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

* Here is an older post that I missed. Jim of BLUEPRINT FOR FINANCIAL SECURITY listed “50 Fun Facts About Taxes” in his April 15th post. Included –

“When you buy an illegal drug, like marijuana or even moonshine, in Tennessee, you have 48 hours to report it to the Department of Revenue to pay your tax and get a stamp for the substance.

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There were 402 tax forms in 1990, by 2002 that number had jumped to a staggering 526.

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The Cato Institute estimates that there are approximately 1.2M tax preparers in the country.

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According to the Joint Committee on Taxation, in 2006, 53.7% of all federal income taxes were paid by those earning $200k+. Those between $100k and $200k paid out 28.3% of income taxes. That means 82% of taxes paid are by those making more than $100k.”

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* TAX GIRL Kelly Phillips Erb reports that the “Overwhelming Majority of Americans Cynical About Tax Rebates”.

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“According to a poll conducted by CNN/Opinion Research Corp., a whopping 82% of Americans believe the stimulus package won’t work. This is up sharply from 70% of Americans who said the same thing in February.”

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* Speaking of TAX GIRL - there can never be too many post to warn you about “Scams, Schemes and Tomfoolery”, as KPE does regarding the “stimulus” rebates.

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Kelly reiminds you, as I have said here many time before, that the IRS will never “send you email or phone you without your first contacting them”. She also quite rightly warns, “do not believe anyone who tells you that they can get your rebate to you ‘faster’ - this is not true. As slow as the IRS is moving to get those checks out, there is no private service that can speed it up.”

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* In “Calling All Small Business Owners” A Tax Consultant for All Seasons reports that the IRS is offering a phone forum on May 21. All you need is internet access and a separate phone line. Click here for registration information.

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* Kay Bell of DON’T MESS WITH TAXES reports that the IRS is stepping up efforts to root out offshore tax evasion by enforcing a law originally enacted in 1970 to help detect laundered drug money aggressively and appling stiff new penalties to taxpayers who don’t file disclosures required under the law.

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The disclosure to which Kay refers is IRS Form TD F 90-22.1, officially known as a Foreign Bank and Financial Account Report, or FBAR (not to be confused with FUBAR, a term that could also be applied to the IRS on occasion). A question at the bottom of Schedule B asks “At any time during [the tax year] did you have an interest in or a signature or other authority over a financial account in a foreign country, such as a bank account, securities account, or other financial account?” If you answer “yes” you must complete Form TD F 90-22.1.

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In my 37 tax seasons I have only come across one taxpayer who checked yes and completed the disclosure form. He was an officer at a NYC branch of a Swiss bank and in this capacity had signature authority on foreign bank accounts.

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I often ask clients if they have money in Swiss accounts, telling them that the IRS asks the question on Schedule B – but none have ever admitted having any such accounts.

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* An article from Smart Pros, included in Friday’s daily AccountantsWorld.com “Headlines” email, indicates that “Up to 350,000 households aren't getting the $300 per child owed them as part of their economic stimulus rebate payments”.

For example - a couple with two qualifying dependent children (under age 17) received a check for, or direct deposit of, $1,200.00 instead of $1,800.00. It seems the problem involves taxpayers failing to check a box on their paper tax returns – at Line 6c it is item (4) - and to two computer software systems that weren't capturing the information needed to trigger the payment. Just another reason not to rely on tax software.

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“IRS spokesman Terry Lemons said the agency was confident it had identified all the people affected by the mistake. He said the IRS will send letters to those who missed out on the refund and that checks for the child credit will be mailed out in July. People need not contact the IRS or file additional paperwork, he said.”

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* Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG excellently sums up the entire “stimulus” rebate election year bribe program, especially in light of recent reports of multiple FUs –

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“Bad ideas, badly executed. Bipartisanship at work!”

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‘Nuff said!

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TTFN

THE FIRST THING WE DO IS KILL ALL THE LAWYERS!

Trish McIntire of the OUR TAXING TIMES blog mentioned in today’s post “Rebate Problems” that “it seems that many Refund Loan customers are threatening lawsuits against preparers (notably the big tax prep companies) because their rebates are coming by check”.

Apparently taxpayers who applied for refund-anticipation loans, or who had their e-filing fees deducted from their refunds, won't receive their rebates by direct deposit, even if their regular tax refunds were delivered that way. They must wait for a paper check.

Believe me, I am the first person to encourage lawsuits against the “big tax prep companies” (you know about whom I am speaking) for greed, incompetence, misleading clients, and the like with regards to their various high cost services and products. And there have been many over the past few years (that is one reason Henry and his brother charges so much – they have to pay for their legal fees and the cost of the many settlements they have negotiated). I can’t think of one reason why anyone would overpay these guys to prepare a tax return. However in this instance I must agree with Trish and admonish the greater of two evils.

I, like Trish, am “fascinated by the attorneys who are considering the class action suits. Are they so desperate for work that they are thinking about suing a preparer for not seeing into the future?”

What did a person whose rebate was not directly deposited actually lose? Everyone will still eventually get their appropriate check. Are the lawyers going to sue for interest at 2% on $600.00 for the month or two that the payment is delayed? What arseholes!

In most “class action suits” what eventually happens is that the “class” gets a check for $12.36 each and the “barritors” (no, I did not mean to say barristers – look it up) who initiate these actions end up with millions in fees.

Many years ago on one of my post-tax season Atlantic crossings on the QE2 the ship was forced to change course and go south to avoid an iceberg or some such other obstacle (it if was indeed an iceberg it would certainly be sort of “deja-vu-ish” - as Cunard is the “descendant” of the White Star Line of Titanic fame). As a result an extra day was added on to the length of the crossing.

To “compensate” for any inconvenience Cunard provided a one-hour open bar and a free bottle of wine at each table that evening, and the ship’s Travel Office made all necessary arrangements free of charge for passengers who had to change or adjust bookings. In our case we had to push up by one day our reservation at a hotel in Southampton, which Cunard took care of for us.

I remember that we were thrilled to have an extra day at sea on the luxurious QE2, as were most of the passengers. We actually saved money in the long run as we spent one less night at the Southampton hotel.

While I was reading in the lounge the afternoon after the delay was announced a ship’s officer called for our attention and said that one of the passengers wished to address us. A young woman, who identified herself as a lawyer, told us that Cunard had refused to compensate her for having to pay her babysitter back in the States for an extra day and to reimburse her for other minor costs, such as telephone calls, that arose from the delay. She planned to institute a class action suit against Cunard and said that anyone wishing to join with her in this action could contact her later that afternoon in her stateroom, which was somewhere well below deck in “steerage”.

I don’t recall if her announcement was met with hardy laughter then and there – but she was the joke of the cruise for the remaining two days. Everywhere one turned you could hear someone laughing about the “absurd American lawyer” or saying “what did you expect from a lawyer”. I doubt very much whether anyone joined in her action, as nothing was ever heard about it again.

Bill the Bard was right – the first thing we do is kill all the lawyers!

TTFN

THIS JUST IN

Here are two news items of interest -

* Ways and Means Committee Chairman Charles B. Rangel has introduced H.R. 6049, the Energy and Tax Extenders Act of 2008, which will extend tax credits and deductions that expired last year or would expire at the end of this year. H.R. 6049 will be considered by the Ways and Means Committee today.

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H.R. 6049 would provide important tax relief for individuals and families, including:

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· Deduction of State and local sales tax
· Deduction of tuition and other education expenses
· Deduction of out-of-pocket expenses by teachers
· Deduction of property taxes for non-itemizers
· Relief for more than 12 million children through an expansion of the refundable child tax credit to taxpayers earning $8,500 a year.

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The bill apparently does not include an extension of the AMT fix.

Click here for the official Ways and Means Committee press release and here to view a summary of the bill.

BTW, the Ways and Means Committee website includes an excellent section that provides details on the status of Tax Legislation in the 110th Congress.

