Tuesday, October 31, 2017


It seems appropriate on Halloween to discuss one of the scariest items involved with 1040 preparation.
I have said it before and I will say it again.  I HATE K-1s.  Specifically, the K-1s, always late, for limited partnership investments.
In almost all cases, unless there is a substantial investment, the financial tax benefits of these type of investments, if there are any, are wiped out by the cost of the additional work to actually prepare the investor’s individual tax returns.
I very seriously believe that brokers receive a higher commission for selling these investments, and often brokerage houses instruct their brokers to sell specific limited partnership investments to clients.  I also firmly believe that there are alternative mutual fund investments that provide the same, or perhaps better, investment returns.
If all we had to deal with were items in boxes 1 through 10 and 12 – business income, interest, dividends, capital gains, and the Section 179 deduction – it would be ok.  The instructions on Page 2 of the Form K-1 clearly indicate what line on series 1040 forms and schedules on which to enter these numbers.  The problem with these GD forms concerns the items of “other income” and “other deductions”.
For example, under “other income” the referenced internal supplemental statements reference Internal Revenue Code Sections 475, 988, and 1256, cancellation of debt, other portfolio income, and other income (not specifically identified).  For most of these items the instructions say “See the Partner’s Instructions”. 
“Portfolio income” is interest, dividends, royalties, and capital gains.  Sometimes the “other income” boxes detail specifically references “interest, dividends, and capital gains”.  Why is this income not included in the boxes in the first 10 that specifically identify interest, dividends, royalties, and long and short-term capital gains?  Are these items reported on Form 1040 Schedules, B, D or E, or are they merely “other income” reported on Form 1040 Line 21?  Or do they go elsewhere?
“Other deductions” refers to Internal Revenue Code Sections 59(e)(2) and 743, pass-thru deductions, royalty deductions, and, again not specifically identified, other deductions.  Again, we are told to “See the Partner’s Instructions”.  While I would expect “royalty deductions” are entered on Page 1 of Schedule E, where do the rest of these deductions go?
Of course, the taxpayer investor has absolutely no idea what these things mean – nor do they, for the most part, give a rat’s hind quarters.  They just give the multiple K-1s to their tax preparer, often as they arrive (usually after April 15th) and expect us to figure it out.
The “framework” for tax “reform” talks of doing away with business “loopholes”.  The answer to fixing the dreaded limited partnership K-1 would be to do away with all the “loopholes” and Internal Revenue Code Sections that create the confusing and convoluted components of “other income” and “other deductions” identified above, and have ONE net income item for either “ordinary business income(loss)” or “net rental income(loss)” to report all “non-portfolio” income and deductions, include all portfolio income from all sources in the appropriate boxes 5 through 10, and limit “other deductions” to the traditional Section 179 deduction, charitable contributions, investment interest, and miscellaneous “portfolio” expenses.  I hope this is part of what the “framework” is talking about.
I would be interested in hearing from other tax pros about the dreaded limited partnership investment K-1.

