WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’ - TUESDAY EDITION

I trust you had a “successful” Memorial Day Week-End.  While I did work on a GD extension in the morning on Monday (which ended up a "red file"), I took some time off in the afternoon for a leisurely lunch with friends from NJ in Milford. 

  

* A “blast from the past” from MAINSTREET.COM that is still applicable – “How to Take a Tax-Deductible Vacation”.  I think you will recognize the author.

* Trish McIntire writes on “Planning for Your Taxes” in her capacity as resident tax expert at ANSWERS.COM.

* EA Jamaal Solomon has begun a weekly series titled “Diary of a Young Tax Accountant: My Long Journey to Become a Successful Entrepreneur” at TAX FACTOR.

Jamaal and I will be working together this summer on a discussion of top issues facing young and seasoned tax professionals and are considering discussions of specific tax issues from a young and seasoned point of view.

* Better late than never.  USA TODAY reports that 7 months later “Tax Relief Proposed for Victims of Hurricane Sandy”,

The article tells us “possible congressional action to help Oklahoma tornado victims could provide the lawmakers with a legislative vehicle”.

* A reminder from Jean Murray that in many cases “Farmer's Market, Flea Market Booths Must Pay Taxes” at ABOUT.COM.

* For those of you who are interested – click here to download the Amicus brief supporting Loving v. IRS plaintiffs filed by fellow tax bloggers including Joe Kristan, Russ Fox, and Jason Dinesen.

* Ron of THE WISDOM JOURNAL lists “25 Shocking Statistics About Personal Finance in the US”.  

* Professor Annette Nellen suggests a unique plan for “Modernizing Retirement Plans and Savings” at 21^st CENTURY TAXATION.

Her plan could be used to provide the benefit of the “Saver’s Credit” currently distributed through the Tax Code (instead of, as she suggests, having low income individuals’ retirement contributions be paid via the Earned Income Credit). 

What do you think of her idea?   

The Final Word-

The TODAY SHOW hosted a tribute show to the Jersey shore – celebrating the beginning of summer at the shore – on Friday.  The show highlighted the recovery of the shore from the devastation of SANDY.

For the most part it was a good show.  However the TODAY SHOW insulted the State of New Jersey by including cast members of MTV’s steaming pile of excrement known as THE JERSEY SHORE on the tribute show and providing acknowledgment and credibility to this worthless piece of garbage.  These brain dead self-absorbed sluts and skanks did not belong on a show highlighting the best of the Jersey shore. 

THE TODAY SHOW owes an apology to the residents of the State of New Jersey for this inexcusable action!

TTFN

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

* Bill Perez reminds us that IRS offices are closed today (Friday, May 24) in “IRS Offices to be Closed on May 24” at ABOUT.COM.

* Did you see my piece “Tax Tip: Summer Employment for Your Dependent Child” at MAINSTREET.COM?

* The IRS tells us “More Taxpayers e-file from Home in 2013” -

“So far in 2013, more than 43 million people have self-prepared and e-filed their tax returns from home, an increase of more than 4 percent compared to the prior year.”

In most cases in order to e-file from home these taxpayers needed to use a “box” – tax preparation software – to prepare their return.  That means there is the potential for 43 million incorrect tax returns.

If you don’t know anything about the Tax Code do not rely on a “box” to correctly prepare your tax return.  A “box” is not a substitute for tax knowledge, or for a qualified, competent tax professional.

* Trish McIntire does a good job of explaining the Section 501(c)(4) organization, the tax-exempt entity involved in the current IRS scandal, in “Another Tax Exempt Twist” at OUR TAXING TIMES.

* And Trish also explains “Oklahoma Disaster- Tax Relief” –

“Taxpayers in Cleveland, Lincoln, McClain, Oklahoma and Pottawatomie counties (possibly more to be added later) will be able to postpone tax and payment filings until September 30th.The IRS will abate failure to file and failure to pay penalties for taxpayers who have to delay their tax filings.

The tax and payment filings include any due from May 18th. This will include 2nd and 3rd quarter estimates for individuals and a wide variety of business taxes. The IRS will also work with taxpayers whose books and records are in the disaster area and workers with recognized relief organizations but live outside the disaster area.”

