Thursday, April 30, 2015


Here is something that came to me as I was preparing a GDE. 

The taxpayer, a NJ resident, purchased insurance for her and her dependent college student child for 2014 via the Obamacare Marketplace and received an advance premium credit that was applied to her monthly premium payment.

Health insurance premiums are deductible on the federal return if you itemize and the total of all allowable medical expenses exceeds 10% (or 7 ½%) of your Adjusted Gross Income (AGI), and also on the NJ-1040 state income tax return if the total of all allowable medical expenses exceeds 2% of your NJ Gross Income.

If a person receives an advance premium credit the amount that is deductible on the federal and state returns is the net “out of pocket” payment after deducting the advance premium credit – the amount the person has actually paid each month for the insurance coverage.  

If a taxpayer received an advance premium credit he/she must reconcile the amount of credit applied to the premium charges during the year, based on projected 2014 household income, to the actual credit to which he/she is entitled based on actual 2014 household income when filing his/her 2014 federal income tax return.  If the taxpayer is entitled to an additional credit it increases the refund or reduces the balance due on the tax return.  If the advance credit received during the year is more than the actual credit allowed the taxpayer must pay back the excess credit by reducing his/her refund or increasing his/her balance due.   

An additional credit that is paid to the taxpayer via the tax return reduces the “out of pocket” cost of the health insurance premiums for 2014 and, if the taxpayer itemized in 2014, represents a refund of a previously deducted item – and may be taxable income for 2015 under the tax benefit rule for recovery of a previously deducted item. 

If the taxpayer has to pay back all or part of the advance premium credit applied during 2014 then the pay back is an additional “out of pocket” cost for health insurance premiums, and is a deductible medical expense for 2015.  

My client had to pay back over $1,500 of advance premium credits applied in 2014 on her 2014 Form 1040 by reducing the requested refund on the return.  In effect she paid an additional $1,500+ for health insurance premiums.  If she will be able to itemize she can add this $1,500+ to the medical expenses she reports on Schedule A, subject to the in this case 10% of AGI exclusion. And she can most definitely add the $1,500+ to the medical expenses claimed on her 2015 NJ-1040.

So if you had to pay back all or part of the Obamacare advance premium credit on your 2014 tax return all is not lost – you may be able to deduct the pay-back on your 2015 federal and/or state income tax return.

I do not recall anyone discussing or writing about this anywhere when talking, teaching, or writing about the Obamacare premium credit.



Tuesday, April 28, 2015


Today is Ann Margaret’s 74th birthday!  And Bobby Rydell was 73 on Sunday.  Perhaps I should watch BYE BYE BIRDIE to celebrate.  I saw Ann Margaret’s live act twice – in Vegas and in NYC.

* No surprise here.  TAX GIRL Kelly Phillips Erb tells us that the “Top 10 Most Expensive Real Estate Tax Bills Found In Just 2 States”.  Guess which state had 7 of the 10 most expenses counties.

* And Kelly brings back “Fix The Tax Code Friday” asking for responses to the question “Should We Repeal The Federal Estate Tax?”.

My answer would be yes – but if doing away with the federal Estate Tax also does away with the step-up in basis for inherited assets it is no.  Doing away with stepped-up basis would create a nightmare for tax preparers and taxpayers.

* Jason Dinesen continues his series on “Marriage in the Tax Code” with “Part 7: 1920s Court Battles”.

* Another no surprise here. NJ 101.5 tells us “Worst Tax Systems in the US? New Jersey Ranks Second”.

The ranking comes from the report Business Tax Index 2015: Best to WorstState Tax Systems for Entrepreneurship and Small Business put out by by the Small Business & Entrepreneurship Council (SBE Council).

In the five years that we’ve done the small business tax index New Jersey has either been 49th or 48th. This year the state is 49th,” said Ray Keating, chief economist for SBE Council and author of the report. “You can always count on California being at the bottom. If there’s something that you want to do wrong on the tax front California is the example and you just don’t want to follow that state, but unfortunately New Jersey hangs right there with them.”

