public office? A rhetorical question, I know there isn’t. Too Bad.”

BTW - the lack of intelligence in the idiots in Congress is not limited to Republicans.

* More reason for the idiots in Congress to actually do something for a change before it is too late - CCH reports “Fiscal Cliff Will Cause Recession Next Year, CBO Warns”:

The U.S economy will enter into a recession in 2013 unless Congress and the White House address the so-called fiscal cliff of expiring Bush-era tax cuts and lower defense and entitlement spending, the Congressional Budget Office (CBO) warned in a report released on August 22.”

* Joshua Wilson, a CPA, has some good tips for “Choosing the Right Tax Professional”. 

Unlike many of his brethren (and sistern) he acknowledges RTRPs and EAs as qualified tax preparers, and a viable option, and does not tell you the lie that CPA = tax expert.  

* A recent court decision causes Professor Jim Maule to reminisce about my favorite historical tax break in “Where Are You Income Averaging?”.  

Income Averaging was a little advertised tax calculation method that allowed us, as tax preparers, to literally pull a rabbit out of a hat back in “the day”.  Its use on a 1040 would usually result in guaranteeing us a client for life.  It was a casualty of the Tax Reform Act of 1986.

In the “good old days” the Tax Code was more complicated in many ways, but actually less complicated in others.  There were no phase-outs or sunsets or temporary deductions, and the applicable version of today’s dreaded AMT was very much less of a problem (I did not see any AMT activity among my clients until the early 1990s).

* And WithumSmith Brown’s DOUBLE TAXATION” A TAKE ON ALL THING TAXES blog uses a court case to teach an important tax lesson – “You’d Better Start Saving Those Home Depot Receipts”:

The lesson is obvious. When reporting a sale from real estate, save all documents supporting not only your acquisition cost (such as a closing statement), but also those establishing the cost of any and all improvements made to the property. After all, it’s up to you to prove you spent what you say you did; it’s not up to the IRS to prove you didn’t.”

* A final reminder for tax pros to check out my “Summer Tax Savings”.


Friday, August 24, 2012


Professor Annette Nellen has some thoughts on “Tax Reform and the Mortgage Interest Deduction” at 21st CENTURY TAXATION.

Her bottom line -

To keep lower tax rates, remove inequities, remove economic distortions, simplify the law and reduce the debt and deficit, I recommend:

·      Phase-out the home equity interest deduction over 5 years.

·      Phase-out the deduction for interest on a vacation home over 5 years.

·      Phase-out the $1 million debt limit on acquisition debt over 5 years. Drop it to $500,000 adjusted annually for inflation.

·      Convert the deduction to a tax credit.”

The idea of doing away with this deduction is not new.  In a post from June of 2010 I noted –

Howard Gleckman posed the question “Should We Dump the Home Mortgage Interest Deduction?” at TAXVOX, the blog of the Tax Policy Center.

Kay Bell added her two cents to Howard’s commentary in “Is It Time to Kill the Mortgage Interest tax Deduction” at DON'T MESS WITH TAXES.

A recent tweet led me to the article “Mortgage Deduction: America's Costliest Tax Break” By Jeanne Sahadi at from April

While I support doing away with the deduction for mortgage interest on 2nd homes and home equity interest, and would do it “cold turkey” and not via a phase-out, I have always wanted to keep the deduction for interest on loans to buy or build your personal residence.

Here is what I said about the deduction in my post “THE NEW TAX CODE - INTEREST AND TAXES"

The Internal Revenue Code taxes Americans based on income measured in pure dollars. However it is a fact that the “value” of one’s level of income differs, sometimes greatly, based on one’s geographical location. A family living in the northeast (New York, certainly New Jersey, and Connecticut) or California that has an income of $150,000 may be just getting by, while a similar family that resides in “middle America” lives like royalty on $150,000. Many components of the Tax Code are indexed for inflation, but nothing is indexed for geography. To be honest I have no idea how one would even begin to index for geography.

It costs an awful lot to live in, for example, New York, certainly New Jersey, Connecticut, and California. State and local income and property taxes are the highest in the country. The cost of real estate is also excessively high. As a result one must earn a lot more money to be able to live in these states – and salaries are arbitrarily increased to reflect the increased cost of living. Yet $150,000 in income is taxed by the federal government at the same rate in New York City as it is in Hope, Arkansas.

Taxes and the cost of a home, and therefore also the amount of “acquisition debt” mortgage interest paid on a residence, are higher in the Northeast, and California. Since we pay taxes on “net income” after deductions, allowing an itemized deduction for these items would help to somewhat geographically “equalize” the tax burden.”

This is the same reason I would keep the deduction for real estate and state and local income taxes.

I have seen no talk about this geographic inequity in the tax reform debate.  Am I the only one who sees it as an issue? 
Please let me know your thoughts on the subject.


Wednesday, August 22, 2012


* Did you see my article “Yes It’s Tax Deductible, But . . .” at THESTREET.COM?

* Congratulations to Kay Bell, the yellow rose of taxes, for having her blog DON’T MESS WITH TAXES named a 2012 Association for Women in Communications Clarion Award winner!