* An article from the Chicago Tribune included in today’s daily AccountantsWorld.com Headline email reports that the IRS is admitting that some “stimulus” rebate checks have been directly deposited to the wrong bank account.

The article quotes Kevin McKeon, the IRS spokesperson for the New York region–

"We do know of instances of problems; we've heard of situations where stimulus checks have gone to the wrong people's bank accounts. We're getting a lot of calls to the toll-free number."

The IRS advises those receiving misdirected IRS deposits to report the mistake to their bank. Paper checks sent to incorrect recipients must be mailed back to the IRS.

TTFN

WHERE THE FAKAWI

I have decided to work through this coming Sunday (May 18th) on the GD extensions before "coming up for air" – so that I can either complete and mail out or transfer to a "red file" all the GD extensions I had to file this past April.

While I did get a “second wind” I am once again “running out of steam” and need to take time off to recuperate soon.

As a result my postings to THE WANDERING TAX PRO between now and next Monday will be scarce. I will be doing a "What's The Buzz" posting on Saturday.

FYI, I have posted to both ANYTHING BUT TAXES and THE FLACH REPORT this morning. In “Ain’t Broadway Grand” at ABT I report on the 2008 Tony nominations, and at TFR I discuss economic “stimulus” measure for businesses.

TTFN

HAPPY MOTHER'S DAY!

I do not think David Letterman is funny - and I find the bits on his show that take up time before the interviews especially lame and humorless. However there always is the exception that proves the rule.

Here is what Letterman had to say about his Mother’s Day gift during his Friday night monologue -

“I was going to send my mother something special for Mother’s Day and then I realized she is already getting that economic stimulus check.”

Happy Mother’s Day!

TTFN

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

* Kay Bell, the yellow rose of taxes, provides a detailed post on the tax aspects of yard and garage sales in her post “Taxes On Garage Sale Proceeds”. I identify with her aversion to “hondling”. Her conclusion to the post is one I came to years ago. When all is said and done having a yard sale is probably not worth the potential agita involved. Donate the items to Goodwill or the Salvation Army and claim a tax deduction.

* Jim Maule discusses some additional costs of George W’s “stimulus” election year bribe in his post “Tax Rebate Program Gets More Expensive” at MAULED AGAIN. Jim agrees with me that “the entire tax rebate gimmick is just that, a gimmick”.

What about the cost to the IRS for processing the millions of “0” liability Form 1040As that have been and will be filed just to qualify for the rebate check. I would expect that at least half will be filed manually. We are told that it costs much more for the IRS to process a “paper” return than it does to process one that is electronically filed.

* Right on, IRS MIND! Your blog post “’Pennies on the Dollar’- I Don't Think So....” took the words right out of my mouth by stating “Nothing irks me more than the 'pennies on the dollar' ads on TV that state that I can get your tax debt lowered. Anyone who provides a "predetermined" conclusion about your personal finances and your tax debt is a fraud.”

The Internal Revenue Service itself has issued a consumer alert advising taxpayers to “beware of promoters’ claims that tax debts can be settled for ‘pennies on the dollar’ through the Offer in Compromise Program”.

* The title of this article by Scott Burns from MSN Money, included in an Accountingworld.com daily headlines email last week, caught my eye – “The Naked Truth About Income Taxes”. The first paragraph hooked me.

“Taxes are unpleasant and unfair. We all know this. And our friends in government work hard to keep it that way.”

The article discussed some of the findings in the IRS report "Individual Income Tax Rates and Shares, 2005". It includes some surprising facts, including the following-

“In 1986, Americans filed 103 million federal income-tax returns. Of those, 84 million filers had to pay taxes. That's about 81.5% of all returns. By the time Clinton took office, the percentage of filers paying taxes had declined to around 75%. During the Bush years, the percentage of filers who paid taxes has continued to decline. It fell to about 67.4% in 2005.”

* Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG quotes some excellent words to live by when making tax policy by Megan McArdle of The Atlantic.com. Go to his post and click on his link to read the entire article.

* It seems that perennial headline chaser and publicity seeker Rev Al Sharpton joins the list of “celebrities” who owe their “uncles” substantial back taxes. According to an article on the home page of mail.com -

“Government records obtained by The Associated Press indicate that Sharpton and his business entities owe nearly $1.5 million in overdue taxes and penalties.

Sharpton's own debts include $365,558 owed in New York City income tax and $931,397 in unpaid federal income tax, according to a lien filed by the Internal Revenue Service last spring. His for-profit company, Rev. Al Communications, owes the state another $175,962 in delinquent taxes.

Tax headaches are nothing new for Sharpton. The 53-year-old minister has been assailed over his career for running up big tax debts and failing to abide by rules governing his charities and election committees. He is perpetually being sued for failing to pay his bills.”

TTFN

A QUESTION ABOUT THE “STIMULUS” REBATE

I got the following email from KC early yesterday evening.

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“I'm not sure if you are answering any questions regarding the stimulus rebate, but I have one. I did my taxes online with H&R block and had my refund direct deposited. Do I qualify for direct deposit for the rebate or will I get a paper check? I am getting conflicting answers. Thank you”

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Well, KC, as I am stuck for a Friday post here is your answer:

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The answer to your question depends on where you had the refund directly deposited. If you indicated on your 2007 Form 1040 that you wanted your refund directly deposited to your personal checking or savings account and provided a Routing and Account number, and your refund was successfully directly deposited, then your “stimulus” rebate should also be directly deposited to the same account.

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What if you filed a Form 8888 to have the refund directly deposited to more than one account? According to the IRS Stimulus FAQ Page on Direct Deposit - “If you elected to split your refund between several accounts, you will not receive your stimulus payment by direct deposit. Instead, you will receive a paper check.”

If you were tricked into an expensive Refund Anticipation Loan (RAL) or had your refund directly deposited to an H+R debit card with high hidden fees here is what the IRS has to say:

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“Q. I chose direct deposit for my 2007 tax refund but also requested a refund anticipation loan (RAL) from my preparer. How does that affect my stimulus payment?

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A. Taxpayers who use RALs or enter into any other loan or financial agreement with their tax professional cannot receive their stimulus payments by direct deposit and instead will get a paper check.

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Q. I chose to have my tax refund deposited onto a "stored value card" or debit card through the professional tax preparer I used. Will my stimulus payment be directly deposited onto that same stored value card or debit card account?

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A. Yes, unless you requested a refund anticipation loan (RAL) through your tax professional, or the stored value card or debit card account has been closed, in which case you will receive your economic stimulus payment by paper check.”

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I hope I have been of help.

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While we are on the subject of the “stimulus” rebate – please check out Kelly Phillips Erb's posting “Scam Alert: Monthly Stimulus Payments” at TAX GIRL.

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TTFN

THE CAFONES IN TRENTON

I am no longer featuring a weekly ASK THE TAX PRO here at TWTP – and am stockpiling questions submitted during the tax season for a new blog devoted to such questions to “open” in June. However I couldn’t resist responding to the following email from a New Jersey taxpayer -

“I saw your blog online and wondered if you'd heard about any errors in processing at the NJ Division of Taxation. Yesterday I received a statement of account underpayment claiming that my husband and I only had about $350 in NJ taxes withheld when our return and W2s show $3500 (we are dinosaur paper filers).

Their helpline consistently says to call back later because of high call volume, and I received an automated response to an email I sent them saying that because of high volume it might be more than 10 business days to get a response.

I would think the rush would be mostly over by now, so I'm wondering if there are lots of others in the same boat as me. I was looking online for evidence of this and found you. I'm concerned since the payment deadline for the $ they say I owe them is 5/15, and I'm not sure I'll be able to get through by then!”

A second email followed a day later -

“Update--finally got through on try #7 and, after being on hold for between 15-20 minutes got through to a representative who looked at it, confirmed it as a scanning error and told me to disregard the notice. I should have asked but didn't about the source of their high call volume--if they have a lot of errors, etc. It seems like they could design a better exception process to identify these errors before sending a notice... but, well, you know (and I know you know, because I read your blog).

