50 YEARS OF PREPARING 1040s – HOW IT ALL BEGAN

My first encounter with income taxes came when I was a freshman in college.  I had taken the first half of Accounting 101, but had not taken any tax classes.  I had no experience with or education in any aspect of income taxes.  I had never even prepared my own simple returns. 
 
On February 12, 1972, my Uncle Ted, my father’s older brother, did what he did every Lincoln’s Birthday.  He went to the storefront office of James P Gill on Sip Avenue, just off Journal Square, where the Jersey Bounce began, in Jersey City to have his tax return prepared.  While there he told Jim that I, a freshman Business Management major at St Peter’s College, had completed the basic Accounting course and was helping him keep the books for the non-profit pre-school he ran. 
 
Jim, or JP as was known, hired college students during the tax season as “apprentice” preparers.  He told my uncle to send me in to see about a job.
 
On my initial visit to Jim’s office he took me to a desk, gave me a copy of a client’s previous year’s tax return and a briefcase full of papers that constituted the current year’s tax “stuff”, and told me to “jump in and swim”.
 
Jim preferred hiring apprentices with no prior tax education, training or experience – so we could learn practical tax return preparation in the “real world” and not the classroom.
 
If I had a question, I would ask JP, who would take the time to explain the answer or send me to find the answer in his CCH tax library.   So, I was self-taught via on-the-job training.  I learned how to prepare income tax returns in the very best way possible – by preparing income tax returns.  Back then there was no software – so I learned by preparing returns manually.  I firmly believe the best way to learn how to prepare returns is by preparing them manually.   
 
In the mid-1980s Jim moved his office to Newark Avenue, one block from the County Courthouse.  While I had begun my own tax and accounting practice by then I continued to work for Jim on week-ends and full-time for the last two weeks of the season.
 
At the beginning of the 1999 tax-filing season some of Jim’s clients, who knew me and how to contact me, told me that his office was locked and they could not reach him at the office phone.  I went to his home in Hoboken and he told me, “I’m 75.  I don’t want to do this anymore.”  He gave me the practice and his office lease in exchange for my paying the few months back rent he owede.  For that first year I worked out of two offices, Jim’s in Jersey City and mine in Union.  When the season was over, I gave up my Union office and settled into Newark Avenue. 
 
Rolls were reversed, as JP would come and help me out during the last weeks of the season.  In 2001 Jim went to his final audit. We had worked together just one year short of 30 tax seasons.     
 
In my 50 tax seasons I have never prepared a 1040, or any other federal income tax return, using flawed and expensive commercial tax preparation software.  When asked what software I use I simply say “my brain”.  I am truly the last of the dinosaurs, one of a handful, if not the only, tax professional who still prepares all my 1040s manually.
 
The closest I came to using software was during my brief tenure as a “para-professional” for the Small Business Department of then big-eight CPA firm of Deloitte Haskins + Sells back in the late 1970s.  I would fill-in an “input sheet” for a Form 1040 and give it to our department’s secretary, who would enter the information in a computer and generate a return using Computax.  My reaction back then was that by the time I finished filling in the input sheet I could have actually prepared the return manually.
 
At a CPE session in San Antonio many years ago, conducted by legendary veteran tax pro and former director of the IRS Office of National Public Liaison (a division of the agency that serves as a link to tax professionals, business associations, taxpayer assistance groups, and federal agencies) Beanna Whitlock, she asked the participants if anyone still prepared 1040s manually.  Of course, my hand was the only one that went up.  Beanna said she wanted to shake my hand - because I was the only one in the room who really knew how to prepare 1040s!
 
I actually worked with a computer geek friend to create a tax software program, which went nowhere, back in the early 1980s.  It did not generate an actual Form 1040, but would verify the tax liability that was calculated on a manual return by entering key information and numbers from the 1040.  We called it the Tax Return Verification System.
 
I doubt if I thought back in February of 1972 that preparing tax returns would become my career.  But here I am 50 tax seasons later.  