* Joe Taxpayer has a great idea at his ROTHMANIA blog – “Let’s Kill All the Lawyers!”.  When do we start?

This post is another reason for what I consider my best tax advice – DON’T ACCEPT TAX ADVICE FROM ANYONE OTHER THAN A PROFESSIONAL TAX PREPARER.   

Joe discusses a question from a reader.  Included in the explanation of the reader’s situation is the totally incorrect advice given by a lawyer – which would have cost the taxpayer over $100,000 in current income taxes unnecessarily.

The IRS tax preparer regulation regime may consider all lawyers to automatically be tax experts, and therefore exempt from testing and CPE requirements in order to prepare tax returns for compensation – but we know full well that this is pure “basuda” (a word I remember from my high school Spanish – though I am not sure of the spelling).

Joe correctly points out –

Unfortunately, I don’t know how many people are getting this kind of bad advice, I just know it’s all too common. Fortunately, I was contacted before a bad mistake was made, too often I hear these stories well after the fact. People go to a pro thinking they are doing the right thing, only to find out the pro is shall we say, uninformed.”


* The TAX FOUNDATION’S “Monday Map” this week answered the question “Does Your State Have a Marriage Penalty?”.

Nick Kasprak explains -

In a progressive tax system, higher incomes are taxed at higher rates, and in states where the same tax brackets apply to both single and married filers, the effective tax rate on the combined income of two earners can be significantly more than if the two incomes were taxed separately. In 2011, sixteen states had some form of marriage penalty in their income tax system.”

The map shows that the state income tax of my former state of residence, New Jersey, has a marriage penalty, while my new state of residence, Pennsylvania, does not.  That is not one of the reasons why I moved (my filing status is Single).  I have found, however, that many NJ married taxpayers can avoid the marriage penalty by filing separately – but, generally, one must file separate federal returns in order to file separate NJ state returns.

* While on the subject – check out “TPC’s New Marriage Bonus and Penalty Calculator” at TAXVOX.

* PLANET MONEY from NPR has some interesting facts in “From Abe Lincoln To Donald Duck: History Of The Income Tax”.

* Patrick Temple-West and Kim Dixon of REUTERS provide another reason why I will never refer to the members of Congress without calling them idiots - “Inaction In Congress Could Delay Tax Refunds”.

Congress could delay billions of dollars in 2013 U.S. tax refunds, dealing a blow to the economy, if it waits too long after the November 6 elections to finalize tax law, a top tax oversight official said.”

Can you think of a better word to describe them?


Tuesday, August 21, 2012


The Supreme Court recently upheld most of the Patient Protection and Affordable Care Act (PPACA), aka “Obamacare”, and the idiots in Congress have been unsuccessful in 30+ attempts to repeal the Act.  So it looks like we better prepare ourselves for the provisions that will become effective in 2013.

·      Currently you will only receive a tax benefit for your medical expenses if you itemize on Schedule A and the total of your allowable expenses exceeds 7½% of your Adjusted Gross Income (AGI).  If your expenses total $6,500 and your AGI is $80,000 your deduction is $500 ($80,000 x 7½% = $6,000 / $6,500 - $6,000 = $500).

Beginning with 2013, the exclusion rises to 10% of AGI.  In the above example there would be no deduction, as 10% of $80,000 = $8,000, and $6,500 - $8,000 = 0. 

Under the dreaded Alternative Minimum Tax medical expenses are only deductible to the extent they exceed 10% of AGI.

In reality, the allowable medical expenses of most taxpayers do not exceed the current 7½% exclusion – so, unfortunately, the change will only affect those with excessive medical expenses and, in my client base, retired seniors with lower AGIs.

·      There is currently no statutory limit on the amount that employers can permit employees to contribute to a medical expense Flexible Spending Account (FSA).  The limitation is set by the individual plan.

Beginning with 2013, employee contributions to an employer-provided medical expense FSA is limited to $2,500 per year.  This amount will be indexed annually for inflation.

Having medical expenses paid through an FSA is a way of getting a tax deduction for medical expenses “above-the-line” that were not allowed on Schedule A due to the AGI exclusion.  I have often seen as much as $5,000 in FSA contributions for my clients – so this change will increase these taxpayers’ liability by $600-$700.

  Employees and employers split the cost of Social Security and Medicare tax (FICA) – each pays 6.2% of taxable wages for Social Security and 1.45% for Medicare (although for 2012 the employee pays only 4.2% of his/her taxable wages).  There is a limit on the amount of taxable wages subject to the Social Security portion, but the Medicare tax is applied to all taxable wages.  Taxable wages for FICA may be different that taxable wages for income tax.

Self-employed taxpayers pay both halves of the FICA tax as “self-employment tax”, again with a 2% reduction in the Social Security component for 2012.  They are allowed an “above-the-line” deduction for a portion of the self-employment tax assessment.

Beginning in 2013, the employee’s share of the Medicare tax increases by 0.9% - to 2.35% - for taxable wages over $200,000 ($250,000 for joint filers and $125,000 for married couples filing separately).  The self-employment tax is similarly increased on these levels of income.   

