Monday, May 20, 2019


* In an item from last December that was recently referenced on Twitter the TAX FOUNDATION explains “The Economic and Distributional Impact of the Trump Administration’sTariff Actions”.

Key findings –

The Trump administration has imposed $42 billion worth of new taxes on Americans by levying tariffs on thousands of products.”

For taxpayers in the middle quintile, this represents a decrease of $146 in after-tax income.”

So much for moron Trump saying "China has been paying tariffs to the USA".  It is American companies and ultimately the consumer who actually pays the tariffs.  Clearly Trump doesn’t know his ass from a hole in the ground about anything.

* In response to the news of the arrival of the royal baby Kay Bell identifies “5 tax breaks to help offset child-rearing costs” at DON’T MESS WITH TAXES.

* Congratulations to Prof Annette Nellen on the 12th Anniversary of 21st CENTURY TAXATION!

* Michael Cohn tells us “IRS fixes worksheet that miscalculated capital gains taxes” at ACCOUNTING TODAY.

The Internal Revenue Service has posted a revised 2018 Schedule D Tax Worksheet in the instructions for Schedule D (Form 1040) after finding out that it contained an error that ended up calculating higher taxes for many investors.”

The item quotes the IRS as saying –

Affected taxpayers need not file an amended return with the IRS or call the IRS.  The IRS is reviewing returns submitted prior to May 16; more information will be provided about this review later.”

It also suggests –

Those taxpayers who might be potentially affected can always try to recalculate their regular tax using the new worksheet to see if it changes.”

The majority of my clients, and I expect the majority of taxpayers in general, used the “Qualified Dividends and Capital Gain Tax Worksheet” if applicable and not the Schedule D Tax Worksheet.  The Schedule D worksheet would only be used if a taxpayer had an entry on lines 18 and/or 19 on Page 2 of the 2018 Schedule D. 

* FORBES.COM’s “TaxGirl” Kelly Phillips Erb reports “IRS Offers Filing Relief For Taxpayers Affected BySoftware Outage”.

None of my clients were affected by software outage.  The tax preparation software I use is my brain.  In 48 tax seasons I have never personally used flawed and expensive tax preparation software to prepare a federal income tax return.

* Once again, like Oliver Twist the state of New Jersey is last on the list.

The list in question is the TAX FOUNDATION’s “2019 State Business Tax Climate Index”.

New Jersey, for example, is hampered by some of the highest property tax burdens in the country, recently implemented the second highest-rate corporate income tax in the country, levies an inheritance tax, and maintains some of the nation’s worst-structured individual income taxes.”

The 10 best states in this year’s Index are:

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

The 10 lowest-ranked, or worst, states in this year’s Index are:

41. Vermont
42. Ohio
43. Minnesota
44. Louisiana
45. Iowa
46. Arkansas
47. Connecticut
48. New York
49. California
50. New Jersey

My current home state of PA is #34.


Tuesday, May 14, 2019


A tax preparer is a person who assists an individual (who I will refer to going forward as “taxpayer” – whether or not he or she actually pays any tax) in preparing a government form – the 1040 and NJ-1040, IT-201, PA-40 or whatever.

In most cases the preparer is trained in the “instructions” for the government form – the US Tax Code is in effect the “instructions” for the 1040 – and has experience in preparing the form.  The information required to properly complete the form is given to the preparer by the taxpayer, and the preparer uses his or her knowledge and experience to enter the information provided by the taxpayer properly on the form.

The taxpayer signs the completed form to attest that the information on the form, which he or she has given to the preparer, is true, correct and complete.  The preparer signs the form to identify himself or herself and to verify that the form was completed using information provided by the taxpayer.

The preparer does not have to personally verify and attest to the veracity of each and every entry on the form – just that all the information on the form was provided by the taxpayer.  It is the responsibility of the government to verify the veracity of the information on the form, with a 1040 via matching and the audit process.

Obviously, the preparer must not willfully, with the intent to defraud, enter false, incorrect or incomplete information on the return.  If the preparer knows, via independent personal knowledge, that information provided by the taxpayer is false he or she must refuse to enter the false information on the form or refuse to complete the form altogether.  If the preparer has questions about the truthfulness, correctness or completeness of any information provided he or she must seek clarification from the taxpayer.

While the government does, and should, have the authority to regulate persons who officially represent the taxpayer in the various levels of the audit process – to “practice” before the IRS – it does not, and should not, have the authority to regulate the preparer.

Of course, the government does have the authority to fine or otherwise penalize a preparer who willfully conspires with a taxpayer to defraud the government by entering knowingly false information on the form.