Ahh, NJ”

Errors in processing returns at the NJ Division of Taxation? Does a bear relieve himself in the woods? I feel your pain!

I do believe I have previously blogged that at least half of the balance due CP notices sent out by the IRS are incorrect (I am being conservative). With NJ it is at least 2/3 – again being conservative.

I have seen balance due Statement of Accounts from NJDOT that have not given the taxpayer(s) credit for dependents, dependents in college, age 65, medical deductions, or state income tax withheld, even though the information is clearly stated on the NJ-1040 as originally submitted. For two years in a row a Statement of Account sent to a client did not include $100,000 in NJ Gross Income Tax withheld, even though Copy 2 of the W-2 was included with the mailing. Of course the wage income was properly reported.

The NJ-1040 is now a scannable form – which means that the information is machine-read and not entered into the system by a person. It seems to me that there are more errors from machine scanning than there were when a person sat at a keyboard and “manually” input the information.

With the scannable system you are told not to staple pages or forms together, as the metal in the staple will mess up the scanning process. NJDOT says they do not lose or misplace any loose pages or forms – yeah, right.

NJDOT processing errors are not limited to paper returns. A client recently received a balance due Statement of Account for a return that I submitted online via NJWebFile (I am required by NJ law to submit all my full-year resident NJ-1040s “electronically” unless the client tells me not to and signs an “opt out” form – for me the only method of so doing is NJWebFile). The Statement of Account failed to give the taxpayer credit for NJ Gross Income Tax withheld. The state tax withheld was clearly entered in the course of the NJWebFile input. Again, of course, the wages were included in the Statement.

Two years ago every single NJ-1040 with a balance due that I submitted via NJWebFile was FU-ed. In each case the taxpayer paid the tax due, using the coded payment voucher that was part of the confirmation print-out, by the April due date. And in each case the client was billed for the tax liability – which had already been timely paid - plus penalty and interest in September! Luckily in all but one case (that I know of) the taxpayer realized that NJ had FU-ed and either sent me the Statement of Account, as per my general instructions to clients, or called the DOT directly to report the error.

What happened was that instead of crediting the payment made by the client properly to tax year 2005 the money was applied to tax year 2004. So the system still showed an open balance due for 2005.

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My question to NJ, which remains unanswered, is this - If the payment was applied to tax year 2004 there would be an overpayment for that year. Why did the NJDOT not automatically refund this overpayment, or at least issue a letter of inquiry to the taxpayer? If the IRS shows an unidentified payment applied to a particular tax year “account” that produces an overpayment it will at least send out a letter of inquiry.

In the past when I received an erroneous NJ Statement of Account I would write to the NJDOT. I would, and will, never call the NJDOT, or the IRS for that matter. Based on past experience, both mine and my clients’, I do not trust what I would be told via phone. I want a written documentation of all contact. For the most part it appeared that my correspondence was totally ignored. In some cases the problem was taken care of by NJDOT, but I was never given the courtesy of a written acknowledgement or response. In many cases I had to write to upper-level NJDOT management, as far up as the Director, before I got appropriate action.

Lately I have had good responses when I send an email to the “address” indicated on the specific Statement of Account notice. Emails I send to the general DOT email address take forever to get a response, although one is always eventually received.

I would not worry about not being able to get through to NJDOT by a stated deadline. If they are wrong and you are right, as is the case more often than not, there will be no penalty or interest assessment.

One item to note – if you are wrong and owe NJ money you are charged interest from day one. If they are wrong and owe you money don’t expect the check to include any interest. What's good for the goose (NJ) is apparently not good for the gander (taxpayer).

On the whole dealing with the IRS is a pleasure compared to dealing with the New Jersey Division of Taxation.

TTFN

BUT I THOUGHT I COULD . . . .PART II

More misconceptions.

While none of my clients asked me this question during this past tax season, every now and then I will hear, “Why am I paying taxes on these dividends? I didn’t receive the money – it was reinvested.”

I have also been asked on various occasions why I reported a capital gain on the transfer of money from one mutual fund to another mutual fund within the same fund “family” (Fidelity, Vanguard, T Rowe Price, Van Kampen, etc).

“I didn’t sell anything – I just moved it to another fund.”

Just because you did not receive cash in your hands does not mean that it is not taxable.

Dividends are taxed when paid by the corporation or mutual fund, regardless of where the money actually went. In the case of reinvested dividends it is as if you received a dividend check, deposited the check, and then purchased additional shares of the fund.

If the Flach Fund issues a $50.00 dividend payable in December 2007, and as per your instructions to the fund all dividends are reinvested, you pay tax on $50.00 on your 2007 income tax return. The $50.00 will increase your cost basis in the fund investment.

When you sell your total investment in the Flach Fund all the dividends that have been reinvested over the years will be added to your original purchase, and any subsequent cash purchases, to determine the cost basis for calculating taxable gain or loss.

You purchased 100 shares of the fund for $1,000.00 in February 2002. You were issued $425.00 in dividends from 2002 through 2007, all of which were reinvested. You sell your entire investment in the fund in 2008 for $2,000.00. You have a $575.00 taxable capital gain, most of which will be “long-term”.

Part or all of the $50.00 dividend that was issued in 2007 by the Flach Fund may be considered “qualified dividends” and taxed not at your “regular” income tax rate, but at the lower capital gains rate of 5% or 15%. That portion of the $50.00 that is “qualified” will be identified on the Form 1099-DIV you receive from the Flach Fund.

In 2008 the lower 5% capital gains rate is reduced to 0% - so if the fund issues another $50.00 dividend in 2008 and you are in the 15% “regular” tax bracket you will pay absolutely no federal income tax on the $50.00, although, as far as I know, it will still increase your cost basis in the fund.

While “qualified” dividends are taxed separately at a lower rate, the dividend income will increase your Adjusted Gross Income (AGI) and may cause you to reduce or lose various deductions and/or credits and/or increase taxable Social Security or Railroad Retirement benefits. So, as discussed here before, the effective tax cost of the $50.00 dividend may be more than 5% or 15%.

When you transfer money between funds of the same “family” (i.e. from Fidelity Growth and Income to Fidelity Puritan) think of it similar to reinvested dividends – you sell shares in Fidelity G+I, receive and deposit a check, and then use the money to purchase shares of Puritan. It is no different than telling your broker to sell shares in GE and use the money to buy shares of IBM. Each individual fund is a separate investment and each transfer is treated as a separate sale of that investment and must be reported on Schedule D. It does not matter that the funds are in the same “family”.

The only exception is if you transfer money from a “money market fund” to a mutual fund. The price of a share in a money market fund is always $1.00. Money market funds are basically the same as cash. If you transfer money from a money market or cash reserves account of a fund family to the family’s Growth and Income Fund it is like taking money out of a savings account at your local bank and using it to purchase shares of the fund. The sale of shares of a money market account does not have to be reported on Schedule D.

Any questions?

TTFN

WHO SAID TAXES WERE FAIR?

Most states that have income taxes require non-residents to pay tax on income earned in their state. The most frequent example is a taxpayer who works in one state but lives in another. If you work in New York but live in New Jersey you first pay state income tax to New York and then take a credit for the tax paid on the New Jersey resident return.

From my experience it seems that a majority of the states determine the tax on non-residents by first determining the state income tax that would be assessed if the person had been a full-year resident of the state, and then pro-rating the tax based on the amount of actual taxable income earned in the state divided by the total income determined as a full-year resident.

If the total state tax liability determined as if the taxpayer were a full-year resident is $1,000.00, and the actual amount of income taxable by the non-resident state is 30% of the total taxable income (if taxed as a full-year resident), than the non-resident state income tax liability is $300.00.

The tax is not determined by simply taxing the income attributable to the non-resident tax by the appropriate state income tax rate.

While working on a GD extension for a client who lives in Rhode Island but has Kansas-source income taxed by Kansas I came across one of the inequities of this method of tax computation.

