TODAY'S ASSIGNMENT

Your assignment for the day is to read my editorial "What the IRS Should Do About the RTRP" at ACCOUNTING TODAY and comment on it - either here or there.

 

TTFN

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

* A “blast from the past” (February of 2010) from Jim Blankenship of GETTING YOUR FINANCIAL DUCKS IN A ROW, brought to my attention via a “tweet”, explains “A Little-Known Social Security Spousal Benefit Option”.

* TAXGIRL Kelly Phillips Erb reminds us “FBAR Deadline Creeping Up Taxpayers: No Extensions Available”.

That’s FBAR (Foreign Bank and Financial Accounts), not FUBAR (the current US Tax Code).

* Kay Bell celebrated Father’s Day with “Tax Breaks for Dads on this Father's Day” at DON’T MESS WITH TAXES.

* At BARGAINEERING Miranda Marquit wonders “Could a 529 Plan Mess Up Your Child’s Financial Aid?”.

Miranda’s bottom line is that, while “a 529 is one of the best ways to save money for college” parents should “be aware of how ownership of the account affects aid, and assign ownership in the most advantageous manner”.

* TAXPRO TODAY tells us about a “Bill Would Let EAs Promote Themselves Everywhere” –

“Sen. Rob Portman, R-Ohio, and Rep. Charles Boustany, R-La., have introduced legislation aimed at allowing Enrolled Agents to present themselves as such and tout their credential wherever they practice.”

I was truly surprised to learn that there are states that “prohibit Enrolled Agents from using their credential when representing taxpayers or advertising for potential clients”.  I very seriously suspect that these prohibitions were the result of local CPA societies attempting to handicap legitimate competition.

The AICPA, and the state societies, believe that CPAs “own” the brand of “tax expert”, and, unfortunately, many uninformed taxpayers, and uninformed journalists, also do.  But the truth is that the Enrolled Agent, or EA, is the true proven tax expert.  To repeat a popular statement of mine – just because a person has the initials CPA after his/her name does not mean that he/she knows his/her arse from a hole in the ground when it comes to 1040 preparation.   

“This bill would clarify that Enrolled Agents may use and display their credential when advertising their services and representing their clients.”

Now if only EAs would get a better name and be able to dispel the unfortunate widely-held misconception that they are employees, representatives, or “agents” of the IRS.

And if we could only create a voluntary designation to give “unenrolled” tax professionals, like myself, the respect that they (we) deserve.

* TAX MAMA (is there a Tax Papa?) Eva Rosenberg talks about “Maximizing Extra Mortgage Payments and Tax Deductions” at EQUIFAX.COM.  

Eva’s “The benefit of making extra or increased mortgage payments” discussion is similar to advice I have been giving to clients and readers for years.

TTFN

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

* CPA ADVISOR reports “IRS Income Tax Tables for 2014 Tax Season”.  The information discussed in this post actually applies to tax year 2013 – for 2013 returns to be filed in 2014.

* “Tax Pros: Do You Know What You're Worth?”  The NSA BLOG reports on the findings of its 2012-2013 “Income and Fees of Accountants and Tax Preparers in Public Practice” survey.  

The survey indicated that the average cost of a Form 1040 with Schedule A and a state return is $246.  The average cost for a non-itemized return is $143.

As you would expect, prices vary based on region.  The average cost for a Form 1040 with Schedule A and a state return for the “Middle Atlantic” region – New Jersey, New York, and Pennsylvania – is $258. 

I hope my clients read this – and realize how lucky they are!

* The marriage penalty is alive and well.  So we learn from “Wedding-Bell Blues” at the WALL STREET JOURNAL.

The article points out -

“For example, if the hypothetical spouses cited above each earn $75,000, rather than one partner earning $150,000, they could incur nearly $4,000 more in tax compared with what they would owe as single filers with the same income, deductions and children.”

           

* Just a reminder – the 2^nd quarter 2013 estimated tax payment is due on June 17^th (Monday).

* Another “Reminder: IRS To Be Closed June 14 Due to Budget and Sequester; Filing and Payment Deadlines Unchanged”.

* “Refund, or No Refund?”, that is the question.  Over at 5 CENT NICKEL new staff writer William Cowie gives us his answer.

William’s answer is contrary to the popular opinion of financial advisors.  And, while I understand the reasoning of the popular opinion, I do support William’s choice. 

Adding to William’s reasoning – going for the refund is a form of forced savings.  I know full well that if some of my clients received an extra $100 in their paychecks each month, or each week, they would spend it – and not necessarily wisely.