The article goes on to say –

New Jersey scores low in most of the tax measures looked at in the study, including:

Property Tax (50th)
Personal Income Tax (46th)
Individual Capital Gains Tax (47th)
Corporate Tax (45th tie)

In case you are interested –

According to the survey, South Dakota, Nevada, Texas, Wyoming and Washington have the five best state tax systems in the U.S.  In addition to New Jersey and California, Minnesota, Iowa and Hawaii also rank in the bottom five for the worst state tax systems in the country.”

* Another reason not to use tax preparation software from Kay Bell at her other blog (BANKRATE.COM) – “Turbo Tax Faces Tax ID Theft Lawsuit”.

Two taxpayers have filed a federal lawsuit alleging that the leading individual tax preparation software company didn't do enough to prevent the theft of their tax identities.”


Monday, April 27, 2015


I thought I had heard everything.

A client, a widower who was filing his 2014 return as a Single individual for the first time after the passing of his wife in 2013, sent his return to the IRS on Feb.7th requesting a refund.  No refund ever came.  Finally on April 25th he received a letter from the IRS saying that they had received the return but was unable to process it.  The letter explained –

"Our records indicate that the person identified as the primary taxpayer or spouse on the tax return was deceased prior to the tax year shown on the tax form. Our records are based on the information received from the Social Security Administration. Based on this information, the tax account for the individual has been locked.”

The IRS was writing to the taxpayer to tell him that he is dead and so they were not going to process his refund.

This is very literally the strangest thing I have heard from the IRS or a state tax agency in 44 tax seasons.

A contact number was provided in the letter.  I told the client to call the number and tell the IRS he was not dead.

Earlier I had learned that the IRS had held up the refund of a client’s unmarried college student son because an injured spouse form was attached to the son’s documents and his return was forwarded to that department for processing.  Where the injured spouse form came from is anyone's guess.  Certainly not from me or the taxpayer

I knew that taxpayer service had suffered as a result of the IRS budget cuts – but this is ridiculous.


Friday, April 24, 2015


BUZZ, BUZZ – the BUZZ is back!

Sorry I have been late in returning to regular posting.  I have been working away on the GD extensions – and have made some good progress.  I want to have all of the returns for which I have information done by the end of April.

Are you celebrating?  Do you know what day today is?  The TAX FOUNDATION tells us “Tax Freedom Day® 2015 is April 24th”!

Here are some items of interest that appeared during my tax season hiatus, and some more recent BUZZ-worth stuff.

* Barbara Weltman reminded me of some history that I had forgotten on one of “The President’s Tax Proposals” at BARBARA’S BLOG (highlight is mine) -

The concept of carryover basis for inherited property was created by the Tax Reform Act of 1976 and was set to take effect for property inherited from decedents dying in 1977 and later. Heirs and tax practitioners soon realized that it was unworkable - it was impossible in many/most cases to know what a decedent had paid for property or whether that property had originally been acquired by gift or inheritance, and whether any improvements that would increase basis had been made. A moratorium was in place until 1978; it was repealed in 1979.”

Some wise advice from the Professor -

“ . . . the Internal Revenue Code ought not be used to accomplish goals that ought to be spelled out in other legislation.”

Speaking of the 1095-A FU Jim correctly states -

If it is outrageous that the IRS has caused problems for almost a million taxpayers, is it not even more outrageous that the IRS was put in this position because the Congress was unwilling to charge HHS with the responsibility for administering the Affordable Care Act?

* And Jim brings to our attention a recent survey on “Testing Tax Knowledge”.

While not the intention of the post, it gives a good reason why relying on a box (tax preparation software) to prepare your return is a bad idea.

According to a report on a recent NerdWallet survey, ‘[m]ost American adults get an ‘F’ in understanding income tax basics’. The survey posed 10 questions to 1,015 people. The average score was 51 percent.”

