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Code changes, Revenue Rulings, Treasury pronouncements, judicial decisions, state law, federal law, legislative wranglings, tax policy, tax treaties, audits and examinations, politics and which way the wind blows may each have a direct impact on you, your tax situation and your financial welfare. How can you be expected to keep up?!

Not to worry! It is my job to gather pertinent news and disseminate it for you in bite-size and digestible chunks. For that purpose, I have created this blog in which I will frequently and informally list information relating to tax matters. Articles will be published as discrete entries or "posts" and displayed in reverse chronological order so that the most recent post appears first.

Please check back often to stay abreast of tax issues that may pertain to you.

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March 2, 2018: Beware of Red Flags

Image result for red flag Market Watch has published a list compiled by tax professionals of the most common audit triggers and cautions taxpayers to be beware of:

  • Taking higher than average deductions – based on statistical data, the IRS compares individual returns to national averages and may scrutinize returns on which deductions for charitable contributions, mortgage and student loan interest are greater than typical deductions claimed by taxpayers in comparable income brackets.

  • Claiming that a for-fun hobby is a for-profit business – while income from all sources is reportable, deductions for expenses may be limited.  For example, net hobby income cannot be reduced below zero.  [Be sure to read up more on the Hobby Loss Rule.]

  • Withdrawing retirement account assets early – since the IRS is notified by financial institutions of all distributions taken, taxpayers may be subject to under-reporting and under-payment penalties in addition to applicable early distribution penalties if the withdrawal is not properly reported on the tax return.  [Check out exceptions that may apply to the Early Withdrawal Penalty.]

  • Deducting unreimbursed employee business expenses – keep in mind that these expenses must be ordinary and necessary.  An ordinary expense is one that is common and accepted in a particular field of business, trade or profession; a necessary expense is one that is helpful and appropriate for a particular business, trade or profession.  NOTE:  This deduction is no longer available for 2018 and beyond.


February 11, 2018: Don't be mad; be happy!

Image result for tax extendersOkay, be mad.  You have a right to be but as Forbes contributor Kelly Erb cautions, “don’t take it out on your tax pro or your software manufacturer.”  Your anger should be directed at Congress which – while it self-servingly claims accolades for avoiding yet another government shut-down by passing the Bipartisan Budget Act of 2018 – has created yet another tax nightmare.  Hidden in the 640-page legislation, are tax provisions that had already expired and have now been extended retroactively for the 2017 tax year!

Mind you, these extensions were passed on February 9th, 40 days after the close of the 2017 calendar year and 12 days after the IRS officially kicked off the current tax season!  More than 18 million tax returns have already been filed and processed; many of those will now have to be amended.  Federal tax forms will have to be revised.  Tax software will have to be updated.  Tax pros will have to attend yet more educational seminars.  Taxpayer information will have to be disseminated.  NOTE:  I have already updated my Summary of Important Tax Data and Highlights of Pertinent Code Changes for TY’17.

Tax Practice Pro, Inc. rightfully and indignantly asks, “What the HECK were they thinking?”  As The Hill attempts to explain:

[The] Tax Cuts and Jobs Act is being sold as a permanent fix to our tax code, but because of the gamesmanship and contortionist gimmicks the bill includes, it is setting us up for yet another era of tax extenders. These are sometimes narrow, sometimes broad tax preferences that get passed as “temporary” but then almost always get renewed year after year.  [Hidden] in the clamor for comprehensive tax reform, lawmakers let them expire at the end of 2016.

But to satisfy powerful special interest lobbies such as NASCAR track owners, film and television productions, rum sales from Puerto Rico, even electric motorcycles, these extenders have now “hitched a ride” on unrelated legislation “largely without pay-fors or offsets.”

In an email to tax professionals, the IRS has said that it is reviewing the retroactive extender provisions:  “We are assessing these significant changes in the tax law and beginning to determine next steps. The IRS will provide additional information as quickly as possible for affected taxpayers and the tax community.”  Stay tuned…


February 3, 2018: IRS Warns Practitioners of New Scam

With the 2017 filing season only days old [the IRS and FTB each began accepting e-filed returns on January 29th], it is disappointing to note that already a new fraud scheme has emerged.  As has happened before, cyber-criminals have stolen client data from the unprotected computers of several tax practitioners, filed fraudulent returns and then, in a new twist, have used taxpayers’ real bank accounts to request auto-deposits of tax refunds.  Then, with tremendous audacity, a woman posing as a debt collection agency official contacted the taxpayers to explain that the refund was deposited in error and asked the taxpayers to forward the money to her.

While this notice has been disseminated to practitioners urging the professional community to remain vigilant of phishing e-mails, malware and other methods used to gain access to client data, the warning should also be heeded by the public.  Taxpayers are reminded that they should be alert to any unusual activity such as receiving a tax transcript or tax refund they did not request.