* NJ homeowners - here is the latest word on the 2012 NJ Homestead Benefit program, from the NJDOT website –

“Applications for the 2012 homestead benefit are expected to be mailed in the fall of 2013.”

So the program is still alive. 

As for the 2011 NJ Homestead Benefit –

“ . . eligible homeowners will receive their 2011 homestead benefit as a credit applied to property tax bills in August 2013.”

* We all like to get free stuff – especially free stuff that is actual worth something.  Kristine McKinley of BEACON FINANCIAL ADVISORS is offering a “FREE Report: 10 Strategies to Maximize Your Social Security Income”.

TTFN

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

* MISSOURI TAXGUY Bruce McFarland explains “Employee vs. Contractor… How to Tell”.

 

* A @Tax Policy Center tweet explained “A hit man can deduct his cost of doing business. So can a prostitute. But firms that sell medical marijuana cannot.”  Howard Gleckman pleads “Let Legal Marijuana Dispensaries Deduct Their Business Expenses” at TAXVOX, the Tax Policy Center’s blog.

* Find out what charities you should NOT donate to.  The CENTER FOR INVESTIGATIVE REPORTING discusses the “Dirty Secrets of the Worst Charities”.

* Tom Herman of the WALL STREET JOURNAL deals with a question I have often heard asked over the years in “Working Seniors Must Still Pay Tax”.

“Q: I am 72, retired and went back to work. At what point do I not have Social Security tax deducted from my pay?”  

Actually I have more often heard it in a different way.  A worker age 72 or older demands that payroll (sometime me) stop withholding Social Security tax from their wages – he/she is age 72 and no longer has to pay Social Security tax.

From the day you are born till the day you die you must pay Social Security (and Medicare) tax on all taxable wages.  It doesn’t matter if you are 2 years old or 97 years old.  There are no age limitations on the requirement for FICA withholding.

The confusion comes from the old rules that at age 72 you could have unlimited earned income and not have to pay back Social Security benefits.

* A “tweet” from @PARKER TAX UPDATES led me to Parker’s discussion of a court case where “Lack of Signed Release Costs Noncustodial Parent Dependency Exemption and Child Tax Credit”.

It is very, very important that if you are a non-custodial parent you MUST attach a signed Form 8332 if you want to be sure to claim your child as a dependent.  In the past attaching a copy of the divorce agreement may have been sufficient – but do not rely on this anymore.

If your spouse refuses to sign the Form 8332, as required under the divorce agreement, you may want to withhold alimony to the extent of lost tax benefits or go back to court.  But discuss the problem with your divorce attorney first.

Or when drafting the divorce agreement spell out specific “penalties” if the custodial spouse will not sigh the 8332. 

It is very important that you get your, or a, tax pro involved in the process of drafting your divorce agreement.    

As I said last year in “Wandering Tax Pro On The Tax Aspects Of Divorce” at FORBES.COM –

“ . . while you would certainly want Arnie Becker as your divorce attorney, you should have the divorce agreement reviewed and approved by Stuart Markowitz  before signing it.”

I expect that this cultural reference dates me.

* Speaking of FORBES.COM, Peter J Reilly covers “Whole Life Insurance Tax Disasters” there.

* Did you know “IRS.gov provides a special section dedicated to truckers and their taxes”?  I found out via a “tweet”.

Click here.

THE FINAL WORD-

Every year on the Saturday before the TONY Awards show I attend a matinee performance of a musical comedy in New York City with friends.  More often than not the musical is a revival (the original production of which I have probably seen over my 50+ years of going to Broadway).  And every year the production we have seen on Saturday afternoon wins at least one major TONY Award on Sunday night.

This past Saturday we saw PIPPIN.  I had seen the original with Ben Vereen, John Rubinstein, and Irene Ryan (Granny from “The Beverly Hillbillies” tv show) 40 years ago.  And, true to form, PIPPIN won the TONY for Best Revival of a Musical as well as Best Director of a Musical and Best Leading and Featured Actress in a Musical – all well deserved.

I was surprised that RODGERS AND HAMMERSTREIN’s CINDERELLA was included in the musical revival category.  The current production is the first time it appeared on Broadway.  It was originally written as a television special – first with Julie Andrews and years later “revived” on tv with Leslie Ann Warren. 

TTFN

HOW IS SOCIAL SECURITY TAXED?

I am often asked to explain how Social Security, and Railroad Retirement, benefits are taxed.

Back when unemployment benefits first became subject to federal income tax I remember my mentor and I saying that next they will tax Social Security benefits.  And we were right.