For 2007 the taxpayer’s federal Adjusted Gross Income (AGI) was $18,000+ more than that of 2006, due to increased capital gain income reported on Schedule D. However the portion of the federal AGI that was subject to Kansas state income tax was $2,100+ less than 2006. The calculation of Kansas state income tax begins with the federal AGI, as is the case with many states.

Because the federal AGI was substantially greater, so was the Kansas state income tax determined as if the client had been a full-year resident. And because of the nature of the 2007 AGI increase, the % of Kansas taxable income as a non-resident to total taxable income as a resident was much smaller.

The bottom line – for $2,100+ less in state taxable income the client paid $254.00 more in Kansas state income tax!

It is true that the taxpayer received a credit for the tax paid to Kansas on the Rhode Island state income tax return – but it was not a dollar-for-dollar credit and the client still ended up with $140+ additional net “out of pocket”.

Who said taxes were fair?

TTFN

CELEBRATE CINCO DE MAYO WITH KAY BELL

Kay Bell has posted “Tax Carnival #36: A Cinco de Mayo Tax Celebration” at DON’T MESS WITH TAXES.

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Included is my post “It Ain’t Necessarily So.”

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Check it out.

SPEAKING OF MISCONCEPTIONS

As an addendum to this morning’s post:

The source of many misconceptions about federal and state income taxes is often unsolicited tax advice from uninformed friends, family and even “Strangers on A Train”.

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Talk about bad tax advice. You should check out the May 4th comment on my post “ASK THE TAX PRO – STATE TAXES FOR A NJ RESIDENT WORKING IN NYC" from Schadenfreude and my response.

BUT I THOUGHT I COULD . . . .

I find each tax filing season that my clients still have misconceptions about various tax deductions and credits. In many cases a little knowledge is dangerous. I will devote several posts to some of the misconceptions I came across during this and previous seasons.

One client, a single parent, needed to keep her Adjusted Gross Income (AGI) under a certain amount to qualify for a specific state program. To this end she made a contribution to a traditional IRA, thinking that it would be fully deductible and therefore reduce her AGI.

This was not the case. The client was an “active participant” in an employer pension plan, as evidenced on her W-2 by reference to the type of plan and amount of her contribution in Box 12 and the fact that the “Retirement Plan” box was “x-ed”. Because her AGI exceeded $62,000.00 she could not deduct her IRA contribution.

Her response to me when I advised her of this fact was, “But I thought I could contribute to both”.

That is totally true – you can contribute to both your employer’s plan(s) and a traditional - or if you qualify a ROTH - IRA. However you may not be able to deduct part or all of your contribution to the traditional IRA.

The amount of the contribution that can be deducted is “phased out” for active participants in an employer plan as “modified” AGI goes from $83,000 to $103,000 for married taxpayers filing a joint return and Qualifying Widow(er)s, and from $52,000 to $62,000 for Single and Head of Household filers.

The amount of “participation” in the employer plan does not matter. You can be covered by the plan for only one month. A contribution of $100.00 to an employer plan can keep you from deducting a $5,000 contribution to a traditional IRA.

If one spouse is an active participant in an employer plan but the other spouse is not, the “non-covered spouse” can deduct in full any contributions to his/her traditional IRA if the joint “modified” AGI is under $156,000. The deduction is “phased out” as the “modified” AGI goes from $156,000-$166,000. No deduction is allowed if MAGI exceeds $166,000.

“Modified” AGI in these cases is the Adjusted Gross Income adjusted by adding-back foreign income exclusions, excluded adoption assistance benefits, the “domestic production” deduction, and such educational items as excluded savings bond interest and the "above-the-line" deduction for student loan interest, and tuition and fees.

In both cases if a married couple is filing separate returns the IRA deduction is “phased-out” as MAGI goes from $0.00 to $10,000. Another way the Tax Code tries to keep married taxpayers from filing separately.

In my client’s situation I reported the traditional IRA contribution as non-deductible on Form 8606. This creates a “basis” in her IRA investments so that when she begins to take withdrawals a portion will be treated as a tax-free “return of basis”. A Form 8606 should be filed with each subsequent Form 1040, even if no additional non-deductible contributions are made, to keep track of the IRA basis so that it is not forgotten when withdrawals are ultimately made.

When calculating the amount of tax-free return of basis that applies to a withdrawal all traditional IRAs, regardless of the source of the original contributions (i.e. deductible, non-deductible, roll-over from employer plan) are taken into consideration - and it does not matter from which individual IRA account the withdrawal comes from. One client deposited deductible and non-deductible contributions into separate accounts – but this had absolutely no affect on the taxability of subsequent withdrawals.

I told the client the proper way to reduce her AGI was to increase her “pre-tax” employee contribution to her employer’s plan. This will reduce the amount of federal wages reported on her Form W-2 and therefore her AGI.

If the taxpayer is a participant in a 401(k) plan his/her contributions will most likely also reduce the state taxable wages. However, while “pre-tax” for federal purposes, the contributions of employees of federal, state and local government units and non-profit organizations to a 403(b), 457, 414(h) or similar plan may not be “pre-tax” for state income tax purposes. Such is the case in New Jersey.

The moral in all of the misconception stories is - contact your tax professional before doing anything tax related. If the client discussed above had simply emailed me before making the IRA contribution I would have set her straight.

Any questions?

TTFN

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

Welcome to the return of “What’s The Buzz”.

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Not much buzz lately. Several tax bloggers have been taking a break to recuperate after the end of the tax season. Blog postings have been pretty much devoted either to the “stimulus” rebate checks or Wesley Snipes.

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Every tax blogger, myself included, has reported on the basics of the rebates. But several have brought up some interesting points or information on these checks:

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* Trish McIntyre of OUR TAXING TIMES makes a good point in her post “Change of Address”. If you have changed your address since you filed your 2007 federal income tax return make sure to get a Form 8822 to the IRS ASAP to be sure your stimulus check is not returned to the IRS. Unless the IRS has been notified of a change the rebate check will be mailed to the address used on the 2007 Form 1040 or 1040A – unless, of course, the taxpayer requested direct deposit.

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* Former Tax Playa Ryan Ellis deals with the stimulus rebate on a joint return filed by a “Surviving Spouse” in his TAX INFO BLOG.
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FYI, a rebate will also be issued for an individual deceased taxpayer who files a tax return for 2007 – i.e. for a taxpayer who went to his/her “final audit” either during 2007 (in which case it would be the final return), in early 2008 before filing a tax return, or in 2008 after filing a tax return.
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* IRS MIND reminds us that the IRS will apply a “stimulus” rebate against any existing outstanding tax debt from prior years. Plus, if you have not filed a return for a past year the rebate may be withheld “in lieu of unfiled returns”.
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Your rebate may also be applied to other outstanding federal debts or to outstanding state taxes or debts.

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* A TAX CONSULTANT FOR ALL SEASONS reports on IRS ANNOUNCEMENT 2008-44, which says that if your “stimulus” rebate is directly deposited into an IRA or other such “tax-favored” account (i.e. Health Savings Account , Archer MSA, Coverdell Education Savings Accounts, Qualified Tuition Plan, or 529 plan) you can take the money out tax-free and penalty-free.

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If you requested that your 2007 federal income tax refund be directly deposited your “stimulus” rebate will be directly deposited to the same account. So if you had your refund deposited to an IRA account your rebate will also be sent there.
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Kay Bell also discusses this issue in her post “Unwanted Rebate Deposits” over at DON’’T MESS WITH TAXES.
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* Kristine McKinley reports that, as I anticipated, the IRS website now has a “Where’s My Rebate” feature in her newly renamed THE MONEYWISE COACH (formerly Financial Tips for WAHMS) blog.
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* Brett Arends of the Wall Street Journal gives some excellent advice regarding what to do with your “stimulus” rebate in his article “Stimulate Savings, Not Spending” at MARKETWATCH.