Taxpayers who receive a direct deposit refund that they did not request should take the following steps:

  • Contact the Automated Clearing House (ACH) department of the bank/financial institution where the direct deposit was received and have them return the refund to the IRS.
  • Call the IRS toll-free at (800) 829-1040 (individual) or (800) 829-4933 (business) to explain why the direct deposit is being returned.
  • Keep in mind interest may accrue on the erroneous refund.

January 16, 2018: New Medicare Cards

New Medicare cards offer greater protection to more than 57.7 million Americans
New cards will no longer contain Social Security numbers, to combat fraud and illegal use  

medicare cardThe Centers for Medicare & Medicaid Services (CMS) is readying a fraud prevention initiative that removes Social Security numbers from Medicare cards to help combat identity theft, and safeguard taxpayer dollars. The new cards will use a unique, randomly-assigned number called a Medicare Beneficiary Identifier (MBI), to replace the Social Security-based Health Insurance Claim Number (HICN) currently used on the Medicare card. CMS will begin mailing new cards in April 2018 and will meet the congressional deadline for replacing all Medicare cards by April 2019. Today, CMS kicks-off a multi-faceted outreach campaign to help providers get ready for the new MBI.

“We’re taking this step to protect our seniors from fraudulent use of Social Security numbers which can lead to identity theft and illegal use of Medicare benefits,” said CMS Administrator Seema Verma. “We want to be sure that Medicare beneficiaries and healthcare providers know about these changes well in advance and have the information they need to make a seamless transition.”

Providers and beneficiaries will both be able to use secure look up tools that will support quick access to MBIs when they need them. There will also be a 21-month transition period where providers will be able to use either the MBI or the HICN further easing the transition

CMS testified on Tuesday, May 23rd before the U.S. House Committee on Ways & Means Subcommittee on Social Security and U.S. House Committee on Oversight & Government Reform Subcommittee on Information Technology, addressing CMS’s comprehensive plan for the removal of Social Security numbers and transition to MBIs.

Personal identity theft affects a large and growing number of seniors. People age 65 or older are increasingly the victims of this type of crime. Incidents among seniors increased to 2.6 million from 2.1 million between 2012 and 2014, according to the most current statistics from the Department of Justice. Identity theft can take not only an emotional toll on those who experience it, but also a financial one: two-thirds of all identity theft victims reported a direct financial loss. It can also disrupt lives, damage credit ratings and result in inaccuracies in medical records and costly false claims.

Work on this important initiative began many years ago, and was accelerated following passage of the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA). CMS will assign all Medicare beneficiaries a new, unique MBI number which will contain a combination of numbers and uppercase letters. Beneficiaries will be instructed to safely and securely destroy their current Medicare cards and keep the new MBI confidential. Issuance of the new MBI will not change the benefits a Medicare beneficiary receives.  

CMS is committed to a successful transition to the MBI for people with Medicare and for the health care provider community. CMS has a website dedicated to the Social Security Removal Initiative (SSNRI) where providers can find the latest information and sign-up for newsletters. CMS is also planning regular calls as a way to share updates and answer provider questions before and after new cards are mailed beginning in April 2018.


December 21, 2017: Wait and see...

A client wrote, “With the passage of the Republican tax bill, we have a few questions.”  Another client asked, “With all the new tax legislation in the works, do you think…?”  A third inquirer astutely mentioned that he was “sure [that I was] getting a lot of questions from clients now.”

pulling hair outIndeed.

And while I can already address many issues, there are at least as many others for which I do not yet have answers.  It’s really too early to formulate tax strategies based on tax reform that has in fact not yet been officially signed into law, let alone analyzed by the practitioner community.  The proverbial ink isn’t even dry and already rumors abound that modifications will be made, that legislative corrections will be introduced to plug newfound loopholes, and that special interests will attempt to force change whether by influence or lawsuit.

Only a week ago, I was bombarded with communications from various professional associations recommending – at first – that taxpayers who would likely forfeit a deduction for state taxes under the proposed reform rules pre-pay their state income tax liability for 2018.  Citing IRS Rev. Rul. 82-208, practitioners were assured that such payments would be "deductible under §164(a)(3) of the Code" as long as the taxpayer made a good faith estimate of the tax that would be owed in the future year.  Days later, advisors began to back-peddle posturing that the deduction might be disallowed since it would result in a distortion of income.  Ultimately, Congress settled the matter by inserting a last-minute clause which definitively outlawed the tempting ploy.

With revisions occurring as fast as shrewd strategists seek to interpret the new rules, it is premature to establish any definitive course of action.  Instead, taxpayers should work with what is known and should do so with only a few days remaining prior to the anticipated effective date beginning with the 2018 tax year.  For the most part, the current tax reform will be prospective rather than retroactive.  A surprising exception appears to be the medical deduction currently limited to only those expenses which exceed 10% of the taxpayer’s Adjusted Gross Income (AGI).  New legislation will reduce the threshold to 7.5%; thereby allowing affected taxpayers to benefit from a greater reduction of taxable income.

