THIS JUST IN – PPE DEDUCTIBLE MEDICAL EXPENSE

IRS Announcement 2021-7 (1) tells us that the cost of personal protective equipment (PPE) for the primary purpose of preventing the spread of COVID-19 is considered amounts paid for medical care under Internal Revenue Code Sec. 213(d). 

So, the purchase of personal protective equipment such as face-masks, hand sanitizer and sanitizing wipes for COVID-19 protection are deductible as medical expenses on Schedule A.  

And, for NJ residents, because these costs are a deductible expense for Schedule A they are also deductible as a medical expense on the NJ-1040. 

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THE SECOND ECONOMIC STIMULUS PACKAGE

 

“The Consolidated Appropriations Act of 2021” was finally signed into law by Trump on Sunday night, December 27.  In addition to the $600 per taxpayer and dependent child Economic Impact Payment (discussed here), the Act includes the following items that affect Form 1040 (and 1040-SR) filers -

FOR 2020 RETURNS

Taxpayers can use their 2019 income to determine eligibility for and calculate the 2020 Earned Income Credit and Additional Child Tax Credit if it results in a bigger credit than actual 2020 income.

FOR 2021 AND BEYOND RETURNS

* Business-related “food or beverages provided by a restaurant” are 100% deductible for 2021 and 2022 (remember - employee business expenses, including employee-paid business meals, are no longer deductible on Schedule A).   

* The "above-the-line" deduction of up to $300 per taxpayer for qualifying charitable contributions for taxpayers who do not itemize on Schedule A, a per return deduction for 2020, is per taxpayer for 2021.  The maximum deduction for a married couple filing a joint 2021 return is $600.

* The 7½% of AGI exclusion for medical expenses on Schedule A is made permanent

* The MAGI-based phase-out amounts for the Lifetime Learning Credit are permanently increased to equal the amounts for the American Opportunity Credit.

* The lifetime $500 credit for 10% of qualified residential energy purchases is extended for 2021.

The Act also included new and extended business and payroll tax relief and other non-1040 items.

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THIS JUST IN

The IRS has announced the new Standard Mileage Allowance rates for calendar year 2021.

Beginning on January 1, 2021, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

* 56 cents per mile driven for business use, down 1.5 cents from the rate for 2020, 

* 16 cents per mile driven for medical or moving (for qualified active duty members of the Armed Forces only) purposes, down 1 cent from the rate for 2020, and 

* 14 cents per mile driven in service of charitable organizations, the rate is set by statute and remains unchanged from 2020.

The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs (does not include depreciation).  The rate for charitable driving is set my Congress and has not been increased for decades.

Remember - employees can no longer deduct employee business expenses, including business mileage, as an itemized deduction on Schedule A.

BTW - Trump has refused to sign the new stimulus bill discussed yesterday.  So the second round of checks is not law yet.

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THIS JUST IN - MORE BREAKING NEWS!

The IRS has announced the new standard mileage rates for 2019.

Beginning on Jan. 1, 2019, the standard mileage rates for the use of a car will be:

* 58 cents per mile for business use, up 3.5 cents from 2018,
* 20 cents per mile for medical or moving purposes, up 2 cents from 2018, and
* 14 cents per mile in service of charitable organizations.

It is important to remember that thanks to the GOP Tax Act, taxpayers can no longer claim a miscellaneous itemized deduction for unreimbursed employee business expenses. The standard mileage rate for business is only available to self-employed taxpayers filing a Schedule C, C-EZ or F, and for reimbursement of employees by employers under an accountable plan. 

Taxpayers also can no longer claim a deduction for moving expenses, except for members of the Armed Forces on active duty moving under orders to a permanent change of station.  

The standard mileage rate for business use is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.  The charitable rate is set by Congress and hasn’t changed in a dog’s age. 

Taxpayers still have the option of calculating the actual costs of using their vehicle and apply the appropriate percentage for business, medical or moving use instead of using the standard mileage rates.  The rules for which method is available for business use (for Schedule C, Schedule C-EZ or Schedule F) has not changed.

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THIS JUST IN - 2017 STANDARD MILEAGE ALLOWANCE RATES

The IRS has just announced the new standard mileage allowance rates for calendar year 2017 (highlights are mine) -

 

“The Internal Revenue Service today issued the 2017 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes.