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* Whatever you decide to do with your rebate check DO NOT do what Pastor Steve Munsey suggests, as shown in TAX GIRL Kelly Erb Phillips’ post “God Wants Your Rebate Check (and Your Refund Check)”.

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TTFN

IT AIN’T NECESSARILY SO

As I have blogged here before - the various “maximum” tax rates are not always what they are “advertised” to be.

The maximum AMT tax rate is supposed to be 28%. The maximum capital gain tax rate is supposed to be 15%. However, as you will see from the comments below, taken from an explanatory note sent to a client with his finished returns (a GD extension) - “it ain’t necessarily so”.

“You were once again a victim of the dreaded Alternative Minimum Tax (AMT). While the ‘advertised’ maximum AMT tax rate is 28%, because of the “phase-out” of the AMT exemption you actually pay a flat 35% tax on all of your AMT taxable income.

For each $1,000.00 of additional income you reduce your AMT exemption - and increase your ‘Alternative Minimum Taxable Income’ - by $250.00. $1,250.00 x 28% = $350.00. So $1,000.00 of income costs $350.00 in ATM – hence 35%.

While we are told that qualified dividends and capital gains are taxed at a maximum 15% rate, under AMT in your situation this becomes 22%. $1,000.00 of capital gains reduces your AMT exemption by $250.00. The $1,000.00 is taxed at 15% ($150.00) – but the $250.00 is taxed at 28% ($70.00). The $1,000.00 cost you $220.00 in additional tax ($150.00 + $70.00) – hence 22%.”

Perhaps the most unfair example of this concept is the case of Social Security benefit recipients. In many situations, as I have explained in client memos over and over again, “for every $1.00 in additional income you are taxed on $1.85”.

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So a Social Security or Railroad Retirement beneficiary in the normal 15% tax bracket could pay an effective 27.75% tax on additional ordinary income and 17.75% on capital gain income! As taxable Social Security increases AGI, which could affect many other deductions and credits, the effective tax cost might end up being even higher in some cases.

You should keep this in mind when doing projections and estimates of the tax consequences of financial transaction you are considering.

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TTFN

THE APPLICATIONS ARE IN THE MAIL!

The NJ Department of the Treasury has announced that the Division of Taxation will begin to mail out NJ Homestead Rebate applications to senior citizens and disabled homeowners this week.

Those in Bergen, Burlington, Cape May, Cumberland, Gloucester, Mercer, Middlesex, Passaic, Union, and Warren counties should have the application in their hands by the end of this week. Applications will be sent to residents of the other counties during the week of May 5th.

The deadline for seniors and the disabled to submit their application has been announced as June 2, 2008 – but based on past years’ experience this deadline should eventually be extended through October 31, 2008.

Rebate checks for seniors and the disabled will begin to be mailed out on or about July 31st.

The current proposed FY 2009 budget calls for reducing the NJ Gross Income threshold for receiving a NJ Homestead Rebate from $250,000 to $150,000. Corzine wants to take the rebate away from homeowners with NJ income of more than $150,000.

Those with incomes of $100,000 or less will continue to receive a rebate of 20% of their 2007 real estate tax – capped at $2,000, but under the proposed budget those with incomes of between $100,001 and $150,000 would receive a 10% rebate – up to a $1,000 maximum. This is down from the 15% rebate of the first $10,000 of 2006 real estate taxes that was paid to this category of income in 2007.

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It appears that NJ has given up on the idea of applying the rebate amount directly against a homeowner's real estate tax billing - so that the homeowner actually pays less tax rather than having to wait for a rebate check. This method pretty much negates the basic purpose of a tax rebate check - the fact that the voter receives an actual payment directly from the State so he can exclaim, "Look what Corzine has given to me!" and, hopefully for the Democrats, act with appropriate appreciation at election time.

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A tax rebate has nothing whatsoever to do with easing a homeowner's tax burden (or stimulating the economy for that matter) - it is a purely politically motivated gesture to buy votes. NJ had to raise the sales tax by 1% to pay for these rebates - so how is the average NJ taxpayer or homeowner any better off?

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The idea behind the current federal rebate program is no different.

TTFN

ANOTHER EXAMPLE OF “DON’T ASSUME”

The following story is true. The name has been changed to protect the guilty.

My client, let’s call him Alfred Wiedersehen, has twin children who turned age 3 in 2007. Both attend a pricey preschool.

Alf had opened up a Coverdell Education Savings Account (ESA) for each of the children in 2004. In 2007 he took a distribution of $2,500 from each of the ESA accounts to help pay for the preschool costs. The trustee of the ESA accounts issued two Form 1099-Qs (Payments from Qualified Education Programs) to report the distributions.

While most tax benefits associated with education apply only to post-secondary education (i.e. college or other education that takes place after graduating from High School), with a Coverdell ESA qualified expenses can be “either higher education (post-secondary) expenses or elementary and secondary education expenses”. It can be used for “tuition for any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law”. However, pre-elementary education expenses, such as the cost of “pre-school”, are not qualified expenses.

I asked my client who told him he could make a withdrawal from a Coverdell ESA to pay for preschool education. His answer was “I just ass u me-d it (emphasis on the last syllable)”. Those are his exact words, taken from his email response.

Once again we learn that, as Felix told Oscar on THE ODD COUPLE sitcom, when you “assume” you make an “ass” out of “u and me”! Actually in this case only you (the client) and not me.

The moral of the story – don’t assume! Before doing something that involves income taxes check with your tax professional.

What happenned in this case is that each of the children had to file a tax return and report taxable income from the Coverdell ESA. While they did not have to pay federal income tax because of the amounts involved they did have to pay a 10% premature withdrawal penalty on the taxable portion of the distribution.

It was not an expensive mistake, but the penalties and my fee for preparing the two returns represent unnecessary expenses that could have been avoided.

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TTFN

THE REBATES ARE COMING! THE REBATES ARE COMING! PART II

The IRS will begin to distribute the “stimulus” election year bribes tomorrow – Monday, April 28 – four days ahead of schedule.

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About 800,000 tax filers will have their rebates directly deposited into their bank accounts per day on Monday, Tuesday and Wednesday. The IRS will take Thursday off, and continue with 5 million payments on Friday.

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Taxpayers who requested that their 2007 federal income tax refund be directly deposited to a bank account will have their "stimulus" rebate also directly deposited to the same account(s).

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According to a Treasury Department spokesman the payments will be going out ahead of schedule because of a new computer program that updates records daily.

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More than $110 billion in rebates will be distributed to some 130 Million taxpayers (and “non-taxpayers”) by July – all of which will come directly from the budget and therefore increase the federal deficit.

Make sure to make a note of the amount of the rebate you receive, or keep the check stub, so you can tell your tax professional what you received next year.

TTFN

HEY DUDE, WHERE’S MY CHECK?

Haven’t received your 2007 federal income tax refund yet.

Don’t call your tax preparer (I can't do anything). Go to www.irs.gov and click on Where's My Refund?.

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You should have your copy of the 2007 return in front of you when checking on the status of your refund. You will need to enter your Social Security Number, Filing Status (i.e. Single, Head of Household, Married Filing Joint) and the exact amount of the refund as claimed on the return.

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You can check on the status of your refund seven days after electronic filing a return. For a paper return you should wait four to six weeks after mailing the return.

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The system will advise you if a check has been mailed or if the refund was directly deposited.

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You should know that if your refund is directly deposited you will not receive a confirmation from either the IRS or your bank. You must check the bank activity or balance online, or check out a bank statement, to see if the refund was received.

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If the system tells you that your return has not been received then you should contact your tax preparer to obtain a duplicate return.

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To check on the status of a state income tax refund you should go to the website of the state’s appropriate Finance, Revenue or Taxation department. You can start by going to, for example, www.state.nj.us or www.state.ma.us. Just substitute the "nj" or "ma" with your state's initials.

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I expect that once the first round of “stimulus” rebate checks have been mailed out there will be a similar method to check on the status of these checks at www.irs.gov.