1984 was the first year that Social Security and Railroad Retirement benefits were taxed.  Originally the maximum amount subject to tax was 50% of your total gross benefit.  The Deficit Reduction Act of 1993 increased the maximum to 85%.

The amount of your benefits that is subject to federal income tax depends on the amount of your other income – both taxable and tax-exempt.

The calculation of taxable benefits starts with one-half (50%) of your gross Social Security or Railroad benefits (from Box 5 of Form SSA-1099 or RRB-1099) – combined if filing a joint return.

To this number you add all other taxable income (Form 1040 Lines 7, 8a, 9a, 10-14, 15b, 16b, 17-19, 21).

Next you add the amount of tax-exempt interest reported on Box 8b of Form 1040.  While municipal bond interest is exempt from federal income taxation, it is included in the calculation of taxable SS or RR benefits – so in reality up to 85% of tax-exempt municipal interest could be subject to federal income tax.

From the total of these three amounts you subtract the total “adjustments to income” from Form 1040 line 23 – 32 plus any write-in adjustments included in Line 36.  Deductions for student loan interest, tuition and fees, and domestic production activities, the adjustments reported on Form 1040 lines 33, 34, and 35, are not allowed in calculating taxable benefits.

If this amount (50% of benefits + other taxable income + tax-exempt interest – most adjustments to income) is more than $25,000 (but not more than $34,000) if you file as Single, Head of Household, or Qualifying Widow(er) or $32,000 (but not more than $44,000) if you are Married Filing Joint than you will pay federal income tax on up to 50% of your total gross benefits.

If the amount is more than $34,000 if Single, Head of Household, or Qualifying Widow(er) or $44,000 is Married Filing Joint you will pay federal income tax on up to 85% of your total gross benefits.

If you are filing as Married Filing Separately and you lived with your spouse at any time during the year you will pay tax on 85% of your Social Security or Railroad Retirement benefits.  If you file separately and you and your spouse lived apart for the entire year you calculate the taxable benefit as if you are a Single individual.

Click here to download the IRS Social Security Benefits Worksheet.  Although this worksheet is for the 2011 Form 1040 it also applies for 2012 and 2013.

You can see that, because of the way Social Security and Railroad Retirement benefits are taxed, it is possible that for every $1.00 in additional taxable income you receive from other sources you will be taxed on $1.50 or $1.85!  So it is important that benefit recipients who are not already paying tax on the maximum 85% of benefits plan carefully to reduce their Adjusted Gross Income (or in this case a Modified AGI).  This is just another example of why AGI is the most important number on your tax return. 

We are told that long-term capital gains and qualified dividends are taxed at the rate of 0% if you are in the 10%-15% brackets.  But this income increases your MAGI for purposes of calculating taxable Social Security or Railroad Retirement benefits.  So if you have $1,000 in qualified dividends, which you expect to be totally tax free due to the 0% bracket, you could end up paying tax on as much as $850 at your "normal" ordinary income rate!

Here is a tax tip.  If you itemized in 2012 and claimed as a deduction the full amount of state income taxes withheld or paid in via estimated tax during 2012, and report income on Line 10 of your 2013 Form 1040, your net taxable income for 2013 could be increased by from 50% to 85% of this state income tax refund. 

But if you deducted only the actual amount of state income tax liability (from your 2012 state income tax return) on your 2012 Schedule A, then you did not receive a “tax benefit” from the amount of your refund, and nothing needs to be entered on Line 10 of your 2013 Form 1040.  The refund will not increase your taxable benefits. 

By doing this your 2012 federal refund is slightly reduced, but the reduction in federal income tax liability on your 2013 return is more than the reduction in the 2011 refund – so you are net “in pocket” for the two years.

If 2013 is the first year you will be collecting Social Security or Railroad Retirement (either disability or normal retirement) benefits you should visit your tax professional before the end of the year to do some calculations.

Any questions?

An afterthought - there is another way that tax-exempt municipal bond interest can end up biting you in the arse.  The amount of exempt interest reported on Form 1040, or Form 1040A, Line 8b is added to your AGI to determine if you will be charged a higher Medicare Part B premium.

TTFN

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

* Oops, they did it again! 

“Governor Chris Christie is expanding access to the property tax relief available to

New Jersey residents by extending the filing deadline for the 2012 Senior Freeze (Property Tax Reimbursement Program) to September 16, 2013.”

We are talking about NJ’s PTR-1 and PTR-2 forms.