 

Beginning on Jan. 1, 2017, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

 

• 53.5 cents per mile for business miles driven, down from 54 cents for 2016
• 17 cents per mile driven for medical or moving purposes, down from 19 cents for 2016
• 14 cents per mile driven in service of charitable organizations

The business mileage rate decreased half a cent per mile and the medical and moving expense rates each dropped 2 cents per mile from 2016. The charitable rate is set by statute and remains unchanged.   The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs.

 

Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates.”

 

FYI – the idiots in Congress have not changed the charitable mileage rate since 1998!

 

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OBAMACARE AND MEDICAL EXPENSES FOR SENIORS

I was reminded this morning that the 7.5% Adjusted Gross Income (AGI) exclusion of medical expenses for taxpayers age 65 or older who itemize on Schedule A will expire on December 31, 2016.  So the 2016 Form 1040 is the last year that seniors can take advantage of this lower AGI exclusion. 

 

Beginning with tax year 2017 all taxpayers who itemize must reduce medical expenses by 10% of their AGI.

 

This increased income threshold came out of the Affordable Care Act (ACA), aka “Obamacare”.  The application of the increase took effect for most taxpayers with tax year 2013, but had been postponed for seniors.

 

This presents a tax planning opportunity for seniors.  If -

 

(1)  you will be able to itemize for 2016, and

 

(2)  your 2016 medical expenses will, or have already, exceeded the 7½% exclusion, and

 

(3)  you think that, based on past tax returns, your 2017 medical expenses will not exceed 10% of AGI

 

you should look at accelerating medical expense to be able to claim them in 2016.

 

Pay any outstanding medical bills and schedule, and pay for, prescription renewals, check-ups, doctor visits, elective surgery, and needed dental work before the end of December.

 

As a point of information, if you will be a victim of the dreaded Alternative Minimum Tax your 2016 medical expenses will only be deductible to the extent they exceed 10% of AGI regardless of your age.

 

When adding up your 2016 medical expenses be sure to include travel to and from doctors, dentists, clinics, hospitals, therapy, etc. at 19 cents per mile and related parking and tolls.  And check out Kay Bell’s recent post “Tax deductions for allergy-related medical costs” at DON’T MESS WITH TAXES.

 

My MEDICAL EXPENSE GUIDE provides a detailed listing of what you can deduct as a medical expense on Schedule A - if you are lucky, or unlucky, enough to have enough expenses to exceed the AGI exclusion - plus several worksheets to help you keep track of your deductions.  It is available for $2.00 delivered as a pdf email attachment, or $4.00 in print form sent by postal mail.  Click here for more information.

 

A complete 2016 year-end tax planning guide will be available in early October.

 

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AN INTERESTING TAX WITHHOLDING STRATEGY

I learned an interesting tax withholding strategy from a client who resides in a “life care” assisted living facility a couple of years ago.

 

First of all – what do I mean by a “life care” facility?  SENIOR HOMES.COM explains “What are Life Care Communities?” -

 

“Life care is one type of Continuing Care Retirement Community (CCRC) that provides independent living, assisted living and nursing home care.”

 

And - 

 

“Life care communities are different from other senior housing options in that they require a long-term, upfront financial commitment that, in turn, guarantees housing, services and nursing care all in one location through the end of life.

 

In contrast to fee-for-service contracts, life care residents pay a large initial deposit plus a monthly maintenance fee that stays nearly the same no matter how much care is needed.”

 

My client, a retired couple, paid a very, very substantial “up-front fee” (in the hundreds of thousands of dollars).  And each month their net Social Security and pension checks are paid directly to the facility as monthly “maintenance” fees.  A resident or a resident’s estate may receive a partial refund of the “up-front” fee is he or she leaves the facility or passes.

 

Residents of my clients’ facility receive a private room with bath, 3 meals served in the dining room, housekeeping, laundry, and all medical care paid for by the facility.  There are also planned trips and in house activities, 2 beauty parlors, an on premise bank, billiards, ballroom/theater, arts and crafts, exercise equipment and classes, library and chapel.  All this is included in the upfront and monthly fees.

 

So basically the couple has no living expenses, as just about everything, including all medical care and prescriptions, are provided by the facility without additional charge.

 

If the health of my clients deteriorates and nursing care is required it is provided within the same facility.

 

As I explain in my MEDICAL EXPENSE GUIDE you can deduct as a medical expense on Schedule A -

 

“The ‘lump-sum’ entrance fee paid to a ‘life-care’ or ‘continuing-care’ facility that is specified in the residential agreement as a condition for the facility’s promise to provide lifetime care that includes medical care.  The qualifying amount may be deducted in full in the year it is paid, even though the medical care will be provided in the future.”