The above all apply to a person who assists an individual in preparing any government form – a census form, a student financial aid form, etc.  The Form 1040 is just another government form.

The purpose of an income tax is to generate the revenue needed to pay the cost of administering a government and the cost of the services provided by the government.  Period.

An income tax system, and the form used to calculate a tax assessment, should NOT be used to enable “social engineering”, i.e. the redistribution of income, or to distribute or deliver social welfare or other government benefits.

The excessive additional “due diligence” currently forced on tax preparers began as a reaction to the extensive fraud that was a direct result of the erroneous practice by Congress of using the tax system and the 1040 to redistribute wealth and to distribute and deliver government benefits, specifically in the form of “refundable credits”.  Unfortunately, as I said in a previous post, this had gotten way out of hand and now applies to every tax form where a taxpayer claims a dependent.

Since it is the responsibility of the government to verify the veracity of information on the form known as the 1040, the excessive additional due diligence requirements force the preparer to do the job of the government without the compensation given to a government employee.

The bottom line –

(1) The government should NOT have the authority to regulate tax preparers.

(2) The Tax Code should NOT be used to redistribute wealth or to distribute and deliver government benefits.

(3) A tax preparer should NOT be required to personally verify individual items on the 1040 via excessive additional due diligence.


Monday, May 13, 2019


As a result of the GOP Tax Act, for tax years 2018 through 2025, or until new tax legislation is enacted, only mortgage interest on “acquisition debt” – money borrowed to buy, build or substantially improve the residence – is deductible on Schedule A.  Interest on home equity debt interest – money borrowed to buy a car, pay for college, pay down credit card interest, etc. – is not deductible, regardless of the amount.  Period.  And there is no grandfathering of existing home equity debt.

It has always been important for homeowners to keep separate track of acquisition debt and home equity debt, because of the previous $100,000 principal limitation on the deduction for home equity interest and the fact that home equity debt interest was not deductible in calculating the dreaded Alternative Minimum Tax.  However, I do not know of a single homeowner who actually did this.  Even before the hastily written GOP Tax Act was scribblings on a cocktail napkin I had commented that the deduction for mortgage interest, both on Schedule A and Form 6251, was perhaps the area of the Tax Code where proper documentation and strict adherence to the law was the most overlooked (or actually ignored).    

But if the dreaded AMT was not a consideration this wasn’t an issue in most cases because of the $100,000 home equity principal threshold.  Now it is truly vital that his be done, going back to the original purchase mortgage for the property.

I explained this in detail to applicable 1040 clients last tax season when giving them their finished 2017 tax returns.  And I gave these clients worksheets with instructions and a detailed example to use to track the two different types of debt and offered to track the debt for them during the year at a slightly reduced hourly rate.

Nobody contacted me during the year to ask me to do it for them.  And this past tax filing season every single client either (1) assumed that they could not itemize, because I told them so last year and it didn’t matter, or (2) totally ignored the need to differentiate between acquisition debt and home equity debt and, like every other year, merely gave me their 1098s and expected me to either intuitively know the correct amount to claim or pull a number out of the air.

The one good thing about dealing with this issue during the tax filing season is that most clients who consistently itemized in the past can no longer itemize, regardless of the amount of mortgage interest paid, so it did not matter that they did not properly identify the correct amount of deductible interest.

Over the years most homeowners have refinanced their mortgage, often several times, for a variety of reasons, taken out home equity loans or lines of credits, also for a variety of reasons, and consolidated mortgage and equity loans.  In NJ, where most of my clients live, the market value of homes was excessively inflated at various times, creating the potential for additional borrowing.  There were many instances when a homeowner’s mortgage principal exceeded the original purchase price of the property and the cost of subsequent capital improvements.  Unless the homeowner purchased a new home recently, most, if not all, current mortgages include some combination of acquisition debt and home equity debt.

It is the responsibility of the taxpayer, and NOT the tax preparer, to separately track acquisition and home equity debt and properly identify the correct amount of deductible acquisition debt interest.  You can ask your tax pro to do this, or he or she may actually have been doing this on his or her own, but never assume or expect that he or she has been doing it. 

And it is the responsibility of the taxpayer to provide documentation for the amount of mortgage interest deducted if questions by the IRS.

Two important points to know when tracking the debt -

(1) Thankfully, to simply the tracking process, when applying principal payments to the different type of debt in mixed-use mortgages you first reduce home equity debt and any debt you have identified as investment debt.  Acquisition debt is paid down last.

(2) When a homeowner refinances, only that portion of the principal of the new loan that represents the pay-off of the principal on the original mortgage, if it is all acquisition debt, continues to be acquisition debt.  Any closing costs for a refinance that are included in the principal of the new loan is home equity debt.

