Monday, November 30, 2015


This rant is more for tax professionals than taxpayers.  Although the opinion of taxpayers, who are supposed to receive additional help from what I will be ranting about, is welcomed and solicited.
Last week I talked about the “NATP Year End Tax Update Workshops” in a post here at TWTP.  My description of the first day of classes, known as “The Essential 1040”, included the following –

And, of course, the annual 2 hours of redundant ethics preaching.  No reflection on the seminar leader, but, for me (not legally required) this is a total waste of 2 hours, and I usually zone out or daydream during most of the presentation.”

I have also complained in the past that this 2 hours of redundant ethics preaching can actually turn into 4 or 6 hours of wasted time each year, as most organizations who offer day-long CPE sessions feel they must include 2 hours of ethics preaching, regardless of the intended main topic, to insure maximum enrollment.

Forced ethics CPE will not reduce tax fraud!  I have said time and time again over the years that if a person is crooked, forcing him or her to sit through 2 hours or redundant ethics preaching every year ain’t going to turn him or her honest! 

I have been preparing 1040s for over 40 years.  If I ain’t honest by now – and I probably wouldn’t have been able to remain in business for 40+ years if I were not – a 2-hour class ain’t going to perform a miracle.

This annual 2-6 hours of redundant ethics preaching not only wastes our time but also our money – we are paying for 8, or 16, or 24 50-minute CPE hours of actual tax return related education, but are only receiving 6, or 12, or 18 CPE hours!

I recently wrote an article for the NJ-NATP chapter newsletter on the newly required 4 or 16 hours of tax-related CPE for “unenrolled” tax professionals who want to prepare New York State tax returns.  There is an ethics component in these required classes as well, which is truly redundant.  Thankfully they only waste time and not money, as the classes are offered online for free.

I do not need to take basically the same class on depreciation each and every year.  I only need to be told of any new depreciation-related law or developments.  So why am I forced (although not actually required) to sit through 2 hours of ethics each and every year to be able to properly prepare 1040s?  If there is a true change or new development in the area of ethics or preparer penalties it can be mentioned along with other new law or development as part of the annual update presentation.

The forced inclusion of 2 hours of redundant ethics preaching in the annual “The Essential 1040” presentation can actually diminish the benefit of the class for tax preparers.  The discussion of important topics can be cut short, and/or one or more court case, or new revenue ruling or other development, although included in the text, is often skipped over in the classroom presentation and discussion, when it really is important enough to be reviewed in detail, because the instructor must be sure to have 100 minutes left at day’s end for the ethics nonsense.  

So, fellow tax preparers, what do you think about the annual forced 2 hours of redundant ethics preaching?  Does it provide any real value for you?  Or do you agree with me that it is truly a waste of time and money?  I sincerely want to hear your thoughts and comments, whether by submitting a comment to this post or via an email to me at with “Ethics Discussion” in the subject line. 

And I also want to hear from the taxpayer public, who use our services, on this issue as well.














HAWLEY PA, 18428


Friday, November 27, 2015


I trust everyone had a “successful” Thanksgiving. 

Just wanted to say that I am thankful for my fellow tax bloggers – Joe, Jason, Kelly, Kay, Russ, Bill, Jean, Jim, Peter, Trish, etc - who help to keep me up-to-date on new tax developments.  Wandering the tax blogosphere is often better than CPE classes.

Despite the holiday today’s BUZZ is “so meaty”.

* In “End of Year Legislative Agenda” at JD Supra Business Advisor we are told (highlights are mine) –

“With the House and Senate in recess this week for the Thanksgiving holiday, there are now only a very limited number of scheduled legislative days left for the year – 12 in the House and 15 in the Senate – and there is increasing talk that both chambers will leave for the holidays by Friday, December 11th, which would mean even fewer days.”

That does not leave much time for the incompetents in Congress to pass legislation to extend the “tax extenders”.  To repeat what I said in the last BUZZ installment

Hey, you incompetent idiots, shit or get off the pot!  Each and every one of you should be thrown out of office for not doing your job properly!

* Only a few days left to take advantage of my “Special November Offer”.  Get your check in the mail today!

* Jim Blankenship discusses some “Inter-Family Loan Topics" at GETTING YOUR FINANCIAL DUCKS IN A ROW.