 

The husband, a retired municipal employee, receives a monthly pension from the State.  He has elected to have both federal and state income tax withheld from his monthly pension check.

 

A few years ago I told my client that, due to a pension exclusion and high filing threshold the state tax return, as long as his situation does not change, or he does not win the Publishers’ Clearing House sweepstakes, he will no longer need to file a state income tax return each year – and that he was only filing a state return to get a full refund of all the state income tax withheld.  I suggested that he stop having state income tax withheld from his pension.  I also told him that he could reduce the amount of federal income tax withheld.

 

My client told me that he wanted to get the federal and state refunds each year.  Since the facility got the total amount of his monthly pension and Social Security checks, and he no longer had a monthly income, he used the refunds from the excess withholding to get some in pocket “spending money”.  Unlike the monthly benefit checks, the refund checks went to him and his wife and he could cash these checks and pocket the money.

 

So – it is something to think about if you, or a relative, are in a similar situation.

 

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THIS JUST CAME TO ME

Here is something that came to me as I was preparing a GDE. 

The taxpayer, a NJ resident, purchased insurance for her and her dependent college student child for 2014 via the Obamacare Marketplace and received an advance premium credit that was applied to her monthly premium payment.

Health insurance premiums are deductible on the federal return if you itemize and the total of all allowable medical expenses exceeds 10% (or 7 ½%) of your Adjusted Gross Income (AGI), and also on the NJ-1040 state income tax return if the total of all allowable medical expenses exceeds 2% of your NJ Gross Income.

If a person receives an advance premium credit the amount that is deductible on the federal and state returns is the net “out of pocket” payment after deducting the advance premium credit – the amount the person has actually paid each month for the insurance coverage.  

If a taxpayer received an advance premium credit he/she must reconcile the amount of credit applied to the premium charges during the year, based on projected 2014 household income, to the actual credit to which he/she is entitled based on actual 2014 household income when filing his/her 2014 federal income tax return.  If the taxpayer is entitled to an additional credit it increases the refund or reduces the balance due on the tax return.  If the advance credit received during the year is more than the actual credit allowed the taxpayer must pay back the excess credit by reducing his/her refund or increasing his/her balance due.   

An additional credit that is paid to the taxpayer via the tax return reduces the “out of pocket” cost of the health insurance premiums for 2014 and, if the taxpayer itemized in 2014, represents a refund of a previously deducted item – and may be taxable income for 2015 under the tax benefit rule for recovery of a previously deducted item. 

If the taxpayer has to pay back all or part of the advance premium credit applied during 2014 then the pay back is an additional “out of pocket” cost for health insurance premiums, and is a deductible medical expense for 2015.  

My client had to pay back over $1,500 of advance premium credits applied in 2014 on her 2014 Form 1040 by reducing the requested refund on the return.  In effect she paid an additional $1,500+ for health insurance premiums.  If she will be able to itemize she can add this $1,500+ to the medical expenses she reports on Schedule A, subject to the in this case 10% of AGI exclusion. And she can most definitely add the $1,500+ to the medical expenses claimed on her 2015 NJ-1040.

So if you had to pay back all or part of the Obamacare advance premium credit on your 2014 tax return all is not lost – you may be able to deduct the pay-back on your 2015 federal and/or state income tax return.

I do not recall anyone discussing or writing about this anywhere when talking, teaching, or writing about the Obamacare premium credit.

Comments?

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2015 STANDARD MILEAGE ALLOWANCE RATES

Let me join my fellow tax bloggers in reporting that the IRS has announced the 2015 standard mileage allowance rates.

 

See my MAINSTREET.COM article “2015 IRS Standard Mileage Rates Announced: Get a Tax Deduction for Driving” for the details.

 

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LOCK IN 2012 MEDICAL DEDUCTIONS

As you probably already know, medical expenses can be deducted on Schedule A of your 2012 Form 1040 only to the extent that the total allowable expenses for the year exceed 7½% of your Adjusted Gross Income (AGI).  If your AGI is $70,000 and your medical expenses total $6,000 you get a tax deduction of $750.  If your expenses total $5,000 you get no tax benefit.

But did you know that beginning with tax year 2013 the AGI exclusion increases to 10% for taxpayers under age 65?  In the above example there would be no tax deduction if your total expenses for 2013 totaled $6,000.  Taxpayers age 65 and older can continue to use the 7½% exclusion rate through tax year 2016. 

The increase comes via the Patient Protection and Affordable Care Act signed into law in March of 2010.   

