Thursday, July 31, 2014


Dear Graduate:

1.  Claim Single-1, or Single-0, on your Form W-4 for federal and state withholding.  Do NOT claim more than 1 exemption.

2.  Participate in your employer’s 401(k) or 403(b) plan.  If cash-flow permits, contribute the maximum, which for 2014 is $17,500.  If you cannot contribute the maximum try to contribute at least enough to qualify for the maximum amount of any employer matching contribution.  If your employer offers a ROTH 401(k) or 403(b) option choose this option.  As an alternative, if you are contributing the maximum put 50% in a “traditional” account and 50% in a ROTH account.

3.  If you contribute toward the cost of employer-paid group health insurance premiums via payroll deduction, and you are offered an option, elect to have your contributions be treated as “pre-tax”.

4.  Participate in your employer’s medical expense Flexible Spending Account (FSA).  Be conservative and start with $1,000.  You can increase your contribution in subsequent years once you get a handle on your annual out-of-pocket medical expenses.

5.   If you have any cash from graduation gifts left over open a ROTH IRA account and use this money to fund your 2014 contribution.  The maximum you can contribute to an IRA, “traditional” and ROTH combined, for 2014 is $5,500.

6.  Take an empty coffee can, or other form of “piggy bank”, and put it in your bedroom.  Each week put $10, $20, or $50 in this “bank” (if you choose $20, but $20 in each week).  On January 2nd of 2015 take the money that has accumulated in this “bank” and contribute it to your ROTH IRA for tax year 2015.  Continue this practice for 2015 and subsequent years.  


Tuesday, July 29, 2014


* Have you seen my new website yet – FIND A TAX PRO?  Check it out!

* The IRS has released draft versions of new tax forms related to the Obamacare health insurance premium tax credit.

Form 1095-A is the “Health Insurance Marketplace Statement”  that will be sent to those who have received an advance credit (via premium reduction) during the year and Form 8962 (“Premium Tax Credit”) is used to reconcile the advance credit received to the actual credit allowed based on AGI and calculate any pay back of excess advance credits.

The Form 1040 draft has also been released, with new lines for the premium tax credit.

More work, and agita, for tax preparers.  And the taxpayer must reduce the actual benefit received from the premium tax credit by the additional cost to prepare his/her/their tax return.

* Rick Kahler tells it like it is when he says “Fame Does Not Equal a Good Source for Financial Advice” at the RAPID CITY JOURNAL –

When a financial advisor, someone with a radio or television show, or an author of financial books becomes well-known, it's easy to assume you can trust that person's advice. This isn't necessarily the case.”

As I have said before, take any advice from a celebrity “financial guru” with several grains of salt – and check with your own trusted financial advisor before taking any action.  This is especially applicable to tax advice.

* He’s back!  Joe Kristan returns from vacation with “Tax Roundup, 7/28/14: Out of the Wilderness Edition”.  I, for one, am glad he is back to blogging.

* Jean Murray provides a primer on “Self-Employment Tax and Taxes From Employment” at ABOUT.COM.


Have you noticed the gratuitous proliferation of the word, or syllable, “shit” in scripted basic cable dramas lately?

It appears to me that the executives at the TNT network have issued a memo to the producers of all their original scripted shows requiring that shit, or some variation, be uttered at least four times in each episode.

I am certainly not offended by the word.  And there are times when such use of language is acceptable, and even appropriate, within the context of character, situation, and story.  But what I have found is unnecessary and gratuitous use – having characters say “shit”, or a variation thereof, for no other reason than that they can.


Monday, July 28, 2014


I just created a new website titled FIND A TAX PROFESSIONAL!

The purpose of the site is to help a taxpayer find the right tax preparer for his or her individual situation.

Actually now is a good time to begin looking for a professional to prepare your 2014 tax returns.  You should not wait until next January or February.  Preparers have more time now to spend talking to you. 

This new website has links to several searchable databases of professional tax preparers, and a collection of invaluable articles, by me, to help with your search.

These articles include:

ALPHABET SOUP - What do all the initials mean?
DON'T ASSUME - A CPA is not automatically a 1040 tax expert, and Henry and Richard Ain't Cheap!

WHAT TO ASK A PREPARER - Questions to ask a potential tax preparer.

THE COST OF TAX PREPARATION - How much will a tax preparer charge?