Some good advice (highlights are mine) –

If you decide to go through with the loan, make sure expectations on both sides are clear. Discuss all terms and conditions and consider putting them in writing. You may even want to {I say should – rdf} draft a formal loan agreement. At the very least, settle on the amount of each loan payment and the date by which the loan must be paid in full. Open-ended obligations inevitably lead to misunderstandings.

On the other hand, don’t feel guilty if you decide to turn down your family member’s loan request. It’s hard to say no, but it’s still easier than repairing a damaged relationship if things don’t work out.”

When it comes to loans to family or friends I agree with the Bard – “Neither a borrower nor a lender be.

* Have you seen “The Gentleman Is A Dope (‘Gentleman’ Is Perhaps Too Kind)” at BOBSERVATIONS yet?  Can you guess who the “dope” is?

* A guest post at FORBES.COM from Scott T. Hanson, CFP explains “Social Security At Age 62? Why Delaying Your Benefits May Not Pay Off”.

Contrary to what most financial writers say, Scott suggests –

While it may be beneficial for many folks to wait until age 66 or even age 70, for those who have done a great job saving for retirement, it might be best to start Social Security as soon as possible–maybe even as young as age 62.”

* Attention tax pros - a free offer for the premiere issue of my new quarterly e-magazine THE TAX PROFESSIONAL (coming in January 2016) – see my website THE TAX PROFESSIONAL.

* Kelly Phillips Erb, FORBES.COM’s TaxGirl, reminds us that her annual “12 Days Of Charitable Giving 2015 Starts Soon” –

As I do every year, I’m asking readers to submit, via email ( the name of a charity which deserves a mention this year for the 12 Days Of Charitable Giving. Ideally, it would be one that you have supported financially over the past year or that you plan to support before the year end. In addition to the name, I’ll need the city where the charity is located, what it does and why you support the charity (a personal story would be great). Please also link to the website if the organization has one (Facebook FB -0.94% is okay, too): the more information that you can provide, the better.”

I am against calling featured participants in reality tv excrement “stars” (just as the title “Dancing With the Stars” should really be “Dancing With Celebrities”).  The term “star” seems to indicate some kind of quality or talent - and reality tv "featured participants" have neither.  {FYI - when I refer to reality tv excrement I do not include the various talent competitions}.

As for making money mistakes, by very definition narcissistic willing “featured participants” in reality tv excrement have minimal, if any, intelligence, and have made bad life decisions merely by choosing to appear in reality garbage.

And as for Kelly’s title, no one should ever attempt to emulate anything about reality tv idiots!

* Before I leave the topic of charities, and narcissists – we haven’t heard much from or about Al Sharpton lately (thankfully), but Robert Wood, also from FORBES.COM, tells us “Al Sharpton's Charity Hikes His Pay 71%, But Tax Liens, Clinton Imprint Remain” (highlights are mine) -

Al Sharpton was in the news again, this time over giving himself a 71% raise. Rev. Sharpton is the president of National Action Network–NAN for short. It is a civil rights organization with chapters and affiliates across America. NAN collected a tidy $6.9 million in 2014, up $2 million from the prior year.”

And –

Still, the nice uptick in donations evidently left a cushion to increase Rev. Sharpton’s pay from $241,545 to $412,644, including a bonus of $64,400.”

RW goes on to remind us of Sharpton’s, and his charity’s, continuing tax issues.

* Russ Fox of TAXABLE TALK reports “IRS Increases De Minimis Expense Threshold to $2,500 from $500 for 2016 Onward” –

The IRS today announced that the de minimis expense threshhold for small taxpayers (which is the vast majority of all taxpayers) to $2,500 from $500 for tax years 2016 onward. Note that this does not apply for 2015 returns filed in 2016. This move will allow taxpayers to expense many items that currently must be depreciated.”

* Jason Dinesen provides advice and information “From the Archives” with “Home Offices, Principal Place of Business, and Mileage Deductions” at DINESEN TAX TIMES.

* Let me end with some timely advice from Barry Fowler at TAX CONNECTIONS – “Don’t Be Scammed By Fake Charities”.


+ Here is a belated quick, but very important, reminder for journalists, columnists, and personal finance bloggers who will be talking about year-end tax-planning during the next several weeks.