If you expect to be able to itemize on your 2012 Form 1040 here is what you should do.  Sit down and estimate what your AGI will be for 2012.  Then add up all of your qualified medical expenses to date.  If your expenses come close to, or already exceed, the projected 7½% of AGI exclusion you should incur as many allowable medical expenses between now and the end of December.

Schedule medical and dental check-ups and procedures, renew prescriptions, purchase medical supplies, pre-pay related insurance premiums, and pay any outstanding balances.  If you do not have the cash available to pay for the accelerated medical expenses you can charge them to a bank credit card.

When adding up medical costs be sure to include travel to and from doctors, dentists, therapists, treatments, etc., using the standard mileage allowance of 23 cents per mile if you drive.

The increasing AGI limitation on medical deductions makes it even more important to seriously consider participating in an employer-sponsored medical Flexible Spending Account.  FSA contributions effectively provide an “above-the-line” income tax deduction for qualified medical expenses from dollar one.  And they can reduce your Social Security and Medicare tax liability as well.

Unfortunately, also thanks to the healthcare reform Act, effective with tax year 2013 you will be able to put aside only $2,500 per year, indexed annually for inflation, in a Flexible Spending Account.

One caveat – under the Alternative Minimum Tax medical expenses are already subject to a 10% of AGI exclusion.

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OUR PPACA IS HERE TO STAY (AT LEAST FOR NOW)

The Supreme Court recently upheld most of the Patient Protection and Affordable Care Act (PPACA), aka “Obamacare”, and the idiots in Congress have been unsuccessful in 30+ attempts to repeal the Act.  So it looks like we better prepare ourselves for the provisions that will become effective in 2013.

·      Currently you will only receive a tax benefit for your medical expenses if you itemize on Schedule A and the total of your allowable expenses exceeds 7½% of your Adjusted Gross Income (AGI).  If your expenses total $6,500 and your AGI is $80,000 your deduction is $500 ($80,000 x 7½% = $6,000 / $6,500 - $6,000 = $500).

Beginning with 2013, the exclusion rises to 10% of AGI.  In the above example there would be no deduction, as 10% of $80,000 = $8,000, and $6,500 - $8,000 = 0. 

Under the dreaded Alternative Minimum Tax medical expenses are only deductible to the extent they exceed 10% of AGI.

In reality, the allowable medical expenses of most taxpayers do not exceed the current 7½% exclusion – so, unfortunately, the change will only affect those with excessive medical expenses and, in my client base, retired seniors with lower AGIs.

·      There is currently no statutory limit on the amount that employers can permit employees to contribute to a medical expense Flexible Spending Account (FSA).  The limitation is set by the individual plan.

Beginning with 2013, employee contributions to an employer-provided medical expense FSA is limited to $2,500 per year.  This amount will be indexed annually for inflation.

Having medical expenses paid through an FSA is a way of getting a tax deduction for medical expenses “above-the-line” that were not allowed on Schedule A due to the AGI exclusion.  I have often seen as much as $5,000 in FSA contributions for my clients – so this change will increase these taxpayers’ liability by $600-$700.

•  Employees and employers split the cost of Social Security and Medicare tax (FICA) – each pays 6.2% of taxable wages for Social Security and 1.45% for Medicare (although for 2012 the employee pays only 4.2% of his/her taxable wages).  There is a limit on the amount of taxable wages subject to the Social Security portion, but the Medicare tax is applied to all taxable wages.  Taxable wages for FICA may be different that taxable wages for income tax.

Self-employed taxpayers pay both halves of the FICA tax as “self-employment tax”, again with a 2% reduction in the Social Security component for 2012.  They are allowed an “above-the-line” deduction for a portion of the self-employment tax assessment.

Beginning in 2013, the employee’s share of the Medicare tax increases by 0.9% - to 2.35% - for taxable wages over $200,000 ($250,000 for joint filers and $125,000 for married couples filing separately).  The self-employment tax is similarly increased on these levels of income.   

•  Beginning in 2013, a new tax is added on the Form 1040 for taxpayers with “modified” AGI (MAGI) over $200,000 (again $250,000 for joint filers and $125,000 for married couples filing separately.  These taxpayers will be subject to a 3.8% “surtax” on “net investment income”.

Net investment income is taxable interest, dividends, capital gains, annuities, royalties, rents, and pass-through income from a passive S-corporations and partnership, less related investment expense deduction.  Modified AGI is regular AGI with any foreign earned income exclusion or foreign housing exclusion added back.

