SOME MORE STUFF TO THINK ABOUT

A while ago I brought up as a topic for discussion doing away with the tax deduction for depreciation of real property. See my post “Here is Something to Think About”.

Generally, real estate appreciates in value over the years, so the depreciation deduction distorts the economic reality of a rental or business activity. And, as depreciation must be recaptured on the sale of the property, at a potentially much higher capital gain tax rate, the taxpayer really does not get much overall tax benefit from the deduction. The recapture of depreciation, a legitimate practice under the current tax law, only causes confusion and aggravation for many taxpayers and increased “agita” for tax preparers.

I would like to offer up for discussion some other suggestions for changes to the current Tax Code to make it simpler, fairer, and more representative of economic reality.

* The double-taxation of corporate dividends has been an inequity in the Tax Code that has been around it seems forever.

As you know, corporations are taxed by the federal and state governments on their net earnings before any dividend distributions. When the corporation distributes its earnings to shareholders in the form of dividends, the shareholders must pay tax on these dividends to their "uncles" (Sam and Jon, for example).

Corporate earnings distributed as dividends are taxed by Sam at up to 50% (35% top corporate tax rate plus 15% maximum individual tax rate on “qualified” dividends) or more (if the dividends do not qualify for the lower rate due to the shareholder’s holding period). Plus corporate income and dividends received are also taxed at the applicable state tax rate. In New Jersey the corporate tax rate is 9.36% (with the 4% “surcharge”) and individual dividend recipients could be taxed at up to 8.97% - so we are talking a total of 68.33% or more of dividend income going to your “uncles”! NJ has a special problem - even if the corporate net taxable income is "0" NJ corporations must pay a "minimum tax" of from $500 to $2,000.

I would propose that corporations be allowed a “dividend distribution” deduction of up to the amount of net taxable income. So if a corporation distributed all of its net income for the year to its shareholders as dividends it would pay no federal income tax.

This move would not only do away with the unfair double taxation of dividends, but would also help to do away with most corporate tax fraud, offshore shelters, and special interest tax loopholes. To avoid paying federal income tax a corporation would no longer have to resort to Enron-like scams or pay Congress-persons, or lobbyists to pressure Congress-persons, to pass special corporate tax loopholes. All they would have to do is distribute their earnings to their shareholders as dividends.

Not having to pay federal income tax could lead to increased corporate dividend distributions. Without the double-taxation of dividends, Congress could repeal the special capital gain rates on qualified dividends, unless they wanted to continue to encourage investment by taxing dividends at preferential tax rates.

* The “marriage penalty tax” was a popular topic a few years ago. While the Bush tax cuts did away with this penalty to a degree for those in the lower brackets, this penalty is still alive and well in the federal Tax Code.

To truly do away with the marriage penalty I would suggest changing the “Married Filing Separately” filing status to be totally equivalent to that of “Single”. By filing separately, a married couple, regardless of level or income or individual situation, would pay the absolute same federal income tax that they would if they were both single.

If memory serves me, early in my career New York State allowed its married taxpayers to file as if they were two single individuals on the same state tax return. I would rewrite the federal Form 1040, and 1040A, to allow this as well.

To do this the Tax Code would need to be rewritten to remove all the disadvantages of filing separately and make the Tax Rate Schedule for Married Filing Separately the same as that for Single. Currently if you file a separate tax return –

· You cannot claim the Credit for Adoption Expenses, the Credit for Child and Dependent Care Expenses, the Earned Income Credit, the Credit for the Elderly or Disabled, or the HOPE or Lifetime Learning Education Credit.

· You cannot claim an Adjustment to Income for tuition and fees, student loan interest, or a spousal IRA.

· You will probably be ineligible for a ROTH IRA or a deductible IRA if an active participant in an employer pension plan.

· You will not be able to exclude from income savings bond interest used for qualified educational expenses.

· A greater amount of your Social Security benefits may be taxed.

· The maximum net loss deduction is limited to $1,500 for each spouse.

· You will not be able to deduct a loss on rental property.

· One spouse’s passive loss cannot be used to reduce or wipe out the other spouse’s passive income.

· You will not be able to convert a traditional IRA to a ROTH IRA.

I would also look at ways of reducing the “marriage tax benefit” for families with only one earner. Taxpayers should not be penalized, or excessively rewarded, for being married.

* The above two proposals are the most controversial. I would also favor making all legal and contingency fees relating to court and legal awards and settlements deductible “above-the-line” as an “adjustment to income” – not just those relating to discrimination suits. Recipients should only be taxed on the amount they actually receive “in hand”. Having to deduct the related legal fees as a miscellaneous itemized deduction subject to the 2% of AMT exclusion is definitely unfair.

And I would like to see gambling losses allowed as an “above-the-line” deduction, to the extent of winnings as is currently permitted. This would fix the current inequity that has individuals who actually lost money from gambling activities for the year paying tax on their gross earnings. It is true that losses are deductible, to the extent of winnings, as a miscellaneous itemized deduction not subject to the 2% of AGI exclusion, but one needs to be able to itemize without counting the gambling losses to be able to fully benefit, plus the current method increases AGI and as a result unfairly penalizes taxpayers elsewhere on the return

So Kay, Kelly, Gina, Trish, Dan, Joe, Jim, Kerry, Paul, Ryan, and everyone else out there – what do you think? BTW, I am still waiting for your comments on my real estate depreciation idea!

TTFN

AMT UPDATE – WHERE THE FAKAWI?

CCH reports that –

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“House Ways and Means Committee Chairman Charles B. Rangel, D-N.Y., succeeded in his promised effort to pass an alternative minimum tax (AMT) relief bill on December 12, but the new measure contains more than $50 billion in revenue increases that critics believe are unlikely to win support in the Senate. Rangel said that he introduced the AMT Relief Bill of 2007 (HR 4351) in hopes that GOP lawmakers would agree to pay for a one-year AMT patch, rather than forcing the federal government to borrow money to offset the cost. The bill passed the House on a party-line vote of 226 to 193.”

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The bill would extend AMT relief for nonrefundable personal credits and increase the AMT exemption amount to $66,250 for joint filers and $44,350 for individuals, provide relief for AMT taxpayers who have exercised incentive stock options, and make changes to the refundable AMT credit. It also includes a provision to increase the eligibility of the refundable child tax credit.

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Accountingweb.com reports –

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“Chairman Rangel’s legislation removes provisions that would tax carried interest of private equity managers at ordinary income rates instead of the current capital gain tax rates, but would retain the provision to close a tax loophole that allows hedge fund managers to defer taxes by sheltering their pay in offshore tax havens”.

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According to Ways and Means ranking Republican Jim McCrery, the Rangel bill will not survive a Senate vote. "We've been down this road before," McCrery said. Eventually House Democrats would be forced to accept an offset-free AMT bill. "Until that happens, considering AMT legislation with unnecessary tax increases does nothing-nothing except contribute to chaos in our tax filing season and delay tax returns for tens of millions of taxpayers," he said.

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The White House is standing firm in its promise to veto an AMT tax fix package that is paid for by raising taxes elsewhere.

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The longer this farce continues the longer the processing of tax refunds will be delayed!

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I will continue to keep you posted on developments.

DID YOU DONATE A CAR TO CHARITY IN 2007?

Did you donate a car to charity in 2007?

Did you receive a Form 1098-C, including a COPY B, from the charity?