The devil is in the details, which is why I am counseling my clients to wait and see how things shake out.  There will be plenty of time in the new year to adapt to the new rules and assimilate them into a workable strategy.  But for those of you who nevertheless want a glimpse of what’s to come, Forbes has published an excellent summary of "What your Itemized Deductions on Schedule A will look like after Tax Reform."


April 8, 2017: High-end Immigration

Each year, US employers use the H-1B visa to import foreign labor to fill specialty occupation positions such as architects, engineers, teachers, researchers, medical professionals, computer specialists, accountants, attorneys, economists, librarians and “fashion models of distinguished merit”.  The maximum number of visas is capped at 65,000 per year, of which 6,800 are reserved for Chile and Singapore under certain free trade agreements.  An additional 20,000 visas are available to individuals who have received an advanced degree from an American university.

With limited visas obtainable, employers scramble to be amongst the first to apply; particularly since the US Citizenship and Immigration Services (USCIS) stops accepting applications as soon as the agency thinks it has enough H-1B visa petitions, including the backlogged applications, to meet but not exceed the allowable cap.  The number of applications has risen steadily in recent years (currently 236,000).  Since 2014, the cap has been reached within mere days after the early April start of the application season!

H1B Top

March 24, 2017: Unintended Consequences

In a cleverly titled article [You Lost That Loving Feelin'. Whoa, That Loving v. IRS Feelin'], the National Association of Enrolled Agents (NAEA) explains that  the fallout from the Loving v. IRS case continues unabated.  When the ruling went against the IRS four years ago, it prevented the tax authority form imposing basic competency and ethical standards upon unenrolled tax preparers.  That ruling come back to bite us in Sexton v. Hawkins when the court found that the IRS Office of Professional Responsibility (OPR) had no jurisdiction over a disbarred attorney preparing tax returns and providing tax planning advice. Amazingly, had the attorney remained in good standing, OPR could have taken some action against the individual. But because he had been culled from the herd, unenrolled and disbarred, OPR had no disciplinary authority over the practitioner.  OPR has no jurisdiction over former Circular 230 practitioners who continue to prepare and advise taxpayers.


February 24, 2017: Mumbai

About a month ago, my post mentioned the arrest of hundreds of callers in India impersonating IRS agents who extorted millions of dollars from US taxpayers (Another Scam!). And then there was radio silence.  It was like so many hot news stories with attention-grabbing headlines, quotable sound-bites and scandalous photos, which quickly disappear from the front page, migrate to the back page and soon evaporate altogether.  We are always left to wonder what happened after the car chase, after the arrest, after the storybook wedding, after the jackpot was won…

A follow-up report of substance is rare and so I was thrilled when I stumbled across just such a sequel:  Here is the back story of the Indian cop who took down a massive IRS call-center scam.


February 13, 2017: Celebrating a centennial

Tax Scams_clip_image002I was recently invited to celebrate a client’s 100th birthday.  That was an event I did not plan to miss and when I had to beg off of a conflicting engagement, my disappointed friend remarked, “Wow, your clients must love you to stick around that long!”  Sure enough, this was not my first centennial event as I long ago had the honor to commemorate Lucille’s landmark achievement.  Then, Lucille stuck around for another 7 years.

But this was Meryl’s day.  What a treat it was to watch as friends and family fawned over her and as her husband solicitously ensured that her every wish was granted.  It was all the more remarkable given that this couple arrived in separate cars for their first tax appointment, pushed past each other as they entered my office, crammed themselves into opposites ends of my 6-foot couch and announced in vociferous unison – with obviously many years of practice – “We want you to know that we hate each other, but… we want to file jointly.”

Instantly intrigued, I learned that they heated each other almost from the word “go” more than 50 years earlier.  But both loved their quirky canyon home and vowed that they would never move out; so she lived upstairs and he downstairs, studiously avoiding each other except once each year when they came to my office to file their joint tax return.  Why joint?, you ask.  Well, most of the money was Meryl’s and so it was beneficial for her to file jointly rather than separately to get the extra personal exemption and enjoy more favorable rates.  For him it was also cheaper since she paid his taxes!

But sometimes life throws a curve.  Meryl now sadly suffers from dementia and needs 24/7 care.  An old family friend has stepped up to the plate: he arranges for caregivers, pays the bills, and fetches the old folks when they need to venture into town from their precarious perch atop a slide-prone hillside via a rutted dirt road.  Whether he has mediated a truce or Meryl has forgotten her anger or simply because age has mellowed the couple, hate has once again turned to love.

I guess everything can come full circle in 100 years.


February 1, 2017: Don't say "yes"

not yesI’m pleased to say that my clients are learning to recognize scam phone calls in which a caller purports to be an IRS agent threatening collection action or even jail if the taxpayer does not immediately submit a payment. I still get queries from worried folks but most of these begin by announcing that a scammer had contacted them; my clients no longer fret that they’ll go to jail or that the FBI will show up with guns drawn.  Instead, taxpayers want to know what they can do to help stop these nuisance calls.