This change is the source of the nonsense email that has been circulating for the past year that there is a federal “sales tax” on the profit from the sale of your personal residence.  See my post “WTF?”.

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UNIQUE TAX DEDUCTIONS

Here are some Tax Court decisions that upheld unique deductions.  Do either apply to you?

·      Swimming Pool:

A taxpayer suffered from emphysema.  He installed a swimming pool after his doctor prescribed he undergo a daily exercise regimen. He swam twice a day, which improved his breathing capacity.

The Tax Court in Cherry v. Commissioner allowed him to deduct the cost of the pool as a medical expense, to the extent the pool’s cost exceeded the corresponding increase in the market value of the property.

The primary purpose of the pool was medical care. So the cost of heating the pool, pool chemicals and portion of the taxpayer’s insurance premiums were also deductible.

If you ask me – the taxpayer could have joined the YMCA or other health facility to get in his twice-daily swim at a substantially lower out-of-pocket cost, and the deduction should have been limited to the cost of the health facility membership.  I guess the Tax Court does not take frugality into account in its decisions. 

For more on medical deductions see my MAINSTREET.COM items “Tax Tip: When to Deduct Medical Expenses” and “Tax Tip: Can I Deduct My Gym Membership?”.

·    Body Oil:

A professional bodybuilder used a lot of body oil to make his muscles glisten in the lights during competitions.

The Tax Court, in Wheir v. Commissioner, upheld the deduction.  

The body building activity was engaged in a for-profit, and apparently glistening muscles increase one’s chances of winning a cash prize.  

The Court did not allow deductions for buffalo meat and special vitamins to enhance strength and muscle development.

 

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2012 STANDARD MILEAGE ALLOWANCES

Before I leave I just wanted to let you know that the Internal Revenue Service has issued the 2012 optional standard mileage rates used to deduct using your car for business, charitable, medical or moving purposes.

Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be:

 •55.5 cents per mile for business miles driven

 •23 cents per mile driven for medical or moving purposes

 •14 cents per mile driven in service of charitable organizations

The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile.

The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile by independent contractor Runzheimer International. The rate for medical and moving purposes is based on the variable costs as determined by the same study (i.e. no depreciation component).

The rate for charitable driving is set by Congress.  The idiots have not increased this amount to reflect reality in years.

The rules for deducting the use of your car for business are discussed in my Guide to Schedule A.

THE NEW TAX CODE - THE FINAL ITEMS

So what it left to re-write in the new simple, fair, and consistent Tax Code?

Contributions? I would not change the current rules for deducting contributions to church and charity – except to make the standard deduction for charitable miles equal to the standard deduction for all other miles (the amount currently used for medical and moving mileage) and have it indexed for inflation annually. This deduction would be determined annually by the IRS and not the idiots in Congress, who have not increased the amount in years.

Casualty and Theft Losses? I think I would limit this deduction, without any AGI exclusion, to “out of pocket” casualty losses from Presidentially-declared natural disaster areas and “theft” losses from Madoff-like Ponzi schemes.

Moving Expenses? I would keep the current rules, but make it an “employee business expense” deductible on Schedule A.

Medical Expenses? This is the only area where I have considered maintaining a % of AGI exclusion. I would want to limit the deduction to “excessive” medical expenses. As an alternative to the AGI-based exclusion I have thought about allowing a deduction for expenses in excess of a flat exclusion amount of $5000 for a single taxpayer or $10,000 for a married couple. What do you think about this?

I would once again make taxpayers age 65 or older eligible for an additional personal exemption, and not an additional standard deduction amount. And I would do away with the special tax treatment for legally blind taxpayers. I see no reason why blind taxpayers should be treated differently than any other disabled or handicapped taxpayer.

I have decided that I would not have a “dependent credit” - but instead double the personal exemption for dependent children under age 19.

Before I begin to put my proposals for the new Tax Code into summary format – is there anything I forgot?

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THE NEW TAX CODE – SAVING FOR EDUCATION, MEDICAL EXPENSES AND RETIREMENT

In my new fair, simple, and consistent Tax Code I would replace the IRA, ESA, HSA, and MSA with one USA – “Universal Savings Account”.

I would also replace all of the various retirement savings options for self-employed taxpayers (i.e. Keogh, SIMPLE. SEP, etc) with one SERSA – “Self-Employed Retirement Savings Account”.

All taxpayers could contribute up to the lesser of $10,000 or total earned income to a Universal Savings Account. This $10,000 maximum would be indexed for inflation.