Whenever writing about year-end tax strategies or techniques DO NOT give the advice “consult your CPA”.  THIS IS WRONG ADVICE!

The CORRECT ADVICE is “consult your tax professional”.

While an individual CPA may be a tax professional, CPA does NOT = tax professional.

+ And I cannot leave without at least one Donald Trump item – in this case a excellent editorial from by Christopher M. Halleron, Editor/Publisher of Hudson County NJ based hMAG titled Thousands of People Were Cheering’ — Donald Trump and the Absence of Decency”, which correctly observes –

Recent statements by Donald Trump show the frightening application of willful ignorance.”
And –

So far Trump’s own aesthetic buffoonery has made him an easy target for cheap laughs. But as comics take clich├ęd cracks at his signature clown coiffure, one can’t help but wonder if Weimar-era pundits were too focused on facial hair to comprehend the face of evil wearing it.”

Christopher is spot on when he says of the Donald –

And make no mistake, he has no sense of decency.”

It still amazes me that anyone in their right mind would ever seriously consider voting for Tronald Dump for President, let alone dog catcher.


Thursday, November 26, 2015

Wednesday, November 25, 2015


The recent NATP TAXPRO MONTHLY reminded me of a 2015 tax-related court decision.

In August of this year the US Court of Appeals reversed the Tax Court decision in Charles J Sophy, et al, v Commissioner, 138 TC204.

The original decision upheld the IRS position, as per CCA 200911007, that the $1 Million acquisition debt and $100,000 home equity debt limitations on the deduction of mortgage interest on Schedule A were “per residence” and not “per person”.

The case involved two unmarried taxpayers who jointly purchased a primary personal residence in Beverly Hills CA with a $2,240,000 acquisition debt mortgage and also took out a $300,000 home equity loan which they used to purchase a second home.  They each wanted to claim interest on the $1.1 Million debt limit, effectively deducting interest on $2.2 Million of debt.  The IRS said they were limited to interest on $1.1 Million in debt between them – or $550,000 of debt each, and won in Tax Court.

But the Court of Appeals ruled that co-owners of one primary residence can each claim mortgage interest on up to $1 Million in acquisition debt and $100,000 of home equity debt.  They said that the statutory limits are NOT per residence, but are per person.

FYI, I have written “Mortgage Interest Guide” in which I discuss what you can deduct as mortgage interest on Schedule A, who can claim the deduction, types of mortgage debt, limitations on deductible mortgage interest, refinancing, and points, and provide worksheets, with complete instructions and detailed examples, for keeping track of acquisition debt and home equity debt.  It is part of my “Dollar Store”.  I will need to update this guide to include this relatively new court decision.


Tuesday, November 24, 2015


The tax system should be designed to impose and to collect taxes, not to administer social programs.”
Donald Alexander (Commissioner of Internal Revenue May 1973 - February 1977)

As I tweeted yesterday - the idiots in Congress are gone for the Thanksgiving holiday. Upon return they will have 3 weeks to pass the “tax extenders” before they leave for the year!

Hey, you incompetent idiots, shit or get off the pot!  Each and every one of you should be thrown out of office for not doing your job properly!

* Two new posts at BOBSERVATIONS – “Welcome to the Theatre” and “The Gentleman Is A Dope (‘Gentleman’ Is Perhaps Too Kind)”.

* Attention tax pros - a free offer for the premiere issue of my new quarterly e-magazine THE TAX PROFESSIONAL (coming in January 2016) – see my website THE TAX PROFESSIONAL.

* Once again, like Oliver Twist, NJ is last on the list!  According to the TAX FOUNDATION’s “2016 State Business Tax Climate Index” my former home state is #50 on the list – the state with the worst business tax climate.  NY and CA are not far behind - #49 and #48.

New Jersey, for example, is hampered by some of the highest property tax burdens in the country, is one of just two states to levy both an inheritance tax and an estate tax, and maintains some of the worst-structured individual income taxes in the country.”

Here is how NJ ranks in the individual tax categories -

·   Corporate tax rank: 43rd
• Individual income tax rank: 48th
• Sales tax rank: 47th
• Unemployment insurance tax rank: 31st
• Property tax rank: 50th

The top ten (best tax climates) are –

1. Wyoming
2. South Dakota
3. Alaska
4. Florida
5. Nevada
6. Montana
7. New Hampshire
8. Indiana
9. Utah
10. Texas

My current home state of PA is #32.