  Beginning in 2013, a new tax is added on the Form 1040 for taxpayers with “modified” AGI (MAGI) over $200,000 (again $250,000 for joint filers and $125,000 for married couples filing separately.  These taxpayers will be subject to a 3.8% “surtax” on “net investment income”.

Net investment income is taxable interest, dividends, capital gains, annuities, royalties, rents, and pass-through income from a passive S-corporations and partnership, less related investment expense deduction.  Modified AGI is regular AGI with any foreign earned income exclusion or foreign housing exclusion added back.

This change is the source of the nonsense email that has been circulating for the past year that there is a federal “sales tax” on the profit from the sale of your personal residence.  See my post “WTF?”.


Monday, August 20, 2012


Republican Vice Presidential candidate Paul Ryan released copies of is joint 2010 and 2011 federal income tax returns this past Friday.

Nothing particularly questionable or controversial that I could find. 

The biggest item of income in each year was wages of $153,000+ as a Congressperson (certainly more than Congresspersons are actually worth, but not very much when compared to the private sector).  There was also a nice amount of interest, dividends, royalties and capital gains from investments (much from what looked like family limited partnerships), and in 2011 substantial income from a trust resulting from the passing of his mother-in-law.  The trust income was not reported on his original return, but on an amended one – I expect due to late receipt of the K-1.  

The couple paid an effective tax rate (net federal income tax liability divided by Adjusted Gross Income) of approximately 16% for 2010 and 20% for 2011, and was a victim of the dreaded Alternative Minimum Tax (AMT) in both years.

In 2010 he paid payroll taxes on a household employee, but not in 2011.   

In 2010 he deducted mortgage interest, but did not deduct any real estate tax – although there would have been no additional tax benefit to such a deduction due to the dreaded AMT.  He did deduct real estate tax on his 2011 Schedule A.

They were not particularly charitable in 2010, donating only 1.2% of his AGI.  He was more so in 2011, donating 4%.

They claimed a residential energy Credit for insulation for 2010.

And their tax preparer for 2009 and 2010, a CPA for 2010 (and a different one for 2011) was not cheap.

Again – nothing questionable or controversial that I could find. 

The released returns did show that the couple is not particularly wealthy, with the least income of the 4 candidates – although BO would certainly consider them wealthy in 2011 since the trust pushed their gross income over the magic $250,000 mark.

So much for Ryan’s tax returns.  Let's see what the political pundents make of them.


Saturday, August 18, 2012


* Check out my post “To 1099-C or Not To 1099-C” at my THE TAX PROFESSIONAL blog.

* A guest post by Julian Block at Peter J Reilly’s FORBES.COM “Passive Activities” blog discusses provides us with “Some Presidential Words On Federal Income Taxes”.

I especially liked this quote from Ronald Reagan –

If you will forgive me, you know someone has once likened government to a baby. It is an alimentary canal with an appetite at one end and no sense of responsibility at the other.”

* Staying at FORBES.COM – While I do hate the GD extensions, I accept the fact that they are necessary in certain circumstances.  TaxGirl Kelly Phillips Erb touches on the subject in “What Romney and I Have in Common With More Than 10 Million Taxpayers”.

Actually, my 2011 Form 1040 was also extended!

* ACCOUNTING TODAY has a “slide show” of “Midyear Tax Planning: Top 10 Tips in a Time of Uncertainty”.

* Thursday’s edition of the NATP weekly email newsletter included the following item -

New Director of the Return Preparer Office

David Williams, Director of the Return Preparer Office (RPO), has resigned his position effective at the end of August. Carol Campbell, currently the IRS Deputy Chief of Staff in the Commissioner's office, has been chosen to become the Director of RPO. Campbell has more than 20 years of IRS experience including working as a senior docket attorney for Chief Counsel and counsel to the National Taxpayer Advocate.”

I did a Google search and could not find any information on this topic.  I will let you know when more information is available. 

David Williams was an excellent Director.  I will be sorry to see him go.  It is good to see that his replacement worked with the National Taxpayer Advocate office.  I expect I will be writing to the new Director concerning the need to grandfather long-time tax pros and to require CPAs and attorneys who want to prepare 1040s to take the test and take the annual CPE in taxation.

* A tweet led me to this definition from the URBAN DICTIONARY (the highlights are mine) -


Congress usually refers to the national legislative body of a country. However, congress is a term also used for a group of baboons. That there are obvious similarities between these groups should be pretty obvious to most.

Consider a group of Baboons, they are the loudest, most dangerous, most obnoxious, most viciously aggressive and least intelligent of all primates. And what is the proper collective noun for a group of baboons? Believe it or not ....... a Congress!

I guess that pretty much explains the things that come out of Washington!

* Russ Fox of TAXABLE TALK keeps us informed on tax “bozos” like the CPA discussed in his post “I Don’t Need Proof: Since I Worked for the IRS and am a CPA, You Should Just Accept my Deductions.”  

The bottom line to the story -

If you have expenses, document, document, and document some more. You will be happy you have done so. And if you’re a tax professional and you don’t, well, have your checkbook handy.”

* Don’t forget to check out THE TAX FOUNDATION’s “Weekly Tax Update”.