TTFN

CONGRATULATIONS!

Congratulations to Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG for having surpassed the 500,000 visitor mark!

I have only 64,000+ since my December of 2006 return to Blogger - so I have a long way to go to catch up.

Keep up the good work, Joe!

STUFF

A few items of note.

* You can sing along to the TAX FREEDOM DAY song with Joe Kristan at the ROTH AND COMPANY TAX UPDATE BLOG.

* An update to The Tax Book reminded me of a Revenue Ruling from the end of 2007.

In Rev Rul 2007-72 the IRS states that amounts paid by healthy individuals for self-initiated diagnostic tests and similar procedures are deductible as medical expenses, even though no symptoms currently exist and it was not prescribed or recommended by a doctor or other health professional.

The example used in the update is of a home pregnancy test. It is deductible even though it is used to test the “healthy functioning of the body” and not to detect disease.

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* Recently the House passed the Taxpayer Assistance and Simplification Act of 2008 by a vote of 238 to 179.

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The bill repeals the controversial IRS Private Debt Collection program, which has been criticized for spending $75 million to collect just $35 million for the IRS from three private firms that take a 24 percent cut of the taxes they collect.

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Good move!

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* The IRS has issued a special reminder to retirees, disabled veterans and others who normally do not file a tax return that even though April 15 has passed there is still time to submit a 2007 form and get a “stimulus” rebate check.

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People who normaly do not have to file a tax return but have at least $3,000 in qualifying income should file a simple Form 1040A. Qualifying income includes any combination of earned income, nontaxable combat pay, and certain payments from Social Security, Veterans Affairs and Railroad Retirement.

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According to IRS Commissioner Doug Shulman, “Don’t worry if you did not file a return by April 15. If you meet the criteria, you are still eligible for a stimulus payment. The quicker you file, the quicker you’ll get your payment.”

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The reminder applies to all taxpayers as well, not just “non-taxpayers”. The IRS further pointed out that you “must file a return by October 15 to receive an economic stimulus payment this year”.

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TTFN

A BELATED HAPPY TAX FREEDOM DAY!

Yesterday, April 23rd, was Tax Freedom Day 2008.

According to the annual Tax Foundation calculation, on average Americans had to work 113 days (Leap Day February 29th - not counted) to earn enough money to pay for all federal, state and local taxes.

It is three (3) days earlier than the past two years, when Tax Freedom day was April 26th, but the same as 2005. The earlier date is due to a slowdown in the economy and the recently passed “stimulus” package.

Federal, state and local governments will take, on average, 30.8% of our income this year – down slightly from a year 2000 high of 33.6%. Tax Freedom Day 2000 was May 3rd.

TFD was created by Florida businessman Dallas Hostetler in 1948. He calculated the annual holiday until his retirement in 1971, when he turned the copyright over to the Tax Foundation.

In determining TFD the Foundation divides the total tax payments for the nation by its projected total income. It is assumed that we begin working on January 1st earning the same amount each day.

The Foundation also calculates the day by individual state. It comes as no surprise that New Jersey’s Tax Freedom Day comes out #2 on the list - May 7th. This is only one (1) day behind Connecticut (May 8th) and two (2) days ahead of New York (May 5th). Alaska has the earliest TFD at March 29th.

The Tax Foundation reports that we work 74 days to pay federal taxes and another 39 days for state and local taxes. Housing and “Household Operation” costs take 60 days and Health and Medical Care costs 50 days.

Click here to view the Foundation's complete Special Report on Tax Freedom Day.

TTFN

THE SINGING CPA

Regular visitors to TWTP know that I am a frustrated Weird Al" Yankovic – or more appropriate for my generation Alan Sherman (My Son the Nut, My Son the Folk Singer – HELLO MUDDAH, HELLO FADDAH) – from my Tax Season Carols.

Clients are also aware of my dabbling in this art from the greeting messages I leave on my answering machine during the season.

For example –

* Fish gotta swim, birds gotta fly.
I got a pile of 1040s up to my thigh (or eye as the season progresses).
Can’t rest during tax season time!

* I gets weary,
and sick of taxes.
I’m tired of 1040s,
but feared of extensions.
So, like Ole Man River, I keep on rolling along!

* The sun comes up – I work on taxes.
The coffee cup – I work on taxes.
There are so many 1040s still waiting to be done.
Can’t wait till there is only one!
(Actually I am at my desk working on 1040s before the sun comes up!)

It appears that I am not alone in my dabbling. I received an email of introduction on April 6th from Steven Zelin, who is known as “the Singing CPA”. What surprised me most was that the email was sent on April 6th – when most tax professionals are just beginning to start pulling their hair out. I was truly surprised that he had the time to do anything other than 1040s on April 6th.

Steve writes and performs funny songs about taxes and accounting, most to the tune of popular favorites.

There is, for example, TAX BUSTERS, obviously to the tune of GHOSTBUSTERS:

“If there’s something strange on your tax return
Who you gonna call – Tax Busters!

Don’t be afraid of no tax.”

Actually I had been toying with a similar ditty – but I had not gotten past “We ain’t ‘fraid of no IRS”.

He also has TAX DEDUCTIBLE – to the tune of the Nat King Cole classic:

“Tax deductible.
That’s what you are.
Tax deductible.
Just like my car.”

And then there is:

“Young man, there’s no need to pay tax.
I said, young man, let me tell you the facts.
I said, young man, if your accounting is lax
There’s no need to go to prison.”

He is singing not about going to the YMCA but to his CPA!

And perhaps my favorite – THE ACCOUNTANT, to the tune of Kenny Rogers’ THE GAMBLER:

“You gotta know when to debit, know when to credit,
Know when to shred it, and know where to sign.
You never break any rules; you just bend them with your tools.
And keep your figures focused on the bottom line.”

It appears that for the past 5 years, Steven Zelin has entertained New Yorkers who mail their tax returns at the last minute at the main James A. Farley Post Office. Those who rush to make the midnight deadline can hear his live act.

You can check out Steve at his website at www.stevenzelin.com or listen to samples of his parodies at cdbaby.com/cd/zelin3.

TTFN

WHERE THE FAKAWI?

What usually happens at the end of the tax season is that I am so sick of 1040s that I need to get away or go mad. I head off for my annual recuperative trip to Ocean Grove – but when I return relaxed and refreshed I have lost my motivation to continue with 1040s and the GD extensions drag on.

Last year I waited a few days before leaving for “the Grave” and got some of the simpler GD extensions done before going away. However, when I returned my motivation was gone and the GD extensions dragged on.

This year my cat’s illness caused me to postpone my annual visit to the shore – and I somehow got a second wind! For the first time in my 37 tax seasons I have decided to continue to work on 1040s through the end of April – and take off in May!

I have been doing good – completing two to four GD extensions per day. As expected, many of the returns I start end up being transferred to “red files” – as more information is required. I have been both emailing and postal mailing my request for missing information to clients, and have been completing the returns as the information is received.

I am obviously not working at tax-season pace – but if I can manage to complete and mail out at least two GD extensions per day I will be very happy. I hope to have only “red files” remaining by May 1st.

So if my posts are spotty for the next week know that it is because I am working away on the GD extensions.

TTFN

THE REBATES ARE COMING! THE REBATES ARE COMING!

Here is an update on George W’s “stimulus” election-year bribe.

The Economic Stimulus Act of 2008 provides for a special “credit” on your 2008 income tax return. The rebate checks that will begin to be mailed out in May are an advance on this 2008 tax credit based on the information reported on your 2007 federal income tax return.

I must point out that the rebate check is not an advance on a 2008 tax reduction, as was the case the last time Congress issued rebate checks. It is a direct credit from the government and comes out of the budget and not a future refund. These rebate checks will increase the federal deficit by billions of dollars.

The amount of the rebate check is based on “qualified income”, tax liability, dependent children under age 17, and Adjusted Gross Income.