In order to claim a deduction on your 2007 Schedule A of more than $500.00 for donating a motor vehicle (car, motorcycle, boat, or airplane) to charity, you must attach to your Form 8283 Copy B of IRS Form 1098-C!

The Form 1098-C will include the name and Taxpayer Identification Number of the charity, the vehicle identification number of the auto, and the date of contribution. Form 1098-C must be given to you within 30 days of either the date of the contribution or the date of the disposition of the vehicle (i.e. sale) by the charity. The Form 1098-C will also include additional information depending on what the charity does with the donated car, and this information will determine what you are allowed to deduct.

If you have not yet received a COPY B of Form 1098-C, from the charity give them a call and ask when they will be mailing it to you. It is possible that the car you donated has not yet been sold, especially if donated late in the year, so all the necessary information is not yet available.

If you have received a Form 1098-C, but it does not include a copy identified as COPY B (you are sent a COPY A and/or COPY C, but no COPY B), call the charity and tell them that you need them to send you a COPY B.

I recommend being a pest, and continuing to call the charity and bother them until you get a COPY B of Form 1098-C in your hand.

The charity can give you a statement in lieu of a Form 1098-C as long as it contains all the necessary information – the same information that would be included on a 1098-C – a copy of which can be attached to your 2007 tax return instead of the 1098-C. However, as a preparer I would much prefer to attach an actual COPY B of a Form 1098-C to the return instead of a statement – just to be safe.

I know that “Sam” has been inflexible in the past regarding attaching the requested COPY B of a Form W-2 to the tax return. So I expect that “he” will be just as inflexible with the requirement for attaching COPY B of the Form 1098-C, even though a COPY A, C or D will have the exact same information.

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Your 2007 return will be held up long enough already with the Congressional AMT FU - you don’t want to give the IRS a reason to hold up sending out your refund any more!

Any questions?

BTW, I have written a special report on DEDUCTING CONTRIBUTIONS: ALMOST EVERYTHING YOU ALWAYS WANTED TO KNOW ABOUT DEDUCTING CONTRIBUTIONS ON YOUR 2007 TAX RETURN. Click here for more information.

TTFN

ASK THE TAX PRO - LET’S BE REASONABLE!

Q. I will be moving to the NY area and have a question about taxes.

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I will be working from home making approximately $90,000 per year. My husband will be working in NYC making approximately $70,000 per year with a $50,000 bonus. We have one child, plan to buy a $500,000 house and both plan to contribute about $8,000 per year to 401Ks.

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So the question is - if we choose to live in NJ instead of upper NY approximately how much more will we have to pay every year in taxes?

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A. How should I know?

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For one thing, I would need to know more specific information about your income and expenses. I have no intention of working up estimated tax returns to answer a free online question. My time is valuable. And I am not looking for new clients!

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State income taxes are not the only factor to consider in this situation. You must also look at the real estate taxes for the NJ and NY communities you are considering.

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To find out the comparative state income tax costs, provide your tax professional with detailed information on your anticipated income and expenses for the year and pay him/her to do separate estimated tax return calculations.

The questions I will answer in the weekly ASK THE TAX PRO feature are basically about general federal and NJ state issues, and how they might apply to the specific situation of the person posing the question. I attempt to provide as detailed an answer as I can given the information provided in the question.

I currently do not charge for answering such a tax question here. I do it as a “public service” for the readers of THE WANDERING TAX PRO, many of whom are my own 1040 clients who may benefit from the answer.

I am being totally honest when I say that I am not looking for any more tax clients – and I do not ask for tax questions as a way of soliciting new business.

So please be reasonable when submitting your question for consideration. Do not ask me specific questions that require detailed calculations – legitimate questions, but ones that you should be paying your tax professional to properly answer.

And while I have your attention – I receive many email ASK THE TAX PRO questions. If I choose to answer your question I will do it here in a weekly ASK THE TAX PRO posting. I will not provide you with an immediate answer by return email (unless, of course, you are an existing 1040 client, in which case it is not really an ASK THE TAX PRO question), nor will I send you an acknowledgement that your question has been received. If I do answer your question here I will send you an email on the morning of the Wednesday that the answer is posted.

So be patient - and do not send repeat emails with the same question when you do not hear from me right away. If you need an immediate answer to a tax question – ask your tax pro.

TTFN

NEW YORK STATE TAX UPDATE

As promised, here is what is new for New York State and New York City income taxes for 2007:

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1. The NYC school tax credit has been increased for part-year and full-year residents with a federal AGI of $250,000 or less. The full-year credit for 2007 is $290.00 for Married Filing Joint or Qualifying Widow(er) and $145.00 for all other filing categories.

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2. There is a new “refundable” credit for the child care expenses for children under age 4 paid by full-year or part-year NYC residents with federal AGI of $30,000 or less. The new credit is in addition to the NY State Child and Dependent Care Credit. The credit is claimed on Form IT-216 Claim for Child and Dependent Care Credit.

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3. There is a new subtraction from federal AGI for full-year NY State residents who, while living, donate an organ to another person for human organ transplantation. The subtraction applies to related unreimbursed expenses, including travel, lodging and lost wages, up to a maximum of $10,000.

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4. A new “refundable” credit of $200.00 is available to full-year NY State residents who are active volunteer firefighters or volunteer ambulance workers for the entire year. The credit is claimed on Form IT-245 Claim for Volunteer Firefighters’ and Ambulance Workers” Credit.

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5. A new credit is available for the qualified production costs paid or incurred by qualified commercial production companies or sole proprietors operating a qualified commercial production company. The credit is claimed on Form IT-246 Claim for Empire State Commercial Production Credit.

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6. The Solar Energy System Equipment Credit has been expanded, and there are new credits for the rehabilitation of certain historic homes and properties.

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Click below to view and/or download the 2007 NYS returns and instructions:

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IT-201

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IT-201 Instructions

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IT-203

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IT-203 Instructions
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I held off this posting for a day to see if the 2007 NJ-1040 and related forms and schedules would be available on the NJ Division of Taxation website – but no word yet. I will let you know when they do become available.
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BTW, when you get a chance check out the first “Cabaret of Common Sense Advice” over at ANYTHING BUT TAXES.
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TTFN

ON THE BOARDWALK IN ATLANTIC CITY

As mentioned, I traveled to Atlantic City last Thursday and Friday to attend the National Society of Tax Professionals’ day-long year-end tax update seminar on Friday. As with the similar earlier National Association of Tax Professionals’ “Famous 1040 Workshop” it was nothing more than a review of what I already knew. There was nothing new.

One of the advantages of writing a tax blog and maintaining an up-to-date website is that I learn of new federal tax legislation and developments as they occur, so that the annual year-end seminars I used to look forward to have become redundant and really not worth the expense.

Unless substantial tax legislation is passed in the fall of 2008 I think I will skip the updates next year. I certainly will not return to Atlantic City, especially if the seminar is again at Resorts. I do not gamble – this year I did not even throw away my usual $20.00 or $40.00 in quarters in the slots – so that is not a consideration. The timing is bad, and there is nothing to do or see in AC. Plus it is too cold. While last year’s stay at the Tropicana was worthwhile due to the multiple shopping and dining choices, Resorts had limited, more expensive options.

One of the comments by the seminar leader, with which I agree, is that, as a result of the new strict documentation requirements for deducting cash contributions, we preparers should expect to see lots of “correspondence audits” (written requests from the IRS for copies of back-up) regarding charitable contributions claimed on 2007 Schedule As later next year. Consider this a warning.