WHAT TO GIVE YOUR TAX PROFESSIONAL - Make sure you provide your tax pro with everything he/she needs to properly prepare your return.

YOU ARE RESPONSIBLE! - Regardless of who prepares your return you are responsible for everything on it.

It also has links to books and publications and online resources to help with tax planning and preparation.

Check out FIND A TAX PROFESSIONAL and let me know what you think.


Friday, July 25, 2014


Better late than never!

* I didn’t realize I was chortling so loud.  At times my joy in discovering tax return errors made by CPAs (this happens more often than they would like you to think) can be described as “orgasmic”. 

Case in point, and, as Peter points out, another of many instances of CPAs proving they are not 1040 experts, the situation discussed by Peter J Reilly of FORBES.COM in his post “Social Security Disability Taxation - Curious And Confusing According to Tax Court”.

* Jason Dinesen talks about something that I had never even thought about before – “Taxation of Credit Card Benefits”.  

* Kay Bell, the yellow rose of taxes, reports that “two federal court rulings this week differed on just who is eligible for the {Obamacare premium} credit” in her BANKRATE.COM post “No Change Yet in Obamacare Tax Credit”.

“{IRS Commissioner} Koskinen said that until the courts settle the matter definitively, the IRS plans to continue granting advance premium tax credits to individuals who acquire insurance through the federal exchange.”

If the purpose of Obamacare is to attempt to provide universal health insurance coverage by assisting those who cannot afford the premiums with “upfront” tax credits, who gives a rat’s arse where the policy is acquired?  A person who would otherwise have remained uninsured is now covered.

* And at her DON’T MESS WITH TAXES blog Kay tells us “Mississippi Kicks off the Summer 2014 Sales Tax Holiday Season” –

Mississippi's annual sales tax holiday is this Friday, July 25 {today!}, and Saturday, July 26.”


Wednesday, July 23, 2014


A recent “issue” of the National Association of Tax Professional’s TAXPRO WEEKLY email newsletter included the following item (the highlight is mine) -

The following is from Rev. Proc. 2014-42:

‘Revenue Procedure 81-38 is modified and superseded for tax returns and claims for refund prepared and signed (or prepared if there is no signature space on the form) after December 31, 2015.

Unenrolled tax return preparers may not rely on Revenue Procedure 81-38 to represent taxpayers during an examination of a tax return or claim for refund prepared or signed after December 31, 2015.’

This essentially means that after December 31, 2015, if you don’t volunteer to participate in this program and you aren’t an EA, CPA or attorney, you can’t correspond with the IRS about tax law on a return you prepared unless your client is present.”

First – “you can’t correspond with the IRS about tax law on a return you prepared unless your client is present”.  According to Mirriam-Webster the applicable definition of correspond is “to communicate with a person by exchange of letters”.  Does this mean that I can write a letter to the IRS if my client is in the room with me when I do so?  Does my “correspondence” with the IRS need to include a certified statement from the client that he/she was looking over my shoulder as I typed the letter?

I contacted the NATP publications editor, for whom I have written in the past, and asked how this affects the “check the box” Third party Designee procedure.  Here is the answer I received –

The volunteer program did not change the procedures or rules for naming a third party designee. Anyone can be named as a third party designee. Carol Campbell told me that herself.”

That is good news.

What is “check the box”?

On the bottom of Page 2 of the Form 1040, under the heading “Third Party Designee” taxpayers are asked “Do you want to allow another person to discuss this return with the IRS?”  You would “check the box” to indicate yes.  I have the client “check the box” on all returns I prepare, indicating “Preparer” as the “designee’s name”.  This option is also available on many state returns, like NJ and NY.

The instructions for Form 1040 tells us -

If you check the “Yes” box, you, and your spouse if filing a joint return, are authorizing the IRS to call the designee to answer any questions that may arise during the processing of your return. You are also authorizing the designee to:

·      Give the IRS any information that is missing from your return,

·      Call the IRS for information about the processing of your return or the status of your refund or payment(s),

·      Receive copies of notices or transcripts related to your return, upon request, and

·      Respond to certain IRS notices about math errors, offsets, and return preparation.”

There is no doubt that this “check the box” procedure has done much to expedite and streamline the resolution of basic tax return issues.    