Professor Maule has an excellent suggestion -

It would be fun to require members of Congress and candidates for that office to take this survey, or one like it. I cannot imagine the outcome would be any better than that achieved by the 1,015 survey takers.”

I expect the outcome would be worse.

* Over at DON’T MESS WITH TAXES Kay Bell advised taxpayers “Don't Bet on Fooling IRS with Bought Losing Lottery Tickets”.
I know of tax preparers who had stockpiled losing lottery tickets for clients to use in audits.

I have also been advising clients for years that if they are hoarding losing racetrack tickets to substantiate claimed losses make sure they do not have shoeprints on them.

* Let’s make it a Kay Bell trifecta with “IRS Telephone Tax Help Was a Dismal 38.5% this Filing Season”.

The IRS leadership chose to give taxpayer service the biggest hit from the budget cuts, hoping this would anger taxpayers and cause them to complain to the idiots in Congress.

In 44 years I have never called the IRS.  I conduct all my business with the Service via written correspondence.

* ACCOUNTING TODAY discusses one reason why IRS telephone tax help was so dismal in “IRS Accused by Congress of Diverting Funds from Customer Service”.

The House Ways and Means Committee released a new report Wednesday on the Internal Revenue Service’s declining level of customer service during the 2015 tax-filing season, blaming the IRS for diverting funds away from taxpayer service to finance other priorities such as implementation of the Affordable Care Act.”

The report found that -

. . . the IRS made a 73 percent reduction in user fees allocated to customer service, and a 6 percent decrease in total funding for taxpayer assistance. On the other hand, the IRS awarded $60 million in bonuses to its employees, at a time when the IRS did not yet know what its budget would be for fiscal year 2015. The amount of time IRS employees spent on union activity would allow for over 2 million additional taxpayer-assistance calls, according to the report.”

* Jason Dinesen joins me in reviewing the 2015 tax filing season, identifying some trends he noticed in “Tax Season Recap 2015: What a Strange Season, Part 2 (Trends I Noticed)”.

Jason agrees that the new Obamacare tax return requirements were not such a big deal after all –

The ACA wasn’t really that big of a deal. I keep reading all these horror stories online about accountants saying this was the “worst season ever” because of the ACA. Yes, it meant asking more questions and possibly filling out more forms, but I don’t get what was so horrific about it from a tax-preparation standpoint.”

* ACCOUNTING TODAY reported that “IRS Commissioner Thanks Tax Pros for Surviving Tax Season”.

While Commissioner Koskinen did “thank all the tax professionals and other partners who have helped to make a challenging filing season run as smoothly as we could have hoped”, he specifically identified –

The work of attorneys, Certified Public Accountants and Enrolled Agents as well as the software industry and payroll community has been extremely helpful—and essential—to running the tax system and helping the nation.”

Obviously Enrolled Agents need to be thanked.  But attorneys?  I can’t imagine anyone using an attorney to prepare a 1040, unless it was extremely complicated and involved unique legal issues.  The cost would be prohibitive.  And why single out CPAs but forget the tens of thousands of competent and qualified “unenrolled” preparers.  These preparers are more essential and helpful to running the tax system than the CPA industry.  Further erroneous perpetuation of the urban tax myth that CPAs are automatically 1040 experts.

Now – back to the GDEs!


Monday, April 20, 2015


Before it began the 2015 tax filing season, for filing 2014 tax returns (my 44th season as a paid tax preparer), was expected to be the worst tax season ever, at least by IRS leadership.

The filing season is going to be the worst filing season since I’ve been the National Taxpayer Advocate,” said Nina Olsen.

And IRS Commissioner John Koskinen predicted that the 2015 tax filing season “will be one of the most complicated filing seasons we’ve ever had.”