* JK LASSER instructs us on “Hurricane Season and Tax Rules to Know About”.

* Bruce McFarland, the MISSOURI TAXGUY, walks us through “Form W-2”.

* Jeff Rose gives us a good detailed listing of “Home Sweet Home: What is the True Cost of Having Your Own Home?” at GOOD FINANCIAL SENSE.

* Employers – be aware that “I-9 Form Updated – Make Sure You’re Prepared”.  So says Nancy Smyth at the Sunburst Software Solutions, Inc. QUICKBOOKS FOR CONTRACTORS BLOG.  

The Final Word-

After several strong drinks a woman turns to an attractive man, a stranger, sitting next to her at a Washington DC bar.

“Listen here, good looking.  I screw anybody, anytime, anywhere.  Your place, my place, in the car, front door, back door, on the ground, standing up, sitting down, with or without clothes on.  It doesn’t matter to me.”

Eyes wide open with interest the man responds, “No kidding.  I’m in Congress, too.  What state are you from?”

TTFN

A KIND OF CATCH-22

The IRS-required excessive “due diligence” forced upon tax return professionals who prepare returns with Earned Income Credit (EIC) claims, and the potential for increased preparer penalties related to the EIC, cause tax pros who actually do prepare returns with these claims (I expect that there are tax pros who, because of this, will no longer accept new clients that qualify for the EIC) to charge an increased fee for tax return preparation. 

This is appropriate and proper.  Filing an EIC claim takes much more time than claiming other tax benefits.  The fee for tax preparation is based on the time involved to prepare a return.  Even when a tax pro charges by the form, the cost for preparing the EIC forms is based on the increased time involved.

The Earned Income Credit is a welfare benefit for the working poor that is distributed via the tax return.  Taxpayers who legitimately qualify for the EIC are low-income individuals who, in many cases, cannot afford to spend extra money on tax preparation.

The Earned Income Credit is the only federal welfare program that I know of where the beneficiary must directly pay for the administrative costs of delivering the benefit.  It is as if the beneficiary must pay a “processing fee” for receiving his/her Aid to Families with Dependent Children welfare check.  Or individuals who qualify for the food stamp program must pay the supermarket an additional “processing fee” when purchasing food (“OK, that is $2.50 for the cereal plus a 5% welfare surtax for using your Families First card.”).

And this administrative cost is not deducted from the benefit payment.  It must be paid up-front – weeks before receiving the actual benefit payment.

This really makes sense!

TTFN   

TRUE TAX TIME TALES - IRA WITHDRAWALS

Here are two instances from the recent tax-filing season that concern excess withdrawals from an IRA and the tax consequences, federal and state (NJ), thereof.

Both taxpayers are retired and over age 70½, so they are receiving annual RMDs (Required Minimum Distribution) from their traditional IRA investments.

Client A is a widow with income from Social Security, her IRA, a state pension, and interest, dividends and capital gains.

Client B, who is married, has income from Social Security, his IRA, a small corporate pension, taxable interest, dividends and capital gains, and a large investment in tax-exempt municipal bonds that generate substantial supposedly tax-free income.

Normally Client A would take the RMDs from her various IRA accounts, and Client B would take a distribution of the earnings from his IRA investments, which was slightly more than his RMD.

In 2013 both had investments in their traditional IRA come due - a CD for Client A and a corporate bond for Client B - resulting in excessive cash in the IRA.  Both took significant cash withdrawals from their traditional IRAs that were in excess of their RMDs for specific reasons.  For Client A the excess amount was $43,000+ and for Client B the excess amount was $35,900.

Here is what I explained to Client A –

“Oi vey!

The $43,413.00 extra IRA withdrawal increased your AGI, so it decreased the amount of your medical and miscellaneous expense deductions. The $43,413.00 added $47,547.00 to your net taxable income.

Plus it pushed you well into the 25% tax bracket, and caused your long-term capital gains and qualified dividends to be taxed at 15%. Without this additional income they would have been taxed at 0%.

It cost $12,164.00 in additional federal taxes, but only $4,341.00 (10%) was withheld - leaving a shortage of $7,823.00.

It also reduced the amount of medical expenses I could deduct on the NJ return - the $43,413.00 added $44,281.00 to your net NJ taxable income. It cost $1,121.00 in NJ state income taxes, and nothing was withheld for NJ.