TTFN

 

TTFN

50 YEARS OF PREPARING 1040s – MY FIRST 1040

 

I recently completed my 50th tax filing season.  I have been a paid preparer of 1040s since February of 1972.

This is the first in a series of looking back over my 50 tax seasons as a tax preparer.

Most people remember their first love. I remember with fondness the first Form 1040 I prepared – which for me is really the same thing. 

My first 1040 was the 1971 model (I can actually tell you the name of the taxpayer).  This was back when a deduction was really worth something and everyone itemized. As we used to tell clients, "Uncle Sam will reimburse you for up to half of our fee!" 

Back then -

* a savvy tax preparer could "pull a rabbit out of a hat" and save a client literally thousands of dollars in federal income tax with "Income Averaging" or "10-Year Averaging" (and in doing so be assured a client for life),

* credit card interest, auto loan interest and personal loan interest, as well as our tax preparation fees, were fully deductible,

* "Employee Business Expenses" were allowed as an adjustment to income,

*there was no such thing as an Adjusted Gross Income exclusion or threshold or the "phase-out" of a deduction or credit,

* we had never heard of a PIG, PAL, ACRS, MACRS, or MAGI, at least in the context of tax returns,

* and one-half of long-term capital gain just disappeared from the tax return.

For 1971 the starting tax rate was 14% and the top rate was 70%. There was a "Minimum Tax", not yet alternative, and a "Maximum Tax" (the maximum tax on "earned income" was 50%). While we did prepare a few maximum tax forms, I do not recall ever preparing a minimum tax form. The Alternative Minimum Tax did not begin to affect my clients until the 2nd half of the 1990s.  And there was the previously mentioned Income Averaging and 10-Year Averaging.

On Page 1 of the 1971 Form 1040 one would indicate name, address and Social Security numbers of the filer(s). In the case of a return for a married couple the names were listed as “Richard and Mary Taxpayer” on one line instead of a separate line for the name of each spouse. The filing status was checked and exemptions were claimed. The taxpayer and spouse could each claim an additional exemption for being 65 or over and blind. The names, but not Social Security numbers, of dependent children were listed, with no indication of whether they “lived with you” or “did not live with you”. The names, but again not Social Security numbers, of “other” dependents were listed on Page 2 of the 1040.

Income was reported on Lines 12 through 18 on Page 1, with lines for wages, dividends (no designation of “qualified”), interest (taxable only – no reporting of tax-exempt interest), and “income other than wages, dividends and interest”, the sub-total, total “adjustments to income” and Adjusted Gross Income. The line for dividends included (a) for gross dividends and (b) for an exclusion amount. If gross dividends and/or total interest exceeded $100 one would have to complete and attach Schedule B.

The net tax liability was reported on Lines 19 through 23. Federal Income Tax withheld, Estimated Tax Payments, and “Other payments” were deducted and a balance due or refund was indicated.  Line 31 of the Form 1040, and not Schedule B, was where the taxpayer was asked about foreign accounts.

Part I of Page 2 of the 1040 was where other dependents were listed, along with relationship, months live in taxpayer’s home, did dependent have income of $675 or more, amount taxpayer furnished toward support, and amount furnished by all others, including the dependent.

Specific items of income, adjustments to income, credits, other taxes, other payments, and the actual Tax Computation were reported on Lines 34 through 64 in Parts II through VII.

Social Security, Railroad Retirement, and Unemployment benefits were totally exempt from federal income tax. One could use the “3-year” rule for recovering employee contributions to determine the taxable portion of pensions and annuities. This was calculated on Part I of Schedule E.

Adjustments to income included –

* Sick pay,
* Moving expense.
* Employee business expense, and
* Payments as a self-employed person to a retirement plan, etc.

The only credits indicated on the 1040 were –

* Retirement income credit,
* Investment credit, and
* Foreign tax credit.