The first step to determine the amount of current acquisition debt is to go back to the Closing or Settlement Statement for the very first refinance.  Look at the amount of principal of the original mortgage that was paid off in the refinance.  Compare this number to the 1/1/2018 principal balance reported on the Form 1098 for the current mortgage. 

If the pay-off of the initial mortgage is $100,000 and the 1/1/18 principal balance is 150,000 you then need to determine if any of the additional $50,000 was used to pay for capital improvements to the property.  If not, multiply the $100,000 by the rate of interest you are paying on the current mortgage.  If the rate is 3.5% than the Schedule A deduction is $3,500.

If the 1/1/2018 principal balance is $98,500 than all of the interest paid in 2018, and reported on the Form 1098, is fully deductible acquisition debt interest.

Of course, this example assumes you still have the Closing or Settlement Statement for that first refinance.  In discussing how long a taxpayer should keep records I recommend “if you own real estate keep all Closing or Settlement Statements for the purchase and refinancing of the property, and documentation of any capital improvements, for as long as you own the property plus four additional years”. 

For new homeowners going forward, if the limitation of the mortgage interest deduction to acquisition debt interest continues, and I personally believe it should despite the added complication -

(1) If you need to borrow money for home improvements open a separate home equity loan or line of credit and use this ONLY for home improvements that qualify as acquisition debt.  And keep documentation of the improvements. 

(2) If you need to borrow money for anything else - to pay down personal debt, pay for college, buy a car, etc - open a separate home equity loan or line of credit and use this ONLY for non-acquisition purposes.

(3) Never consolidate or combine the three mortgage accounts.  And if you refinance, always pay the closing costs in full with cash, or money from the non-acquisition home equity line of credit, and ONLY refinance the existing principal balance of the original mortgage.

So, homeowners who may still be able to itemize – read and understand this post carefully and either pay your tax professional to separately track your debt before the end of 2019 (and NOT during the 2020 filing season) or do it yourself. 

If you are going to do it yourself and want my worksheets and detailed instructions for doing this order my MORTGAGE INTEREST GUIDE.

Any questions?


Tuesday, May 7, 2019


In the beginning the Internal Revenue Service and Congress required paid tax preparers to perform excessive additional “due diligence” for client returns that claimed a refundable tax credit – the Earned Income Credit, the Additional Child Tax Credit and the American Opportunity Credit - in an attempt to reduce the substantial tax fraud resulting from refundable credits.

Tax pros were required to interview the client, asking “adequate” questions and contemporaneously documenting the questions and the client’s responses, and review “adequate” information and related documentation to determine if the taxpayer was eligible to claim the credit.

Documents the preparer is supposed to review include -

·         School records or statement.
·         Landlord or a property management statement.
·         Health care provider statement.
·         Medical records.
·         Child care provider records.
·         Placement agency statement.
·         Social service records or statement.
·         Place of worship statement.
·         Medical records.

As a paid tax preparer, I clearly oppose the imposition of these requirements.  It is totally inappropriate.   Tax professionals should not be required to in effect become Social Workers and investigate whether a taxpayer qualified for a government social welfare benefit, or looking at it another way, forced to do the work of the IRS and “pre-audit” returns instead of enacting the obvious solution to the problem – eliminating refundable tax credits. 

The purpose of the federal income tax system is to raise the money necessary to run the government, and not to distribute social welfare and other government benefits or to redistribute income.

But now, beginning with 2018 tax returns, paid preparers must perform excessive additional due diligence, and complete Form 8867 (Paid Preparer's Due Diligence Checklist), for all client returns claiming the Earned Income Credit, the Child Tax Credit, the new Other Dependent Credit, the American Opportunity Credit, and Head of Household filing status – which is basically every single taxpayer who claims a dependent and some who do not.

This has gone too far.  As I have said in the past, eventually tax preparers will be required to make random surprise bed checks of client homes during the year.   

Unfortunately, tax pros must just “grin and bear it” because, unlike most other professions and industries, the tax preparation industry does not have a lobby in Washington.     

Why don’t taxpayers who self-prepare have to complete and separately sign a tax form checklist declaring they certify they are aware of and meet the requirements of these credits and the Head of Household status?

If tax professionals are required to perform and attest to additional due diligence for anything it should be the newly limited itemized deduction for mortgage interest. 


Monday, May 6, 2019


BUZZ BUZZ – the BUZZ is back!

* Russ Fox provided his take on the tax filing season in “The 2019 Tax Season (Part 1): A Miserable Year” at TAXABLE TALK.