So the total tax cost of this withdrawal was $13,285.00 - or about 31%.”

But there was more –

“Plus it kicked your actual gross income to over $100,000 – much more than the $80,000 income threshold to qualify for the Property Tax Reimbursement (PTR) {A special NJ state program that reimburses seniors and the disabled each year for the increase in property taxes – rdf} for 2012 AND 2013 (you need two consecutive years of under $80,000 to qualify). You will not get a PTR check for 2012 or 2013.”

So the actual cost of the excess IRA withdrawal was increased by over $1,000.

Client B’s additional IRA withdrawal also reduced his deductible medical expenses – so the additional taxable income went from $35,900 to approximately $38,600.  In the past he did not have to worry about the dreaded Alternative Minimum Tax, so his portfolio included a substantial amount of interest from “private activity bonds”.  As a result, the increased IRA withdrawal caused B to become a victim of AMT.  The bottom line was about $6,300 more in federal income tax. 

Luckily Client B lives in a state that does not have an income tax.

Because neither client had a “tax basis” in their IRA investments the amount of the IRA withdrawals were fully taxable as ordinary income.

Neither A nor B had to take the money from their traditional IRA accounts.  Both could have come up with the same amount of cash by selling available current investments – mutual fund shares for Client A and tax-exempt bonds for Client B.  At most there could have been a capital gain on the sale – which would have been taxed at the 0% rate on the federal level.

Both taxpayers were already being taxed on the full 85% of their Social Security benefits.  But for those who are not - for each additional unnecessary $1,000 IRA withdrawal they could be taxed on $1,850, making an unnecessary IRA withdrawal even more costly.

Obviously neither A nor B consulted me before taking the additional IRA withdrawals.

What can we learn from the experience of these two clients? 

For one, do not take money in excess of your RMD out of an IRA when you have an alternate source in “current” investments.

And, of course, do not take a substantial excess withdrawal from your IRA without first talking to your tax professional.  If A or B had called me before withdrawing the money I could have worked up a projection and showed them just how much the IRA withdrawal would cost.

TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’ - TUESDAY EDITION

* Do as I say, not as I do.!

Jordan Fabian of ABC NEWS quotes tax cheat “Charles Rangel at IRS Hearing: ‘Wrong to Abuse the Tax System’”.

As Jordan says – “Only in Washington, you guys.”

* Here is the word on refunds for those tax professionals who scheduled and paid for the RTRP test -

“Fee amounts collected for scheduled registered tax return preparer test appointments canceled due to the court ordered injunction are being refunded. Additionally, fees collected from return preparers who tested on or after January 18, 2013, the date the test was enjoined, are also being refunded. No additional refund or reimbursement requests related to registered tax return preparer regulation are being provided or considered at this time. E-mail notifications will be provided to those receiving refunds to explain the process. No action is necessary to receive the refund. A credit for the test fee will automatically be made to the account used to pay the fee. It is anticipated that all refunds will be processed by July 19, 2013.”

* The current IRS “Tea Party” scandal is nothing new.  Liberals and conservatives alike have used the IRS to target the opposition for decades.  Dena Aubin of Reuters takes us on a walk down memory lane in “Factbox: IRS's Rich History of Scandals, Political Abuse” at YAHOO!NEWS.

* My former home state of New Jersey is on every list of the most taxed states, with the exception of the gasoline tax.  So it is no surprise that it is included at #6 in MOTLEY FOOL’s “These 6 States Tax Inheritances the Hardest”. 

I was surprised, however, to find that my current home state of Pennsylvania is #1.  PA won’t tax your pension, but apparently it gets you after you have gone to your final audit.

* FYI, the IRS will be closed this Friday, May 24^th, as part of its sequestration furlough.  No IRS offices will be operating, IRS employees will be off without pay, no tax returns will be processed, and no compliance-related activities will take place.    

The Final Word-

Are dolphins more intelligent than humans?

I usually only buy birthday cards with real cats in various poses, costumes, and situations.  And the occasional dog.  But I found a great card with dolphins that answers the above question.

On the front of the card one dolphin swimming in the ocean says to another, “Of course we’re more intelligent than humans . . . you don’t see us caring about any Kardashians!”