Another thing was pointed out at the NSTP seminar. While, as previously posted, my tax filing season will not be affected by the irresponsibility of the Congressional cafones, I can see why that of most other preparers will be delayed and most will become backed up. I prepare all my federal returns by hand – always have and, as it now stands, probably always will. I do not use tax preparation software (when asked what software I use I point to my brain). Just as it will take the IRS 7 to 10 weeks to rewrite its software programs once the AMT fix is finally signed into law by George W, the various tax preparation software providers will also face similar delays in getting corrected updates to their clients.

The IRS has determined that there are at least 15 forms, 6 publications, and 9 credits that are affected by the AMT. Click here for a listing. The IRS Oversight Board has developed an report on the “Impact of Late AMT Legislative Changes on 2008 Filing Season” that outlines the seriousness of the problem.

Speaking of the cafones in Washington, as mentioned in my WHAT’S THE BUZZ posting, it appears that the Senate has passed a hastily written one-year AMT fix while I was in AC. As I understand it, the bill that was passed did not include any of the extensions of popular tax breaks that were in the House version. The Senate bill also does not provide any tax increases or loophole closures to pay for the AMT fix.

The worst is not over yet. The Democrats in the House want to pay for the fix, so that the bill is “revenue neutral”, while House Republicans, and George W as well, do not want any of the “offsets” the Democrats have proposed. There will be a battle, with posturing on both sides. However, I do think chances are that the Senate version will finally sneak by in the House at the last minute, if for no other reason than expediency and public, and IRS, pressure.

So Congress will pass a hastily written quick fix so it can adjourn for the year with the immediate problem taken care of. It will have to deal with the “extenders” again at some time next year, hopefully at the same time that it finally kills the dreaded AMT. For all of our sakes let this happen early in the year and not next December!

What idiots!

By the way, my blog has topped the 25,000 hit mark (and 37,500 page view mark) since I moved back to Blogger,com last December 1st.

TTFN

WHAT’S THE BUZZ – TELL ME WHAT’S A HAPPENNIN’ - AGAIN

Here are a few items that didn’t quite make it into yesterday’s WHAT’S THE BUZZ posting:

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* The NATP TAXPRO Weekly email newsletter reports that “The IRS has issued a list of Qualified Alternative Fuel Motor Vehicles (QAFMV) and Qualified Heavy Hybrid vehicles. QAFMVs, which are vehicles powered by alternative fuels or a combination of an alternative fuel and a petroleum based fuel, can have an allowable credit of up to $32,000. Qualified heavy hybrid vehicles, which are hybrid vehicles with a gross vehicle weight rating of over 8,500 pounds, can have an allowable credit of up to $12,000. The list is posted on the IRS website.”

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* Andrew Strelka of American University has created a new website TAXING LIFE INSURANCE as a launching pad for legal research on the taxation of life insurance contracts, intended for use by individual policyholders. It contains detailed information on Internal Revenue Code Sections, Treasury Regulations, Letter Rulings, Revenue Rulings, Federal Case Law, Articles, and links to related websites.

* The 2007 New York State income tax forms are now available online at the Department of Taxation and Finance website. There does not appear to be any substantial change to the format of the IT-201 or IT-203. I will review the forms and instructions more carefully later today and provide information on changes in Monday’s post.

TTFN

WHAT’S THE BUZZ – TELL ME WHAT’S A HAPPENNIN’

* While I was in Atlantic City the Senate finally approved a one-year AMT fix without offsets by a vote of 88-5, but not until after Senate Republicans rejected a House version (HR 3996) that was laden with tax loophole closers as a means of offsetting the cost. It will face opposition in the House, as many Democrats was to offset the cost of the AMT patch. The bill does not include any other extenders.

A note to Len Berman who wrote in the Tax Policy Center TAXVOX blog, “Another tax cut for the rich. More than 85 percent of the benefit will go to those earning over $100,000” – in New Jersey a family earning gross wages of $100,000 is not considered rich!

* The internet’s BAG LADY offers an interesting comment on the dreaded AMT in her post “Is Anyone Else Confused and Annoyed by the Alternative Minimum Tax?!” -

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“If the alternative minimum tax never gets indexed for inflation, eventually everyone will qualify, and it will no longer be ‘alternative’ and nobody can say that it’s a tax for the rich because everyone will be paying it. Then the IRS can just print one form again and completely abolish the original tax system!”

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* Roni Deutch’s TAX HELP BLOG provides the “Tax Views of Top 10 Presidential Candidates”. Her post is especially helpful as it also lists the tax-related voting record of those candidates who currently serve/have served in Congress.

* Trish McIntire of OUR TAXING TIMES reminds us that you get what you pay for in her post on “Using a Volunteer Preparer”. Trish points out “According to the Kiplinger Tax Letter, Treasury Inspectors found errors in 56% of the volunteer returns they examined. While the survey was small, the errors found in the several thousand returns they audited have convinced the IRS to expand their review.”

TTFN

ASK THE TAX PRO – SHOULD I WORK IN NY OR NJ

Q. My husband just started a new job in NYC. We live in NJ. The company gave him $5000 additional in salary to be based out of the NY office rather than NJ. If we were to be based out of NJ they would reduce his salary by that amount. What is the best way for us to figure out if it is worth the additional money or should he simply request to be based out of the NJ office and give up the $5000.”

A. Your first step is to go to your tax professional and provide more detailed information on anticipated salaries, income and deductions for the year so that the tax pro can prepare two separate sets of estimated tax returns and provide a comparison.

I must point out -

(1) It is not necessarily where your husband’s office is located but where he actually does his work that determines “nexus” or non-resident state tax liability. If you husband is “based” out of the NJ office, but spends his time visiting or selling products to clients located in NYC, and/or spends time physically working in the NYC office, say 1 or 2 days a week, he could be subject to New York state non-resident income tax on at least some of his wages.

(2) State income tax is not the only cost to consider in this case. What about the commuting costs? Will your husband be able commute to the NJ office via a short drive, but need to take public transportation to get to NYC each day (i.e. train, bus, subway)?

(3) As a general rule, just about everything is more expensive in NYC than in NJ (although NJ is not cheap). This includes meals. Unless he “brown bags” it every day, working in NYC will add to his daily lunch bill.

(4) There are also things to consider that do not involve out-of-pocket expenses:

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* Will working in NYC add a half-hour or more each way to his commute? We had a client who lived in Lincroft NJ (Exit 109 on the GSP) but worked on Wall Street. His door-to-door work day ended up being almost 12 hours!

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* Will working in NYC provide greater exposure and perhaps a better chance for advancement up the ladder?

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* Does he work better with the employees of, or does the work atmosphere provide less stress or “agita” at, the NJ location?

I hope I have been of help.

FYI, I will be off to Atlantic City Thursday and Friday to attend the year-end tax update seminar of the National Society of Tax Professionals, retuning to Resorts after a long absence. So there will be no posts until my WHAT’S THE BUZZ installment on Saturday. I will be sure to report on any new developments and other items of interest from the seminar next week.

TTFN

WHY DO I BLOG YOU – WHY DO YOU BLOG ME?

I have been blogging now as THE WANDERING TAX PRO since July 22, 2001. I first decided to write a blog to provide year-round advice and information to my existing clients and to promote my tax preparation and accounting services. Back then I was still soliciting new clients. Currently I do not solicit or accept any new 1040 clients, nor do I accept any corporate or partnership clients.