The personal exemption amount was $675. Tax could be calculated by “using Tax Rate Schedule X, Y or Z, or if applicable, the alternative tax from Schedule D, income averaging from Schedule G, or maximum tax from Form 4726”. Other taxes included a line for “Minimum tax”, not yet alternative.

On Schedule A –

* Medical and dental expenses were reduced by 3% of Adjusted Gross Income (this was the only item on the Form 1040 that was reduced based on AGI).

* Taxes included state and local gasoline tax (from gas tax tables), general sales tax (from sales tax tables) and (not or) state and local income tax, with an additional deduction allowed for sales tax paid on “major purchases”.

* Contributions were deductible pretty much as they are now, except there was no strict requirement for documentation.

* Interest expense included not only home mortgage interest (fully deductible – not limited to interest on “acquisition debt” and no principle restrictions) but also interest on installment purchases, credit cards, and other “personal” interest.

* Miscellaneous deductions were not reduced by a % of AGI; certain employee business expense, as mentioned earlier, were deductible as an “above-the-line” adjustment to income.

Schedule D allowed for a 50% deduction for net long-term capital gain – only half of such gains were included in AGI. So, if net long-term capital gain (or net combined long-term and short-term gain if smaller) was $10,000, only $5,000 was reported as income on Page 2 of Form 1040. The maximum net capital loss deduction was $1,000.

The 1971 standard deduction was $1,050 for both a single person and a married couple. The standard deduction was originally 10% of AGI up to a maximum of $1,000. It wasn’t until 1975 that the standard deduction for married was more than that for single.

There were no computers in those days. During my first few years we did not even have a copy machine in the office. Returns were prepared by hand on 3-page carbonized forms purchased from Accountant's Supply House.  As most of you know, I still prepare all of my federal income tax returns manually.

As I started out in the tax preparation business the matching of 1099s to 1040s had just begun. I remember a client who came into the office during my first or second year with a humungous print-out from the IRS listing by source all the interest and dividends that he had failed to report on his previous year's 1040.

During my early years you were not required to list the Social Security number for dependents claimed on your return. One year a married client, let's call him John and his wife Mary, left his "stuff" off at the office, which included a handwritten sheet listing, among other deductions, "dependents" John, Mary, Paul and George. The college student who prepared the return that year (not me) listed 4 dependents - John, Mary, Paul and George. The client received the refund requested on the return without question.

The next year John came in and stayed while I prepared the return. I asked if he was still claiming his four kids, John, Mary, Paul and George, and he told me that he only had two children - Paul and George! The John and Mary he had listed on the sheet the previous year was apparently he and his wife. It appears that the student who had prepared the earlier return had forgotten our first, and most important, rule of tax preparation - always review the prior year's return when preparing the current 1040.

At the IRS Tax Forum several years back, it was reported that in the first year you were required to list a Social Security number for all of your dependents about 5 Million dependents mysteriously disappeared from tax returns.

Of course, in the "good old days" we never filed an extension. We finished all the returns on April 15th - even if we had to stay in the office until the wee hours of the morning, with the client present, to do so!  I often made an 11:30 PM run to the Jersey City main Post Office on April 15th

So, you can see there have been a lot of changes to tax law, and tax preparation, since my first 1040.  And there will be more changes going forward.  It appears the only constant in tax law is change.  Today’s tax law is certainly much more complicated and convoluted than the 1917 US Tax Code.

One thing has not changed.  The basic challenge for the tax professional is still the same today as it was in 1971– getting all the necessary information from the client to properly prepare the return.

TTFN

JOINT VS SEPARATE – THAT IS THE QUESTION

This past tax filing season I found that filing separate returns often put more money in the pockets of my married clients than in past years.

While usually in most cases filing separately would provide the same or more federal income tax, or only slightly less federal income tax, than filing a joint Form 1040 (or 1040-SR), the new refundable Recovery Rebate Credit, resulting from reconciling the first two economic stimulus payments, calculated based on 2018 or 2019 income, to the actual amount to which a taxpayer or couple was actually entitled to based on 2020 AGI, created a greater net combined federal refund or less net combined federal tax due on separate returns. 