TTFN

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

I’m back!  Refreshed and, ready to reluctantly get back to the GD extensions.  About 10 more that I can do before I stop for the summer.

* It seems the internet's main topic of discussion tax-wise while I was away was the IRS targeting of Tea Party and conservative organizations seeking tax-exempt status for extra scrutiny.

ACCOUNTING TODAY reports that “IRS Commissioner Fired Over Tea Party Targeting” and “Obama Appoints Budget Official as Acting IRS Commissioner”.

The new Acting Commissioner is Daniel Werfel, controller of the White House budget office.

TAX PROF Paul Caron provides a humungous listing of the media coverage of the IRS scandal in “The IRS Scandal, Day 7” and “The IRS Scandal, Day 8”.  And Joe Kristan lets us know what the tax blogosphere has had to say on the subject in his May 16^th “Tax Round-up” at the ROTH AND COMPANY TAX UPDATE BLOG.

* There were other topics discussed in the tax blogosphere.  For example, Jason Dinesen brought us “Same-Sex Marriage, Community Property, And Multi-State Income — Part 2” and “Part 3” at DINESEN TAX TIMES.

* Congratulations to MISSOURI TAX GUY Bruce McFarland, who has announced that he is “An EA in the Making”.

Bruce probably correctly predicts “the (what I call) pending crash of the RTRP”, and feels that, while he does not necessarily want to represent clients before the IRS, acquiring the EA initials is the only remaining way to obtain recognition as a Tax Professional.

With all the problems that the IRS is now facing, I doubt that they will be able to successfully appeal the Loving decision and bring back their mandatory RTRP requirement.  And I do not believe that they will, as the judge have suggested, maintain the designation as a voluntary one, perhaps, as I have suggested, as part of a two-tiered program that would also encompass the EA designation as well.

Maybe there is hope for the industry-sponsored voluntary Certified Tax Return Preparer designation I proposed.

In any case, best of luck to my buddy Bruce in his quest for the EA designation.

TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’ - TUESDAY EDITION

Better late than never – no wifi at my LBI motel.

Truly enjoying a totally-1040-free “recovery” at Jersey shore.  While 1040-free, I am not tax-free, and have been wandering the web when wifi is available as usual.

* Peter Reilly of FORBES.COM opens another BUZZ.  He talks about a recent court case in “Book On New Jersey Wines Does Not Support Deducting Trips To France”.

I seem to recall a similar situation where an “author” tried to deduct monies paid to “ladies of the evening” as research for a book on the “oldest profession”.

BTW, I share Peter’s fond memories from the 1970s (also in New Jersey, but one county over) of Boone’s Farm Apple Wine, although not in the same context.  Also vaguely remember a strawberry wine variation.      

* Kay Bell takes a “journey down memory lane” in her response to the announcement that “Tax-Writing Committee Chairmen Launch Tax Reform Website” over at DON’T MESS WITH TAXES.

* And at TAX RESOLUTION UNIVERSITY Michael Rozbruch adds his more than 2 cents to the discussion of “IRS Prepared Tax Returns: Are They a Good Idea?”.

His bottom line on the subject agrees with mine –

“Sadly, the American taxpayer will be the ones who suffer and experience the setback of this ‘system’, not the benefit.”

 

* Just a reminder - click here to submit your ideas on tax reform to Max and Dave.  I did.

Tell them not to clutter the Tax Code with social welfare programs like the Earned Income Credit.  And to move the tax benefits for education where they belong - to the federal student financial aid program administered by the Department of Education.    

* While I truly believe that the Tea Party movement is a danger to effective democracy, and is one of the reasons why the Congress is so ineffectual, and that it’s candidates should be opposed on all levels, I also believe that certain IRS employees went too far in targeting Tea Party and other “conservative” (the Tea Party is not true conservatism) organizations for extra scrutiny when evaluating tax-exempt status requests.

Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG (here) and Russ Fox of TAXABLE TALK (here and here) discuss the issue.

I seem to recall that the IRS targeted liberal groups under Dubya.  It is not right for either side to use the IRS for political dirty tricks.

TTFN

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

* It appears that I am not the only wandering tax pro.  Peter Reilly tells of a recent wandering in “Searching for a Little Piece Of New Jersey in Virginia” at FORBES.COM.