There would be a “traditional” USA and a ROTH USA. There would be no restrictions on the ability to contribute to either option. A taxpayer, regardless of his/her level or income or current coverage under an employer plan, could elect to contribute to a “traditional” USA and claim a tax deduction, elect to contribute to a ROTH USA with no current deduction but all withdrawals after age 59½ being totally tax-free (subject to the same current 5-year rule), or elect to split the maximum allowable deduction between the two options.

There would no income tax or premature withdrawal penalty on withdrawals of any amount at any time from a “traditional” USA that are used to pay for qualified post-secondary education (including room and board) or medical expenses (including health insurance premiums). There would be income tax on “unspecified” withdrawals, with a 10% penalty for “unspecified” withdrawals made prior to reaching age 59½, except for death or disability.

In the case where there is a “tax basis” in a traditional USA (resulting from non-deductible contributions to IRAs made prior to the effective date of the new Code) withdrawals would be considered to come from “tax basis” first. If a taxpayer had a “tax basis” of $10,000 in a traditional USA and withdrew $15,000, only $5,000 would be subject to income tax, unless used for qualified education or medical costs. If the taxpayer withdrew $6,000 there may be a 10% premature penalty assessment, depending on the taxpayer’s age and what was done with the money, but there would be no income tax. Withdrawals for qualified education and medical costs would not reduce “tax basis”.

There would be no income tax, or penalties, on any withdrawals of any amount at any time from a ROTH USA to pay for qualified post-secondary education (including room and board) or medical expenses (including health insurance premiums). All other rules that currently exist for ROTH IRA withdrawals would apply to ROTH USA withdrawals.

A self-employed taxpayer could contribute up to the lesser of the current maximum contribution, including “catch-up”, allowed for a 401(k) or 403(b) account or “net earnings from self-employment” to a “Self-Employed Retirement Savings Account”. Employees of the self-employed business could also elect to contribute up to the maximum to their own RSA (established like a current IRA) as part of the business’s SERSA plan, with their contribution reducing taxable federal wages on the W-2.

There would be a “traditional” SERSA and a ROTH SERSA, and all self-employed taxpayers, and their employees, could split their deduction between the two options in any way they so choose regardless of income.

A SERSA plan would have to be established before the end of the calendar year, so that any employees could be notified of its availability and could chose to contribute via payroll deduction. But the owner’s contribution could be determined and deposited up to the due date of the return, including extensions. The owner would not, under any circumstances, be required to make any contribution for himself/herself.

Contributions to a traditional USA or SERSA (by the owner) would continue to be deducted "above-the-line" as an Adjustment to Income.

I admit that the above concepts are not original to me. They do mirror some proposals actually suggested by Dubya during his tenure. Hey, everything that George W did or proposed during his Presidency was not bad, although the list of his good actions and ideas is truly small.

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THIS JUST IN!

Here we go again.

The IRS has announced that the Standard Mileage Allowance is going up by 4.5 cents per mile effective for miles driven from July 1 through December 31.

The Standard Mileage Allowance for business use of your car will be 51 cents per mile for mileage driven from January 1st through June 30th, and 55.5 cents per mile for mileage from July 1st through December 31st.

The Standard Mileage Allowance for Medical and Moving travel is 19 cents per mile for January 1st through June 30th, and increases to 23.5 cents per mile for July 1st through December 31st.

The Standard Mileage Allowance for Charitable driving remains at 14 cents per mile. This rate is determined by the idiots in Congress, and has not been increased in a dog’s age.

That means that my 1040 clients will have to keep track of medical and business miles separately for January through June and for July through December. This mid-year increase happened once before, for calendar year 2008.

Actually a few of my clients still give me mileage broken down by Jan-June and July-December. Some clients have the memory of an elephant, asking if I can still use Income Averaging. Sewer “taxes” were deductible as real estate tax for one year only way back in the late 70s or early 80s (it is so long ago that I forget when), and every year one or two clients will still include their sewer bills with their tax “stuff”.

The good news is that I will be getting increased expense checks each month beginning in July.

As usual the IRS is behind the market, as someone just commented to me today that gas prices should begin to drop any day now.

MORE FINE WHINE!

(1) The biggest time waster during this past tax season was spending time staring at a frozen computer screen. My GDMFPOS computer was FSAM on occasion – wasting valuable time. As you know I do not use tax preparation software to prepare federal returns, but I do submit NJ returns online when possible and use the computer extensively during the season for research and word processing.