On a joint return a combined AGI of over $150,000 would reduce and eventually eliminate one or both of the stimulus payments – but if one spouse had an AGI of less than $75,000 on their separate return they could get the full $1,200 and $600, plus any additional amount for applicable dependents, less the amount, if anything, they actually received, as a refundable credit.

However, the biggest tax savings this year came from filing separate state tax returns – especially for residents of the Garden State.  Over the years I have found that filing separate NJ state income tax returns could result in substantial state tax savings.  This is because of the way the different tax tables for Single or Married Filing Separately taxpayers and Married filers or Heads of Households are constructed.

In two separate occasions this year filing separate NJ-1040s saved my clients between $1,600 and $1,800 in NJ state income tax!

How was this possible?  I am not going to tell you here.  I realize it is selfish, but if you want to find out how I saved my clients so much money you will have to purchase my book THE JOY OF AVOIDING NEW JERSEY TAXES (updated for 2020) – the only book in existence I know of that discusses in detail tax planning for and preparation of the NJ-1040.  In it I reveal how my clients were able to save so much.  Click here to learn about this book and how to order it.  

Please note the e-book version for Kindle has not yet been updated for 2020.  For now, to read about the $1,600 - $1,800 in savings you must get the pdf or print version.

Unfortunately, you cannot file an amended return to change your filing status from joint to separate after the initial due date for that return has passed - so you cannot change your already filed 2020 joint return to separate filings.  But if you submitted an extension for your 2020 return you can still file separate 2020 returns.

The bottom line of this post is this – when preparing your income tax return, or having it prepared, compare, or request that your tax preparer compare, filing a joint return to filing separate returns.  You, and your tax pro, might be surprised.

TTFN

THAT WAS THE TAX SEASON THAT WAS 2021

My 50^th tax filing season, which, as it always does, began for me on February 1st, ended on May 17th.  It actually ended on May 16th, as I never work the last day (click here to learn why).

For the second year in a row, and, as far as I know, only the second time in history, the initial tax filing, and paying, deadline was extended.

The big issues this season had to do with reconciling the first two Economic Impact Payments to determine if a client qualified for a refundable Recovery Rebate Credit and the impact of the retroactive income tax components of COVID relief legislation passed in early March.

It was truly the rare federal return that I could complete in one sitting.  I either had a question about the return – most having to do with the Economic Impact Payment – or I had to wait for IRS guidance on tax issues related to the COVID relief legislation.  Despite my specifically asking clients to tell me what, if anything, they received in EIPs in my January letter the majority ignored this request. 

And often clients did not send me the same information for 2020 that I had requested when preparing their 2019 return.  My advice to my clients, and any taxpayer using a tax pro, is when gathering the information to prepare the current return  look at the previous year’s return and make sure all the information needed for the previous return is included in what you give me, or your tax pro, for the current return.  And please read carefully and completely my January client letter, or any similar correspondence from your tax pro, to see if there is any new information that is needed for the current return.

While the Recovery Rebate Credit was good for many clients – putting more money in their pockets – the fact that the IRS worksheet for the credit reconciled each of the two Economic Impact Payments separately, rather than combining both payments, was stupid (for the government) and financially imprudent (again for the government).  If a taxpayer got more than they were entitled to in the first payment but less than they were entitled to in the second payment, the first payment excess was not applied to the second payment shortage.  

For example, if a taxpayer got $200 too much in the spring of 2020 but $200 too little in January 2021 it was not a wash.  The $200 overpayment from 2020 was ignored and the taxpayer got the full $200 shortage for 2021 as a refundable credit on the 2020 Form 1040 (or 1040-SR).  While the reality is between the two payments the taxpayer got exactly what he/she/they was/were entitled to, the taxpayer actually ended up with $200 more than he/she/they was/were entitled to.