I continue to blog to provide a source of updated federal and state tax information for my 1040 clients, to attempt to market my various special reports and newsletters (to be honest, without much success), to provide easily accessible samples of my writing for potential publishers, and, quite frankly, because I just enjoy it. Now that I am no longer looking for new clients I frequently receive emails from individuals who have visited THE WANDERING TAX PRO inquiring about my services.

I recently wrote an article, with the NATP quarterly TAX JOURNAL in mind, on writing a tax blog. I asked some of my fellow tax bloggers for their observations and comments on why they blog and how it has helped their business.

Gina L Gwozdz of Texas, a CPA who writes GINA'S TAX ARTICLES, told me-

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“I started and continue to blog for the following reasons:

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* To gain new clients.

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* So my current and prospective clients know that I'm capable of having a conversation with them that they will understand.

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* So my current and prospective clients know that I do keep up with the current tax law changes.

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* I want to make the Internet a better place. As a parent I constantly hear about all the dangers of the Internet and how I need to protect my daughter. Well, the Internet isn't all bad – I'm trying to grow the good part.

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* It keeps me in touch with what my prospective clients want to know – what their most pressing concerns are – as far as taxes anyway.”

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When I asked her if the blog has helped her tax practice she replied, “An unbelievable YES! In one year of blogging I increased my client base by over 300%.”

Trish McIntire, an Enrolled Agent from Kansas who writes the blog OUR TAXING TIMES, started her blog in 2004. “Besides my tax practice I was doing a little bit of web design and took a class in blogging for that. I found that I liked blogging. It gave me a way to express my opinions on taxes, the tax business and owning a business. I have always seen my audience as small business owners and taxpayers like myself.

OUR TAXING TIMES has evolved since I started. I am more interested in writing about the business of preparing taxes and my take on laws and the tax business. I don't see OTT as a mission to educate or build a business. It is my chance to express my opinion.”

Has it helped build or expand her practice? “I don't know. No one has come in saying that reading my blog was the reason they brought me their business. However, more people are using the internet to check out services and people. OUR TAXING TIMES, and my website, give potential clients the chance to learn about me and my business.”

Joe Kristan is a CPA with Roth and Company, PC of Des Moines, Iowa. He writes the firm’s TAX UPDATE BLOG. According to Joe - “I blog because I enjoy it, and because I think it is good for me professionally. I have long started my day reading the tax news, so it wasn't a big leap to start commenting about it. I think it helps keep me sharp, and it helps me stay current on the ideas and issues out there. And, of course, there's the glamour, fan adulation and women. Well, ok, none of those things, but there should be..”

Amen to that, Joe!

The TAX INFO BLOG of Enrolled Agent Ryan Ellis of Virginia, the blogger formerly known as Tax Playa, was started “largely because I wanted to create a central repository of plain-English tax topics on the internet. I spent the first year or so of blogging building that database, and now spend most of my blogging answering more specific questions.”

Ryan feels that his blog has certainly helped his part-time tax practice. “Many people find me from my blog.”

Kelly Phillips Erb, the TAX GIRL, is a lawyer who deals with tax planning and compliance issues. She started her blog “because I am that much of a tax geek. I just wanted to write about tax. I also wanted to make it accessible to people who think tax is boring - that's simply not true. Tax is fascinating and it touches everything.”

Right on, Kelly!

I found two comments from by colleagues particularly interesting. TAX GIRL Kelly Phillips Erb told me that her blog has “increased my profile among other tax professionals, which I've found invaluable”. And Trish McIntire commented, “I have a one person office in a small Kansas town, but through the blog I can be heard across the country.”

My experience echoes that of the girls. As a result of my exposure on the internet via THE WANDERING TAX PRO and THE NJ TAX PRACTICE BLOG I have received posting comments and email questions and requests for help or consultation from CPAs, of all people, and other tax pros both in the US and abroad, and from the leaders in specific areas of tax specialization. I have also received offers of speaking engagements as an “expert” on federal or New Jersey taxes!

You cannot begin to understand the thrill I get from having CPAs come to me for advice!

In most cases I am happy to help, though, as I am a better writer than speaker, I have turned down the speaking engagements.

So, unlike poor Rodney Dangerfield, I am finally getting some respect.

TTFN

THIS JUST IN!

* Kay Bell has posted “Tax Carnival #25: Merry Taxes 2007!” over at DON’T MESS WITH TAXES. Kay wants to “make sure you get the best present of all -- a lower 2007 tax bill”. Hopefully by following the advice of the posts in this Carnival “you might even be able to save enough to pay off your post-Christmas credit card bills!” The Carnival includes my post on “My Best Tax Advice”.

* My posting “In Never Never Land” from ANYTHING BUT TAXES is included in the "Everything Else Finance" section of “Carnival of Everything Finance #8 - Investment Education Edition” compiled by Blain Reinkensmeyer at STOCK TRADING TO GO. The Carnival covers investing tips, tricks, picks, and education from market professionals and also includes 10 great ways to learn investing in the stock market. The Carnival contains lots of interesting posts. Check it out!

* Congress is back today for a short 3-week session before adjourning for the year. The Democrats assure us that the dreaded AMT will be dealt with during this time.

The Tax Foundation’s TAX POLICY BLOG quotes “CongressDaily AM” as reporting:

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“Majority Leader Reid and Minority Leader McConnell will likely reprise talks toward reaching a consent agreement that would limit amendments and allow debate on a substitute that patches the AMT for one year, and extend for two years a range of expiring business tax provisions.

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House Democrats are still insisting on fully offsetting the AMT patch, though their Senate counterparts have basically conceded that pay-as-you-go requirements will have to be waived for the AMT portion.”

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* The National Association of Tax Professionals “Tax Tip of the Week” reports:

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“With the end of the year fast approaching, your clients with IRAs may be receiving notices or statements from the account trustees regarding fees on the account. These fees can be paid directly from the IRA assets or by the IRA owner from personal funds. The deductibility of these fees for income tax purposes depends on which method is used to pay the fees.

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If billed separately and paid by the individual, the fee is deductible by the individual as a miscellaneous itemized deduction (subject to the 2% of AGI limit) on Schedule A. If the fees are paid out the IRA assets, the fees may not be deducted by the taxpayer.”

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Two comments –

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(1) It is very important to remember that (a) if you cannot itemize or (b) if you can itemize, but your total miscellaneous job and investment related expenses will not exceed 2% of your Adjusted Gross Income (AGI) you will receive no tax benefit from paying your IRA management fees separately.

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(2) By paying your IRA fees separately with “current” funds (i.e. your checking account) and not having the charge automatically withdrawn from the funds in your IRA account you will increase the amount of money that will accrue in your IRA and be available at retirement. This is especially good if you have a ROTH IRA, as the accrual is totally tax-free.

THOSE DAMNED FOOL POLITICIANS!

The title of a recent post at colleague Trish McIntire’s OUR TAXING TIMES blog was “Tax Season Delayed?”.

In my situation I do not see the beginning of the upcoming tax filing season as being delayed. I am not one of the “return preparers who depend on income coming in during January” that Trish mentions. For me the tax season officially begins on February 1st – and this season will be no different. I will not prepare a tax return in January unless I, not the client, absolutely, positively, beyond any doubt believe that all the necessary information has been received by the client.

I have seen too many cases over the years where a taxpayer mails his finished return to “Sam” in late January or on February 1st or 2nd, only to receive an additional Form 1099 or W-2 on February 3rd.

