Friday, April 28, 2017


Perhaps the greatest source of tax fraud, and tax return error, is the result of the erroneous policy of distributing government welfare and other social program benefits via the Form 1040 (or 1040A), especially when this takes the form of a refundable tax credit – the Earned Income Tax Credit, the Additional Child Tax Credit, and the American Opportunity Credit.
Obviously the best solution to the problem of tax fraud and error in this situation is to remove the distribution of government benefits, and all refundable credits, from the Tax Code. 
But if Congress insists on continuing this erroneous practice I have an alternative to forcing paid tax preparers to act as Social Workers and verify that clients qualify for these government program benefit payments via excessive additional “due diligence”, and forcing many legitimate low-income claimants to pay a tax return preparer to apply for government benefits.
First, require that all taxpayers who claim the Earned Income Tax Credit, whether or not refundable, have their tax returns prepared at an IRS VITA (Volunteer Income Tax Assistance) site, where returns are prepared free of charge for lower-income taxpayers.  Tax preparers would not be permitted to prepare, nor taxpayers to “self-prepare”, tax returns claiming the EITC. 
The number of VITA centers would need to be expanded and staffing would include paid IRS employees who, along with volunteer preparers, are specifically trained in verifying EITC qualifications.  Taxpayers would be required to provide VITA preparers with all the appropriate documentation that tax preparers are currently told to ask for.
Currently VITA preparers are not required to do the same excessive due diligence as paid tax preparers – which is wrong. 
Second, educational institutions must be required to report on the Form 1098-T all cash payments made to the institution during the calendar year for qualifying tuition and fees from all sources (payments from the student or the student’s family, direct student loan or employee benefit payments, and scholarships and grants), net any tuition and fee refunds, without exception (which Congress has already required institutions to do), the Form 1098-T must include a second page that lists the specific details of the charges and payments (as many colleges actually already provide to students), and the Form 1098-T must also be required to be attached to the tax return.
Just a thought. 
What do you think?

Thursday, April 27, 2017


A recent discussion with my wealthiest client about 2017 tax planning reminded me of a truly great tax strategy for charitable taxpayers with long-term capital gains.
Instead of giving cash to charity at year-end you can donate stock, bonds or mutual fund shares that you have held for more than one year and which have increased in value and save some money in the process.

This method of giving to charity has many tax benefits -

1. You can claim a deduction on Schedule A for the full market price of the investment on the date you make the donation and reduce your net taxable income. 

2. You don’t have to report the increase in value as a capital gain on Schedule D.  So you avoid the 15% or 20% federal capital gain tax.

3. If your AGI is more than $200,000 if single or $250,000 if married you avoid the 3.8% Obamacare Net Investment Income Tax (NIIT) on the gain.

4. You also will probably avoid state income tax on the gain.

5. Because the capital gain is not reported on Schedule D you do not increase your Adjusted Gross Income (AGI) and do not reduce or eliminate a variety of deductions and credits that are affected by increased AGI. 

6. Because the increase in value does not increase your AGI, if you are a victim of the dreaded Alternative Minimum Tax you will not reduce your AMT exemption.

My client, whose AGI will already exceed $250,000 without adding the potential capital gain and who generally is a victim of the dreaded AMT, wanted to donate $100,000 to charity.  Let us assume the stock he is donating has increased in value by $40,000.  By donating stock instead of cash he will save at least –

·      $26,000 or $28,000 in AMT for the deduction value of the gift (charitable contributions are deductible when calculating AMT)

·      $6,000 in capital gains tax

·      $1,520 in NIIT surtax

·      $2,600 or $2,800 in additional AMT because the AMT exemption is not reduced

·      $2,548 in NJ state income tax

Bottom line – by using this strategy the taxpayer gets the full $26,000 or $28,000 tax savings from making the contribution.  If he sold the stock first and donated the cash to the charity his net tax savings would be only $13,332 or $15,132.  The net tax savings for donating cash instead of stock would be even less if the resulting increase in AGI reduces other deductions or credits. 

The numbers would be different – perhaps greater tax savings - if the taxpayer was not subject to the dreaded AMT and in the 33% or higher bracket and/or could claim a deduction for the contribution on his state tax return.

Regardless of the amount of the donation and gain and the taxpayer’s federal tax bracket (unless 15% or 10%) there will be some savings from donating stock instead of cash to charity.  Consider this example –

Art Center has pledged $5,000.00 to his church building fund.  He also has 100 shares of Online Profits, Inc. which he purchased in 1998 for $2,000.00 and is now worth $5,000.00.  He decides to give the stock to the church to satisfy his pledge.  Art can deduct $5,000.00 on his Schedule A.  He does not have to pay tax on the $3,000.00 appreciation in the value of the stock.