But every so often, a client brags that he has engaged in conversation with a scammer, if only to try to elicit information and then report it to the authorities or because he wants the scammer to know that he was “onto him” or because “it’s fun”.  Forbes warns about the dangers of responding to these calls, even if you think you’ve got the upper hand, with so much as a simple “yes” answer to even the most innocuous question like “Can you hear me?”  Your reply may be recorded and used by the scammer to authorize bogus charges on a credit card, phone or utility bill.

The author lists six reasons why you should never engage with scammers:

  1. When you engage with a scammer, you’ve confirmed that the scammer has called a working phone number and that you’ll answer the phone.  Identity theft isn’t just about getting money out of you one time or stealing a tax refund check, it’s an entire industry dedicated to putting your identity profile together piece by piece, collecting key bits of information about you which can then be stored, repackaged and sold to the next highest bidding scammer.

  2. When you tell scammers to “stop calling my house” or “don’t call me at work” or “this is my cell phone,” you may inadvertently give out more information about your phone number and you’ve just added to the database of information that scammers want to collect about you.

  3. When you tell scammers that you know you don’t owe anything, you might indirectly confirm your name and Social Security Number and much, much more.  Simply replying that you are current with your tax obligations may imply to the scammer that you’re a taxpayer, that you have a job and that you have sufficient funds to pay your bills; all valuable information to add to your identity profile.

  4. While it may be tempting to threaten the caller with comments like “I’ll get you, I’m a lawyer” or “How dare you, my dad is a cop” or “Just wait until my Army husband, Bill, gets home,” you are merely adding to your profile and even that of other family members.  Scammers routinely match pieces of data to other data and then create a profile that may accurately describe you as Jane Smith, SSN 123-45-6789, a lawyer who lives at 123 Elm Street, Anytown, USA 12345.  Your spouse’s name is Bill; he works for the government; your dad is a cop.  This data, along with information gleaned from other sources including social media, is incredibly valuable to scammers.

  5. You might be breaking the law. In most states, and according to federal law, you can record phone calls with the consent of just one party to the call. But in 12 states (California, Connecticut, Florida, Illinois, Maryland, Massachusetts, Michigan, Montana, Nevada, New Hampshire, Pennsylvania, and Washington), you need the consent of both parties to record a call.

  6. You’re never going to make a scammer feel bad. Threats, bad language, telling them off; scammers have likely heard – and said – far worse. You’re not fazing them one bit so don’t waste your time.

January 20, 2017: Another Scam!

Image result for catch thiefIn 2016, Indian authorities arrested dozens of managers of 9 call centers from which more than 700 callers made thousands of calls a day impersonating IRS agents to accuse American taxpayers of failing to pay their taxes and threaten them with jail time if they didn’t pay up immediately.  The US Treasury Inspector General for Tax Administration claims it received more than 1.7 million complaints of such calls in the last 3 years; more than 8,800 victims have paid more than $47 million as a result of these scams.  The fallout from the arrest has been a near-immediate and dramatic drop in the number of related complaints.  Head for my Fraud page for additional information, tools and links to report and protect yourself if you think you’ve been victimized, even an ever-expanding list of telephone numbers that scammers have used when demanding call-backs from potential prey.

Unfortunately, when one scam ceases to be lucrative, another arises in its place as opportunistic criminals develop an expanding arsenal of tools designed to defraud taxpayers.  Most recently, the IRS warned practitioners about e-mails that state “"I need a preparer to file my taxes." Always eager to serve new clients, an unsuspecting practitioner may download a potential client's tax information or access a site with the potential client's tax information but will, instead, fall prey to a clever phishing scheme designed to mine critical information.  It’s almost enough to scare careful tax professionals from taking on any new clients!  Alas, my business depends on your loyalty and your referrals whom I will eagerly welcome.  All I ask is that new folks provide me with the source of their referral.


January 18, 2017: IP PINs, W-2 Verification Codes, & ID Verification Letters

As part of its efforts to crack down on tax fraud, the IRS is issuing IP PIN letters to taxpayers who reported or were identified as victims of identity theft.  Because the IRS will reject your return if it is e-filed with your SSN but an incorrect or missing IP PIN, it is imperative that you provide your tax practitioner with a copy of the letter (if you received one).

Additionally, the IRS has instituted the use of a 16-digit W-2 Verification Code on some (but not yet all) W-2s issued this January.  If your W-2 has this code, it must be entered into the preparation software to ensure proper e-filing of your return; therefore, you must be sure to submit the original W-2 or a clearly legible copy when providing your tax data.

Image result for verifyIn some instances, taxpayers may receive letters from the tax authorities asking them to verify their identity.  While some taxpayers may worry that these letters are themselves fraudulent, IRS Letter 5071C and FTB Form 4734D are in fact legitimate.  Taxpayers are asked to respond to ensure further processing of their returns and ref und requests.  If you are concerned about these letters, kindly forward a complete copy to me so that I may advise further.


