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.


Tuesday, April 23, 2019


Issues continued with NJ taxpayers who no longer receive 1099-G forms for unemployment income and withholding in the mail – they are only available online.  Unlike the 1099-G forms for state tax refunds, also no longer mailed, these forms are not easy for me to access online.  And, while I know that a client had a state tax refund, I do not know if he or she received unemployment if not told (sometimes there is only a one- or two-week carryover from a previous year’s claim and the client forgets).

On the plus side, the Form 1098-T sent to college students by universities is finally no longer the equivalent of tits on a bull.  The 2018 Form 1098-T actually provided the information necessary to calculate the education tax credits – “the total payments received by an eligible educational institution in 2018 from any source for qualified tuition and related expenses less any reimbursements or refunds made during 2018 that relate to those payments received during 2018”.  Previously these forms only told us what the college billed.  I don’t give a rat’s hind quarters what the college billed during the year – I need to know what was actually paid.

I did not have to deal with any clients who did not have “appropriate” health care coverage for the year, and did not have to calculate the shared responsibility penalty for anyone.  However, there were a few more who had to pay back some, or all, of the advance premium credits they received during the year.  In most instances I had the victims make deductible traditional IRA contributions to either reduce their household income and the amount required to be paid back, or to reduce their income tax liability and lessen the net amount due.

This year the cafones in Congress added the “Head of Household” filing status and the newly created “Other Dependent Credit” to the items that require excessive additional “due diligence”, and certification of compliance with this additional due diligence on Form 8867.  As with the other items on Form 8867 I did absolutely nothing new or more than I would normally do, and normally did before the institution of the excessive due diligence nonsense, when claiming these items on a client’s return.

The biggest issue of this tax season was the occasionally disastrous results of what I called “the IRS withholding FU”.  As I explained to clients in my explanatory memo, last February the IRS revised the federal withholding tables to reflect the reduced tax rates.  But they did it too “liberally” – on purpose I believe so it would look like the GOP Tax Act benefited taxpayers more than it really did. 

Taxpayers did benefit from the lower rates of the Act, but the perhaps $50 per week more in their paycheck was usually more than the actual perhaps $25 tax savings.  The additional $25 or more per week had to be paid back when filing their 2018 return.

In addition, since the Act did away with the deduction for personal exemptions as well as many itemized deductions, the concept of the withholding exemption no longer applied.  Individuals who claimed additional exemptions for a spouse or dependents or for excess itemized deductions and did not revise their withholding for 2018 were royally screwed.  The increased amount and availability of the Child Tax Credit for dependent children under age 17 helped in some cases – but often not enough.

Almost every taxpayer whose withholding was based on the federal tables – and not a flat amount as with most IRA withdrawals and Social Security benefits – was under-withheld.  This was especially disastrous with multiple sources of withholding – like two-income couples, taxpayers with more than one job, and those receiving both pension and W-2 income.  I had clients owing $4,000, $9,000 and $20,000 because of the IRS withholding FU.

This problem will continue until the IRS figures out how to properly structure the withholding tables to properly reflect the new law.  In the meantime, my advice to EVERY taxpayer is to claim “Single-0” or “Married but withheld at the higher Single rate-0” for EVERY source of income subject to withholding.

Thankfully the IRS somewhat “relaxed” the safe-harbor for avoiding the penalty for underpayment of taxes - going from 90% of current year liability to 80%.  But this may not be enough for many taxpayers.  There should be no penalty for taxpayers relying on withholding for 2018 returns.

As for the state returns – this season we not only had a new federal 1040 but, for the first time in decades, a revised Form NJ-1040 and supplemental schedules and totally rewritten NJ-1040 instruction book.  However, unlike the new federal 1040, the 2018 NJ-1040 was changed for the better – thanks, I think, at least in part, to the fact that Jake Foy, former head of the “NJ Taxation University”, is now in charge of reformatting forms, instructions and correspondence to make them more “user-friendly”.

I used the new online fill-in NJ-1040 and supplemental schedules when I could not use NJWebFile.  I wish NJ would make this online filing option available and accessible for more filers.  The NJWebFile system has not been revised since its inception.

I continued to use, and truly appreciate, the New York state “enhanced” fill-in forms, which did the math and calculated the tax for the IT-201 and IT-203.  This is an excellent online system.  I wish the online fill-in NJ-1040 and supplemental schedules were similarly “enhanced” (Jake, are you listening?).

I got a new “designation” this year.  Previously the son of a long-time close friend and client had called me “Master of Taxes”.  This year a long-time client bestowed on me the title “Supreme Tax Expert”.  So, while not an EA and certainly not a CPA, I am a MOT and STE.  These titles appreciated, although not necessarily earned.

So that was the 2019 tax filing season.  Thank God it’s over!  Now – on to the GDEs.


Monday, April 22, 2019


And another one gone, and another one gone.  Another one bites the dust.

Another tax filing season that is – my 48th.

I got through all of the tax season, and I'm here!

The season ended with only 26 GDEs – the same as last year.  Although I actually prepared 16 less sets of returns by season-end than last year.

Once again, thankfully, no auto, computer, equipment, or weather issues.  And no word of any IRS or state refund or processing delays or FUs - so far.