The logic of some of the stimulus payments was often confusing.  In many cases the first payment was calculated based on the taxpayer’s 2018 AGI and the second payment based on the taxpayer’s 2019 AGI, and I could reconcile how these payments were calculated, but not in all cases.  A surprisingly large number of clients who were entitled to the second payment based on 2018 or 2019 income did not get a check.  And in the case of a couple of married taxpayers who always file jointly, whose 2018 and 2019 AGI was clearly way above the income threshold, one spouse got a $600 check. 

I do believe the second payment, received in 2021, should not have been reconciled on the 2020 return.  Like the third $1,400 payment, while based on actual 2020 AGI, it should have been reconciled on the 2021 return prepared next year.

The IRS announced that the processing of 2020 returns claiming a Recovery Rebate Credit would take longer than “normal” returns and refunds on these returns would be delayed.  As of this writing I have not yet heard from any clients claiming this credit about IRS issues or inquiries – but it is still early.

The affect of the exclusion from income of the first $10,200 of 2020 unemployment benefits, part of the legislation signed into law by President Biden on March 11^th, on other tax deductions and credits is still confusing and unclear.  Specific guidance on whether the exclusion is added back in calculating household income for the Premium Tax Credit, for example, was never issued.  I held up completing returns where this applied as long as I could, but finally assumed it was not and calculated the allowable credit accordingly.  I was, however, truly pleased that taxpayers who received an excess advance premium credit during the year did not have to pay back this excess on their 2020 return.

Thankfully there were no auto, computer, equipment, or weather issues of consequence for me this season.  The only concern was the slowness of the Post Office in delivering work to and from me and payments to me.  The attempts by Trump and his lackey DeJoy to destroy the postal service to sabotage mail-in ballots last year has had continued lasting effects. 

Once again, I was actually happy to be “stuck” at home during the season, leaving my condo only to go to the Post Office, the bank, the supermarket, and restaurants.  And the deadline extension actually worked out good for me – I only had 6 GDEs for 4 clients (2 GDEs related to the children of these clients) this year due to late receipt of tax “stuff” and missing information. 

The excessive backlog of correspondence and 2019 and amended 1040s (and 1040-SRs) resulting from the IRS closing its doors for too many months in 2020 is causing delays in processing current returns.  I hope that the IRS will pay interest on 2020 refunds that take too long to be issued, as it did with 2019 late refunds.

On the state tax front, I continued to use, and appreciate, the new “New Jersey Online Income Tax Filing” system, which began last year, to electronically submit directly to the NJDOT free of charge almost all of the NJ-1040s for my clients.  Using this system, I can include attachments and request direct deposit of refunds.  If only the IRS had a similar system (those of you who know me are aware that in my 50 seasons I have never used flawed and expense tax preparation software to prepare federal returns – all my returns are prepared manually - so I cannot electronically submit federal returns). 

And I continued to use, and appreciate, the “enhanced” fill-in forms available at the New York State Department of Taxation and Finance website.  While I could not electronically submit returns directly to the Department, the returns must be printed and submitted via postal mail, this system does all the mathematical and tax calculations. 

A message for Fidelity Brokerage Services regarding an issue that has been ongoing for the past few seasons – don’t be so cheap!!!!!  

The Tax Reporting Statement that it sends to investors via postal mail does not include “Supplemental Information” such as the individual sources of dividends and distributions reported on Form 1099-DIV and other important information.  The information on the individual dividend sources is important to calculate income from US government obligations that are exempt on state returns and state taxable municipal interest.  You must go online to get this additional statement.  No other brokerage house that I know of does this – all of them include all information – required and supplemental - in the paper statement they mail to investors.  And clearly some brokerage houses do a better job of providing supplemental information than others.

Clients send me the incomplete statement they received in the mail from Fidelity.  When preparing their return, and knowing that dividends from mutual funds are included in the total ordinary dividend number, I have to email them and ask them to download the online statement and email or postal mail it to me.  This causes delays and a waste of my time. 

So that was the 2021 tax filing season.  Once I finish the GDEs I will be “officially” retired!  