The minimum rebate is $300.00 and the maximum rebate is $600.00 per taxpayer, with an additional maximum of $300.00 per dependent child under age 17. A married couple who qualifies for the maximum will receive $1,200.00. I married couple with 3 dependent children – one age 10, one age 16, and one age 18 – will receive $1,800.00.

You must file a 2007 tax return – form 1040A or 1040 – in order to receive a rebate check. If you normally would not have to file a return because your income was under the filing threshold and you had no income tax withheld you must file one for 2007 to get a rebate check. A taxpayer whose only income is Social Security must file a 2007 federal income tax return to get a rebate check.

A dependent, regardless of age, who files a tax return will not receive a rebate.

To get the rebate you must have at least $3,000.00 in “qualified income”. Qualified income is earned income, such as W-2 wages and net earnings from self-employment, and Social Security, Railroad Retirement or Veteran’s disability and survivor benefits.

Non-taxable combat pay is included in qualified income.

The rebate is limited by tax liability. If you have sufficient qualified income but a “0” tax liability you will receive $300.00. If you have qualified income and a $437.00 tax liability you will receive $437.00. If you have qualified income and a $1,000 tax liability you will receive $600.00.

The Child Tax Credit is not counted when determining net tax liability for purposes of calculating the rebate amount, although other tax credits are.

Because the rebate amount is based on tax liability, a couple with no earned income but at least $3,000.00 in Social Security who have a tax liability in excess of $1,200.00 will receive the full $1,200.00 rebate. A retired couple with at least $3,000.00 in Social Security benefits but a “0” tax liability will receive $600.00.

The amount of the rebate check will be reduced, and ultimately phased-out, if your Adjusted Gross Income (AGI) exceeds $75,000 for an individual and $150,000 for married couples filing a joint return.

The rebate is reduced by 5% of the amount that your AGI exceeds these threshold amounts. For example, an individual with qualifying income and a tax liability in excess of $600 who has an AGI of $79,600 will receive $370.00 ($600.00 less $4,600 x 5%).

The basic rebate is totally phased-out at AGI of $87,000 for individuals and $174,000 for joint filers. However if dependent children under age 17 are included in the rebate than these amounts will be larger.

As I mentioned in the beginning the credit for which the advance rebate is issued is on your 2008 tax return. While the advance is based on 2007 tax return information, the actual credit is based on 2008 information.

When you file your 2008 federal income tax return you will calculate the credit based on 2008 information and subtract the amount of the rebate check that you have received. Since the amount of your 2008 qualified income, the number of dependents under age 17, your Adjusted Gross Income, and/or tax liability before the Child Tax Credit may be different from 2007 you could actually receive an additional rebate on your 2008 return.

Let us say as a married couple you receive a $1,073.00 rebate check this May. However, when you file your 2008 tax return the actual credit you are entitled to is $1,500.00. You will receive an additional $437.00 on your 2008 return, which will increase your 2008 refund or reduce your 2008 balance due.

If it is the other way around and you got a $1,500.00 rebate check in May of 2007 but are only entitled to a $1,073.00 credit on your 2008 Form 1040 you get to keep the $437.00 overpayment! You will not have to pay this amount back on your 2008 tax return. As that Russian comic would say – “What a country!”

The last set of rebate checks resulted in over 8 Million errors on 2001 tax returns. I will bet you that this new rebate will beat that number.

The IRS has an excellent Economic Stimulus Payment Calculator on its website. You can use this to determine the amount of your check.

The first set of rebate checks will be going out in May. These will be for individuals who filed their 2007 federal income tax return by the April 15th initial deadline. Those who file an extension will receive their checks later in the year. Click here to see the Stimulus Payment Schedule.

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If you requested direct deposit of your Form 1040 refund your rebate check will also be directly deposited to the same account.

Rebates will not be issued to non-resident aliens. You must have a valid Social Security number to receive a rebate.

When you receive your rebate check do not rush out and buy something you don’t need. Use it to pay down your credit card balance or to invest. How about depositing it in a ROTH IRA for 2008? Or opening a dividend reinvestment account with IBM, GE or a utility stock?

You should be on the alert for tax rebate scams such as telephone calls or emails claiming to be from the IRS that ask for specific sensitive financial information. The IRS will not call or email taxpayers about these payments nor will it ask for specific financial information!

While we are on the subject here is a related item of interest - The IRS couldn’t afford to send out the 2008 estimated tax payment vouchers and envelopes this year – but they could waste millions elsewhere. TAX GIRL tells us where in her post “Why Didn’t IRS Just Buy Super Bowl Commercials?”.

So, any questions about the “stimulus” rebates?

Fellow tax bloggers – did I miss or “mis-state” anything?

TTFN

AS THE CONGRESS TURNS

While I was visiting my folks at the home in Ocean Grove yesterday Senate Finance Committee Chairman Democrat Max Baucus and ranking Republican Charles E. Grassley introduced the Alternative Minimum Tax and Extenders Tax Relief Bill of 2008.

The legislation would extend the option to deduct state and local taxes instead of state and local income taxes, the above-the-line deductions for educator expenses and tuition and fees, the ability to make a tax-free direct transfer from an IRA to a qualified charity, and residential energy tax credits for two years - through tax year 2009.

On the AMT front, the bill increases the personal exemption amounts to $46,200 for individuals and $69,950 for married couples filing jointly for 2008 only. The proposal also allows the use of personal credits against the AMT, which is not allowed under current law. I guess they have given up on completely eliminating the dreaded AMT for the time being.

The lawmakers did not explain how the cost of the bill would be offset. The Finance Committee will take up consideration of revenue offsets in the near future.

Click here for a summary of the bill.

THAT WAS THE TAX SEASON THAT WAS

“The United States is the only country where it takes more brains to figure your tax than to earn the money to pay it.”

A “thank you” to Edward J Gurney for recognizing that fact.

To paraphrase the Stephen Sondheim number from FOLLIES – I got through all of the tax season (my 37th) and I’m here!

First off, let me join Dan Meyer of TICK MARKS in offering congratulations to fellow working tax professional tax bloggers for surviving another tax season.

I ended the season by filing 38 GD extensions – a bit more than last year. About half is made up of returns where I received absolutely no “stuff” and was asked by the client to file an extension, returns that were not “in my hands” by March 31st, and returns for which all the information necessary to complete the returns was not “in my hands” by March 31st. The other half were workload-related - but they were returns that I received at the end of March, most during the last 5 days. And many of them will require additional information. Only one set of returns was “lost in the shuffle” this season – and they are already completed and in the mail to the client.

And of course there are at least a half dozen returns where the client has filed the Form 4868 himself/herself, or not, and will send their “stuff” to me when they get it together. I got one of them in the mail on April 16th.

I am pleased that the workload-related GD extensions were all for “last minute Charlies”. It means that I kept on top of things during the season, especially the “red files” - completing them as the missing information was received.

In the past I would tend to put off “projects” (involved returns) till the end of the season and work on the more “normal” returns first – going for volume. Unfortunately as the end of the season approached I was still backed up and many of these projects ending up extended, as I did not want to rush through them at the last minute or I just did not have the energy to go on. This year I completed the “projects” as they arrived – so there were none hanging over my head as it got closer to April 14th.

As for the LMCs – as I began work on them on Friday, April 11th I was frustrated to find that every return I started, including those that I would have expected to be "simple", proved to be somewhat "involved". Each one had one or two "quirks" that would require research, multiple questions, and other detail work. None could be completed with what I had been given – so I would go on to another. But there was not a "basic" return in the bunch. Oi vey - my head was spinning. It was at that point that I “ran out of steam” and decided that was it for the season.

I have always estimated that I do 400 sets of returns each year, but have never actually sat down and counted. This tax season I had a sheet taped to the end of my desk and I recorded the number of returns completed each day. Between the end of January and April 14th I did 345. With the outstanding GD extensions I do believe that I will make the 400 mark.