* Trish McIntire deals with “Taxable Income Myths” at ANSWERS.COM.

Of special note is her answer to “If no W-2, W-2G or 1099 is received, the income doesn't have to be reported right?”

* JK LASSER asks “Are You a High-Income Taxpayer?” and tells you what additional taxes you will be faced with in 2013 and beyond if you are.

Unfortunately I am not.

 

* Jason Dinesen continues to keep those of us who are interested up to date on same-sex marriage tax issues with a two-part series on "Same-Sex Marriage, Community Property, and Multi-State Income" at DINESEN TAX TIMES.

 

The community property tax laws are a real PITA – and I am glad that I do not have to deal with them.

* Over at BARGAINEERING Miranda Marquit explains “Proposed Retirement Cap: More People Could Be Affected Down the Road”.

While Miranda ends her guest post with the question “What do you think of the cap? Do you think it’s a good idea? Or a bad idea?”, blog author Jim Wang’s promoting “tweet” asks “Is the government's proposed cap on retirement accts a bad idea... or a BAD idea?”

My answer to both Miranda and Jim is – it is a REALLY BAD idea!

* In “Lawmakers Seek Public Support for Tax Overhaul” at USA TODAY Susan Davis  reports that “a new website invites the public to offer their ideas for fixing the tax system”.

It seems –“Senate Finance Chairman Max Baucus, a Democrat, and House Ways and Means Chairman Dave Camp, a Republican, are launching a website Thursday -- taxreform.gov -- and a Twitter handle, @simplertaxes, aimed at inviting taxpayers to offer comments and complaints about how to change the tax code.”

I have checked out the new website, and also follow Max and Dave on Twitter.  I have submitted my recommendations for tax reform (in 5000 words or less).  I suggest you do the same.  FYI, I had previously written directly to Max and Dave, separately, as well as BO with my recommendations.  No word back yet – but it is too soon. 

I continue to applaud Max and Dave for their apparent sincere commitment to tax reform, and hope they can accomplish something of consequence.  However the rest of the idiots in Congress have to pass whatever they come up with, and that is where my hope fades.  Already the fools are lining up to protect their special tax breaks (and those of the lobbyists who line their pockets).

* Russ Fox proves once again that great minds think like in his TAXABLE TALK post “How Long Should You Keep Your Tax Returns For?”.  Russ agrees with what I have been saying for years recommending (with an additional comment) -    

“I strongly recommend you keep your tax returns–and proof of filing–forever”.

* A truly frequently asked question, asked of me as well of fellow blogger Jean Murray and probably every other tax preparer - “I Didn't Get Paid for My Work - Can I Claim a Bad Debt Deduction?”

Jean provides the correct answer at ABOUT.COM –

“You can't claim a bad debt deduction if your business uses the cash method of accounting, because in this method, income is only recorded when it is received; that is, when you deposit the check or credit/debit card payment from your customer.”

FYI, I am off to the Jersey shore (again) for a second week of “recovery” (I am getting sick of looking at 1040s).  I may not be posting next week – depending on whether or not I have anything to say and I have access to wifi.

TTFN

GETTING READY FOR SUMMER – SPRING CLEANING

Spring is the time for spring cleaning – cleaning out closets, attics, basements, and garages to get rid of “stuff” you no longer need or want to get your home ready for summer. 

While some of the “stuff” you no longer want is true garbage and need to be thrown away - many others still have a useful life and can be put to good use by someone else.

Many people decide to have a sidewalk, yard or garage sale and try to make some extra money.  This is not what I would do.

Hey, do you really want the great unwashed masses tramping through your yard or garage, and possibly your house as well? This activity usually wastes a full day, is loaded with potential for agita, and in the end you never get what your stuff is really worth. During the last hour of the sale you often end up almost giving away what is left just to get rid of it.

Instead of having a sale I recommend you donate your unwanted, but still usable, items to a church or charity. With this method, if you are able to itemize, you may ultimately end up with about 1/4 to 1/3 of the current market value of the stuff in your pocket (depending on your federal and state tax brackets) – which is probably not much less than you would end up in a yard sale anyway – you avoid the agita, and you get to help out a needy cause.