Don't worry - I will continue to write THE WANDERING TAX PRO in retirement.

TTFN

THE BIGGEST PROBLEM FACING AMERICA TODAY!

The biggest problem facing America today is not COVID-19.  The biggest problem facing America today, and the biggest threat to the future of America, is the sad fact that about 74 Million Americans are either ignorant, racist, have no conscience, or, like the Presidential candidate they voted for in November 2020, all three. 

There was, and is, absolutely no intelligent, legitimate, rational, or acceptable reason for anyone to support and defend Trump.  Period.  It has nothing to do with political philosophy or policy.  It has nothing to do with conservative vs liberal.  It has to do with the character, or total lack thereof, of Donald Trump. 

In the history of the United States no one person has ever done more damage to America, American values and American democracy than Trump.

Trump is totally devoid of humanity and integrity.  He does not possess a single redeeming positive human quality or value.  He is clearly the absolute worst human being to ever hold national public office in the history of the United States and obviously the worst US President in history. 

Trump and his words and deeds are indefensible.  And support and defense of Trump and his words and deeds is indefensible.

America needs to do better at educating its citizens at all levels.  We need to work harder to combat racism and bigotry.  Intolerance must never be tolerated. 

Religious organizations that profess to follow the teachings of Christ must follow and promote the actual teachings of Christ.  Fundamental to these teachings is that, if there is a God, red, yellow, black, brown, white, gay, or straight all humans are “precious in his sight”.

And tolerance of Trump’s crimes and “sins” must never be tolerated 

What is most important right now is that Trump be investigated, indicted, prosecuted, convicted, and incarcerated for his multitude of federal, state and local crimes.  Trump MUST be held accountable – and we MUST send a message to the future that his actions will never be tolerated by anyone at any level.

And it is also vitally important that the current despicable and deplorable Republican Party be condemned and that Americans with a brain and a conscience, whether liberal, progressive, moderate, conservative, or libertarian, oppose, denounce and vote against all Republican candidates at all levels who do not publicly and aggressively disavow Trump and “Trumpism”.

TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

BUZZ.  BUZZ.  THE BUZZ IS BACK!

* Michael Cohn reports “IRS starts refunds for tax returns claiming unemployment benefits” at ACCOUNTING TODAY.

“The Internal Revenue Service is starting to provide tax refunds to taxpayers who paid taxes on their 2020 unemployment benefits that recent legislation later excluded from taxable income. . . .

 

The IRS said Friday it has identified more than 10 million taxpayers who filed their tax returns prior to enactment of the American Rescue Plan and has been reviewing those returns to determine the correct taxable amount of unemployment compensation and tax. That could result in a refund, a reduced balance due or no change to tax (no refund due nor amount owed).”

 

* Also from ACCOUNTING TODAY – "N.J. residents paythe most in lifetime taxes, W. Virginians the least” -

 

“Those living in New Jersey will pay on average a grand total of $931,698, well above the $827,185 for Massachusetts residents and $805,213 for Connecticut. Nationwide, Americans will pay $525,037 over their lives, which includes taxes on income, property, cars and retail spending, according to the study from financial technology company Self.”

 

Thankfully I now live in Pennsylvania.

 

* Kay Bell, the yellow rose of taxes, tells us “TN disaster relief means May 17 isn't {wasn’t – rdf}Tax Day in 6 states" at DON’T MESS WITH TAXES.

 

* Check out the annual top 10 “Bozo Tax Tips” from Russ Fox at TAXABLE TALK.

 

Click here for #2 – 10 and here for #1.

- - - - - - -

 

I am off to the Jersey shore to recover from my 50^th tax filing season later today!  "Talk" to you when I get back.

 

TTFN

THANK GOD IT'S OVER!

 

TAX SEASON'S OVER (my 50th!)!

MY FACE IT HAS A BIG SMILE.

AND SO, IT'S OFF TO THE SHORE,

1040s NO MORE!

AT LEAST FOR A WHILE.