* The ASBURY PARK PRESS discusses this topic in more detail in “NJ Business Tax: Why Are We Still in Last Place?”.

The piece reminds us -

New Jersey has ranked at the bottom since at least 2013.”  

The general rule of thumb is the later you claim, the better because your check will be bigger. But just how much bigger? The Consumer Financial Protection Bureau's new Planning for Retirement tool can show you, in just a couple of clicks.”

* Jason Dinesen continues his series on Choosing a Business Entity with “S-Corporation” at DINESEN TAX TIMES.

* Margaret Barr of McBrayer, McGinnis, Leslie & Kirkland, PLLC explains “Exemption Portability - What is it, and how does it work?” related to the federal estate tax at JD SUPRA BUSINESS ADVISOR.  

* Ken Nopar lists “Clients Who Should Create Donor-Advised Funds” at ACCOUNTING TODAY.  Are you on the list?

I explain Donor-Advised Funds here and in my “2015 Year-End Tax Planning Guide”.

* Julian Block provides “Year-End Reminders on Dependency Exemptions” at ACCOUNTING WEB.


Monday, November 23, 2015


I celebrated my 62nd birthday attending the annual National Association of Tax Professionals’ year end “Essential 1040” workshop, followed the next day by “Beyond the 1040”.  I often find myself at year-end CPE classes on my natal day – usually NATP offerings. 

I chose to attend in the offerings in Hasbrouck Heights NJ this year, as the first day coincided with a bi-annual “Boys Night Out” with friends from grammar school, high school, and college (most of whom are also 1040 clients).

The first day is always a review of the COLA and inflation adjustments and tax developments - court cases, revenue rulings, and new legislation - for, and components of prior years’ legislation taking effect in, the current tax year, in preparation of the upcoming tax filing season.  And, of course, the annual 2 hours of redundant ethics preaching.  No reflection on the seminar leader, but, for me (not legally required) this is a total waste of 2 hours, and I usually zone out or daydream during most of the presentation.

I have compiled “What’s New for 2015” with the 2015 COLA and inflation-adjustment information, which I will send you free.  Just send an email request to with “What’s New for 2015” in the subject line.

The second day covers 2 or 3 tax topics in depth.  This year “Beyond the 1040” covered the “alphabet soup”, as the instructor put it, of medical tax benefits – HAS, FSA, MSA, HRA, PTC, etc – and issues affecting older/retired taxpayers.

Here are some of the items that I was reminded of during the 2 days –

* The American Opportunity Credit is only with us through 2017.  Unless extended or made permanent, for tax year 2018 we will return to the rules for the original HOPE Credit.

* The only real advantage of opening a Coverdell Education Savings Account (ESA) is that it can be used for grammar school and high school costs.

* In order to be able to properly claim gambling winnings on Page 1 of your Form 1040, and not just report total gross W-2G proceeds, beginning with 2016 you must use a casino “Player’s Card” to track your slot activity.  If you come out ahead, at year end you should request a detailed day-by-day report from each casino and not just the one page total annual wins and losses report.

* Under the new IRS proposed regulations effective with tax year 2016, when determining net gambling winnings or losses for a “session of play”, a session is determined on a calendar day, and will end at 12 midnight.  If you are feeding the slots in a casino continually from 9 PM till 2 AM you will have 2 separate sessions – 9PM to Midnight is one and Midnight till 2AM is a second.  Records should be kept accordingly.

* If you are making contributions - either directly or via employer payment or employer withholding - to a Health Savings Account and receiving distributions from the account to reimburse you for qualifying medical expenses you will receive information returns from the account.  You must file IRS Form 8889, even if there is no allowable deduction or taxable income to be claimed on your Form 1040, or else you will receive an IRS notice down the road.

* If you turn age 65 on January 1st, the IRS considers you to be age 65 on December 31st for purposes of the additional standard deduction.

* The tie-breaker rules for claiming the dependency deduction for a child will only apply is there is actual a tie to break – a case where two individuals claim the same child on separate tax returns.  If all parties agree on who will claim the child you do not have to follow these rules.