If Art were to sell the Online Profits, Inc. stock and give $5,000.00 cash to the church he would have to report the sale of the stock on Schedule D and pay $450.00 in federal tax, as well as state income tax, on the gain.  Plus, the $3,000.00 gain would increase his Adjusted Gross Income (AGI), which could reduce or altogether wipe out a multitude of deductions and credits that are affected by AGI

In order for this strategy to work –

·   Any investment you donate to charity MUST be long-term property - an investment you have held for more than one year.  If you donate stock that you held for one year or less your deduction is limited to the cost basis, which in the above Art Center example would be $2,000.00.

·   Any investment you donate MUST have appreciated in value and would generate a capital gain if sold.  Do not donate an investment that has gone down in value - it is better to sell the stock, claim the loss on Schedule D, and donate the cash to charity.

And to provide the maximum tax savings you must be in the 25% or higher federal tax bracket.  If you are in the 10% or 15% tax bracket the special long-term capital gain tax is 0%.

FYI – I discuss the deduction for charitable contributions in detail in the premiere issue of my newsletter ROBERT D FLACH’S 1040 INSIGHTS – which could be yours for as little as $1.00.

If you think this tax strategy would work for you consult your tax professional.


Wednesday, April 26, 2017


Here are my initial thoughts on what has been released of the White House tax reform proposal –
I support the end of the Estate Tax (as long as it does not do away with the step-up in basis for inherited assets).
I support the end of the dreaded Alternative Minimum Tax – which began as the lazy reaction of Congress to a report that 155 individuals with Adjusted Gross Income of more than $200,000 (over $1 Million in today’s dollars) paid “0” tax on their 1967 tax returns.  Instead of closing the loopholes and fixing the Tax Code the reaction of Congress was to provide a “quick fix” in the form of originally a “Minimum Tax”, which has morphed into the dreaded AMT.
I support reducing the number of tax brackets.
I support doubling the Standard Deduction.
I support repealing the 3.8% NIIT surtax, created by the Affordable Care Act.
I like closing “loopholes” – but not doing away with all itemized deductions except charitable contributions and mortgage interest.  I like keeping the deduction for acquisition debt on a taxpayer’s principal personal residence only (not home equity), but also the deduction for real estate taxes on a taxpayer’s principal personal residence only as well as the deduction for state and local income or sales taxes.  I feel that the mortgage, property tax, and state tax deductions help to “geographically equalize” taxpayers.  I can explain more about this concept in a subsequent post.  And I believe that certain “employee business expenses” should be allowed under certain circumstances.
To be honest I do not know enough about the concept of a “border adjustment tax” to form an educated opinion.
I support reducing the tax on corporations – but feel this can be done by creating a “dividend paid” deduction for corporations, which would allow corporations to claim a tax deduction for dividends paid to stockholders (combined with eliminating corporate special loopholes – and taxing net book profit less dividends paid).  Allowing a dividends paid deduction would finally do away with the double-taxation of corporate dividends.  As part of this new treatment I would have individuals pay tax on all dividends at the appropriate ordinary income rates – no more special treatment for “qualified” dividends.
What is wrong is capping the tax on “pass-through” self-employment income from partnerships to general partners, and the self-employment income of Schedule C filers, at 15%.  This is unfair to wage-earners.  Net earnings from self-employment should be taxed the same as wages.
I would support a cap equal to the top corporate rate on sub-S pass-through income, providing that the current rules and guidelines regarding reasonable salaries for sub-S shareholders are maintained. 
I would, however, think about considering taxing some of the excess net earnings from self-employment for partners and Schedule C filers along similar guidelines as those applied to salaries of sub-S shareholders.
I look forward to the actual details of the real tax reform plan that the Republicans will introduce in Congress – hopefully soon.
As an aside - do you find it a coincidence that the largest tax breaks in the skimpy details released would benefit idiot Trump and his family "bigly"?


This past tax season I got the following email from a client –

I was just informed that I am able to write off my union dues which were $370 for the year.” 

The client was correct.  Union dues are deductible on Schedule A as a “Miscellaneous Expense”.  But the client did not actually get a tax deduction for union dues on her 2016 tax return.

Just because a legitimate expense you incurred during the year is “deductible” does not mean that you can actually deduct the item and receive a tax benefit.