The second biggest time waster was trying to determine whether purchases of new windows, doors, water heaters, boilers and furnaces by clients qualified for an energy credit (is seems more so for 2010 returns than for 2009 returns).

While I instructed my clients to send me the Manufacturer’s Certification for all energy-efficient purchases, which verifies qualification for the credit, few actually did. For the most part I was given a copy of a bill or receipt for a potential energy-efficient item, or a note stating “I purchased a new hot water heater for $800.00”.

I then had to email the client and ask if they had a Manufacturer’s Certification, and, if not, explain the specific qualifications and ask if the item met these qualifications (a certain statutory minimum measure of energy efficiency), When the reply said they did not have a Certification and they did not know if the item met the specifications I would then have to ask for the make and model number of the product and, upon receipt, search through online listings to see if I could find a match.

This will not happen during next year’s tax season, when a limited energy credit is still available (as I discussed yesterday). If I am told “I bought a new hot water heater for $800.00” I will reply “Isn’t that special”.

If clients want to claim an energy credit on their 2011 federal return they will have to either send me a Manufacturer’s Certification Statement or verify by some other method that the item qualifies for the credit.

As I suggested in yesterday’s post, if a client has purchased what he/she thinks may qualify for the credit, but was not given a Manufacturer’s Certification Statement at the point of purchase, they should, before sending me their stuff, go back to the salesman and ask for one, or go the website of the item’s manufacturer and download a statement.

Clients can also go to the Energy Star website to find out what the specific qualifications are for individual items and compare these specifications to those identified in any manuals or paperwork received with the item. Those who do not have easy access to a computer can email me during 2011 and I will provide them with the required specifications.

I will not waste any of my time during the tax season trying to determine if the item qualifies.

Here is another great example of a tax credit that, while the main purpose of which is legitimate, has no business being in the Tax Code and only increases a tax preparer’s workload.

The credit for qualifying energy-efficient products should be given as a direct discount at the point of purchase – much like the Cash for Clunkers program of a few years back.

(2) While I provide most clients a Medical Expense Worksheet in my annual January mailing, telling them to fill it out themselves, I still receive from some a pile of medical bills, receipts and statements, as I did from one whose GD extension I just completed.

I tell clients not to send me their medical bills – and try to discourage them by saying I will charge $50.00 per hour for my time to sort through these bills – but some still do not listen.

Much of what I receive, as was the case with this client, is Blue Cross+Blue Shield, Medicare, or other insurance statements. For my purposes these statements are like tits on a bull – totally useless. They tell what the insurance provider has paid, but not what the client has actually paid during the year. What they often say is “you may be asked to pay” a certain amount – the amount not covered by insurance – but this is not always the case. Many medical providers will accept as payment in full what is given to them by the insurance company.

Next tax season if I receive a pile of medical bills, receipts and statements from a client I will promptly mail the pile back with another copy of my Medical Expense Worksheet.

Thank you for letting me vent!

TTFN

MORE ON THE NATP YEAR-END TAX UPDATE

As promised, here are some items of interest that was discussed at last week’s NATP year-end tax-update class -

• Student loan interest reported on a Form 1098-E under the dependent student’s Social Security number can be claimed as an adjustment to income, subject to the statutory limitations, on the parents Form 1040 if the parents actually paid the interest and they are legally responsible for the loan – i.e. they co-signed the loan. Be ready to send the IRS proof of legal responsibility if questioned down the road.

• For 2010 the Adoption Credit is refundable. If the credit is from an adoption initiated in 2010, and not the result of a prior year’s carryover, copies of documenting paperwork must be sent in with the return, much the same as the documentation required for those claiming the Homebuyer’s Credit.

• Non-prescribed “over the counter” medicines can no longer be paid through an employer-sponsored medical expense Flexible Spending Account beginning in 2011. So if there is money left in your FSA stock up before year-end. Such items were never deductible as a medical expense on Schedule A.

• Cell phones are no longer considered “listed property” for purposes of the special record-keeping.

• And here is a bit of info that has apparently been passed along to NATP from a reliable insider source - the IRS is looking more closely at self-prepared tax returns generated by Turbo Tax software. It seems the Service is aware of the many failings of the Turbo Tax 1040 preparation software. Just another reason to forget about preparing your return yourself using a software package and seek the services of a competent tax professional.
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We talked about the new requirements for small businesses and landlords to send a Form 1099-MISC to everyone to whom they pay more than $600 during the year. One excellent comment - if these requirements remain it will mean that hundreds of thousands, if not millions, of individual taxpayers will be applying for Employer Identification Numbers.