Each year the PTR packages (with a blue cover) are sent out to NJ senior and disabled homeowners stating that the filing deadline is June 1^st (or the first business day thereafter – it was June 3^rd this year).  And each and every year the cafones in Trenton extend the deadline.  Initially they had more than one extension eventually until October, but lately they have just made the one extension. 

Why don’t the fools just make October 1^st – or October 15^th or October 31^st - the filing deadline from the beginning?  I guess because by doing that they can’t look like they are being good guys and showing sympathy and concern for seniors and the disabled by extending the deadline to make sure no qualified applicant misses out.

I have no idea why the new deadline is September 16^th and not October 1^st or 15^th or 31^st. 

And there is no word on the 2012 NJ Homestead Benefit.  Usually the application packages have gone out by now. 

* Jamaal A Solomon announces “IRS vs. Tea Party: Let the Court Battles Begin” at TAX FACTOR.

As Jamaal points out – “You knew this was going to happen……”

* And speaking of IRS FUs - Kay Bell tells us “Taxpayers Picked Up $49 Million IRS Conference Tab Over Three Years, Including One That Cost $4.1 Million".

With all the problems the IRS has to deal with I expect that their campaign to license all tax return preparers is pretty much dead – and the Loving v IRS decision will stand.

And at this point I don’t see Congress passing legislation to give the IRS the authority to license all tax preparers.

The only question is if the IRS will keep the RTRP program as a volunteer designation – perhaps as part of a 2-tiered designation that includes the current Enrolled Agent program (as I have suggested).

* If you want to keep up-to-date on the ongoing IRS scandal(s) you should visit Paul Caron’s TAX PROF blog daily.  He is up to “The IRS Scandal – Day 29”.

* Just in case you have been following the story – Jason Dinesen’s saga continues with “Taxpayer Identity Theft — Part 15”.   

* A reminder that all IRS offices will be closed next Friday, June 14th, due to sequester (via the idiots in Congress).  All filing and payment deadlines unchanged.  Click here for the IRS release.

* “Non-passive? Prove it!” So says Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG.

“The Obamacare Net Investment Income Tax will make owners of “passive” businesses pay 3.8% additional tax on income from their businesses, as long as their income is high enough for the tax to apply in the first place.

Taxpayers with only profitable businesses haven’t had to worry about whether they were “passive” before.  It only mattered if you had losses.  Now it matters a great deal, and a case this week out of Tax Court helps illustrate some of the challenges these taxpayers will face.”

Joe’s bottom line –

“If you want to prove that you are non-passive, and it’s not obvious otherwise (e.g., a full-time job), you should keep a daily calendar of your time spent.” 

TTFN

READERS WRITE

I got some response to my post on “And You Wonder Why I Do Not Use Tax Preparation Software”.

The first came from the author of the article in the PA-NATP chapter newsletter that “inspired” the post, the newsletter’s editor Samuel A Wingard.

“I enjoyed your ‘Wondering Tax Pro’ piece. You very accurately stated what I have long thought to be the downsides of tax prep software. It does tend to make preparers lazy and certainly its supposed time savings are much overrated. I recall from my early years in this business (working for H&R Block) when we switched from manual to computer returns. We all thought we would be able to do so much more in less time. Well, it didn’t happen. The time not spent doing hand calculations was spent trying to figure out how to get the software to do the job. That said; I still would not want to go back to doing returns by hand.”

In my case I never stopped doing returns by hand – so I would have to waste time to learn the software from scratch.

And my occasional verbal, or rather written, sparring partner – although we are now both on the same side of the IRS tax pro regulation issue - Joe Kristan of the ROTH AND COMPANY TAX UPDATE BLOG weighed in -

“Robert passes on a tax software horror story, which we all have.  Yet for all of its flaws, there is a reason most practitioners use tax software.  It saves an enormous amount of duplicative work, avoids the vast majority of math errors, and enables you to get much more done.  But you don’t want to cheap out on your software — you get what you pay for.

Robert is welcome to his hand-crafted returns, but I’d quit rather than do a 20-state 1065 by hand.”

My reply to Joe –

“JK-

I would never take on a 20-state 1065 in any situation. I am happy with 1040s – enough to have to know.

I will be glad to pass along any 20-state (or even 2 state) 1065s that come knocking at my door to you!

I do not think TPS would save me any time whatsoever. And it certainly would waste three times as much paper! The ONLY advantage is if I have to make a small correction I just have to re-enter one number and just re-print the return. And it allows for electronic submission, doing away with an underpaid civil servant middle-man.

And I am not sure it really avoids a majority of potential math errors.”

Does anyone else out there want to join the discussion?

TTFN