If you itemize you can deduct the “fair market value” of used items donated to charity. According to the IRS, fair market value is the price a “willing, knowledgeable buyer would pay a willing, knowledgeable seller when neither has to buy or sell.”

You are responsible for determining what the items you are donating are worth. The charity is not required to, and in most cases will not, provide you with a value. There are several online guides to help you come up with a number, such as the one provided by the Salvation Army. (click here).

Whenever you make a contribution of used items you should always make and keep a detailed listing of the items you are donating with the condition and value of each set of items (i.e. 6 pairs of men’s pants, good condition, $60.00, 5 pairs of men’s shoes, good condition, $75.00). You may want to attach a copy of the listings to your tax return.

You cannot deduct the contribution of a used item unless it is in at least "good" condition. Donations of clothing and household items with a minimal monetary value, such as used socks or underwear, are also not deductible

While you can simply drop your donation off in a local charity’s bin at the mall, I would recommend taking the bags or boxes directly to the charity’s location so you can get a receipt or acknowledgement.  If you do use a bin make sure what you are dropping off on any one day is not worth more than $250.00.  If the total value of items donated to a charity in a single day is more than $250.00 you must have a written acknowledgement from the charity with its name and address, the date of the contribution, and a description of the items donated. The acknowledgement must also, and this is very important, indicate whether you received any goods or services from the charity in exchange for the donation.

To repeat an important factor – you will receive no tax benefit from donating used items to a church or charity unless you can itemize on Schedule A.

Let me suggest another alternative to having your own yard or garage sale.  Take your stuff to a consignment shop.  The shop will deal with all the agita, for which it will take a commission, and you get cash. 

TTFN

GETTING READY FOR SUMMER – FILLING OUT FORM W-4 FOR A SUMMER JOB

Do you have a teen-age dependent that will soon be looking for a summer job?

Frequently, unless you prepare your child’s tax return yourself, the cost of preparing a short form for a dependent child with an a summer job, solely for the purpose of getting a refund of the federal and state income tax withheld, is more than the amount of the refund.

Before starting his/her job your son/daughter will be given a Form W-4 to fill out.  Line 7 of the W-4 allows an employee to claim exemption from federal and state income tax withholding, if he/she had no income tax liability for 2012 and does not anticipate earning enough to pay income tax for 2013, by writing the word “EXEMPT” in the box indicated.

Writing “EXEMPT” on the form means that the employer will withhold only FICA (Social Security and Medicare) and any required state unemployment and/or disability taxes from the student’s wages.

For 2013, the federal standard deduction for a dependent with a W-2 is the greater of $1,000 or the sum of $350 and the dependent's earned income, not to exceed $6,100 (plus $1,450 if age 65 or blind). The state amount varies, and may be more of less than $6,100.

If you do not anticipate that your son/daughter will earn more than $6,100 during 2013, including up to $350 in interest, dividends and capital gains, have him/her claim “EXEMPT” on his/her Form W-4. This way he/she will not have to file a federal or state income tax return simply to get a refund of the income tax withheld.

 

If your son/daughter has already filled out a Form W-4 for his summer employer, but has not begun work yet, have him/her fill out a new one claimint EXEMPT to give to the employer before starting work.

Of course, on the other hand, and if you will be preparing your son/daughters simple tax returns yourself, you can have him/her use unnecessary federal and state income tax withholding as a form of “forced savings”, so he/she does not urinate away all of his/her summer earnings.

And while we are talking about summer jobs, If your son or daughter has one you should consider opening up a Roth IRA account for him or her.

You can contribute 100% of your child’s earnings to the account, up to a maximum of $5,500.  If your son earns $2,400 this summer you can contribute $2,400 to a Roth IRA for him. If he earns $6,000 you can contribute $5,500.

There is nothing in the tax code that says that the money deposited in an IRA for your son or daughter has to come from the child’s funds.

There is no tax deduction for contributing to a Roth IRA, but most teenagers don’t need the deduction. Qualified distributions from a Roth will be exempt from federal, and probably state, income tax (assuming, of course, that the idiots in Congress don’t change the law in the future).

You can use a Roth IRA to encourage your children to work or to save.  If your son earns $5,000 in a part-time job, open a Roth IRA for him.  Or, if your daughter agrees to put $2,500 of her salary from a summer job in a Roth, match it and put in another $2,500.