* You should keep separate physical accounts for “contributory” (you actually make annual contributions) and “converted” (you convert a traditional IRA or other retirement plan balance) ROTH IRAs for purposes of tracking the 5-year holding requirement.  Each type of ROTH – contributory and converted – will have a separate 5-year holding period.

* While some states will tax Social Security benefits, under federal statute Railroad Retirement benefits are exempt from state taxation – they can never be taxed on the state level.

If you have any questions on the items I have listed above contact your tax professional.

It was interesting to hear comments from fellow attendees concerning the recent total breakdown of taxpayer “customer service” by the IRS.  One attendee could not believe how rude and abusive an IRS employee who answered the telephone was.  And another told of being on hold with IRS for well over an hour before finally just being cut off (one reason I have never called the IRS).

To repeat what I have said before – the solution to mismanagement at the IRS is not to cut the budget at the expense of taxpayer service, but to change the management.

As usual NATP did a great job.  If you are a tax professional and you do not belong to NATP you should.  Email me at with “NATP Inquiry” in the subject line and I will send you membership information.


Tuesday, November 17, 2015


I am off to New Jersey to attend the annual National Association of Tax Professional’s year-end tax update classes – and to celebrate my 62nd birthday with friends from grammar school, high school, and college (some from two and some from all three), most of whom are also 1040 clients.
I will post items of interest from the 2 days of classes in a subsequent post here at TWTP, probably next Monday.

* FREE! FREE! FREE! Did you see the two reports you can get for absolutely nothing?  Check out the left hand margin (under the plug for my Dollar Store).

* Bob is babbling again!  Only this time as BOBSERVATIONS.  Check out my new post “Maybe This Time”.

* Jason Dinesen wonders “Was There Really a Good Old Days of Accounting?” at DINESEN TAX TIMES.  Read my comment.

I wonder if being forced to sit through 2 hours of ethics preaching CPE would have turned her honest.

As I “tweeted” last week - the solution to IRS mismanagement is not to reduce the budget at the expense of taxpayer service, but to change the management.

* And slightly belated birthday wishes to DON’T MESS WITH TAXES, “who” turned 10 on Saturday.  TWTP has got almost 5 years on DMWT.

* This past week-end a client asked me about “file and suspend”, and sent me this item by Mary Beth Franklin at INVESTMENT NEWS – “Singles Can File and Suspend Social Security Benefits”.  To be honest I was not aware of how this worked until I read this piece,

This option was recently done away with by the idiots in Congress, as was referenced in a previous BUZZ installment..  However Changes to the "file and suspend" strategy will not take effect for six months, so you still have time – until May 1, 2016 - to take advantage of this option if you meet certain age requirements.

* William Perez tells you what to do if you see "RSUs on Form W-2” at ABOUT.COM.


Rabbi, is there a proper blessing for Donald Trump?

Of course! May God bless and keep Donald Trump . . . far away from the White House!


Monday, November 16, 2015


We all know, or at least many of us know, that long term capital gains (gain on the sale of investments held more than one year and capital gain distributions from mutual funds) and qualified dividends are taxed separately at special lower rates.  Those in the 10% and 15% brackets pay 0% tax on this income, those in the 25% - 35% brackets pay 15%, and those in the top 39.6% bracket pay 20%.  And that these applies to both the “regular” income tax and the dreaded Alternative Minimum Tax (ATM). Right?
Well it ain’t necessarily so {wow! 2 Broadway musical lyric references in one post!}.

Long-term capital gains and qualified dividends are reported as taxable income on Page 1 of the Form 1040 and are included in Adjusted Gross Income (AGI).  There are a multitude of deductions and credits that are reduced, phased out, or disallowed based on one’s AGI.  These include:

  deductible traditional and spousal IRA contributions,
  the ability to contribute to a ROTH IRA,
  student loan interest,
  the deduction for tuition and fees (if extended)
  medical and dental expenses,
  charitable contributions,
  casualty and theft losses,
  miscellaneous itemized deductions,
  total Itemized Deductions,
  the deduction for personal exemptions,
  the Credit for Child and Dependent Care Expenses,
  the Credit for the Elderly or Disabled,
  the American Opportunity and Lifetime Learning education credits,
  the Retirement Savings Contributions Credit,
  the Child Tax Credit,
  the Adoption Credit,
  the Earned Income Credit, and
  Coverdell Education Savings Account contributions.      