Let’s look at this particular “deductible” item – my client’s union dues. 

First you must itemize – have more “itemizeable” deductions than the Standard Deduction you are allowed based on your filing status. 

There are situations where you either must itemize or it is beneficial to itemize, even if your total allowable deductions are not more than the Standard Deduction – but these are truly rare.  And there are certain items that can be deducted either directly against a category of income reported on Page 1 of the 1040 – expenses related to self-employment income on Schedule C or EZ, expenses related to rental income on Schedule E, and direct expenses related to the sale of investments on Schedule D – or “above the line” as an “Adjustment to Income”.  But in this case union dues are an itemized deduction claimed on Schedule A.

A classic example of the need to itemize to claim a deduction comes from another of my clients many years ago.  When sending me her tax “stuff” a client expressed great joy in her note because she donated her used car to charity so she would get a big tax deduction – as the charity to whom she gave the car had advertised.  She was truly disappointed when I told her she got no tax benefit for her gift because she could not itemize (she rented an apartment, so had no deductions for property tax and mortgage interest, and had truly minimal other deductions – and the market value of the used car donated did not push her “over the top”).

Second, in the case of most Miscellaneous Expenses – job-related expenses such as union dues, investment expenses, and tax preparation fees - you must first reduce the total by 2% of your Adjusted Gross Income before you get any tax benefit.  If your AGI is $100,000 and your total expenses are $1,500 you get no tax deduction – 2% of $100,000 is $2,000, which is more than $1,500.  If your allowable expenses total $2,125 your tax deduction, for which you will receive an actual tax benefit, is only $125.

And third, if you are a victim of the dreaded Alternative Minimum Tax you get no, or a limited, tax benefit from Miscellaneous Expenses.  Miscellaneous itemized deductions subject to the 2% of AGI limitation are not deductible in calculating AMT.

In the example at hand, the taxpayer could itemize but did not have total allowable Miscellaneous Expenses, including the union dues, in excess of 2% of AGI.  So, while “deductible”, she could not actually deduct, and receive any tax benefit, from her union dues.

In many cases the “deductibility” of an item depends on the specific facts and circumstances of the individual taxpayer.  As I have said many times before, the answer to the question “Can I deduct X, Y, or Z” is almost always “it depends”.

Even deductions that you assume based on “common knowledge” are fully deductible may be limited due to “facts and circumstances”.  Just because you receive a Form 1098 reporting $12,459 in mortgage interest for the year does not mean you can deduct $12,459 on Schedule A.  I believe many taxpayers do not deduct the correct amount of allowable mortgage interest.  Your actual mortgage interest deduction is limited based on the amount of the loan and how the money borrowed was used.  For complete details check out my MORTGAGE INTEREST GUIDE. 

So just because someone tells you, or you hear or read somewhere, that an item is “deductible” does not mean you can actually deduct it on your tax return.  As usual check with your tax professional before doing anything.