Monday, October 30, 2017


We are all, taxpayers and tax professionals alike, anxiously awaiting the actual specific details of the “cocktail napkin scribblings” that is the Republican “framework” for tax “reform”, which is expected to be released in early November. 
While we are waiting, here is some BUZZ -
* The blog of the NATIONAL SOCIETY OF ACCOUNTANTS (the other NSA) quotes from the IRS “Commissioner’s Corner” to announce “David Kautter to serve as Acting Commissioner” –
Secretary Mnuchin has announced that David J. Kautter, Treasury’s Assistant Secretary for Tax Policy, will serve as Acting IRS Commissioner when my term ends next month.”
* TaxGirl Kelly Phillips Erb of FORBES.COM addresses “The Difference Between Innocent Spouse And Injured Spouse” in an “Ask the TaxGirl” post.
* Want to know “What’s New For 2018” in taxes (under current tax law)?  Click here for my free compilation.
* Kay Bell’s DON’T MESS WITH TAXES post “Medical tax provisions affected in 2018 by inflation” includes 2018 information on HSAs and MSAs that are not included in my “What’s New for 2018” compilation.
* And click here for my free TAX TOPICS e-newsletter.
* Jason Dinesen adds to his Glossary with an explanation of the difference between “Tier I/Tier II Railroad Retirement Benefits” at DINESEN TAX TIMES.
* Today at my THE TAX PROFESSIONAL blog “2017 Year-End Tax Planning – What Do We Tell Our Clients?”.
BTW – did you see last Wednesday’s TAXPRO BUZZ?
* It is that time of the year for year-end tax planning again.  The November issue of ROBERT D FLACH’S 1040 INSIGHTS includes details on year-end planning techniques and strategies, details on what’s new in taxes for 2017, and some worksheets to help with your year-end plan.  I will send you a copy of this issue as a pdf email attachment for only $3.00. 
Send your check or money order for $3.00 payable to TAXES AND ACCOUNTING, INC to Taxes and Accounting, Inc, 1040 Insights Tax Planning Issue, PO Box A, Hawley PA 18428.
It is vitally important that every American read this remarkable speech from one of the sadly too few true patriots in politics today.  Click here.
Let’s get one thing perfectly clear.
Arrogant idiot Donald T Rump does not want tax reform, or anything else on the so-called "agenda". He wants a legislative victory – any legislation regardless of its content or merit – simply so he can say “Look what I did”.
Trump has no political beliefs. His one and only true belief is "Trump is good and Trump is great".
Republicans who refuse to vocally denounce Trump because they believe he wants what they want are as delusional as he is!

Thursday, October 26, 2017


If you want to talk about tax loopholes that disproportionately benefit the “wealthy” let’s take a look at the deduction for depreciation of real property.  See my post "A Controversial Tax Reform Idea".
Those in the higher brackets – 28% to 39.6% - get, at some point (the deduction may not be currently allowed but “suspended” to be deducted in the year of sale), an ordinary income deduction for a truly phantom expense – depreciation of real estate.  This deduction is merely a “loan” that must be paid back – referred to as “recapture” - when the property is sold.  But it is paid back at a maximum rate of 25%.  So, the net benefit is 3% to 14.5% on a non-existent expense.
As a general rule - to which, as with any rule, there are certainly exceptions – real estate does not “depreciate”.  It “appreciates”.  My father sold the home he purchased for $13,000 in the 1950s for $75,000 in the 2000s – and the sale price was too low.
Real estate is an investment, just like stocks, bonds, mutual funds, etc.  You invest in rental real estate because you expect the building to increase in value over time, often more so than stocks and mutual funds, and because it generates “dividends” in the form of net “in pocket” rental income.
The deduction for depreciation of real estate is like allowing those who purchase stock to depreciate the purchase price of the stock as a deduction against the dividends paid out.
Being a phantom expense, the deduction for depreciation of real estate distorts the true economic reality of the investment activity.  An activity producing a positive cash profit becomes a deductible tax loss. 
A good example is the truly huuuuuuge loss reported on the one tax return of arrogant idiot Donald T Rump that we have actually seen, almost a billion dollars, that caused him to avoid income taxes that year and potentially on several carryback or carryforward years, has been explained by many as the result of the deduction for depreciation on real estate.
If the cocktail napkin scribblings that is the “framework” for tax reform truly wants to do away with tax loopholes that benefit the wealthy it should include the deduction for depreciation of real property on the list. 
What do you think?