A “set of returns” could be anything from the simple one-page NJ TR-1040 tenant rebate application and/or a “0” liability 1040A filed solely to get George W’s “stimulus” rebate check (last year it was the special form to request the telephone excise tax refund) to a federal return with multiple supplemental forms and schedules and multiple state income tax returns that takes a full day (12+ hours) to complete. In the case of a married couple filing separately I count that as two (2) sets of returns.

My major complaint of this tax season was not with clients but with the Internal Revenue Service. For some unknown reason the CAs (the “C” is for “cheap” – and I was initially much more harsh in the next initials) at the IRS decided not to send out the 2008 estimated tax package this year. I know of only one client who actually received the pre-printed vouchers, envelopes and instructions as per usual. At first we thought they were just late, but when they never arrived I had to waste extremely valuable last-minute tax preparation time typing up and mailing out 2007 federal estimated tax payment coupons for my clients.

The NATP TAXPRO Weekly email newsletter had the following entry on the subject:

“The IRS has discontinued mailing paper Form 1040-ES, Estimated Tax for Individuals, vouchers and envelopes to your 1040-ES clients who file electronically. 1040-ES filers who file a paper return will receive only one mailing instead of quarterly mailings.”

None of my clients file their federal returns electronically – as I prepare all 400 sets of returns by hand each year. To my knowledge they had always received only one mailing per year and not “quarterly mailings”. They did not receive the promised "one mailing".

I noticed that even though I had ceased posting for the tax season THE WANDERING TAX PRO remained popular. I have now exceeded 63,000 visits since moving back to Blogger in December of 2006.

And, despite the fact that I clearly stated I would not be reading or responding to ASK THE TAX PRO questions during my “hiatus” I received more submissions during the past 2½ months than during the regular year. I have “stockpiled” those submissions that were appropriate and will be setting up the weekly ASK THE TAX PRO WEDNESDAY as a separate blog once I have “recovered”.

I am truly glad that the season is over. I can now get on with more normal matters like bathing, sleeping and doing laundry - it will be nice to allow the sun to rise before me and to wear clean underwear each day again.

I had planned to leave for my annual post-tax season trip to the Jersey shore yesterday – but my elderly cat’s illness (at least she waited until the end of the season to get sick) has caused me to postpone, and I am not sure what I will do yet. I will devote today to quarterly payroll tax returns and this week-end to GD extensions that I can complete in “one sitting”.

I am still waking up too early in the morning (hence I am writing this post at 5:30 AM). And I am still doing tax returns in my sleep – actually dreaming about preparing specific tax returns. I guess it will take a while to “wind down”.

TTFN

THANK GOD IT'S OVER!!!

TAX SEASON'S OVER!

MY FACE IT HAS A BIG SMILE.

AND SO I'M OFF TO THE SHORE - 1040's NO MORE.

AT LEAST FOR A WHILE.

BEWARE!

I just had to break from my tax season hiatus again to comment on the requirement that individuals with no income other than Social Security, Railroad Retirement or Veterans benefits will have to file a “0” Form 1040A in order to receive their $300 (or $600 for a couple) rebate check.

As the Acting IRS Commissioner made the announcement I could hear the corks popping and imaging the Champagne flowing at the headquarters of Henry and Richard and other “fast food” tax preparation chains of their ilk.

This new requirement will give Block and friends another way to continue their policy of soaking lower income individuals with excessive preparation fees, usurious Rebate Anticipation Loans, and other scams and schemes like their fee-loaded debit cards. The greedy bastards!

To anyone out there reading this who will have to file not because you have taxable income but solely to report your Social Security or other benefits in order to get a rebate check – whatever you do, do not go to Henry and Richard to have your return prepared. Look for a free service like VITA or the program run by AARP.

Now, back to work!

TTFN

BREAKING NEWS!

We interrupt this tax season hiatus for the following breaking news:

IMPORTANT NOTICE REGARDING THE FEDERAL REBATE

IRS Fact Sheet FS-2008-16 provides the following instructions:

Individuals who might not otherwise be required to file a 2007 tax return will need to file a return this year to receive the stimulus payment. The return must show at least $3,000 in qualifying income.

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In other words, low-income workers who had at least $3,000 in earned income in 2007 but do not otherwise earn enough to be required to file a federal tax return need to file a return in order to get the stimulus payment. Likewise, Social Security recipients, veterans and retired railroad workers who might not otherwise need to file a tax return must do so to receive the economic stimulus payment.

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For purposes of meeting the qualifying income requirement, the following benefits need to be reported in any combination on Line 20a of Form 1040 or Line 14a of the Form 1040A.

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· Social Security benefits reported on the 2007 Form 1099-SSA, which people would have received in January 2008. People who do not have a Form 1099 may estimate their annual Social Security benefit by taking their monthly benefit, multiplying it by the number of months during the year they received the benefits, and entering the number on Line 20a of Form 1040 or Line 14a of the Form 1040A. Supplemental Security Income (SSI) does not count as qualifying income for the stimulus payment.

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· Railroad Retirement benefits reported on the 2007 Form 1099-RRB, which recipients would have received in January 2008.

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· The sum of veterans’ disability compensation, pension or survivors’ benefits received from the Department of Veterans Affairs in 2007. People are allowed to estimate their annual benefit by taking their monthly annual veterans’ benefit, multiplying it by the number of months during the year they received benefits, and entering the number on Line 20a of Form 1040 or Line 14a of the Form 1040A.

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People should note that Line 20a of Form 1040 and Line 14a of the Form 1040A are designated for Social Security. To qualify for the economic stimulus payments, these lines should also be used to include any qualifying Railroad Retirement or veterans’ benefits.

SO LONG, FAREWELL, AUF WIEDERSEHEN, GOOD NIGHT!

As is my custom, due to the demands of the tax filing season I will not be posting to THE WANDERING TAX PRO, or my other blogs, until the end of April. Between now and April 15th I barely have time to relieve myself let alone blog!

I realize that I am abandoning you at a time when you may need me the most – but I need to make a living, and my blogs certainly don’t pay any bills!

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My clients should visit the TAX SEASON UPDATE Page on my tax practice website to keep up-to-date on my progress during the season and to learn of any changes or additions to my tax season policies and procedures.

FYI, when the Economic Stimulus plan is finally signed into law by George W I will post a detailed analysis on the FEDERAL TAX UPDATE Page at www.robertdflach.net.

“Talk” to you when it is all over!

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TTFTS

IT’S HERE!

Joy to the world - tax season’s here.
I’ll soon be flush with cash!
Let every client be organized,
and give me all I need, and give me all I need,
and give me all I need to prepare their returns!

My 37th tax season has officially begun - the floodgates have been open!

And now for what will be a February 1st tradition here at THE WANDERING TAX PRO - “The Twelve Days of Tax Season” -

On the first day of tax season my client gave to me a Closing Statement for the purchase of a home.

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On the second day of tax season my client gave to me 2 W-2 forms.

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On the third day of tax season my client gave to me 3 mortgage statements.

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On the fourth day of tax season my client gave to me 4 Salvation Army receipts.

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On the fifth day of tax season my client gave to me 5 Form K-1s.

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On the sixth day of tax season my client gave to me 6 1099s for dividends.

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On the seventh day of tax season my client gave to me 7 cancelled checks.

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On the eighth day of tax season my client gave to me 8 useless items.

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On the ninth day of tax season my client gave to me 9 medical bills.

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On the tenth day of tax season my client gave to me 10 stock sale confirms.

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On the eleventh day of tax season my client gave to me 11 employee business expenses.

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On the twelfth day of tax season my client got from me a finished tax return, 11 employee business expenses, 10 stock sale confirms, 9 medical bills, 8 useless items, 7 cancelled checks, 6 1099s for dividends, 5 Form K-1s, 4 Salvation Army receipts, 3 mortgage statements, 2 W-2 forms, and a Closing Statement for the purchase of a home.

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And, of course, on the thirteenth day of tax season the client gave to me a corrected Consolidated 1099 from Merrill Lynch!