And. also once again, I was truly “locked behind closed doors” for the entire season.  I did not plug my phone in unless I was expecting a specific call, which was rare.  I got spoiled last season and again this year truly enjoyed working through the day – which began between 3 and 4 AM and ended just after 4 PM - without the interruption of the telephone.  I did, of course, constantly check my email accounts, and responded promptly when appropriate.   

Regardless of how long a person has been in “the business” there is always the challenge of changes in tax law resulting from new legislation, often illogical and inequitable and reflective of the ignorance and agendas of those who actually write and pass tax law.

It took a while to get used to the flow of the ridiculous new “postcard 1040” and the accompanying new Schedules 1 through 6 (although I only used 1 -5).  The old Form 1040, which had evolved over decades, was, like Mary Poppins, “practically perfect”, with a logical flow of information.  There was absolutely no reason to change this format.

The idea of a tax return that fits on a postcard is a gimmick – and a gimmick totally lacking in legitimacy and with no basis in reality.  It is very literally impossible to have an individual income tax return that fits on a postcard under our current Tax Code. 

The new 1040 is not a “postcard”.  It is a 2-sided 8½ x 5½ size form.  This is truly stupid.  The new format should be a 1-page 8½ x 11 form.  And the 8½ x 5½ + or – sized Schedules 1 through 6 should be two 8 ½ x 11 forms – one for Schedules 1 and 3, since these Schedules are the most commonly used, and one for Schedules 2, 4, 5, and 6.  Or 1 through 6 on a 2-sided form. 

The new form 1040, in order to fit into the half-page format, condenses some information that, in my opinion, damages the logical flow of information.

As expected, very few of my clients were able to itemize for 2018.  Since almost all live in New Jersey or New York they were substantially affected by the new $10,000 limit on the “SALT” deduction – some losing $10,000 - $20,000 in allowable itemized deductions.  The few clients who could itemize were those with excessive medical expenses, single filers with mortgages, and couples with recent new home purchases.

But, due to the “SALT” deduction cap, 2018 is the last year I will have to claim as taxable income the prior year’s state income tax refunds.  For the few who could itemize the $10,000 limitation did away with any tax benefit from deducting state income taxes.  A related side benefit of the Act – clients deducted the state income tax withheld and paid in 2017 when rates were higher, and claimed the refund received as income in 2018 when rates were lower, for example deducted at 25% and taxed at 22%.  So, the result was they are net “in pocket” the rate differential - in the above example $30 for every $1,000 of state refund.  Not a lot – but better in the taxpayer’s pocket than the government’s.

The tax law change from the GOP Tax Act that had the most potential for agita was the elimination of the itemized deduction for “home equity debt” mortgage interest and the resulting need to correctly separately identify “acquisition debt” interest and “home equity debt” interest.  Actually, it had been important to separately track acquisition and home equity debt prior to the Act, but not as vital due to the $100,000 home equity debt threshold.  As an aside, I do not know of any taxpayer, client or otherwise, who actually did this in the past.

Another aside, while I oppose the $10,000 limit on state and local property taxes and income or sales taxes, I wholeheartedly support limiting the deduction for mortgage interest to acquisition debt interest.

Last year I advised my clients of the importance of keeping separate track of acquisition debt and home equity debt going back to their original purchase mortgage, provided instructions and worksheets on how to do it, and offered to do it for them during the year.  No client contacted me about this issue during 2018, and no client provided me with information on the source of their 1098 interest with their 2018 “stuff”.  They totally ignored this issue.

Luckily most clients were not able to itemize for 2018, so the issue only applied to a handful of returns.  For some, since I keep copies of every return I have ever filed for current clients as well as some back-up documentation, I was able to easily determine or estimate the amount of acquisition debt interest. 

Because of the “pecking order” for applying principal payments I could go back to the first refinance of their original purchase mortgage (if I had the closing statement in the file) and identify the amount of the original mortgage principal that was paid off via that refinance.  If this was $98,000, and the 1/1/18 principal balance of the current mortgage (listed on the Form 1098) was $206,000, after multiple refinances and consolidations over the years, and the fixed rate of the current mortgage was 3.65% I would know that the correct itemized deduction was $3,577 and not the $7,000+ reported on the 1098.  If they had borrowed to make a “substantial improvement” in the past – say $25,000 to remodel the kitchen – the allowable deduction would be higher.

While the inability to itemize did make some returns simpler, it did not substantially reduce the time involved in preparing, checking and compiling most returns

There was a disturbing change this year in the Fidelity year-end consolidated tax statements.  Those sent to taxpayers in the mail did not include detail on the dividends paid.  You had to go online and print-out the statement to get the complete report.   

While all of the consolidated year-end tax statements provide the same basic 1099 information, the supplemental information provided by the brokerage houses in these statements varies.  TIAA-CREF without a doubt has the absolute best supplemental information – with literally all the information needed to properly prepare federal and state tax returns available.  Morgan Stanley does good providing information on exempt income, foreign income and USGO percentages for mutual funds and individual state percentages for municipal bond funds, but I wish they would have sub-totals for each investment’s separate dividend income.  Fidelity provides the least amount of information in their statements, and now even less.

To be continued . . . . . .


Monday, April 15, 2019





1040s NO MORE!


FYI, here is why I NEVER work on the last day of tax season -