Wednesday, October 25, 2017


It is important to sign this petition and call for the impeachment of arrogant, dangerous, deplorable, despicable, ignorant, incompetent, mentally unstable, truly unfit Donald T Rump!
Go to NEED TO IMPEACH today and join with me.
The highlights in the below letter are mine -
Wednesday, October 18, 2017
Dear Elected Official,
This is not a time for “patience” — Donald Trump is not fit for office. It is evident that there is zero reason to believe “he can be a good president.”
Whether by the nature of Mr. Trump’s relationship with Vladimir Putin and Russia, his willingness to exploit the office of the Presidency for his personal gain and treat the government like a family enterprise, his conduct during Charlottesville, his decision to pull out of the Paris climate accords, or his seeming determination to take the nation to war, he has violated the Constitution, the office of the Presidency, and the trust of the public. He is a clear and present danger to the United States of America.
Republican Senator Bob Corker, Chair of the Senate Foreign Relations Committee, referred to the Trump White House as a day care center, and observed that this president has put us “on the path to World War III.” This comes following reports that Trump’s own Secretary of State referred to him as a “moron” and that Chief of Staff John Kelly and Secretary of Defense James Mattis have an agreement not to leave Trump home alone for fear of what he could do. And we have seen other Republican Senators, including Senators Sasse and Flake, express their own profound concerns.
If Trump has lost the trust of the members of his own administration and leading members of his own party, surely it is time to act.
An accounting of his record to date leads to the same conclusion. He is turning his back on Lady Liberty by holding immigrant children hostage. He is actively sabotaging the Affordable Care Act — a law he is constitutionally obligated to faithfully execute — while seeking to strip away health care coverage that will leave millions of Americans to choose between life and bankruptcy. He is repealing clean air protections and unleashing polluters, even as increasingly catastrophic natural disasters supercharged by our warming planet ravaged the country throughout the summer — from hurricanes Harvey, Irma, and Maria, to the wildfires that have raged across California, Oregon, Washington, Idaho, and Montana. He has threatened to reduce aid for millions of American citizens in Puerto Rico who are struggling to survive without drinkable water or electricity — a move that would be a total dereliction of his duty. And every day, Americans are left bracing for a Twitter screed that could set off a nuclear war. These actions represent systemic attacks on our nation’s future. They endanger every single one of your constituents. That’s why you have a duty to speak out.
There is no moral reason to remain silent about this. Constitutional experts like Noah Feldman have already laid out clear legal and historical foundations for impeachment.  Founding Father Alexander Hamilton, a co-author of the Federalist Papers — and an immigrant himself — argued that “high crimes and misdemeanors” could be defined as “abuse or violation of some public trust.” This president has clearly already exceeded these standards. Congress has impeached past presidents for far less.
While we know that Republicans do not seem prepared to pursue impeachment even as members in their own ranks openly question Trump’s fitness for office, we are all working hard to ensure Democrats will take back the House and Senate in 2018.  
Given Trump’s total lack of fitness for office, the question of impeachment becomes a very real issue should we succeed in our midterm goal. That makes it imperative for every Governor of every state, and every mayor of every city, to acknowledge where they stand. This question affects the lives of every single American. They deserve to hear whether or not our party is willing to do what is necessary to protect them and their families. This is not an academic exercise. The very stability of the Republic is at stake.
So, by way of this letter, I am asking you today to make public your position on the impeachment of Donald Trump, and to urge your federal representatives to remove him from office at once. Every day he remains in reach of the nuclear codes is another day for him to menace the citizens you serve and protect. Your constituents deserve to know they are represented by people in every level of government who have the patriotism and political courage to stand up and take action when it is so desperately needed.  This is not a time to give in to an establishment that insists on acting the way the establishment always does, with “patience” or “caution.” It is an unprecedented moment, and it calls for extraordinary measures. We cannot remain fixated on what is politically smart. We have to do what is morally right.
Tom Steyer