Under this procedure, I can call the IRS (which I never have done and never will do) or the IRS can call me (which actually happened once when a client forgot to sign his tax return before mailing it to the IRS), or I can write to the IRS to respond to a question or concern that the Service has about a return I have prepared, or to explain a processing or assumption error that resulted in a notice to a client about a return I have prepared.

I have prepared the client’s tax return, and have an intimate knowledge of what is reported on the return.  Who better to respond to IRS questions or to explain to the IRS the nature or method of calculation of items on the return?

I am glad the IRS did not change the “Third Party Designee” procedure.  Forbidding me from dealing with the IRS in this manner unless I “volunteer” would be stupid. 


Tuesday, July 22, 2014


* Barbara Weltman explains the “Hobby Lobby Case and Your Small Business” at BARBARA’S BLOG.

On June 30, 2014, the U.S. Supreme Court ruled that requiring family-owned corporations (like Hobby Lobby, Inc) to pay for insurance coverage for contraception under the Affordable Care Act violated a federal law protecting religious freedom.

The Court said that a closely-held corporation (the legal entity of the litigants Hobby Lobby Stores, Inc. and Conestoga Wood Specialties Corp.), is a person for purposes of the RFRA {the Religious Freedom Restoration Act of 1993 – rdf}, thus protecting, at least on this contraception issue, the religious liberty of the humans who own and control it.

To me this is totally ridiculous.  Individuals – persons like you and me – have religious freedom, not business entities.  If an individual employee, or shareholder, of Hobby Lobby opposes contraception on religious grounds then that individual should not use contraceptives.  But if a shareholder, or all shareholders, of a corporation opposes contraception on religious grounds he/she/they cannot force their individual religious beliefs on, and deny otherwise required legal medical coverage to, the employees of the corporation who may not share the same religious beliefs.  It is the individual employee, or shareholder, who has religious freedom, not the business.

In this situation religious freedom means that the government cannot force a person to take contraceptives if their religion tells them doing so is wrong. 

* Roger Wohlner, THE CHICAGO FINANCIAL PLANNER, discusses “Required Minimum Distributions – 7 Things You Need to Know”.

* Jason Dinesen wonders “Why is the AICPA Filing a Lawsuit Against Lame IRS Preparer Program?” at DINESEN TAX TIMES.

Jason does a good job of concisely describing the IRS’ new voluntary nonsense (highlight is mine) -

My understanding of the program is that if a preparer sits through 18 hours of continuing education and passes some sort of test administered by a CPE provider, they get a gold star and an ‘attaboy’ from the IRS.”

* Jason also deals with “Deducting Losses in Retirement Accounts” in an earlier post.

* Prof Jim Maule debunks on with a new entry in his “Tax Myths” series.  This myth is “Part XI: Alimony Always Is Taxable”.

The Prof explains examples of when alimony is not taxable.

If I may add another example – when what is called “alimony” is actually disguised “child support”.  I came across this once in my 40+ years.  Perhaps I will write TWTP post on the subject in the near future.


I really miss true variety television.  Thank God for reruns of LAWRENCE WELK on PBS.

With over 200 channels, and too often nothing on but garbage, you would think at least one of them would rerun episodes of the dozens of classic variety shows of the 60s and 70s.


Monday, July 21, 2014


“Qualified residence interest” (i.e. interest on debt secured by the residence), also known as mortgage interest, paid on your primary residence and one secondary residence can be deducted on Schedule A, subject to certain limitations. 

You can only deduct interest on two properties at a time.  If you own a personal residence in New Jersey and two separate person-use vacation properties, one in Florida and one in the Pocono Mountains, and all three properties have a mortgage, you can only deduct the mortgage interest on two of the properties

There are three kinds of deductible qualified residence interest - 

1) Grandfathered debt – debt acquired on or before October 13, 1987, that was secured by your main residence or a qualified second home.  It does matter what the proceeds of the loan were used for, as long as the debt was secured by the property.

2) Acquisition debt - debt acquired after October 13, 1987, to buy, build, or substantially improve your main residence or a qualified second home. A “substantial improvement” is one that adds value to the home, prolongs the home’s useful life, or adapts the home to new uses.

3) Home equity debt – debt acquired after October 13, 1987, that is secured by a principal residence or second home that is not used to buy, build, or substantially improve the property.  There is no restriction or limitation on what the money can be used for; you can use it to buy a car, to pay for college, or to pay down credit card debt. 

The amount of principal on which interest can be deducted is limited –

  Grandfathered debt is not limited.  Interest on grandfathered debt is deductible in full as mortgage interest.  

