Thursday, April 26, 2018
The Earned Income Tax Credit (EITC) is a federal welfare payment, applied for on the 1040 or 1040A tax return and administered by the Internal Revenue Service.
Traditional welfare payments are administered and distributed by government welfare agencies on a state level, with applicants required to submit to the appropriate agency independent documentation to support their qualification for the benefit.
Individuals applying for the EITC on self-filed tax returns simply need to enter numbers on their tax form and include a Form EIC to identify the dependent children that qualify them for the credit if applicable. No independent documentation is required to be submitted to the Internal Revenue Service with the filing of the tax return.
It has been suggested that as many as 1/3 of all EITC claims are erroneous. And the refundable portion of the EITC is one of the main sources of tax fraud, costing the government billions of dollars each year.
If an EITC applicant uses a paid tax professional to prepare their tax return the government requires, under threat of a $500 penalty, that the paid preparer undertake excessive due diligence in verifying the applicant’s qualification for the benefit and prepare an additional tax form identifying and certifying compliance with the excessive due diligence requirement.
A paid tax preparer charges a fee based on the time and work involved in preparing a tax return. A tax return that includes an application for the EITC requires additional time and work, legally required by legislation and government regulation. So, the preparation of a return including an EITC claim costs more, or should cost more, than a non-EITC tax return. By definition, EITC claimants are low-income individuals who cannot necessary afford additional fees. Yet the government forces them to pay a fee to apply for a federal welfare payment.
Some tax professionals, realizing the inappropriateness of this situation, do not charge clients claiming the EITC the full and proper fee to which they are legally, ethically and morally entitled for the additional work they are required to do by the government.
So, in effect, either the taxpayer applying for an EITC or the tax professional preparing the return with an EITC claim is penalized.
Here are some solutions to these serious problems.
(1) Remove the Earned Income Tax Credit from the US Tax Code and require individuals to apply for and receive this benefit via traditional welfare channels.
(2) Require tax filers claiming the EITC to use the services of an IRS-sponsored VITA center to prepare their return, where independent documentation of qualification would be required to be provided to the VITA preparer or file their return electronically directly to the IRS via the IRS website, with independent documentation required to be included with the submission of the return.
(3) Forbid paid tax preparers to charge an additional fee for claiming the EITC on a tax return and have the IRS, using the PTIN filing system, pay tax professionals a pre-determined fee for each return they prepared with an EITC claim within 60 days of April 15th and October 15th.
Obviously, solution #1 is the best and easiest answer.
So, what do you think?
Wednesday, April 25, 2018
Now that the tax filing season is over it is time to think about your 2018 return.
The GOP Tax Act – aka the Tax Cuts and Jobs Act – drastically changes the US Tax Code, and will affect every single 1040, and 1040A, filed from 2018 through 2025 (or until new tax legislation is passed).
Traditional recordkeeping for tax returns no longer applies. Here is what you do and do not need to keep track of during the year.
What you no longer need to keep records of (at least for 1040 purposes) –
* Job-related moving expenses. Except for active duty members of the Armed Forces who move pursuant to a military order and incident to a permanent change of station.
* Casualty and theft losses. Unless they are the result of a Presidentially-declared natural disaster.
* Unreimbursed employee business expenses. This includes job-related mileage, travel and entertainment, continuing education, dues and memberships, subscriptions and publications, tools and supplies, uniforms and work clothes, and job seeking expenses. Except if you are a grade K – 12 teacher, instructor, counselor, principal, or classroom aide who works at least 900 hours during the year, a “qualified performing artist”, or a National Guard member or Armed Forces reservist who must travel more than 100 miles away from home and stay overnight to fulfill his or her training and service commitment. These individuals can still claim an “adjustment to income” for some of their expenses.
* Investment expenses, such as investment advisory fees, investment charts, newsletters and publications, and safe deposit box rental fees.
* Fees and expenses related to preparing your tax returns and responding to a federal or state audit of a tax return.
What you do need to continue to keep records of –
* Unreimbursed medical expenses, including mileage and travel to and from medical care.
* Property taxes and state and local income or sales taxes paid.
* Interest paid on home mortgages for up to two personal properties. While it has always been important to keep separate track of interest paid on acquisition debt and interest paid on home equity debt, this is more important than ever under the new law. And this must be done going back to the original purchase mortgage of a property and include all subsequent refinancing and borrowing. Interest on home equity borrowing is no longer deductible, and there is no “grandfathering” of any home equity interest. I wrote a special report that will help you with this task – click here for more information.
* Investment interest.
* Gambling losses.
I am currently working on an e-book that discusses in detail how the new GOP Tax Act will affect 1010 filers and include tax planning strategies to help you take full advantage of the new laws. I will let you know when it becomes available.
Tuesday, April 24, 2018
BUZZ, BUZZ. THE BUZZ IS BACK!
Starting out slow.
* Kelly Phillips Erb, FORBES.COM’s TaxGirl, invited”. us to participate in “Tax Haiku 2018”.
* While I was recuperating at the Jersey shore I missed Tax Day 2018. Key Bell, the yellow rose of taxes, asked “How did you celebrate Tax Freedom Day on April 19?” at DON’T MESS WITH TAXES.
BTW – Tax Day for New Jersey is May 3rd and for New York May 14th.
* Kay also lists “4 moves to make now if you missed the tax-filing deadline”.
* FYI – TWTP is on the recently updated list of the “Top 100 TaxWebsites & Blogs For Tax Professionals & Payers” at FEEDSPOT.COM.
Do you have any blog posts or online articles that I missed during the tax filing season that you think my readers would be interested in? Email me at firstname.lastname@example.org with "BUZZ SUGGESTIONS" in the subject line.
Monday, April 23, 2018
I survived my 47th tax season . . . .and I’m here!