Tuesday, October 24, 2017


Tax reform has become a hot political topic.  Reduce taxes on the middle class, or increase taxes on the “wealthy” simply because they can afford it.
I see a great need for substantive tax reform not to reduce, or for some taxpayers increase, the actual amount of taxes paid – but to simplify the Tax Code and make it more fair.
Nobody ever said taxes are fair.  There are many inequities in the US Tax Code, some purposeful and some unintended.
Among the biggest inequities concerns how the Code treats some aspects of “gross income” and expenses related to generating this income.  I speak specifically of the taxation of gambling winnings and legal settlements.
If you have gambling winnings you must report, in most cases (how to report some winnings is a topic for another post), the gross winnings as income on Page 1 of the Form 1040.  This is the amount that is reported on Form W-2G.  So gross winnings are included in Adjusted Gross Income (AGI).  But gambling losses, to the extent of winnings reported, are deducted as a Miscellaneous Deduction on Schedule A if you are able to itemize (although not subject to the 2% of AGI exclusion).
Similarly, the gross amount of legal settlements, except for settlements for physical injuries or sickness (any damages or settlement you receive to compensate you for your medical expenses, lost wages, and pain, suffering, and emotional distress is not included in income), is included as income on Page 1 of Form 1040.  The legal fees, often as much as 1/3 of the settlement, and other related are also deducted as a Miscellaneous Deduction on Schedule A if you are able to itemize (in this case the deduction is subject to the 2% of AGI exclusion).
A taxpayer can have $5,000 in gross winnings from gambling activities for the year, but $6,000 in gambling losses.  So, the taxpayer’s gambling activity for the year has resulted in a loss.  The taxpayer ended up with no money “in pocket’ from gambling. 
If the taxpayer is able to itemize without taking into effect the allowed gambling losses, the Schedule A deduction for $5,000 in gambling losses results in net taxable income of 0 – so, in effect but not necessarily in reality, he/she does not pay federal income tax on the winnings.  But if the taxpayer is not able to itemize, even with the gambling loss deduction, or if he/she is only able to itemize because of the gambling loss deduction (without the deduction his itemizable deductions do not exceed the applicable Standard Deduction), he/she will be paying federal income tax on up to $5,000 of income that was not actually received – in the 25% tax bracket $0 in net gambling income could cost the taxpayer at least $1,250.
Similarly, with a taxable legal settlement, the need to deduct legal fees as a miscellaneous itemized deduction subject to the 2% of AGI exclusion could result in federal income tax being paid on more than the actual “in pocket” amount.
Of course, a large portion of the inequity comes from the fact that various items of income are increased and deductions and credits are reduced or eliminated based on one’s AGI.  And the fact that most itemized miscellaneous deductions are not allowed in calculating the dreaded Alternative Minimum Tax (AMT).
While a taxpayer may be able to wipe out gambling winnings with fully deductible gambling losses, the fact that gross winnings are included in AGI could result in more of the taxpayer’s Social Security or Railroad Retirement benefits (the amount of benefits taxed is determined by a formula that is based on AGI) being taxed – many frequent gamblers in the casinos of Atlantic City for example are senior citizens – or could reduce or totally eliminate allowable tax deductions or credits.  So again, the taxpayer is in reality paying federal income tax on $0 in net income.
The same is possible with a taxable legal settlement – except for settlements for discrimination claims, the related legal fees allowed as an “adjustment to income” which reduces AGI.  And, while there may be no excess tax under “regular” income tax rules there may be AMT.  Allowable gambling losses from Schedule A are fully deductible in calculating the dreaded AMT – but because legal fees are a miscellaneous deduction subject to the 2% of AGI limitation they are not deductible in calculating AMT.  So, tax is paid on the full amount of the gross settlement at a flat 26% or 28%.  When adding the federal and state tax to the legal fees the taxpayer may end up with only 1/3 or less of the actual award “in pocket”.
And while in many cases net and not gross gambling winnings are taxed under AMT, the fact that gross winnings are included in AGI, and therefore Alternative Minimum Taxable Income (AMTI), could reduce the AMT exemption, resulting in AMT tax on gambling winnings even if the net is 0.  $5,000 in gross winnings can reduce the AMT exemption by $1,250 and result in an additional $325 or $350 in AMT.
The AMT issue would go away if tax legislation repeals this tax.  And changing the way Social Security and Railroad Retirement benefits are taxed and no longer allowing AMT to affect tax deductions and credits would also help to remove inequities.  But the best way to do away with the unfairness of the tax treatment of these two types of income would be allowing taxpayers to net gambling losses against gambling wins (still not allowing the deduction of more losses than wins) and net legal fees against gross settlements – either directly by entering the net amount on Page 1 or by allowing the deductions as an adjustment to income reducing AGI – would certainly fix the problem.
So, what do you think?
FYI – I will post on other inequities in the current Tax Code in future posts.