Why?  To begin with the idiots in Congress once again waited until literally the last minute to extend the perennial “tax extenders” for tax year 2014, which would, despite IRS assurances to the contrary, almost assuredly cause processing delays.  The IRS budget was cut - also attributable to the idiots in Congress - and, of course, taxpayer service took the hardest hit.  And the cuts came just as the IRS began its new added responsibility of administering the Affordable Care Act, aka “Obamacare”. 

As a result of Obamacare taxpayers had to indicate on their 2014 Form 1040 (or 1040A) whether or not they had “adequate” health insurance coverage, and could be subject to a penalty if they did not.  It was suggested that tax preparers would need to spend excessive time on “due diligence” to verify that their clients did indeed have adequate coverage.

Taxpayers who acquired insurance through the Obamacare Marketplace and received an “advance premium credit” to help pay for their insurance during 2014 had to calculate the correct amount of the credit to which they were entitled as part of the filing of their tax return and reconcile the actual credit to the advance credit.

As it turned out, at least for me, the tax filing season was no worse, or better, than any other.

To begin with, for the past 40+ years the tax filing season has always started for me on February 1st.  And this season was no different.

For the most part I was able to tell whether or not my clients had health insurance coverage without even asking the question.  I could tell from the DD entry in Box 12 of Form W-2, or a reference to Section 125 pre-tax health insurance coverage in Box 14.  Or the deduction for Medicare Part B premiums identified on Form SSA-1099.  Or the amount of the “above-the-line” self-employed health insurance deduction listed on the worksheet of a Schedule C filer.

For the very few clients where the above did not apply all I had to do was ask.  I had no legal or ethical responsibility to personally verify a client’s coverage.  A simple yes or no answer was enough.

I only had a handful of clients who did not have the required coverage, and most were able to avoid the penalty via the “unaffordable” exemption.  Only two clients had to actually pay a penalty.  And only three clients had received an advance premium credit (one a GDE). 

The two that I did during the season initially received erroneous 1095-As.  One client received a corrected form – after holding up the preparation of the return for at least a month – and one has not yet received a correction.  I prepared the second return with the incorrect information so as not to hold up the client’s refund, and will amend for an additional refund when the corrected 1095-A finally arrives.  

Other than the two Obamacare items there was really nothing new for 2014 returns.

The new reporting requirements for Form 1099-B have been around for 4 years now, so more transactions were considered to be “covered” this year.  And overall 1099-B reporting by brokerage houses continued to be more consistent and easy to follow.  

I was happy to take advantage, where possible, of Lines 1a and 8a on Schedule d, which allowed me to enter totals for covered transactions without adjustments and avoid listing each sale individually on Form 8949 or supplemental statements thereto.  However, I do wish that the IRS would allow these lines to be used if the only adjustments to be reported are category “W” (for wash sale) - as a $1.00 wash sale adjustment on one transaction currently forces me to cut and paste dozens of pages of sales on supplements to Form 8949.

And I continue to believe that brokerage houses should be allowed the option of reporting the cost basis of “non-covered” sales to the IRS on Form 1099B if the investment was purchased by the same firm that is reporting the sale, expanding the use of Lines 1a and 8a.

It seemed that the initial Consolidated 1099 Tax Reporting Statements from brokerage houses were mailed out later than usual this year – with some houses totally ignoring the February 17th deadline – and the sometimes multiple corrected 1099s also arrived later.  I was notified by a client’s broker of corrected 1099 statements for two accounts on March 24th, literally the day after I had hand-delivered the finished 1040 to the client, with news of another corrected form for the same account a week later.  One of the corrected statements contained absolutely no changes, but the others did.  I chose not to revise the finished return, but instead will file an amended 1040 after I am done with the GDEs.

The extended deadline for issuing the initial 1099, and the apparent need for multiple corrections, started with the introduction of the “qualified dividend” back in 2003.  The financial industry has had more than a decade to create software that would properly identify qualified dividends on a more timely basis.  I see no reason why we should still have to wait until mid-February for certain 1099 statements, and then wait until mid-March or later for corrected statements.