What will happen this tax season is that taxpayers requesting a refund will have to wait much longer than usual, or what should be necessary, to get their check. And the fault lies not with the IRS but with the cafones in Congress. This is because they have failed to enact an AMT fix that, in theory at least, both parties, and George W as well, are wholeheartedly in favor of. While a fix has passed the House nothing will be done in the Senate until next year!

The IRS estimates that it will take 7 to 10 weeks after the law is finally passed to make the appropriate corrections to their computer system. Because the dreaded AMT could affect so many 1040s, the Service is considering pushing back the date that it will begin to process returns, currently scheduled for January 14th.

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An AP article reports that Richard Spires, the deputy IRS commissioner for operations support, said in an interview that the agency is considering not processing any early returns if the AMT issue is not resolved soon. The IRS Oversight Board, an independent advisory group, predicts that if the delay extends into mid-February it would slow nearly 38 million refunds worth a total of about $87 billion.

I anticipate that if the Congress is going to act they will do so by February 1st - so I will know what is what when I begin my 2007 Form 1040s, and should not have to hold off preparing returns that could fall victim to the dreaded AMT.

Last year Congress waited until the last minute to extend some popular tax breaks, which caused delays in processing the returns of taxpayers who claimed such breaks - but this year's delay will affect all returns.

Whatever you do – do not use this as an excuse to put off getting your 2007 tax “stuff” to your tax professional! The longer you wait to turn over your information to your preparer, the more backed up he/she will become. This will only add to the IRS delays and it will be even longer before you finally get any refund check to which you are entitled.

To add insult to injury, Trish reports, “$1 million- that is what I heard was the cost of last year's delay. This year's delay will cost the IRS at least that, if not more.” I would expect much more.

Another downside of the delay in processing refunds is that it gives H+R Block and others of that ilk an added opportunity to push Refund Anticipation Loans (RALs) on low income taxpayers – happily filling their coffers by taking advantage of those who can least afford these usurious arrangements.

I would like each and every taxpayer to write a letter to their Congress-persons and complain about their irresponsible behavior in this situation. I will be posting a copy of my letter here shortly.

BTW, you can find out what has been keeping me from finishing my tax work in today’s posting at ANYTHING BUT TAXES!

And finally, thanks and a tip of the hat to the internet’s TAX GURU for introducing me the above political cartoon.

TTFN

WHAT’S THE BUZZ – TELL ME WHAT’S A HAPPENNIN’

* Republican Presidential candidate Fred Thompson, of LAW AND ORDER FAME, has announced his tax plan.

Thompson would repeal the estate tax, repeal the alternative minimum tax, lower corporate rates considerably, permanently extend all the Bush tax cuts, permanent extend more expensing for businesses, and adjust depreciation schedules (presumably providing even more upfront deduction for long-term assets) for the “regular” tax and offer an optional alternative flat tax system.

It appears that Thompson is talking about the Taxpayer Choice Act that I talked about in my posting “Verrrry Interesting….” back in October.

As I said in my original posting on the proposal, why should taxpayers have a choice of tax “systems”? Why not just make the new flat system apply to everyone?

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* Kelly Phillips Erb, the TAX GIRL, agrees with me that the federal government should institute a Tax Amnesty program, similar to those successfully run by the states for years now, to collect back taxes in her posting “Does Amnesty Make Sense?” See my various comments to the post.

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* Oi vey! Kay Bell of DON’T MESS WITH TAXES reports that Mark Everson, who quit as Commissioner of the Internal Revenue Service to become President of the American Red Cross, was fired by the Red Cross because “he had engaged in a "personal relationship" with a subordinate employee”. Click here to read an article on the subject. KPE at TAX GIRL also discusses the issue.

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* The 20-something grad student who writes the blog INTERESTING MONEY provides some help for “Opening a Roth IRA on a Budget”. While someone just starting out in the workplace can contribute up to $5,000.00 for 2007 and $6,000.00 for 2008, many such individuals cannot afford to set aside such a large chunk of their take-home pay. The important thing is to get into the habit of making an annual contribution. Depositing $500.00 or less for the first few years is a great idea, with annual contributions increasing as your income goes up. Even if you only contribute $500.00 each year to a ROTH IRA you will generate a substantial tax-free retirement nest-egg, as long as you start young and make the contribution each and every year. Lower-income taxpayers may be able to have “Uncle Sam” finance 10% to 50% of their IRA contribution via the Retirement Savings Contributions Credit.

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* CNN discusses both Democratic and Republican Presidential candidates' views on Social Security reform in its article “The 3rd rail: Candidates take on Social Security”.

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* Kathy Howell, author of the TAX Q+A blog at OregonLive.com, answers a question that we tax professionals are often asked – “Can My Fiances Claim Me On His Tax Return?”. Actually, the question is generally asked as “Can I claim my girl friend?”. In the case of the person asking the question, the fiancé would not be able to claim her as a dependent because her earnings, $8,000, is more than the $3,400 limitation. This limitation is based on the personal exemption amount, which is $3,400 for tax year 2007.
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TTFN

ENTER MY ONLINE CONTEST!

Hey youse guys - I have posted a contest over at my other blog ANYTHING BUT TAXES.

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Check it out!

A TAX TIP FOR RETIREES

Here’s a tax tip for retirees:

Many employers offer an Employee Stock Ownership Plan (ESOP), or allow employees to invest in company stock through their 401(k) or other qualified retirement plan.

Upon retirement or termination of employment you often have the option to rollover the balance in your former employer’s pension plan, including the stock, into an IRA. If your retirement plan contains appreciated employer stock you should not rollover the stock in the plan to an IRA.

Instead you should request that the shares of company stock be distributed to you. You will be taxed on your “basis” in the stock, which will generally be your contributions to purchase the stock over the years, in the year you receive the shares. You will not be taxed on the full market value of the stock.

The difference between your basis (the tax cost) and the market value of the stock is the “net unrealized appreciation” (NUA). This will not be taxed until you sell the stock. When you sell the stock the gain, including the NUA on the shares received, will be taxed at the long-term capital gains rate.

You do not have to hold on to the stock for a period of time, for example a year after the date of withdrawal. You can sell the stock right away. The shares are automatically considered to be long-term. You also can hold on to the stock as long as you want – perhaps selling off blocks of shares as money is needed or over a period of years to spread out the tax cost.

If the stock had been rolled-over into an IRA, when you withdrew money from the rollover IRA it would be fully taxed at ordinary income rates – you would lose the capital gain treatment on the NUA.

Of course if you withdraw the shares before your reach age 59½ (or possibly age 55) you will be subject to the 10% premature withdrawal penalty on the basis of the stock withdrawn.

TTFN

IT DEPENDS

You know, the answer to just about any tax question that begins with “can I deduct” is “it depends”. And I do mean just about any question.

Can I deduct my cat? The obvious answer is a definite no (and certainly not as a “dependent”). But what about the owner of the cat who plays Morris in the tv commercials. The cat is what generates the income of his owner. And did you know you could deduct the cost of moving the family pet to a new home, if the move itself is deductible (I think I mentioned this in an earlier post).

Similarly, can I deduct cat food? Again one would expect the definitive answer to be no, except for Morris above. But a business deduction has been allowed for a scrap yard owner who used the food to attract wild cats who would chase away mice and snakes from the yard (Samuel T. Seawright, Et Ux., (2001) 117 TC No. 24).