January 16, 2017: Procedural Issues

The FreeFile program – a partnership between the IRS and commercial software providers – is now open and available through the IRS website. While higher income earners may only obtain free fillable forms, taxpayers with incomes of $64,000 or less may use free software to prepare federal and even some state returns.

If you’d like in-person assistance from an IRS agent, you may visit a Taxpayer Assistance Center.  In prior years, the IRS served taxpayers on a walk-in basis but now requires that an appointment be scheduled in advance by calling (844) 545-5640.

The IRS anticipates issuing most taxpayer refunds in less than 21 days. However, a new law requires the IRS to hold refunds tied to the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC) until February 15th so that the tax authority may match information from Forms W-2 and 1099 with information reported on tax returns.  The hold, together with bank processing times and bank holidays, means that taxpayers should not count on seeing those tax refunds until the week of February 27th.

If you are concerned about the status of your refund, head for the Where's My Refund? tool on the IRS website or the IRS2Go app on your smart-phone.  Information is generally available within 24 hours after the IRS has received your e-filed tax return or four weeks after mailing your paper return.


April 10, 2015: Tax Forms

It’s five (5) days before the deadline!  And you’ve just now realized that your taxes are due.  But…

The head of the National Treasury Employees Union reports that taxpayers are standing in line outside some walk-in service centers beginning at 4 AM.  The New York Post reports that one taxpayer visited six public libraries and two IRS offices in Harlem and Lower Manhattan in pursuit of a Form 1040EZ and came up empty.  The Washington Post reports long lines outside the IRS Taxpayer Assistance Center in Dallas, where many taxpayers were turned away because the shelves in the room where preprinted forms are normally stocked were bare; apparently the office printer had been removed because the maintenance contract was deemed too costly.
What to do?!

Call me.  I have a brand new laser printer, extra toner cartridges, a garage stacked high with fresh reams of paper, and software that can generate and print any tax form you might need.


March 19, 2015: IRS Identity Verification Letters

Just days ago, I warned readers to beware of a bogus e-mail scam used to mine taxpayer data from unsuspecting victims who click on a link in response to an e-mailed request to “kindly verify your information from a 1040 tax return that you filed within the last six years.”  Then, yesterday, the tax authority sought to encourage taxpayers to use the government’s Identity Verification Service website in response to an IRS request.

Amazingly, this IRS request is legit.  While it may sound confusingly and suspiciously similar to the scam, the crucial difference is that the IRS makes its request by US mail in correspondence identified in the header as “Letter 5071C”.  I remind you again that the IRS never contacts taxpayers by e-mail or phone – the tax authority communicates only by mail.

Letter 5071C is generated by the IRS after a suspicious tax return has been filed with a real person’s name and/or Social Security Number.  To determine whether a real taxpayer or a scammer has filed the return in question, the IRS will ask a series of questions about previously filed returns that only the real taxpayer can answer.  Once a taxpayer’s identity has been verified and the IRS has confirmed that the real taxpayer filed what had been suspected to be a fraudulent return, the IRS will process and issue the taxpayer’s refund within about six weeks.  If however, the real taxpayer did not submit the suspicious return, the IRS will reject the return and work with the taxpayer to recover his identity; a process that unfortunately may take many months.

http://www.wexfordgaa.ie/wp-content/uploads/2013/03/fiver-confused-graphic2.pngIndividuals, who are fearful of using the IRS website to confirm their identities online, may also contact the IRS via a toll-free number listed in the letter.  The IRS reminds internet users to always look for a URL web-address ending in “.gov” – never “.com”, “.org” or “.net” when attempting to access an IRS-sponsored site.

If ever you are unsure if you received a real or fake message from the IRS, call me.  I’ll be happy to help you sort things out.


March 12, 2015: It takes Concentration

Speaking to a friend with a sympathetic ear, I had just finishing lamenting that I had not left my office since Tuesday.  It’s Thursday now and with only the occasional meal and bathroom break, I’ve been at my desk from early morning to late at night.  It’s tax season; the middle of tax season!  I really shouldn’t expect to walk out the front door into glorious sunshine or head for the beach to enjoy the summer temperatures or even take a late-night stroll under the stars.  I was tempted but for a moment, if only because the night air was almost balmy.  Instead, I emptied my shredder, took out the trash and sat right back down at my desk.

I had just closed one client file and was about to begin another when Outlook chimed, “You’ve got mail” announcing the arrival of yet another blog, e-blast and newsletter keeping me abreast of all things tax.  I scanned the headlines broadcasting Senate hearings on tax fraud, unclaimed tax refunds for non-filers, the tax consequences of naming rights, injured spouse relief, and empowerment zone designation extension.  Trust me; I was not more interested in these topics than you are.  And then, I stumbled upon Tax Official Dies in Office, Co-Workers Don't Notice for Two Days.   That grabbed me!

http://www.casinomanagementreview.com/wp-content/uploads/2014/04/man-asleep-on-desk.jpgAs it turns out, a tax auditor in Finland died in his office on Tuesday but was not discovered by any one of his 100 co-workers until Thursday!  Everyone just thought that he wanted to work in peace and was silently poring over returns.  I told you, it takes concentration!