  Acquisition debt is limited to $1 Million ($500,000 if Married Filing Separately). Qualified acquisition debt cannot exceed the cost of the home and any substantial improvements.  The $1 Million (or $500,000) debt limit is reduced by any grandfathered debt.

  Home equity debt is limited to $100,000 ($50,000 if married filing separately).  The $100,000 (or $50,000) debt limit is reduced by any grandfathered debt in excess of $1 Million (or $500,000).

Refinanced acquisition debt actually qualifies as acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing.

If you have done nothing but refinance acquisition debt to get better rates over the years - and you never took out a home equity loan, or opened a home equity line of credit, or refinanced to get cash and used the money for anything other than to buy, build, or substantially improve a personal residence, you still may have home equity debt.  The additional closing costs of each refinance that were added to the principal of the refinanced mortgage represent home equity borrowing. 

The only way you would avoid home equity debt in this case is if you literally refinanced only the principal from each old mortgage and paid all closing costs in cash.

John and Mary purchased a home in 2011.  They have one mortgage, from the original purchase, and no home equity debt.  They want to refinance their original mortgage in 2014 to get a better rate.  The principal balance on the original mortgage is $197,374.  The principal balance of the new mortgage will be $200,000.  They did not take any money “out”, and actually paid a little over $1,000 at the closing.  The difference is the closing costs for title insurance, inspections, fees, etc. etc.  John and Mary now have acquisition debt of $197,374 and home equity debt of $2,626. 

None of my clients have purchased homes for anywhere near $1 Million, and I doubt no more than a handful of my readers have.  So excess acquisition debt is not an issue for me.  But I have had several clients who have constantly refinanced over the years, often using additional borrowings to pay down credit cards or other debt or to purchase a car or pay for college.  Here is where the potential problem lies.

To be perfectly honest, I do not know of a single taxpayer, client or otherwise, who actually keeps track of acquisition debt and home equity debt from purchase through all refinances and borrowings. 

So, while it is clearly the responsibility of the taxpayer to keep track of acquisition and home equity debt, if anyone is actually doing this it is the professional tax preparer.  More work for us, thanks to complexity in the Tax Code that has been provided by the idiots in Congress.

I expect that at least 90% of all taxpayers who “self-prepare” their return, either by hand or by using tax preparation software, simply deduct the gross amount of mortgage interest reported in Box 1 of each Form 1098 they receive, regardless of the amount of their acquisition and accumulated home equity debt.  I also expect that at least two thirds (66.67%) of all tax preparers also do this.

Congress has successfully placed the burden for maintain records of the cost basis of investments (going forward) on the individual broker or mutual fund house.  Would it be possible to place the burden for maintaining records of acquisition and home equity debt on the banks and mortgage companies? 

A mortgage applicant would need to certify, under some kind of penalty, the purpose of the borrowing.  And the Form 1098 could include four separate entries for mortgage interest paid-

1. Covered Qualified acquisition interest
2. Covered Qualified home equity interest
3. Non-Deductible mortgage interest
4. Non-Covered mortgage interest

“Non-covered mortgage interest” would be interest on loans that originated before the inception of the new rules.

I doubt this will ever happen.  You can bet that the banking and mortgage lobby would line the pockets of the idiots in Congress aggressively combating such requirements.

Oh well, I can dream, can’t I?   

In an upcoming TWTP post I will discuss the rules for determining the amount of mortgage interest that can be deducted and some ways to get around the acquisition and equity principal limitations.


Friday, July 18, 2014


* According to “National Taxpayer Advocate Identifies Priority Areas and Challenges in Mid-Year Report to Congress” National Taxpayer Advocate Nina E. Olson released her statutorily mandated mid-year report to Congress that identifies the priority issues the Taxpayer Advocate Service (TAS) will address during the upcoming fiscal year

In her continuing call for “minimum standards for tax-return preparers” Ms Olson (highlight is mine) –

reiterates her longstanding recommendation that a meaningful preparer standards program must contain four components:  (1) registration to promote accountability; (2) a one-time “entrance” examination to ensure basic competency in return preparation; (3) continuing education courses to ensure preparers keep up to date with the many frequent tax-law changes; and (4) a taxpayer education campaign to help guide taxpayers to credentialed practitioners (i.e., CPAs, attorneys, and Enrolled Agents) or preparers who have satisfied the above requirements”.