Almost all “can I deduct” questions – such as can I deduct my cell phone or my car or my answering machine – requires that I ask the question, “Do you use it for business?” But not all.

Can I deduct commuting? The usual answer is no. But in T.C. Summary Opinion 2004-74 the court upheld that transportation costs to and from work are allowed as a medical deduction under Section 213 if the employment itself was explicitly prescribed as therapy to treat a medical condition. And you can deduct travel between home and a temporary work location (the job is expected to last and actually does last for one year or less) that is outside of the “metropolitan area” where you live and normally work.

Can I deduct the cost of a wig? You can if prescribed by a doctor for your mental health when hair loss was caused by a disease or accident. And many years ago we had a client who we called the “wig lady”. She was an undercover store detective who posed as a shopper to catch shoplifters, and often wore disguises in the course of her work – including wigs.

Can I deduct clarinet lessons? You can deduct both the clarinet and the lessons if prescribed by a doctor or dentist to help correct an overbite (Rev Rul 62-210).

Pretty much anything that a qualified medical professional will explicitly prescribe to treat a specific medical disease or condition will be deductible.

Can I deduct mortgage interest depends on the nature of the mortgage (acquisition debt or home equity), the amount of the loan principal, the purpose of the loan, and the number of personal properties you own. See my post on “So What Do I Think?”.

The answer to “Can I deduct my real estate taxes” is not always yes. It depends on whether or not you actually own the property and are liable for the taxes. However, there have been occasions where a person whose name was not on the title could deduct the taxes (i.e. a married couple live in and pay all the bills, including mortgage and taxes, for a home whose title is in the name of the husband’s parents).

Can I deduct charitable contributions now depends on whether or not you have the proper documentation as well as to whom the contributions are made.

And, of course, you can only deduct many of the above items if you are able to itemize on Schedule A – and medical or miscellaneous investment and job-related expenses are only deductible to the extent they exceed a percentage of AGI.

So, can you deduct dry cleaning? It depends!

TTFN

THIS JUST IN

Sorry to be so late in getting this breaking news to you – but, as usual for Wednesday, I was out of “the office” all day and just got back.

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The IRS has issued the new “standard mileage rates” effective for travel on or after January 1, 2008. It seems to me that the announcement is later than usual this year.

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The 2008 rate for business travel will be 50.5 cents per mile, up from 48.5 cents in 2007. Depreciation represents 21 cents per mile of this rate (up from 19 cents per mile for 2007).

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The standard mileage rate is based on the fixed and variable costs of operating an automobile for business, including depreciation, maintenance, repairs, insurance, license and registration fees, and the price of gasoline.

The standard rate for miles driven for medical or moving purposes, based on a different calculation than that used for business driving, will drop from 20 cents a mile in 2007 to 19 cents per mile for 2008.

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The rate for driving related to charitable purposes, set by Congress, remains at 14 cents a mile. This rate has remained unchanged for several years now.

ASK THE TAX PRO – WHAT IS MY FORM 1040 FILING THRESHOLD?

Q. Please tell me: What is the 2007 Federal gross income allowed for a married couple filing jointly? My husband is 65 and I am 64. We are both on Social Security and between the 2 of us half of that total is under $32K.

As I understand it, if we don't earn up to a certain amount we don't have to file. I believe last year the amount was $17,900. Is it the same this year? Where can I find that figure each year? I've tried using the IRS official website, but couldn't find it.

Thanks!

J.V.

A. The “filing threshold” for your situation for 2007 would be $18,550.00. This amount is listed in Chart A on Page 6 of the 2007 Form 1040 instructions.

The amount is determined as follows:

Standard Deduction for Married Filing Joint = $10,700.00
Plus the Additional Standard Deduction for Age 65 = $ 1,050.00 (1 person)
Plus the Personal Exemption of $3,400.00 x 2 = $6,800.00

When determining your filing threshold you would include the “gross proceeds” from the sale of investments and not the net taxable gain. You would have to file a Form 1040 Schedule D to report the cost basis of the investments sold even if your net Adjusted Gross Income was less than $18,550.00.

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To determine if any of your Social Security benefits would be taxed you first take ½ of your combined total gross benefits (before deducting the Medicare premiums withheld). To that you add the total of your other net taxable income plus any tax-exempt interest that would be reported on Line 8b of the 1040. From this amount you subtract any “adjustments to income” that would be claimed on Form 1040 lines 23 through 32 (i.e. educator expenses, HSA contribution, moving expenses, alimony, IRA, SEP SIMPLE or Keogh contributions, and early withdrawal penalty on CDs). If the result is less than $32,000 none of your Social Security benefits will be taxable.

FYI, your filing threshold for 2008, when you will both be age 65 or older, is $20,000.00.

The information necessary to determine your filing threshold is available on the WHAT’S NEW FOR 2007 and WHAT’S NEW FOR 2008 Pages of my website. Each year I add a new WHAT'S NEW FOR Page.

TTFN

LIKE OLIVER TWIST, WE’RE LAST ON THE LIST – AGAIN!

"Mark Minassian's US Business Law / Taxes Blog" at about.com recently reported that “each year, the Small Business & Entrepreneurship (SBE) Council releases its Small Business Survival Index. The index rates all 50 states on their suitability for fostering small business startup and growth based on a variety of factors, including personal and corporate tax rates, property tax rates, health care regulation, unemployment rates and workers compensation costs.”

Once again the state with the worst business climate was New Jersey. Mark points out that “high tax rates are the common denominator of the states at the bottom”. My reply to this ranking, as one who lives in and is all too familiar with the taxes of New Jersey, is “Constipation, Mr. Holmes!”

FYI, New York is #46 and California is #49. The top 5 are South Dakota, Nevada, Wyoming, Washington, and Florida.

TTFN

FINE WHINE

I prepare 1040s. That is what I do for a living. I have been preparing 1040s for 35 years. Each year I attend between 20 and 60 hours of continuing education on 1040s to keep up-to-date on new developments.

Over the years clients have asked me to fill out, or at least help them fill out, all kinds of non-tax forms and applications - mortgage or loan applications, census forms, college financial aid applications, prescription drug or utility discount program applications, immigration forms, etc, etc, etc.

I do not prepare these forms for a living. I do not have any special training or experience in filling out these types of forms or applications. For the most part I do not even fill them out for myself.

I do not know why clients expect that I know how to complete these things. I suppose because 1040s have to do with numbers and so do these forms and applications then I should be able to complete them just like that. Or perhaps it is that most of these forms are for some kind of government program or reporting, and if I know the Tax Code I must also know every other federal and state government code, regulation, etc.

I do not like to fill out these forms, and, for the most part, do not want to fill out these forms. Especially during the tax filing season, when I barely have time to relieve myself let alone deal with non-1040 items. When asked to prepare such a form I do exactly what the client would have to do – read the instructions and attempt to answer the questions as best I can. I have no special insight to reading and understanding instructions.

I can, and do, happily provide specific answers for the part of the student college financial aid form that deals with the information reported on the parents’ and student’s tax returns. I can understand clients asking me this specific information, and have no problem providing it. However, I do not want to fill out the entire form.

And, while technically not tax forms, I also do prepare the NJ property tax rebate application for clients – at it is easy to do online and requires certain information reported on the NJ-1040. I will also prepare the PTR-1 or PTR-2 “senior freeze” application, although, to be perfectly honest, I would actually prefer not to.