It’s not that his office-mates were asocial and uncaring.  Apparently his closest colleagues had been out at meetings.  According to the BBC News, “He was found only when a friend called to have lunch with him.”  I imagine a scene in which the friend pops into the office with a sandwich bag in hand and sits across from the auditor.  The friend doesn’t even notice that the auditor, a quiet sort of fellow, is a bit more reticent than usual.  But when the auditor doesn’t even take a bite out of his favorite hoagie, the friend takes a closer look and finally realizes what should have been obvious days earlier.  The head of personnel in the Helsinki office explains that “everyone at the tax office [i]s feeling dreadful - and [that] procedures would have to be reviewed.”

That gets me to think:  I work alone.  No co-workers, no office-mates, and no clients for days at a time since I limit appointments to only a few days a week.  I sit at my desk, buried under mounds of tax data, crunching numbers.  And there’s nobody who knocks on my door to share a sandwich with me.  I wonder how long it would take to discover that I was no longer just concentrating but that I had passed on.


February 24, 2015: IRS Audit Rate for Individuals Drops

USA Today reports that “your chances of facing an IRS audit rate dropped to the lowest level in at least a decade in 2014 and are expected to fall further this year.”  In 2013, the IRS audited more than 1.2 million individual taxpayers; this represents a mere 0.86% of returns filed.  With recent declines in IRS funding, it is expected that your chances of being audited will continue to decrease.  An analysis of IRS data confirms that audits fell in every category and across all income levels, even as the number of individual tax returns filed have risen.  The IRS audited less than 1.1 million taxpayers with incomes under $200K in 2014 (versus 1.4 million in 2010) and only 34K individuals with incomes in excess of $1 million (vs. 41K in 2012).  But before you cheer, think about IRS Commissioner John Koskinen’s warning that the audit rate decline could eventually "corrode" Americans' faith in the federal tax system and undermine voluntary payment compliance.  "If you're in Des Moines and you're writing that check, and you feel that maybe your neighbor down the street isn't, or is getting away with something, that's a problem".


February 23, 2015: More ACA reporting issues!

The Obama administration has announced today that the federal health insurance exchange has issued incorrect tax information to approximately 800,000 insureds.  Corrected Forms 1095-A are expected to be issued by the first week of March. Taxpayers who received incorrect tax statements should wait to file their 2014 federal income tax returns. Those who have already filed may have to amend their returns.


February 21, 2015: Covered CA sends out inaccurate tax forms

It would seem that last year’s roll-out fiasco and the legal challenges to the Affordable Care Act (ACA) currently pending before the US Supreme Court were not yet enough to worry taxpayers.   Late last week, California's health exchange was forced to apologize for mailing incorrect tax forms to roughly 100,000 people who purchased private coverage.  Although Covered CA is in the process of sending out revised 1095-A forms, this mistake could delay tax filings or force taxpayers to amend already filed tax returns.

The exchange explained that most of its errors were related to the number of months a household had coverage, precisely the information needed to determine if taxpayers may be subject to the Individual Shared Responsibility Payment that could be as high as 1% of household income for every month in which members of taxpayer’s household did not have qualifying medical coverage during 2014.  NOTE:  The maximum penalty increases to the greater of $325 or 2% of household income in 2015.

Informational reporting documents are required to be issued by ACA marketplace providers (Form 1095-A), insurance companies (Form 1095-B) and employers (Form 1095-C) who have provided healthcare coverage to individuals and their families.  While Forms 1095-A must be issued this year, non-marketplace 1095 forms need not be sent until 2016.  Some insurance companies and employers may issue the forms voluntarily, but taxpayers should not worry if none are received this year.  Instead, they should be on the look-out for the forms and make sure to provide them to their tax practitioners next tax filing season.


February 9, 2015: IRS Overseas Offices Closing

Although the IRS has stated that offshore tax evasion remains amongst its highest priority areas for criminal enforcement in 2015, the tax authority has recently announced that it is planning to close various European offices.  Frankfurt, London and Paris will be shuttered in addition to the Beijing office which was already closed earlier this fiscal year.  In an attempt to assuage Americans abroad, the IRS claims that it remains committed” to servicing the expatriate community andmeeting international obligations.  It will just do so with a significantly reduced footprint!