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Currently sole proprietors, one-person LLC owners, and landlords who do not have employees don't need to get a separate EIN for their business or rental. These taxpayers could use their Social Security Numbers for bank accounts. However I, and my fellow tax pro participants, doubt if these taxpayers, faced withing having to send out a multitude of 1099-MISC forms, will want to make their Social Security Number public knowledge by including it on these 1099s. So they will need to get an Employer Identification Number to use instead.

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I am sure the idiots in Congress did not take this into consideration when passing the ridiculous new requirements.

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During a discussion of “who is a tax preparer” in regard to the new tax pro regulation regime the instructor gave the following scenario –

She has a client whose only income is from self-employment. He has no investment income or activity and does not itemize. Each month the client brings in his business checkbook, account statement and other related information to the instructor’s office and an employee of the instructor’s firm inputs the necessary information into Quickbooks. This employee also reconciles the client’s business checking account. In January the employee prints out a profit and loss report for the business from Quickbooks. The instructor “imports” this P+L to her tax preparation software and the software spits out the 1040 and Schedules C and SE.

In this scenario who is a tax preparer – the instructor, the employee, or both.

If you ask me the answer is neither - the return was prepared by the software!

The text explained that included in the definition of a tax preparer is –

“A non-signing tax return preparer who renders advice (written or oral) to a taxpayer (or to another tax return preparer) on a position that is directly relevant to the determination of the existence, characterization, or amount of an entry on a return that constitutes a substantial portion of the return." And -

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"A person who furnishes to a taxpayer, or another preparer, sufficient information and advice so that completion of the return is largely a mechanical or clerical matter.”

Let us also look as some “scenarios” from the IRS FAQ page on the subject -

“* I am a tax return preparer, and I have a PTIN. My firm employs a bookkeeper. She gathers client receipts and invoices, and organizes and records all information for me. Although I use the information that our bookkeeper has compiled, I prepare my clients’ tax returns and make all substantive determinations that go into computing the tax liability. Does my bookkeeper need to have a PTIN? (posted 9/28/10)

No, she is not a tax return preparer, and is not required to have a PTIN.

* I am a tax return preparer, and I have a PTIN. Every tax filing season I hire two paid interns from the accounting program at a local college to help me during the busy season. The interns perform data entry from the tax organizer that my clients fill out, and assemble the documentation that the clients have submitted. Where clients have submitted incomplete information, or more information is needed, the interns may call clients to gather information missing from the tax organizer, but they are not allowed to provide advice or answer tax law questions. I prepare and sign all my clients’ returns. Do my interns need to have a PTIN? (posted 9/28/10)

No, the interns are not tax return preparers, and are not required to have a PTIN.

* I am a tax return preparer, and I have a PTIN. I have an administrative assistant in the office who also performs data entry during tax filing season. At times, clients call and provide him with information, which he records in the system. Using the data he has entered, I meet with my clients and provide advice as needed. I then prepare and sign their returns. Is my administrative assistant required to have a PTIN? (posted 9/28/10)

No, the administrative assistant is not a tax return preparer, and is not required to have a PTIN.”

I am sure that there is more to the scenario in question than the instructor presented. I expect that the instructor reviews the P+L statement before importing it, and makes any adjustments for items such as Section 179 expensing, discussing the report with the client if she has any questions. I also expect that she determines the amount of contribution that the client could make to a SEP self-employed retirement plan and discusses this with him. And she would also ask him for the amount of health insurance premiums he paid for himself and his family, and other questions to see if there are any additional items to report or deduct. And I am sure she at least double-checks the return that is “spit out”.

In any case it is my belief that simply preparing an internal financial statement does not constitute preparing a “substantial” portion of the tax return – and therefore the employee of the instructor’s firm that does the Quickbooks input is not a tax preparer.

An internal financial statement, such as the P+L discussed above, whether prepared by the client or by an employee of the preparer, is merely a piece of documentation that is used by a tax pro to prepare the return. It is the same as a Form W-2, 1099, or K-1. It is the same as if the client simply provided a handwritten sheet of paper with his business income and expenses for the year – only a more formal presentation.

The P+L is not the Schedule C – several adjustments may need to be made in transferring the information from the P+L to the Schedule C – and being able to generate a P+L from a GL software package does not mean one knows how to prepare a Schedule C. So in this case the instructor, who actually “prepares” and signs the return, is the only tax preparer.

What do you think?

TTFN