How do I charge for doing something I know nothing about? Often clients will give me $10.00 or $20.00 for filling out the form as a “tip”. Perhaps I should apply my hourly rate in these situations and charge clients a minimum of $50.00 per form or application for taking up my valuable time – maybe this would stop them from asking me to fill out non-tax forms.

I do know that some tax professionals attempt to build up a sideline income by preparing financial aid and other such forms – but they actually have some training and experience in the area. This is not something that I want to do.

So clients - take a hint and do not bring such forms and applications to me along with your 1040s!

And fellow tax professionals – how do you feel about this issue?

TTFN

WHAT’S THE BUZZ – TELL ME WHAT’S A HAPPENNIN’

Not much buzz this week, considering the holiday.

* TAX PROF Paul Caron brings to our attention an article from the Dallas Morning News that reports “While presidential contenders in both parties denounce the AMT, few offer even a cursory explanation of how they would pay to scrap it or keep it from spreading.”

Speaking of the TAX PROF, as expected Paul provides links to all the appropriate press releases and reporting on George W’s nomination of Douglas H. Shulman, Vice Chairman of the Financial Industry Regulatory Authority (formerly known as the National Association of Securities Dealers), to be Commissioner of the Internal Revenue Service.

* Wow! THE WANDERING TAX PRO has been nominated in the tax category as one of the "Twelve Blogs of Christmas" in Dan Meyer’s 3rd annual award presentation at TICK MARKS. Click here to check out the previous 2 years’ winners. Dan will be posting winners between now and Christmas.

TTFN

MORE COMMENTS ON COMMENTS

A few of my previous postings have generated some interesting comments.

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For my posting “ASK THE TAX PRO – STATE TAXES FOR A NJ RESIDENT WORKING IN NYC” I have received and responded to several additional questions about NJ and NY state taxes, particularly on the issue of “nexus” - the connection required to exist between a state and a potential taxpayer such that the state has the constitutional right to impose a tax.

Over at “ASK THE TAX PRO – ALLOWED OR ALLOWABLE” I have been carrying on a discussion on the issue of depreciation recapture as it relates to the home office deduction for a one-man corporation with a CPA.

I am disappointed that I have not received any comments on my suggestion that we do away with the depreciation deduction for real estate on the 1040 in my post “HERE IS SOMETHING TO THINK ABOUT.” I had especially hoped to hear the opinions of my fellow tax bloggers.

I welcome comments and questions on any of my postings. Let me know if you agree with me or think I am dead wrong, or if you need further clarification on the issue discussed. You are certainly welcome to “weigh in” on the above two discussions.

You may want to review my post “SOME COMMENTS ON COMMENTS”.

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BTW, todays posting at ANYTHING BUT TAXES is a discussion of acronyms.

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TTFN

May your stuffing be tasty,
May your turkey plump,
May your potatoes and gravy
Have never a lump.
May your yams be delicious
And your pies take the prize.
And may your Thanksgiving dinner
Stay off your thighs!

Happy Thanksgiving Everyone!

ASK THE TAX PRO – TAXING SUB-S CORP DISTRIBUTIONS

Q. Are the distributions from an S Corporation taxed as a qualified dividend at 15% or at the shareholders’ marginal tax rate? Is there any way for an S Corporation distribution to be taxed as a qualified dividend or capital gain?

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A. “Distributions” from a "Subchapter S" corporation are generally tax-free, as they usually represent a payment of “previously taxed income”.

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Sub-S distributions are not considered to be dividends. For tax purposes they are treated as “drawings” from the shareholders’ “capital account” (called here an "Accumulated Adjustments Account”), similar to a way distributions from a partnership are treated.

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The income and expenses of a Sub-S corporation are passed-through to the shareholders. Shareholders are taxed on the income of the corporation whether or not they actually receive a distribution. The income is taxed when it is earned by the corporation, and not when it is distributed to the shareholder. Again, this is basically the same tax treatment as a partnership.

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The income and deductions passed through from a Sub-S corporation are reported on the Form 1040 of the shareholders, and are taxed based on the individual nature of the item. Ordinary business income is passed through as ordinary income on Schedule E and is taxed at ordinary “marginal” income tax rates. Interest, dividends, capital gains dividends and short and long term capital gains from the sale of assets that are received by a Sub-S corporation are taxed by the shareholder as interest, dividends and capital gains, and are reported on Schedule B or Schedule D.

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Interest is taxed as ordinary income, dividends are taxed as either ordinary income or qualified dividends (at lower capital gain rate) depending on the original source of the dividend, capital gain dividends are taxed as long-term gains, short-term capital gains are taxed as ordinary income and long-term gains are taxed at the appropriate capital gains rate.

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Similarly, any charitable contributions, investment expenses and Section 179 expense from the corporation are “separately stated” on the appropriate 1040 schedule or form, as are “tax preference items” that affect the dreaded Alternative Minimum Tax.

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The only possible way a distribution from a Sub-S corporation could be taxed as a qualified dividend, at the lower capital gain rate, is if the corporation had “earnings and profits” (E&P) from prior tax years during which it operated as a “C” corporation. For example, the corporation was formed in 2000, but did not elect Sub-S status until 2004, and it had accumulated net profits from the period of operation as a “regular” corporation. A distribution from E&P could be taxed as a “qualified dividend”.

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The IRS has “ordering rules” to determine how a distribution made by a Sub-S corporation with E&P is taxed. Distributions are first considered to be from the “Accumulated Adjustments Account” (AAA) – income generated by the Sub-S corporation that has been previously taxed to the shareholders. These distributions are tax-free. Any distribution in excess of AAA is considered first to be from E&P and taxed as dividends.

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Under IRC 1368(e)(3) you can make a special election to take distributions first from E&P instead of AAA. The election is made on a year-by-year basis.

The only time a distribution from a Sub-S corporation could be treated as a capital gain is if the distribution is in excess of the taxpayer’s "basis" in the Sub-S corp. This is last on the list in the “ordering rules”.

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As mentioned above, qualified dividends earned by the Sub-S corporation that are passed through to the shareholder are taxed at the special capital gain rates, as are passed-through capital gain dividends and long-term capital gains.

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BTW, todays posting to ANYTHING BUT TAXES contains lots of interesting "stuff".

TTFN

MY BEST TAX ADVICE

Perhaps the best piece of tax advice I can give anyone is DON’T ACCEPT TAX ADVICE FROM ANYONE OTHER THAN A PROFESSIONAL TAX PREPARER.

Don’t listen to a broker, a banker, an insurance salesman, or your Uncle Charlie!

You wouldn’t ask your butcher for a medical opinion, so why would you listen to tax advice from your MD?

Many people in the “financial industry” may be experts in their particular field, but know absolutely nothing at all about federal or state income taxes. Well maybe not nothing. They may have a little knowledge about taxes – but in this case a little knowledge can truly be dangerous.

I am sure for the most part those who give you free tax advice are doing so out of a genuine desire to help you, and sincerely think they know what they are talking about. But there are also those out there who are only interested in making a commission by selling you an annuity or other investment and give you false tax advice to try to convince you to give them your money.

For a case in point I refer you to TAX GURU Kerry Kerstetter’s post “Beware Taking Advice From An Insurance Salesman”.

Remember, an insurance broker is a salesman, as is a stock broker. They make their money by selling you something. So take anything they tell you regarding taxes with several grains of salt.