February 6, 2015: Federal Directory of Preparers

The IRS has just launched its new online directory of tax professionals, intended to help taxpayers find a qualified return preparer.  The directory is a searchable, sortable listing featuring the name, city, state and zip code of attorneys, CPAs, enrolled agents and those who have completed the requirements for the voluntary IRS Annual Filing Season Program (AFSP). Taxpayers may search the directory using the preferred credentials or qualifications they seek in a preparer, or by a preparer’s location, including professionals who practice abroad. All preparers listed also have valid 2015 Preparer Tax Identification Numbers (PTIN).  Tax return preparers with PTINs who are not attorneys, CPAs, enrolled agents or AFSP participants are not included in the directory, nor are volunteer tax return preparers who offer free services.

And, yes, I’m listed in the directory!



January 26, 2015: Includable Income

A while back, I got a call from a taxpayer who wanted to know if she had to claim the income she received from selling eggs.  Momentarily surprised that a resident of the urban sprawl that is Los Angeles would find space and zoning approval to raise chickens, I nevertheless promptly launched into my spiel:  All income, “from whatever source derived”, is reportable [IRC §61(a)].  I explained that she would be required to attach Schedule F Profit and Loss from Farming to her individual return and would have to claim the sales proceeds in full but could then deduct allowable expenses such as antibiotics and breeding costs.  Only when the caller stated that she had not taken any medications and that she was not responsible for the expenses associated with the insemination, did I realize that she was talking about selling her eggs!

Now that’s a horse – or shall I say an egg (?) – of a different color!  Just last week, the Tax Court ruled that money received for eggs donated to infertile couples was “compensation” and not “damages” despite the fact that the donor claimed to have suffered a painful procedure that was potentially damaging to her present and future health since she had voluntarily signed a contract to undergo both the surgical process and the attendant pain [Perez v Commissioner, TC # 9103-12, February 14, 2014].  Judge Mark Holmes wrote that any other ruling would yield “no limits on the mischief” others might seek to argue:  A professional boxer could, for example, claim that the payments he received for his latest fight should be excludable from income because they were payments for his cuts, bruises and nose bleeds and a hockey player could argue that his million-dollar salary constituted payment for the chipped tooth he would inevitably suffer at some time during his career.


January 22, 2015: Miscellaneous IRA Rules

IRA Rollovers.  The Tax Court (Bobrow v Comm. TCM 2014-21) has ruled that taxpayers are allowed only one rollover per year effective on January 1, 2015.  The rule applies to the aggregate of all IRAs and the year begins on the date of distribution (regardless of calendar or taxable year).  As before, any distributed amounts must be re-deposited into the original or a new account within 60 days.   Trustee-to-trustee transfers are excluded from this limitation.

Inherited IRAs.  The US Supreme Court (Clark v Rameker, June 12, 2014) has held that inherited IRAs are not deemed “retirement funds” and therefore not protected from creditors in bankruptcy proceedings.  Traditional IRAs and other retirement accounts – including 401(k) plans and tax-sheltered annuities – remain protected under the US bankruptcy code (Title 11, US Code §522).

Deferred Compensation.  Contractual rights to receive payments under a §457 deferred compensation plan are similarly protected from creditors under the Bankruptcy Code.  Nevertheless, Darryl Strawberry stood helplessly by as the IRS recently auctioned off the deferred compensation agreement that was part of his 1985-90 contract with the New York Mets.  The IRS had placed a levy against Strawberry’s assets long before the start of his bankruptcy proceedings and therefore held a priority claim resulting from an unpaid tax debt of $542,572.  The proceeds of the auction totaled roughly $1.3 million; an unnamed winning bidder will get a monthly check from the Mets for $8,891.82 over the next 18-plus years.


October 7, 2014: Canadian Registered Retirement Plans

As per Rev Proc 2014-55, the IRS has eliminated the annual filing requirement of Form 8891 U.S. Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans for US citizens and residents who own Canadian Registered Retirement Savings Accounts (RRSP) effective immediately.  In the past, US taxpayers could only benefit from tax deferral by attaching Form 8891 to their return and making an election under the US-Canada tax treaty.  Many taxpayers failed to comply with this and another requirement; namely that they file Form 8891 each year to report contributions made, income earned and distributions received from RRSPs and Registered Retirement Income Funds (RRIFs).  Before today’s change, these omissions would have to be retroactively corrected by making a time-consuming and costly request for a private letter ruling from the IRS.  Now taxpayers may qualify for automatic tax deferral as if they had invested in US-based retirement accounts.  NOTE:  This change affects federal reporting requirements only; not all states confiorm.  California taxpayers, for example, are not eligible for tax deferral and must report all income earned inside the RRSP each year.


August 25, 2014: Tax Cheaters Beware

According to a taxpayer attitude survey conducted annually by the IRS Oversight Board, 86% of those queried said it is not at all acceptable to cheat on income taxes.  While the public’s attitude has remained relatively unchanged from year to year, it is nevertheless important to note that some respondents believe that it is acceptable to shave “a little here and there” or even “as much as possible”.


While cheating does not always rise to the level of criminal intent, taxpayers should note that the IRS Criminal Investigations (CI) division initiated 5,314 cases and recommended 4,364 cases for prosecution; increases of 12.5 and 18% respectively over the prior year.  The conviction rate for fiscal 2013 was an impressive 93%!