He echoes my opinion of the ridiculous new “postcard” 1040 –

The new postcard-sized forms are a joke. With the old Form 1040, arithmetic worked. If line 39 was the sum of lines 37 and 38, you could just see the result. That’s not the case any more. In various places, you have to know that a + b will not equal c, because you have to add in (say) the result of Schedule 3, too.”

For me the season was not a miserable one.  I give my take here and here.

I look forward to Part 2 of the other RF’s review of the season.

* Kay Bell lists “7 tax record keeping FAQ” at DON’T MESS WITH TAXES.

My take on #3. “How long should I keep records?” is the belief that you should keep a copy of the actual federal 1040 and schedules, and copies of all W-2s, forever.  You never know when information on the return, or the W-2, will come in handy for a variety of reasons, both tax and non-tax.  And it provides a financial history.

* Another timely list – this one from FORBES.COM’s TaxGirl Kelly Phillips Erb – “Made A Mistake On Your Tax Return? 15 Things You Need To Know”.

* Speaking of the TaxGirl, she discusses a recent milestone as a FORBES.COM blogger at her TAXGIRL.COM blog – “What I’ve Learned In 1,000 Tax Posts”.

A belated congratulations to KPE!

* No surprise to me.  Michael Cohn reports “Tax refunds down $4.4B for tax season, says IRS” at ACCOUNTING TODAY.

The Internal Revenue Service reported a $4.4 billion decline in total tax refunds as of April 19, the first tax season under the Tax Cuts and Jobs Act, with the average size of tax refunds down about 2 percent.”

Many of my clients received smaller refunds, and some actually owed a substantial amount to Sam, as a result of underwithholding.  I talk about it in my tax-season review – see links above at first item..

* I love it when I can say “I told you so.”   

More from MC at ACCOUNTING TODAY – “Private agencies collecting less than 2% of tax debts”.

A new program requiring the Internal Revenue Service to hire private debt collection agencies is falling far short of its goals and putting taxpayers at risk of falling prey to scammers, according to a new government report.”

Passing a law requiring the IRS to use outside collection agencies is just more proof of my long-held belief that the members of Congress are idiots who believe that if something doesn’t work keep doing it – although when compared to Diaper Don they look like genius statesmen (and women).

* A post at TAXBUZZ (love the title – wonder where they got it) explains “Accounting Terms: Why Tax Basis Is So Important?”.

A kind of background companion piece to a recent post of mine – click here.

Joe Biden gets it.

The biggest threat to the future of America is the Trump presidency. And the number one issue of the 2020 election is removing Trump from office.

The election must NOT be about right vs left - it must be about right vs wrong.

There is one thing that is perfectly clear – Trump is wrong!


Monday, April 29, 2019


An incident during this past tax filing season caused me to compose an item to be included in my mid-year letter to 1040 clients.

Here is what I wrote -

“You must include in taxable income the gains from the sale of investments, and can deduct, within limits, losses from investment sales.  The gain or loss is determined by subtracting the purchase price of the investment and the costs of purchase and sale – i.e. commissions, fees and taxes - from the sale proceeds. 

As the result of past legislation, actually good legislation for once, brokerage houses are now required to provide clients with cost basis information for certain investment sales on Form 1099-B.  However, the longer you have held the investment the more likely the broker is not required to identify the cost.  Many brokerage houses will report cost basis information on the sale of all investments, whether or not required to by the law.  However occasionally the broker will report the gross proceeds with no cost basis information.

I cannot properly prepare your tax return without the cost basis information.  You must provide me with the cost basis information – date of purchase and purchase price – of all investments sold.  It is not my responsibility to determine the cost basis.  And during the tax filing season I do not have the time to waste trying to come up with the needed information. 

If the investment was acquired via mergers or spin-offs I may be able to do some basic research during the season, but even then I would need the cost basis information for the underlying investment.

If you receive a Form 1099-B from a brokerage house that does not include cost basis information for each and every investment sale do not just send it to me and expect me to pull numbers out of the air.  Contact your broker and have him or her provide you with the missing information.  If I get a Form 1099-B without cost basis information for all sales I will NOT begin work on the return until you provide me with all the missing information.

For your information, according to T.C. Memo 2003-259, if a taxpayer cannot provide proof of the cost basis of a stock or other investment sold it will be considered to have a "0" cost basis.  As a result, the entire gross proceeds will be fully taxable.

It is very important that you open and read all the tax documents you send me.  Don’t just put an envelope unopened or unread in the package you are sending to me.”

Insert “your tax professional” for “me” in the above.