Monday, October 23, 2017


* During my 45 years in “the business” I have heard a lot of strange things from clients – about taxes and other topics.  Russ Fox lists “The Five ‘Strangest’ Things Clients Told Us This Tax Season” at TAXABLE TALK.
#2 is something I have never heard – ““The side income was only $30,000. Doesn’t that qualify for the de minimis exception to reporting income?
#1 is a very common “urban tax myth” that many taxpayers actually believe - “The 1099 never showed up. I don’t have to report the income, right?
Russ correctly reminds us –
All income is taxable, no matter if you receive paperwork or not.”
And –
There is no de minimis exception to reporting income.”
I look forward to reading Russ’ “serious thoughts about the Tax Season that was” that he promises to post next week.
* On the same topic, I recently came across a blog post by Paul Allen at the PIM TAX SERVICES BLOG from April that I missed the first time around – “Tax Season 2017 in Review - The Biggest Mistakes I Saw.
Paul makes reference to my special designation for extensions.
The post has an excellent discussion of the importance of recordkeeping (highlights are mine) -
Tax records are for YOUR benefit. Here’s why – the courts interpret the internal revenue code to mean that ALL your income is taxable. Any adjustments, deductions, or tax credits you might receive are bestowed upon you through legislative grace. It is the taxpayer’s responsibility to prove they are entitled to any adjustment, deduction, or credit.
May people seem to believe it is the other way around – that they are entitled to claim adjustments, deductions, and credits and the IRS must prove they are not entitled to claim them. It absolutely does not work that way. If you are audited and you cannot document your qualification for a deduction or credit the IRS will disallow it and charge you additional taxes, interest, and possibly penalties. Keep good records!
* Today at my THE TAX PROFESSIONAL blog “Just Say No!”.
* Getting back to Russ Fox of TAXABLE TALK, he was the first blogger to report “California Fire Victims Have Extension Until January 31, 2018” -
The IRS announced today that California wildfire victims have until January 31, 2018 to file various tax returns (including tax returns on extension due this coming Monday, October 16th). California’s Franchise Tax Board (the state income tax agency) immediately followed suit.”
Click here for the official IRS announcement.
* It appears I missed this post first time around, but “found” it via a reprint at TAX VOX.  From Janet Novack’s “Tax Reform Week” series at FORBES.COM a guest post from Eugene Steuerle, co-founder of the Tax Policy Center, that discusses “How To Design Tax Reform: 8 Lessons From 1986”.
* A “tweet” led me to a primer on the pros and cons of “Combining Retirement Accounts” by Paul D Allen of PIM Financial Partners.
* The TAX FOUNDATION has released its annual State Business Tax Climate Index, which “enables business leaders, government policymakers, and taxpayers to gauge how their states’ tax systems compare”.
No surprise that my former home state of New Jersey is #50 in overall ranking – like Oliver Twist last on the list!  My relatively new home state of Pennsylvania ranks #26.
The 10 best states in this year’s Index are:
1. Wyoming
2. South Dakota
3. Alaska
4. Florida
5. Nevada
6. Montana
7. New Hampshire
8. Utah
9. Indiana
10. Oregon
The 10 lowest ranked, or worst, states in this year’s Index are:
41. Rhode Island
42. Louisiana
43. Maryland
44. Connecticut
45. Ohio
46. Minnesota
47. Vermont
48. California
49. New York
50. New Jersey
* Jason Dinesen briefly reviews “Deducting Business Charitable Contributions” for the various types of business entities at DINESEN TAX TIMES.
* Professor Annette Nellen provides a “Summary and Observations on Tax Reform Framework” (aka scribblings on a cocktail napkin) at 21st CENTURY TAXATION.  
*  As I have said before, while I would NEVER recommend that ANYONE use Henry and Richard to prepare their tax returns, I do find the information on the H+R blog and website to be accurate and helpful.  Case in point – “FAFSA Tax Return Requirements”.
* Over at GETTING YOUR FINANCIAL DUCKS IN A ROW Sterling Raskie reminds taxpayers age 70½ to “Remember Your RMD” -
It’s getting close to the end of the year and that means many individuals need to take their required minimum distributions (RMDs). It also means that there will be individuals who must begin taking their required minimum distributions as they will have reached the magic age of 70 ½.
* FREE! FREE! FREE! New tax e-newsletter - TAX TOPICS.  Check it out!
Do you have a dog?  Here is a great product for you – click here.