If you put the maximum into a Roth each year for your 16-year-old from 2013 through 2018, when he/she will turn 21, and no other contributions are ever made, the account could grow to a truly tidy sum (in 6 figures) by the time the child turns 65.

A warning - there exists a potential problem with opening a Roth account for a child. Once the child reaches the “age of majority,” usually 18, he/she will have full access to all the funds and can “take the money and run.”

TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’ - TUESDAY EDITION

* Tony Nitti, one of the stable of FORBES.COM bloggers, has been running a series of posts on the new 3.8% investment income tax.  In “Overview of the New 3.8% Investment Income Tax, Part 3: Gains from the Sale Of Property” he addresses the spam email nonsense that has been floating around the internet for a couple of years now -

“. . . if a taxpayers sells a principal residence and the gain is properly excludable under Section 121 because the taxpayer owned and used the home as their primary residence for two of the previous five years, then no gain from the sale of the home is included in ‘three little i’ income.”

What does he mean by the “three little i” income?  Check out the post to find out.

* Sandra Block from KIPLINGER.COM explains “Why You Don't Need a Living Trust”.

I have always been wary of such creatures, and have warned clients against them.  To say the least, as the subtitle of the item suggests, “They are costly and often overhyped”.

As one of the article’s headings points out - “Probate doesn't have to be a nightmare”.

* In her OUR TAXING TIMES post “RAL Fees in Court” Trish McIntire reports –

“The California State Supreme Court denied an appeal made by Liberty Tax Service on a 2009 ruling. Actually, they refused to hear the case after the state appeals court upheld the original ruling.”  

A victory!  I have always said Refund Anticipation Loans (RALs) are bad, and tax preparers should not be offering them.  Unscrupulous fast food tax preparation chains like Henry and Richard and Liberty made a fortune on these usurious loans in the past, and have been taken to task often by state court.

* Joe Kristan gives us the word that the “IRS Publishes 2014 Health Savings Account (HSA) Limits” at the ROTH AND COMPANY TAX UPDATE BLOG -

“The IRS has issued the 2014 contribution limits for health savings accounts: $3,300 for single plans and $6,550 for family plans. The 2013 limits are $3,250 for single plans and $6,450 for family plans.”

* There is hope, based on recent quotes from House Republicans -  

‘‘We’re not going to take the current code and see what comes out. We’re going to take a blank piece of paper and see what goes back in.’’  House Ways and Means Committee chairman Dave Camp.

‘‘The conference will unite around tax reform.’’  House Majority Whip Kevin McCarthy.

“There will be a premium here on simplicity.  If we can craft a code that’s simpler and the rates are lower, it’s the kind of thing that can carry us a long way.”  House Deputy Whip. 

However, knowing that, after all, the members of Congress are self-absorbed idiots, my optimism is cautious.

* Wise words from Professor Jim Maule of MAULED AGAIN in a letter to the editor to TAX NOTES TODAY titled “IRS-Prepared Tax Returns: A Theory That Doesn't Work in Practice” -

“The idea of the IRS preparing individuals’ returns is a classic example of a theory that cannot survive in a practical world. Like most theories, it deserved an experiment. It had that chance, in California, and it failed, with only a tiny portion of the eligible population deciding to participate.

Making taxpayers’ lives easier is a matter of simplifying the tax law, not enabling the complexities by turning tax preparation over to the IRS.”

* Kay Bell brings us “Tax Carnival #116: May Tax Flowers 2013” at DON’T MESS WITH TAXES.

The first item in the Carnival is a post from Emily of EVOLVING PERSONAL FINANCE titled “Our Experiences Using Tax Software”.  Kay tell us that Emily "likes to use tax software to check our returns, but we don't fully trust it. We also do our returns manually so we can understand them."

In the actual post Emily explains -

“I do think it’s important to understand your taxes on a theoretical level, even if you farm out the actual work to a CPA or tax software.  There’s no excuse for not understanding how marginal tax brackets work or deductions vs. credits!  I think you should have a general idea of what deductions and credits you are taking and why you can take them.”  