Nina, a CPA is NOT a “credentialed” tax practitioner.  Nor is an attorney. 

A CPA is a credentialed accountant who is authorized to certify financial statements.  An attorney is a credentialed attorney.  Nothing about the initials CPA or JD have anything to do with competence or currency in the preparation of 1040s! 

A CPA and an attorney can “practice” before all levels of the Internal Revenue Service – but not because they have proven competence or currency in taxation, like the Enrolled Agent has.  They can practice before the IRS because a law says they can.

If you want “minimum standards for tax-return preparers” these standards must apply to all individuals who want to prepare tax returns – be they CPAs, attorneys, or the previously unenrolled.

* While we are on the subject, ACCOUNTING TODAY brings us the news that “AICPA Sues IRS over Voluntary Program for Tax Preparers”.

I have said time and again that there are so many things wrong with the IRS voluntary Annual Filing Season program.  But, pardon my cynicism, the AICPA would be against any voluntary program that would identify competent non-CPA tax preparers, deflate the totally untrue urban tax myth that a CPA is automatically a 1040 tax expert, and provide serious competition to CPAs.

My “twitter buddy” Dan Alban of the Institute for Justice points out that the AICPA originally supported the IRS mandatory RTRP program and thinks it is odd that they oppose a voluntary program.  However, if all tax preparers are required to be licensed as RTRPs, and CPAs are exempt from licensing, this appears to support the myth that CPAs are 1040 experts.  The erroneous assumption is that because the IRS does not require testing and mandatory tax CPE of CPAs this means they have already proven competence and remain current in 1040 preparation by virtue of being a CPA.

* Did you get a change to check out my article on “When Should You Begin Collecting Social Security?” over at MAINSTREET.COM.

* Steven J Fromm is thinking about “Summer Weddings” and gives us a comprehensive “Quick and Easy Tax Guide For Those Getting Married and Newlyweds” at the PHILADELPHIA ESTATE AND TAX ATTORNEY BLOG.

His first item of advice is most important (highlight is mine) –

The names and Social Security numbers on your tax return must match your Social Security Administration (SSA) records. If you change your name, it is imperative to report it to the SSA.”  

* Miranda Marquit provides some “Tips for Keeping Your Taxes Organized All Year Round” at EQUIFAX.COM.

She has a good final paragraph of advice –

If you consistently keep up with your taxes, properly filing everything once you receive it (you can do this in less than 30 seconds), all you’ll need to do is gather your paperwork up once tax time rolls around. You’ll reduce your stress level and make the time you do spend filing your taxes much more efficient.”

* Russ Fox identifies one of the reasons why I NEVER call the IRS, or a state tax agency in “101 Minutes…” at TAXABLE TALK.  I always use written correspondence.

Another reason – I do not trust the person to whom I speak to (1) tell the truth or (2) do what he/she says he/she will do.  In the past both I and clients have been lied to over the telephone by federal and state employees.

* "Back To School Sales Tax Holidays Begin Soon For Many States” explains Kelly Phillips Erb, FORBES.COM’s TaxGirl.

* Kay Bell provides another reason that refundable tax credits, and federal welfare payments, should NOT be in the Tax Code in “$15.6 Billion in Bad EITC Payments” at her BANKRATE.COM Taxes Blog.

* Professor Jim Maule continues his series on debunking Tax Myths at MAULED AGAIN with “Part IX: The Tax Rate Confusion”.

The Professor is correct when he says, “Most people do not understand income tax rates.”

I dealt with this confusion here at TWTP in “Evaluating Tax Rates”.

I am waiting for Professor Maule’s debunking of the tax myth that a CPA is automatically a 1040 expert.


An item Kate Ackley at Roll Call’s BELTWAY INSIDERS blog quotes from a recent report by the Bipartisan Policy Center’s Commission on Political Reform

The commission decries the inordinate amount of time that members of Congress spend raising money and worry about the effects of such fundraising on the legislative process,” the report stated. “In particular, we fear that the need to raise ever-increasing amounts of campaign funds is crowding out the time that members have to engage in legislating and government oversight, the job they were sent to Washington to perform.”

The post is titled “Who Has Time for Legislating Anyway?”.

Clearly the number one priority of the idiots in Congress is getting re-elected, and getting other members of their party elected or re-elected, and not legislating and government oversight – “the job they were sent to Washington to perform”. 