The stock market apparently did great in 2014.  Dividends and capital gain distributions, and gains on investment sales, were substantially higher for many clients – resulting in some hefty balances due to Sam and Chris.  Most of this increased income arrived in late December, so there was no “warning” during the year.  One client received over $25,000 in dividends and capital gain distributions from a single mutual fund in late December.

When breaking the bad news to these clients I reminded them of what my mentor, Jim Gill, always used to say – “If you owe taxes you must have made money somewhere.”

The increased investment income also raised an issue for clients who make estimated tax payments.  Do we schedule higher 2015 estimated payments using the “safe harbor” method, or base the payments on more “normal” returns?  In a couple cases the increased investment income kicked AGI over the $150,000 mark, which makes the 2015 “safe harbor” 110% of 2014’s total liability.

While NJ state tax law did not change, I now had to attach a signed NJ-1040-O “opt-out” form to all manually prepared NJ-1040s, as well as keep signed copies on file.  I do not use flawed and expensive tax preparation software, and never will, so I cannot submit all NJ returns electronically.  Whenever possible, and unless the client specifically opts out, I use the NJWebFile system, which allows me to submit NJ-1040s directly to the Division of Taxation online, but this system has many limitations, and I am often forced to submit manual returns.  I was pleased to learn that the ability to claim excess Family Leave Insurance contributions was finally added to the NJWebFile system, allowing me to use it for more returns this season.

Beginning with the 2014 NJ-1040 the Division of Taxation allowed taxpayers to submit filled-in NJ-1040s online.  This initially appeared to be an excellent alternative option for me.  But I discovered that a separate username and password/pin was required for each individual submission.  I used this new option for three returns early in the season and then stopped.  I had no intention of having to create and keep track of dozens of separate and distinct usernames and passwords.  Hopefully the Division of Taxation will change this policy in the future and permit multiple submissions from a single username and password.

This new requirement added more time, and paper, to the process of completing many NJ-1040s.

Of course the NJ Division of Taxation could always follow New York State’s lead and exempt tax preparers who do not use software from the electronic filing mandate.  I won’t hold my breath.

Also new for the 2014 NJ-1040 - homeowners were required to enter on their return the Block and Lot numbers of the residence for which they were claiming a property tax deduction or credit.  NJ has not asked for this information since the early 2000s, when the Homestead Rebate application was part of the NJ-1040 filing.  In many cases the client included the postcard from the city, borough, or township that indicated the property tax assessment, and the block and lot numbers, with their “stuff”.  For others I had to dig through past years’ return copies in my files to search for the numbers.  This, too, added more time to the NJ return completion process. 

Thankfully there were no “technical difficulties” involving my computer or printer, my car, or the weather to contend with this tax season.

As usual I ended the season with too many GDEs (the “E” is for extension – and the GD is for exactly what you think it is for).  Though less were due to workload.  I was again “more better” at self-enforcing FIFO – first-in, first-out. 

More than 2/3 of the GDEs I mailed out on April 14th were submitted because the client’s package was received after my new earlier deadline (my January client letter instructed “If you want me to complete your tax returns in time for the April 15th deadline your stuff must be in my hands - not postmarked - by end of business on March 21st”), or because there was missing, or no, information.  It is my hope to finish all the GDEs for which I have all the necessaryinformation by April 30th.

I do need to thin the herd going forward to cut down on GDEs, and in preparation for my eventual retirement after completing 50 tax seasons.  Sadly the herd was thinned a bit this year by the passing of several long-time clients, originally of JP Gill.

As usual the tax season ended for me not on April 15th but on April 14th.  For those of you who do not know why, fellow tax-blogger Peter J Reilly from explains here.  And on April 16th I headed to the Jersey shore to recover.

So there it is.  That was the tax season that was.  It certainly wasn’t the worst, or the best, in my 44 years.  Any questions?


Wednesday, April 15, 2015


Tax season's over!

My face it has a big smile.

And so, it's off to the shore -

1040s no more!

At least for a while.