Tuesday, April 25, 2017


Another tax filing season down – 4 more to go till I can say I have prepared 1040s for 50 tax seasons. 
Another successful year – I ended the season with only 22 GDEs (the “E” is for “extension” – you can guess what the “GD” is).  This is lower than the 24 from last tax season, which at the time was the least amount of GDEs since I took over my mentor’s practice in 1999. 
13 were because the client’s package, or all the needed information, was received well after my deadline for timely filing of March 18th - many received in April (actually one package arrived in my PO box on April 19th).  Only  2 were “red-filed” – I needed more information to complete the return.  And 7 were requested by clients who did not send me any 2016 tax info yet.  I expect that there is one more from a client who had not contacted me at all yet – they usually submit their own GDE application and send me their “stuff” in the summer. 
Not a single GDE was due to my workload!  Every single return received in my hands by March 18th was completed and returned to the client, as were several received after that date.   
So once again my filing season ran smoothly.  There were no car, equipment, computer, or other issues.  The weather did impact the season on one occasion – for the first time since I moved to NE Pennsylvania the snowfall was much more here than in NJ.  A 30+ inch blizzard in mid-March literally buried my car and I could go nowhere for almost 2 weeks.  I have always said that I welcomed a huge snow storm in March so I could catch-up without interruption – and I got my wish this season.  
I had no issues with late-issued corrected Consolidated 1099 Tax Statements from brokerage houses this year.  The returns of several clients who usually had to wait until late March to send me their “stuff” were done earlier than usual.  And more cost basis information was provided, to both taxpayers and the IRS, for long-term transactions.
The IRS did much better processing returns this year.  I have not heard of any excessive refund delays or other processing FUs so far.  NJ announced in January that no refund, regardless of how submitted, would be issued until March 1st, due to additional identity verification - and I advised February filers with refunds of this fact.
Despite an advertised slight delay in the date the IRS would begin processing returns (Monday, Jan. 23, 2017) the season officially began for me, as it always has, on February 1st.  I can could on the fingers of one hand the number of returns I have prepared before February 1st in the past 45 years.
Thanks to the PATH Act (nothing to do with the subway from NJ to NYC) the IRS was required to hold tax refunds until Feb. 15 for taxpayers who claimed the Earned Income Tax Credit or the Additional Child Tax Credit.  This did not affect my clients – as I have a truly minimal number of clients who claim these government welfare benefits.
While I continue to oppose the excessive additional “due-diligence” requirements for tax professionals preparing tax returns of clients requesting an Earned Income Credit, and beginning with this season the American Opportunity Credit and the Child Tax Credit, and the existence of IRS Form 8867, I was happy that the form was reduced to 2 pages this season and wasted less of my time to prepare. 
I did absolutely nothing new, different, or additional this season regarding EITC, AOTC, and CTC claims than I have done in past years.  The Form 8867 was only a minor time-wasting inconvenience this season.  My biggest issue with this form was having to remember to include it for taxpayers claiming the Child Tax Credit.
Most of my clients have been with me for decades, often before the birth of their applicable dependents, so I am well aware of their situation.  And I have always asked clients for college Bursar’s or other financial statements in addition to the Form 1098-T to verify the correct amount of qualified tuition, fees and expenses when claiming tuition tax benefits.  While Congress, doing something right for a change, did require colleges to properly complete the Form 1098-T beginning with tax year 2016 returns, the IRS gave in to whining from the schools and continued to allow the 2016 Form 1098-T to be as useful as tits on a bull.
As most of you know I no longer accept ANY new clients.  If I did I would refuse to accept clients who would be requesting an Earned Income Credit.
The Obamacare “shared responsibility penalty” was not an issue for me this season.  Nor was the advance premium tax credit reconciliation.  There was only one client who would have been subject to this penalty – but the IRS announced that it would not delay processing of returns that were “silent” on full-year health insurance coverage (did not check the box to verify full-year coverage and did not include Form 8965), so I completed the return without checking the box and without completing Form 8965.  The IRS may ask for this form later in the year – and I will deal with the issue it that occurs.  I continue to believe it is wrong to require a taxpayer to pay someone to assess an IRS penalty.  
Forms 1095-A, B, and C arrived earlier this season, though the late receipt of Form 1095-B or C would not hold up my preparation of a return.  Information on W-2s and Social Security statements and client representations are enough for me to indicate full-year health insurance coverage.
On the state side – I continued to be extremely pleased with New York’s new “enhanced” online Form IT-201 and IT-203 “fill-in” (but manually filed) forms.  The “enhancement” automatically did the math and actually calculated the tax – saving valuable time.  I used the new enhanced process for all of the New York returns I prepared – and continued to add to my invoice a $5.00 “New York State Tax Preparer Extortion Fee Surcharge” for all clients with NY state returns.
I also continued to use NJWebFile to electronically submit NJ-1040s directly to Trenton free of charge whenever possible (unless specifically forbidden by the client’s request).  However there are still too many situations where this option is not available.  When I had to manually prepare the return for the client to mail I used the online “Fill-In” Form 1040, which did some math but did not automatically calculate the tax (I wish NJ would initiate a system similar to the NYS “enhanced” process).   I did not encounter any issues with NJ returns – yet.  But it is still early.
The delayed filing deadline – April 18 instead of April 15 again this year – really did not add much work time to my season.  I stopped working on 1040s April 14, and actually completed most of the GDE forms that afternoon.  As you may know, I never work on 1040s (or 1040As) on the actual filing deadline day (click here to see a post from fellow tax-blogger Peter Reilly explaining why).
As is my custom I took time off after the 18th to recover at the Jersey shore.  As you read this I am back at my desk working on GDEs at a more leisurely pace.
So another tax filing season is added to the history books.  Let’s hope the next 4 seasons continue to be similarly smooth-running and problem-free.
I end with my usual question for fellow tax pros – did I miss anything?