Thursday, July 17, 2014


In response to my call for a voluntary RTRP-like credential, and the IRS’s new voluntary Annual Filing Season Certification program, many tax professionals state that the IRS already has a voluntary credential – that of Enrolled Agent or EA.

I agree that this is a true statement of fact.  A preparer who passes the Special Enrollment Exam and maintains the required 72-hours in CPE over a three-year period has certainly demonstrated competence and currency in the preparation of 1040s.

Historically, however, the purpose of the Enrolled Agent credential, and the reason many preparers become an Enrolled Agent, has more to do with representation and “practice” than with “preparation”.  An Enrolled Agent is authorized to “practice” – i.e. represent any taxpayer – before all levels of the Internal Revenue Service audit process.

Many tax preparers, myself included, do not want to “practice” before the IRS.  All I want to be able to do is discuss with or explain to the Internal Revenue Service the 1040s that I have personally prepared, not as a “legal representative” of the taxpayer but merely as the preparer of the return.

Representation of taxpayers before the IRS can be, and has become for many EAs, a full-time job separate from the actual preparation of tax returns. 

The Special Enrollment Examination is a difficult and comprehensive test, comparable in difficulty to the CPA exam (FYI, passing the CPA exam is by no means whatsoever any proof of competence in preparing 1040s).  It consists of three parts – Individual Taxation, Business Taxation, and Representation, Practice and Procedures.  The fee for taking the SEE is $109.00 for each of the three parts of the examination – or a total of $327.  And it is advisable that an applicant take an EA Exam Review Course.  NATP currently charges its members $606 for its complete review course. 

As mentioned above, EAs are required to maintain 72-hours of CPE in taxation over a 3-year period.  This averages out to 6 mores hours per year than the current requirement for the new IRS credential.

So becoming and remaining an Enrolled Agent is an expensive proposition.  Appropriate for being able to practice before the IRS, but certainly excessive for those who do not wish to practice.

There is a need for a unique, specific, universally recognized and accepted voluntary credential, complete with initials, that will identify to the taxpayer public a tax preparer’s competence and currency in the preparation of 1040s based on the passing of an initial competency test and the maintenance of required annual CPE in taxation but does not involve "practice" before the IRS – whether it is administered by the IRS or an independent industry-based organization.   


Wednesday, July 16, 2014


The purpose of a voluntary tax preparer credential is NOT to be able to more closely “regulate” tax preparers – as it appears is all the IRS really wants to do. 

The IRS already maintains a database of “approved” tax return preparers via the PTIN requirement, and has in place a system of preparer penalties to “punish” naughty preparers. 

The purpose of a voluntary tax preparer credential, whether administered by the IRS or an independent industry-based organization, is to identify to the taxpayer public tax preparers who have proven competence and currency in 1040 preparation via testing and mandatory annual CPE in federal taxation.

The purpose of the IRS-administered Enrolled Agent (EA) program is to qualify non-CPAs and non-attorneys to “practice” before all levels of the Internal Revenue Service.  It has the side benefit of identifying competent and current 1040 preparers.



As promised in last Friday’s BUZZ installment, I will share with you information on deducting expenses of a “mixed-use”, or dual purpose, vacation property.

What prompted this was an email from clients whose GD extension I had recently finished, which began, in effect, saying –

We took a look at our return before tucking it in the mail and it appears that most of our 2013 expenses relating to our vacation home are not set forth on Schedule E of the return.”

When you rent a vacation home and your personal use of the property is more than 14 days, or more than 10% of the number of days it is rented at fair market value, whichever is greater, the property is treated as a "dwelling unit used as a home" for income tax purposes.  In 2013 my clients used the property for “personal use” a total of 55 days, which is more than 14 days.  The property was rented for a total of 35 days.    

Expenses directly related to the rental of the home are 100% deductible on Schedule E.  These are expenses that would not have been incurred if the property was not being rented.  They can include advertising for tenants, commissions and fees paid to real estate and property management agencies, local business registration fees, cleaning the property and laundering of bed sheets and towels after the end of one rental period and before the beginning of another, and consumable supplies. 

You can also deduct in full maintenance, repair and replacement costs resulting from damage done by the tenants, less the amount of any security deposit you have withheld to cover the damage. 