And as AGI increases so does the taxable portion of Social Security and Railroad Retirement benefits, and the deductible loss from rental real estate is reduced or phased out.

In the case of Social Security and Railroad Retirement benefits, an additional $1.00 of AGI can increase taxable benefits by as much as 85 cents.  So capital gain and qualified dividend income for a taxpayer in the 25% bracket could be effectively taxed at 21.25%, as an additional $1.000 in such income could increase taxable income by $850.

And even $10 in such income could cause a taxpayer to lose a $2,000 deduction for tuition and fees, if extended, and cost $500 in taxes in the 25% bracket.

Even though long-term capital gain and qualified dividend income is taxed separately at the special rates under the dreaded AMT, since this income increases AGI it also increases Alternative Minimum Taxable Income (AMTI), and could reduce the amount of the allowable AMT exemption.  $1,000 of such income could increase income subject to the 26% AMT tax by $250 and cost an additional $65.00.

And we all, or many of us, know that only $3,000 in net capital losses can be currently deducted on the Form 1040.  Any excess losses are carried forward to subsequent years.  If the total net loss for 2015 was $10,000, $3,000 is deducted in 2015 and $7,000 is carried forward to 2016.  So the loss is not lost.
But this is not the case on NJ or PA state income tax returns (I don’t know of any other states offhand).  These states do not allow any carryforward of capital losses.  So the $7,000 mentioned above is truly lost when it comes to state income tax.  Actually the entire $10,000 in losses are lost – as these states have a “gross” income tax system and do not allow capital losses from the sale of investments to reduce income in other categories.  
I am not saying to avoid long-term capital gains or losses.  The first criteria for evaluating any transaction, strategy, or technique you are considering should always be financial.  Taxes are second.  Never let the tax tail wag the economic dog.  Sell a stock or mutual fund shares for the best possible price.  By postponing a sale to meet the long-term criteria or to avoid having to report the income or losses on your tax return the price of the investment could drop and give you a smaller profit or greater loss.

Just be mindful of what I have discussed above, be aware of the true cost of your capital transactions, and consider increasing estimated tax payments or withholding if appropriate.  And consider harvesting losses to offset gains or engaging in a “wash sale” of investments that would generate a gain to offset losses at year end. 

It would be a good idea to discuss actual and planned investment activity with your tax professional periodically during the year, and especially at year end. 


I am sorry – I cannot resist.

Speaking of it ain’t necessarily so.  The things that you're liable to hear from Donald Trump, it ain't necessarily so.


Friday, November 13, 2015


Not so meaty today.

* This item bears repeating - Are you looking for a tax professional to help you’re your year-end tax planning, and/or to prepare your 2015 tax returns?  The place to begin your search is my website FIND A TAX PROFESSIONAL.

* Speaking of year-end tax planning – why haven’t you ordered by “2015 Year-End Tax Planning Guide” yet?

Another example of the deterioration of taxpayer service at the IRS, due to budget cuts and mismanagement.  However the fact that IRS notices are more often than not wrong is nothing new.

* Jason Dinesen continues his series on “Choosing a Business Entity” at DINESEN TAX TIMES with a brief description of the “C Corporation”.

* Robert W Wood reveals “Amazingly, IRS Says You Can't Rely On IRS Instructions” at FORBES.COM. 

I agree, this is amazing, but, unfortunately, true.   

* Tax pros – FYI, I have added a page of “Tax Pro Online Resources” to my website THE TAX PROFESSIONAL.


Today’s final word is Trump-free (as the current Presidential campaign should be).  It is compliments of fellow tax blogger Joe Kristan of THE ROTH AND COMPANY TAX UPDATE BLOG, who told this tale at the end of his daily “Tax Roundup” on Tuesday.

While leading the class yesterday in Waterloo, co-presenter Roger’s phone was buzzing frantically in his pocket while he was speaking. As it turns out, Mrs. Roger had received a message on her answering machine at home saying the IRS needed to talk to her immediately. She called the number that was left, and somebody answered, telling her the police would arrest her right away if she didn’t pay her taxes.

Roger related the story to the class, and one of the attendees immediately pointed out the sure clue that it wasn’t really a call from the IRS:

“Somebody answered the phone.”