This season I got an answer to the question posed by the Beatles decades ago (at least for me) – you still need me, and some of you still feed me, now that I am 64!
Once again, a successful year. I ended the season with only 26 GDEs (by now I expect you know what this stands for) – similar to the previous 2 years. And once again not a single GDE was due to my workload! Every single return received in my hands by March 18th, with all the necessary information, was completed and returned to the client, as were quite a few received after that date.
Also again, no auto, computer, equipment, or weather issues. And no word of any IRS or state refund or processing delays or FUs - so far.
I was truly “locked behind closed doors” for the entire season. I was up at my desk each morning between 4 and 5 AM during this time, and when February 1st came around I forgot to plug my phone in at 9 AM each morning. After about a week I got spoiled – I enjoyed working through the day without the interruption of the phone (even though I have always screened calls) – and never plugged the phone in (unless I was expecting a specific call). I did, however, constantly check my email accounts, and responded promptly when appropriate. I found that, from my point of view, not having the phone on did not adversely affect the preparation of returns.
After preparing each tax return this season I also calculated the tax on 2017 income and deductions using the new tax law and rates of the GOP Tax Act, to see how clients would have fared if the Act had been effective for 2017. I found that most would have paid less – ranging from $2.00 to several thousand – but a handful would have paid more. I included the result of my calculation in my “The Word” explanatory memo that accompanied finished returns. One thing I learned from this exercise is that many returns will be much simpler next season and beyond, because I found many clients would no longer be able to itemize under the new law. I am NOT complaining.
Obviously, I will still need to report gains and losses from investment sales on Schedule D and deal with the special qualified dividends and capital gains tax rates, report rental income and expenses on Schedule E, and calculate credits for college tuition. But there will be a lot less Schedule As, and many clients will be filing the equivalent of a short form.
The one change from the GOP Tax Act that was effective for 2017 – returning the AGI exclusion threshold for medical expense to 7½% - did indeed benefit quite a few of my clients.
Taxpayers could no longer remain silent on full-year health insurance coverage, as they could last year, and I actually had to calculate a pro-rated Obamacare individual responsibility penalty for 2 clients (my first time using this procedure). A handful of clients had to reconcile advance premium credits, and I was able to save a married couple $1,500 by having them make a $1,000 deductible IRA contribution (to be explained in a future post).
I continued to do absolutely nothing more or different for returns claiming the American Opportunity Credit and the Child Tax Credit, other than include IRS Form 8867. As the season progressed I considered, to save time, creating a pro-forma Form 8867 with my name and PTIN and the questions on Page 1, and the last question, all answered ‘appropriately”, so I would just have to enter the client name and number and answers to the credit specific questions when the form was needed. I will definitely do this next season. As you probably know by now, I strongly oppose and denounce (as I do arrogant arsehole Donald T Rump) the additional excessive due-diligence requirements for these credits.
The ridiculous retroactive one-year only extension of several expired tax benefits that the idiots in Congress included in the “Bipartisan Budget Act of 2018” signed by Trump on February 9th did not cause any problems for me. I did not, and will not, have to amend any 2017 returns to include these extended benefits.
On the state side, I used NJWebFile to electronically submit NJ returns whenever possible, and permitted by the client, and used the state’s somewhat enhanced fill-in form when needed, and took advantage of the excellent NY state truly enhanced fill-in Forms IT-201 and IT-203. Of course, all my federal returns were prepared manually.
Like last year there was a delay in the beginning of processing returns by the IRS – the Service began processing returns on January 29th, later than last year’s January 23rd start date. But, of course, I did not begin to prepare returns until February 1st. And for the first time in history the April 17th filing deadline (once again the 15th fell on a week-end and the 16th was Emancipation Day, a legal holiday in Washington, DC) was extended to April 18th when, as fellow taxblogger Kelly Phillips Erb explained in her post “Don't Panic: After IRS Problems, Taxpayers Get An Extra Day To File” –
“Following computer system issues which appeared early on the April 17 tax deadline, the Internal Revenue Service (IRS) has announced that taxpayers will have an additional day to file and pay their taxes. . . . The system issues were discovered early in the morning on Tax Day. Despite these problems, some taxpayers were able to file and pay their taxes online. However, since millions of taxpayers were expected to file at the last minute, out of an abundance of caution, the IRS has extended the deadline.”
As usual the season ended for me the day before the original deadline – on Monday, April 16th – with the mailing of the GDEs. I actually prepared my last Form 1040 of the season on Saturday. The additional day meant nothing to me – I left for my annual post-season recuperation at the Jersey shore on the morning of April 18th.
It seems that I prepared about 20 less sets of returns during the season this year. A couple of clients, aware of my announced retirement after 3 more seasons, did seek out a new more local preparer, telling me so, and I lost some clients due to death. And I expect I did not hear from a couple because they no longer need to file a return (although I do invite clients in this situation to continue to send me their “stuff” anyway and I would verify that they did not need to file, which I did for a handful). I did not accept any new clients – keeping true to my policy – although I did do a first return for one or two dependent children of existing clients.
So, there you have my commentary on the 2018 tax filing season. I end with my usual question for fellow tax pros – did I miss anything?
(I am truly showing my age with the title of this annual post. I remember as a child in the mid-1960s watching the American version of the popular British satire THAT WAS THE WEEK THAT WAS – aka TWTWTW – the grandfather of Comedy Central’s THE DAILY SHOW. It was hosted by David Frost and featured Phyllis Newman, Henry Morgan. Buck Henry and Alan Alda. The first line of this post is a hat tip to Stephen Sondheim, adapting a lyric from an iconic FOLLIES song.)
Tuesday, April 17, 2018
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.
Today I honor the memory of Maurice "Moe" Barry -