"Indirect" expenses - expenses that apply to the house in general and apply to both the rental and personal use - are only partially deducted on Schedule E.  Th3 amount you can deduct is based on the number of days rented at fair market value (35 in this case) divided by the total number of days the property is occupied (90 days in this case – the 35 days rented plus the 55 days of personal use). 

Any day you spend working “substantially full time” on cleaning, painting, repairing, or maintaining the property is not counted as a “personal use”.  But days that the property is rented to family and friends at less than the “fair-market” rent are considered “personal use” days.  You normally rent the home for $1,000 per week during the summer, which is in line with what other similar properties in the area charge.  But your brother and his family stay for a week and you only charge them $500.  That week is considered to be personal use. 

35 days divided by 90 days = 39%.  So only 39% of 2013 payments for real estate taxes, mortgage interest on acquisition debt, insurance, utilities, general maintenance, garbage collection, security and alarm systems, cable television and telephone service (if available to tenants), etc is deductible on Schedule E.  If the homeowners’ insurance premium for the year is $1,000 only $390 could be deducted on Schedule E.  A deduction is also allowed for depreciation, based on the rental use percentage.

If the property owners itemize they could claim 61% of the real estate taxes and mortgage interest on Schedule A.

The rental of a “dwelling unit used as a home” cannot generate a deductible tax loss in excess of the amount of direct expenses plus the pro-rated share of indirect costs that would be fully deductible regardless of whether or not the property was rented, such as real estate tax, mortgage interest and casualty losses.  This is similar to the tax deduction allowed for business use of your home.

As with the home office deduction, there is a three-tiered “hierarchy” of deductible expenses for rental expenses.

First to be applied against rental income are direct expenses and pro-rated indirect expenses for real estate taxes, mortgage interest on acquisition debt, and casualty losses.

If there is rental income left after claiming these deductions you next can deduct the pro-rated share of all other “operating” expenses – insurance, utilities, general maintenance and repairs, etc. 

If rental income still remains you can deduct pro-rated depreciation, but only up to the extent of the remaining rental income.

Any unused expenses are “suspended” and can be carried forward to be deducted in subsequent years, subject each year to the net income limitation.

Let us say the total rental income for the year for your “mixed-use” property is $5,000.  If the total of your “tier 1” expenses (direct expenses and pro-rated real estate taxes, mortgage interest on acquisition debt, and casualty and theft losses) are $5,200 you cannot deduct any other expenses and your Schedule E will show a net rental loss of $200.

If the total rent received was $10,000 you would deduct the $5,200 in “tier 1” expenses and could deduct a total of $4,800 in “tier 2” and “tier 3” expenses.  Your Schedule E would show “0” for net rental income.  If “tier 2” expenses totaled $5,000, you could deduct only $4,800 and would not be able to deduct any depreciation.  If “tier 2” expenses were $4,000 you could deduct up to $800 in depreciation.

Any questions?


Tuesday, July 15, 2014


* Joe Kristan’s Friday TAX ROUND-UP led me to “State Economic Prosperity and Taxation”, which summarized “new research by economist Pavel Yakovlev for the Mercatus Center at George Mason University” that “examines the effects of taxation on states’ economic performance, businesses growth, and net migration rates”.  

The not surprising bottom line of the research -

Higher state taxes generally reduce state economic growth, GSP, and even population. It is clear that people produce or consume less, or even move to a different state, in response to higher taxes.”

* A tweet from @DianeGilabert asked, “Need a comprehensive article on the real estate professional rules?”  I clicked on the link and was taken to “Real Estate Professionals: Avoiding the Passive Activity Loss Rules” by John H. Skarbnik, J.D., CPA, LL.M. at THE TAX ADVISOR.

* Over at STACIE’S MORE TAX TIPS, Stacie Clifford Kitts, in a rare original post, asks the question “Are Your Tax Records ‘Company Clean?’ 

Well, are they?    

* As Russ Fox points out in “Deadlines for Us, But Not for Them: GAO Gives IRS an F on Correspondence Audits” at TAXABLE TALK the GAO study’s conclusions weren’t a surprise to me or other tax professionals.

Russ quotes the study (the highlights are his) -

The notices the Internal Revenue Service (IRS) sends during correspondence audits have misled taxpayers by providing unrealistic time frames on when IRS would respond to their correspondence. For example, notices stated that IRS would respond within 30 to 45 days when it has consistently taken several months to do so. Further, as of early 2014, IRS data show that it had not responded timely to more than 50 percent of the correspondence taxpayers sent.”