If you are given any tax information by any non-tax person be sure to check it out with your own tax professional before taking any action. You may have to pay your tax pro a few bucks for the consultation – but it is money well spent, and far more preferable to losing thousands of dollars by following bad advice.

If you don’t have a tax professional you can turn to you can find one in your area at www.taxprofessionals.com. Or you can always ASK THE TAX PRO!

BTW, today’s post at ANYTHING BUT TAXES discusses movie sequels.

TTFN

CAN I CLAIM MY DAUGHTER FOR 2007?

In a letter enclosed with her birthday card to me my cousin asked a tax question about claiming her daughter for 2007.

Her daughter lives “at home”. She became employed teaching 3rd grade in the fall of the year and is expected to earn about $12,000 for 2007. “I am wondering since we supported her for the first 9 months of 2007 {including about $7,000 in college tuition – rdf}, can we claim her?” my cousin asked.

I emailed my cousin explaining the rules for who qualifies as a dependent – under age 24 and a full-time student for 5 months of the year. She responded that her daughter graduated in mid June and turned 24 in September, “so it sounds like a go for 2007”.

I emailed her back and explained that unfortunately the "under age 24" rule does not apply to the period for which the dependent was a full-time student, or for the period during which the parents provided his/her support, but to the entire calendar year. If her daughter turned 24 in September of 2007, my cousin does not get her for 2007. To claim a dependent on your 2007 Form 1040 the “child” must be enrolled as a full-time student during any part of any five months during 2007 and under age 24 on December 31, 2007.

So it is not a go for 2007. The parents cannot claim my 2nd cousin as a dependent on their 2007 Form 1040. However, the daughter will be able to claim an education tax credit for her 2007 tuition on her own return, even if the tuition was actually paid by her parents, which should wipe out any federal tax liability. While a qualified “educator” (i.e. teaching 3rd grade), the daughter will not be able to claim the $250 “above-the-line” deduction for “educator expenses” because she did not spend at least 900 hours during a school year as an educator in 2007. But she will not need the deduction – the tuition credit will be enough to bring her liability to “0”.

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BTW - today's posting at my ANYTHING BUT TAXES blog deals with the difference between debit and credit cards.
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TTFN

HAPPY BIRTHDAY TO ME!

I have turned my birthday celebration into a 3-day week-end affair.

I started on Friday night with a dinner of Veal Saltimbocca and Chocolate Cake at RENATO’S, a true hidden treasure behind the pizza parlor next to the police station in the heights section of Jersey City. While it has been around for a while now I only discovered it three years ago Christmas Eve.

Saturday it was Chicken Picata and Chocolate Moose Cake at GINO’S RESTAURANT, about two blocks from my apartmant.

This afternoon I will be off to Madison to see a matinee performance of “The Musical Comedy Murders of 1940” at the Bickford Theatre and then to MARCO POLO in Summit for a couple of greasy cheeseburgers – the best cheeseburger in the world!

I have also celebrated my natal day by creating a new blog – ANYTHING BUT TAXES. Check it out!

TTFN

AMT UPDATE

An article on the mail.com homepage reports that George W today has demanded that Congress send him legislation that keeps middle-class Americans from being hit at tax time next year by the dreaded alternative minimum tax. This even though he has promised to veto the House-passed AMT fix and tax break extender bill.

WHAT’S THE BUZZ – TELL ME WHAT’S A HAPPENNIN’

Today is the first day of the rest of your life. And tomorrow is the first day of my 55th year, since it will be the 54th anniversary of my birth. For those of you who are looking a bit confused, I started out as a paid tax preparer during the 2nd half of my freshman year in college (age 18) – so I have been doing 1040s professionally for 2/3 of my life!

* Jeremy Vohwinkle of ABOUT.COM: FINANCIAL PLANNING started the week off right with a discussion of the fact that “compound interest is a wonderful thing and the longer your money has to grow, the more it will grow” in his posting “How Much Should I Save for My Childs College Education?”. My only comment is that his use of 11% average annual return may be a bit high to aim for.

* GC of the MY OPTIONS TRADING JOURNAL blog, which I discovered from one of the “widgets” in the right hand margin, provides an excellent discussion of “What is Sub-Prime Mortgage?”

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* The Silicon Valley Blogger of THE DIGERATI LIFE: A Blog About Money, Personal Finance, Geeks and Cyberspace… Here In Silicon Valley has some interesting suggestions in his post “Force Yourself To Save! 15 Painless Ways To Pay Yourself First”, many of which I agree with. I do take exception to his #14 – “Request for higher income withholding”, for which he actually provides a disclaimer. Rather than having more tax withheld, I would take the additional amount that would have been withheld and have it automatically deposited in a credit union money market account, or some other form of “current” (i.e. non-retirement) saving or investing account that can be directly transferred from your paycheck.

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* William Perez of ABOUT.COM: TAX PLANNING reports on a website that is “devoted to understanding and explaining how the federal government raises and spends money” in his post “How the Government Spends Your Tax Dollars”.

* Thursday’s CCH email tax newsletter reported in “Baucus Plans Estate Tax Fix in '08; Major Overhaul in '09” that “At a November 14 Senate Finance Committee hearing, Republicans and Democrats, in rare agreement, said that the current estate tax situation is a quagmire and needs to be fixed”.

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* The TAX GIRL discusses the federal free e-file program and the Free File Alliance in her post “Does the E in E-file Mean Excessive?”. Check out my comment on the posting.

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Kay Bell also puts in her 2 cents on the topic in “Free File Foes Head to Court” over at DON’T MESS WITH TAXES.

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* Click on “IRS Has $110 Million in Refund Checks Looking for a Home” to see if you are one of the 115,478 taxpayers who are due refund checks totaling about $110 million that were returned to the IRS as undeliverable.

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* My birthday isn’t the only one being celebrated this week. Kay Bell’s DON’T MESS WITH TAXES blog turned 2 on Wednesday (November 14th). Happy Birthday to DMWT! And Kay, I like your site's new look.

* Every now and then Congress, or at least some of its members, actually does something right. On Thursday Senate Finance Committee Chairman Max Baucus and Ranking Member Chuck Grassley introduced legislation to prohibit the Patent and Trademark Office from granting patents for common tax strategies and tax planning inventions.

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* The Tax Foundation posed “some questions on fiscal policy that we would like to see asked of the candidates” in Friday night’s Democratic debate in Las Vegas” in its post “Questions for Tonight's Democratic Debate” at TAX POLICY BLOG. Here is one that I especially like -

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“Currently, approximately one-third of all tax returns have no individual income tax liability due to the various credits and deductions in the code. But many of you have proposed various tax credits for certain purposes, whether it's education, health expenditures, or housing. How can you provide these credits to those who have no individual income tax liability unless you make these credits refundable? And if you are making these credits refundable, what is the difference between this and merely increasing spending through some traditional budget program? Shouldn't it come down to whether or not the IRS or some government agency like HHS is more efficient at achieving the goal you are seeking?”

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Someone will have to let me know if this question was asked and answered.

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TTFN

ALL ABOUT ME!

* I am in the “Carnival of Everything Finance #7” at the EVERYTHING FINANCE blog.

* FIRE FINANCE has issued a listing of the “Top 100 Personal Finance Blogs - Ranked By Traffic” for October 2007. Of 800 PF blogs THE WANDERING TAX PRO was #42 on the SiteMeter Rankings list! The only other tax blog on this particular listing is DON’T MESS WITH TAXES at #29. Kay is also #10 on the Quantcast Rankings list.