Monday, April 24, 2017


I’m back with BUZZ!
* I hope you have been checking out Joe Kristan’s Tax Round-ups to avoid BUZZ-withdrawal while I was away.
* The TAX FOUNDATION reports that “Tax Freedom Day 2017 is April 23rd”.
TTF also calculates TFD for each state.  For my home state of PA it is the same day – April 23rd.  For my former home state of NJ it is May 13 - #49 on the list.  CT is #50 at May 21st.  So once again it has been proven that moving from NJ to PA was indeed a good move.
* During the last days of the filing season Russ Fox provided his annual listing of the top ten “Bozo Tax Tips” – “strategies that you really, really, really shouldn’t try” - at TAXABLE TALK. 
The most important tip for everyone to read is #3 – “Let Your IRS Notice Age Like Fine Wine!”.  I say this time and time again, as Russ suggests in the post, “it’s something that bears repeating”.  If you receive a letter or notice from the IRS or a state tax agency GIVE IT TO YOUR TAX PREPARER IMMEDIATELY!
Perhaps the biggest bozo in the group is featured in #6 – “Publicize Your Tax Crimes on Social Media!”.  A typical example of how stupid young people are today, and how the irresponsible use of “social media” encourages and publicizes their stupidity.
A good reminder from Commissioner Koskinen - "I think it’s important to remind people that the IRS does tax administration, not tax policy. Policy decisions are the domain of the Administration and Congress."  If you think taxes are complicated and unfair the IRS is not to blame – the idiots in Congress are.
And I add my voice to that of IRS employees – “Everyone at the IRS would be delighted if you could make the tax code simpler.”  I do not believe a simpler tax system would hurt the tax preparation business – at least not my business.
* Kelly Phillips Erb published an impressive blog post series on "Taxes from A to Z".  At the end of the Z post you can find links to all the entries in this series.
* Ever wonder “Why is the SE Tax Deduction Taken on the 1040 and Not on Schedule C?  Jason Dinesen explains at DINESEN TAX TIMES.
I have a better question – why is the self-employment health insurance deduction an “adjustment to income” on the 1040 and not a business deduction on the Schedule C?  Deducting it on Schedule C would be make the deduction more equal to how it is treated if the business owner organized as a one-person corporation and would ultimately reduce the amount of self-employment tax, as the deduction as an employee benefit on a corporate return ultimately reduces the amount of FICA tax.
FYI – it was allowed as a Schedule C deduction for one tax year in recent history.
* Jason also deals with the question “Do I Need a Receipt for Charitable Contribution Less than $250?”.
The answer – a definite “yes”.  You need some kind of receipt or documentation for every single charitable contribution, regardless of the amount or the charity. 
FYI - I discuss deducting charitable contributions in depth in the premiere issue of my new newsletter ROBERT D FLACH'S 1040 INSIGHTS.
* Congratulations to Professor Annette Nellen, whose 21st CENTURY TAXATION blog was included on a list of “Best Accounting Blogs of 2017”.  
I applaud Annette for her attempts to encourage discussion on important tax issues.
* According to IRS “Filing Season Statistics for Week Ending April 14, 2017” there have been about 5% few tax returns received this year. 
You couldn’t prove this by me – I had no more GDEs this year than last year.
Some good news – the average refund is up 2.1%.
* I realize you have already filed your 2016 tax returns (unless you requested a GD extension).  But if you discover anything in the above blog posts and online articles that you could have claimed on your return to reduce your tax liability all is not lost.  I explain in my vintage post “Amending Your Return”.  This post is a decade old – so add ten years to the years referenced in the discussion.
My opinion of the idiot in the White House (I realize there are currently several idiots in the White House – but then I use this description I mean the head idiot – Tronald Dump) has not changed.  I continue to oppose and denounce Trump as a dangerous mentally unstable narcissist.  For the sake of the country and the world he must be removed from office ASAP.
Check out this editorial from the Los Angeles Times on “Our Dishonest President” – the first in a series of editorials on “The Trouble With Trump”.
And Trump’s selfishness – his basic motivating factor in everything – continues to unnecessarily cost the American taxpayer and local governments millions of dollars, as NBC recently discussed in “Trump’s Mar-a-Lago Travel Triggers Cost and Ethics Concerns”.
Finally, make no mistake – both of these statements are equally true:
Kim Jong-un is a volatile and unstable narcissist.  Giving him push-button access to nuclear weapons is truly dangerous for the entire world.
Donald Trump is a volatile and unstable narcissist.  Giving him push-button access to nuclear weapons is truly dangerous for the entire world.

   PS – Tomorrow I will post my annual review of the tax filing season.