Emily is certainly right not to fully trust tax preparation software, and is certainly correct that taxpayers should understand their taxes, regardless of who, or what, prepares the return.

BTW – I am represented in the Carnival with my post on the Home Office “Safe Harbor Deduction”.

TTFN

GETTING READY FOR SUMMER - SUMMER DAY CAMP AND THE CHILD CARE CREDIT

It won’t be long now before school will be out for the summer.

Do you have a dependent child, or children, under age 13?  Do you and your spouse both work, or are you a single working parent?

If you answered yes to both questions you may be able to claim a Child and Dependent Care Credit for the cost of summer day care for your child(ren).

The cost of sending your dependent child, who is under age 13, to a summer day camp is eligible for the Credit for Child and Dependent Care Expenses. Day camp expenses qualify even if even if the camp specializes in a particular activity, such as computers or soccer.

However only day camp expenses qualify for the credit – the cost of an overnight camp does not qualify.

If you have one qualifying child you can claim the credit on up to $3,000 in expenses. For two or more qualifying children the maximum is $6,000. The amount of expenses eligible for the credit it further limited to earned income of the parent – in the case of two working parents it is the lesser of the two incomes. If one spouse earned $50,000 for the year and the other $2,500, only $2,500 of expenses are eligible for the credit.

If one spouse works and the other is disabled or a full-time student the non-working spouse is “deemed” to earn $250 per month is there is one child or $500 per month is there is more than one. This applies to only one spouse per month. If both spouses are full-time students during the same month, only one is “deemed” to earn the $250 or $500.

In most cases if you are married you must file a joint return to claim the credit.

You can claim the credit on expenses you have incurred up to the child's 13th birthday. If your child will turn 13 this November you can still claim the credit on any day camp expenses incurred during the summer.

It is important that you get the federal Employer Identification Number of the Day Camp if it is a “for-profit” business. You must report this number on Form 2441 – the form used to claim the credit.  The IRS will disallow the credit if you do not include an ID number.

But the IRS tells us, “You do not have to show the taxpayer identification number if the care provider is one of certain tax-exempt organizations (such as a church or school). In this case, enter ‘Tax-Exempt’ in the space where the tax form calls for the number.”  

Day camp expenses also qualify for reimbursement under an employer-sponsored “pre-tax” Dependent Care Benefit “flexible spending account” (FSA). Generally the tax credit is 20%. If you are in the 25% or 28% bracket you will get a greater tax benefit by running your child care expenses through an FSA than if you claim the credit.

TTFN

 

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

* It appears Rick Telberg of CPA TRENDLINES liked my April 15^th TWTP post.

“Our favorite email “away message” so far in this post-tax season period came in a poem. Read it here and smile.”

Glad you enjoyed it, Rick.

* Kay Bell, the yellow rose of taxes, tells us “House Bill Would Give IRS Authority to Register Tax Pros” at DON’T MESS WITH TAXES.  The bill is the Taxpayer Protection and Preparer Fraud Prevention Act of 2013.

I provide my response to this new development in “Congress Gets Into The Act” at THE TAX PROFESSIONAL.

* Jason Dinesen of DINESEN TAX TIMES alerts us to “Another Example of a Tax Scam E-Mail”.

You should always remember that, as Jason explains – “the IRS never corresponds with taxpayers by e-mail”.

* Over at OUR TAXING TIMES Trish McIntire uncovers a little know, and little taken advantage of, penalty abatement – the “First Time Penalty Abatement”.

* Trish is also the new Category Expert Writer on Tax for ANSWER.COM. Her first article discusses “Taxpayer Responsibility”.

She correctly answers an important question in the piece (highlight is mine) -

“How does responsibility change when a tax preparer or tax software is used?

Responsibility doesn't change. A tax pro or tax software can help with the actual preparation of the return, answer your questions or back you in an audit. However, the taxpayer is still responsible for that return. Even if the problem is caused by the tax preparer {or the tax software – rdf} and not you.”

* Emily Guy Birken explains “How Your Benefits Will Be Affected if You Work Part-Time in Retirement” at MONEYNING .

* And Teri Cettina offers some good advice in “Credit 101: Be Careful Lending Money to Family and Friends” at the EQUIFAX.COM FINANCE BLOG.

 

The best way to be careful - don't do it!

TTFN