Without exception every letter I send to the IRS in response to a “correspondence audit”, or any other notice, receives a reply from the Service weeks later stating that the IRS needs 45 more days to research and properly respond to my letter.  45 or so days later a second letter arrives stating that the IRS needs 45 more days to research and properly respond to my letter. 

The issue is usually resolved in 4+ months after the receipt of my original letter.  Sometimes the collection process continues, and I have to write to tell the IRS that they have received my response and should suspend collection, and sometimes it does not.

* It has been a while since I came across news of a state tax amnesty program.  These programs have raised tons of revenue for states in the past.  BOSTON.COM reports “Mass. Approves 2-Month Tax Amnesty Program

The program, signed into law by Gov. Deval Patrick, is available to taxpayers who failed to file a timely tax return or underreported their income.

Taxpayers who failed to pay any outstanding tax liability or failed to pay the proper amount on a required estimated tax payment are also eligible.

Those who pay their taxes and interest within the designated two-month amnesty period will not be assessed penalties. The waiver won’t apply to any individual who is the subject of a tax-related criminal investigation.”  


Monday, July 14, 2014


Back in, I believe, 2006 the idiots in Congress first introduced a list of “temporary” tax benefits, which were set to expire on December 31, 2006.  However, the idiots have seen fit to temporarily extend these benefits every year, or every other year.  The temporary extension of these benefits is often done at literally the very last minute, at the end of the year, which at the very least causes processing delays for the Internal Revenue Service.

These “extenders” expired on December 31, 2013, and have not yet been extended for 2014.  It is expected that the idiots in Congress will extend the benefits for at least another year – but not until after the November elections.  So more problems and delays for the IRS, and taxpayers, for 2014 filings.

The idiots in Congress should either excrete or get off the pot.  If they feel these deductions are appropriate they should be made permanent, as was eventually done with the dreaded Alternative Minimum Tax (AMT) patch.  If not, let them expire for good.  Passing temporary tax benefits is not good tax policy – but then when have the idiots in Congress ever been concerned with good tax policy?

Do these extenders really need to be extended?  Let us take a look at the more popular “extenders” that affect the average 1040 filer.


This $38 - $70 gift from Uncle Sam is a nice nod to teachers – but why do teachers deserve this more than police officers or firefighters or nurses or other public service employees? 


While the American Opportunity Credit generally provides the best tax benefit for college expenses, and is available to more taxpayers due to the higher income threshold, it is not available for graduate students.  This deduction is available to graduate students, and undergraduate students who have already claimed the AOC for the maximum 4 tax years  It is often “more better” than claiming the Lifetime Learning Credit, and is available to more taxpayers due to its higher income threshold.  That being said, the Tax Code should not be used for distributing government benefits.  All education tax benefits should be removed from the Tax Code.  These benefits should be delivered through the existing programs for student financial aid of the Department of Education.


This provides a tax deduction for residents of states that do not have a state income tax, and I have found that it often provides a better tax deduction for retired seniors.  This is one of the two “extenders” that, in my opinion, deserves to be made permanent.


I have absolutely no idea why this deduction was created – other than the aggressive lobbying of the mortgage insurance industry.  It certainly does not deserve to be made permanent.  Mortgage insurance is, for the most part, life insurance, and life insurance premiums are not a deductible expense, other than as an employee benefit provided by employers. 


It allows retired taxpayers over age 70½ who do not need to take a required minimum distribution (RMD) from their IRA for cash flow purposes, but are statutorily required to do so, to avoid increasing their Adjusted Gross Income by using the RMD to make a charitable contribution.  By reducing AGI this tax benefit could also reduce the amount of Social Security or Railroad Retirement benefits that are taxed.  This is the most “appropriate” tax benefit of the lot and if any of the extenders deserves to be made permanent this one does.


This credit has been greatly limited over its extended life – finally ending up as a “lifetime” $500 credit.  Each individual category of purchase also has further limitations, and have very specific requirements that often makes it difficult to determine if a purchase qualifies for a credit.  It really does not provide much encouragement for taxpayers to make energy-efficient purchases.  This also does not belong in the Tax Code.  Instead “cash-for-clunkers” like point of purchase rebates should be used to encourage energy-efficient purchases.

So what do you think?