In 44 years I have never called the IRS to discuss a client issue – so I have thankfully never been put on hold for hours.  Actually the reason I do not call IRS or NJDOT is, based on past client experiences, I don’t believe I will be told the truth when I finally did get an answer.


Thursday, November 12, 2015


I was recently posed questions by the prolific “Anonymous” via a comment to a long-ago post.  Since I know that comments, especially to older posts, are rarely, if ever, read, I will respond in a new post.

Here is the comment I received (actually 2 comments – which I have combined) –

So my girlfriend and I are both currently working and living in NY, we each gross roughly 200k and we both max out our 403B contributions. We are currently shopping for a house and are considering properties both in NY (outside NYC) and NJ. We are wondering from an income tax standpoint which location would be better? I have heard that NJ does not recognize 403B as an annuity deferment, correct?

If I choose a property in NJ, will my property taxes be deductible from my NY state income taxes?

Thanks for your time Robert.”

Any decision on where to live – New York State (outside NYC) vs New Jersey – would require running specific income and deduction numbers, which I am obviously not going to do.  However I can make some observations on the tax consequences of each choice.

1. If you live in New York City you will pay a resident income tax.  I am talking about the 5 boroughs and not just Manhattan.  If you move to NJ, or elsewhere in NY, you would not have to pay the NYC income tax.  Non-residents who work in “the city” do not pay this tax.

2. As two single individuals at your level of income ($200K each) if you are residents of NY State all of your income will be taxed at a flat 6.65%.  If you are a NJ resident working in NY you will determine your NYS tax as if you were a full-year resident and do a calculation to apportion the tax based on NY State source income (your wages).

4. As a NJ resident your total income will be taxed working your way "up the ladder" on a sliding scale from 1.4% to 6.37%, and you will receive a credit for the tax paid to NY State on your NY source wages and any other income.  The credit is not dollar-for-dollar; it is determined using a special calculation formula.  If your NY state tax liability was $10,000 you would not get a full $10,000 credit on the NJ state return. 

5. If there are any days that you do not work physically in New York State – i.e. attending a conference or convention in Las Vegas – you can allocate the wages for those days to New Jersey so that a portion of your wages will not be NY State source income.  Income taxed in New Jersey will usually cost slightly less in net state taxes than income taxed in New York.

6. New York State income tax allows for most itemized deductions you claim on your federal return – except for state and local income or sales tax.  The allowable NYS itemized deduction is reduced for higher-income taxpayers.  New Jersey residents can only deduct medical expenses in excess of 2% of NJ Gross Income and up to $10,000 in real estate taxes on the NJ-1040.

7. You are correct.  New Jersey does not treat employee contributions to pension plans, other than a 401(k) plan, as “pre-tax”.  So the wages subject to tax as a NJ resident will be higher than the wages subject to federal or NY State income taxes – substantially so because you both max-out your 403(b) contributions.  New Jersey also does not treat any Section 125 employee health insurance or health FSA payments as “pre-tax”, as Sam and Andy do, so this may further increase the amount of wages subject to NJ state income tax.  However these expenses can be included in the NJ medical expense deduction (subject to the 2% exclusion).  And NJ also does not treat any transportation benefits at “pre-tax”.

If all of your taxable income comes from W-2 wages, or if what would be “non-NY source” income for a NY non-resident – interest, dividends, etc – is minimal, and any days worked outside of NY State are also minimal, I expect you would pay less net state income tax living in New York.  This is because NY follows federal tax law when it comes to “pre-tax” treatment of employee benefit contributions, while NJ does not.  You would probably pay less state income tax if you both lived and worked in NJ.   

Of course state income taxes is not the only factor to consider when choosing where to live.

If you do decide to live in NJ I would see if your employer(s) would withhold NJ state income tax as well as NY state income tax, or consider making quarterly estimated tax payments to NJ.

As for property taxes paid to New Jersey – while you cannot take a direct deduction of NJ property taxes against NY State source income on a NY non-resident tax return, because property taxes are allowed as an itemized deduction on the federal and NY State tax returns you will receive some tax benefit for the real estate taxes paid to New Jersey on the NY non-resident return

I hope this answers the questions posed by Anonymous.

 Does anyone have anything else to add?