March 29, 2014: Tax Deadline

For those of you who have not recently looked at a calendar, I’d like to remind you that April 15th is just around the corner.  Yep!  It’s time to address what you’ve tried so hard to ignore:  TAXES.

Actually, I’m offering you an “out”.  All you have to do is reply by e-mail and ask me to file an extension on your behalf.  Then you get to bury your head in the sand for another few months until the ultimate deadline on October 15th.

Of course, I would be remiss if I did not remind you that an extension merely extends the time for filing but not payment.  As a result, I would like to suggest that we submit a payment with the extension request if you think you might have an outstanding tax liability for 2013.  But even that is easy:  Give me a call or shoot me an e-mail so that I can run the numbers for you.  If we decide that a payment should be made, I’ll ask you to sign Form 8878 and provide me with a copy of a voided check so that I may authorize the IRS to automatically debit your bank account on April 15th for the agreed-upon amount.  If you owe money to the FTB (state), I’ll provide you with a payment voucher and mailing instructions.  It really couldn’t be easier!

So even if you’re hoping that the tax authorities will miraculously disappear, I’m still here.  And I’m waiting to hear from you…


February 19, 2014: Calling the IRS

Calling IRS

Wouldn’t it be nice if the IRS was just waiting for your call, ready to answer your questions, offer guidance and resolve your issues?  Alas, the National Society of Accountants (NSA) reports that:

  • The IRS could only answer 61% of calls from taxpayers; down from 87% ten years earlier.
  • Callers who did get through had to wait roughly 18 minutes on hold.
  • Taxpayers could choose to visit IRS walk-in sites instead.  Where these sites handled as many as 795,000 questions during the filing season a decade ago, only 110,000 were addressed last year (a drop of 86%).
  • Taxpayers who communicated with the IRS by mail did not fare any better; 53% of the 8.4 million letters received from taxpayers were deemed “over age” (more than 45 days old) at year-end.  Ten years ago, only 12% were found to be “over age”.

To make matters worse, the IRS has announced that it will only answer “basic” tax law questions on its telephone lines and in its walk-in sites during the current filing season but will not answer any tax law questions after the filing season!  In contrast, improved customer service continues to be the highest priority for California’s Board of Equalization (BOE), promising that it is just “call away to assist you”.

To  a great extent, IRS’ decline in customer service can be blamed on budget cuts – some, if pundits are to be believed, due to retaliatory measures taken by Congress for the tax authority’s missteps in reviewing the tax exemption requests of certain non-profit groups.  Legislators have carved almost $1 billion out of the IRS’ budget in the past four years, including amounts allocated to training (reduced from $172 million to only $22 million), resulting in a workforce reduction of 8,000 employees.

But there’s always a silver lining.  The National Society of Tax Professionals (NSTP) reports that audits of individual tax returns have reached the lowest rate since 2005; less than 1 % were audited in 2013.  Nevertheless, roughly 11% of taxpayers with incomes exceeding $1 million – versus 3% of those reporting between $200,000 and $1 million were audited and only 0.4% of those reporting incomes under $200,000 who didn’t file a Schedule C, E, F or Schedule 2106 – were audited.


February 6, 2014: Tax Scams

Tax Scams_clip_image002A worried client called me in a panic this morning moments after he hung up the phone with someone who claimed to be from the IRS.  My client described the events as follows:

A message was left on my phone, indicating that I was responsible for a tax deficiency and insisting that I call him back at (415) 251-6327.  I called the number a few times and kept getting voicemail indicating that the mailbox was full.  Finally, I reached a man who answered “IRS”; there was a lot of background noise as though he were in a business office. He said that several attempts had been made to send me a certified letter, but no one was available to sign for it.  He then indicated that since I did not respond, I am now guilty of criminal tax evasion and would be arrested tomorrow unless I made immediate arrangements to pay $6,859.  If I did not pay, additional legal fees of $25,000 would accrue and my bank accounts would be attached, wages garnished and credit ruined.  He encouraged me to seek the services of a tax attorney.  He then indicated that the only acceptable form of payment would be a "payment voucher."

By coincidence, I had received a warning about this latest IRS scam yesterday.  It sounded as though my client’s caller had lifted the script nearly word for word.  As a result, I was able to appease my client that he did not have any outstanding tax liability with the IRS and that he had done just the right thing by contacting me to obtain reassurance and guidance.  The IRS has asked victimized taxpayers to report these types of calls to the Treasury Inspector General for Tax Administration at (800) 366-4484, as well as file a complaint with the Federal Trade Commission.

Sadly, this is not the only scam making the rounds; just the latest.  In October, for example, California’s FTB alerted the public that scammers were contacting elderly people in Beverly Hills to inform them that they had received red light traffic tickets which had been referred to FTB for collections. The scammers instructed victims to load money onto a prepaid debit card and send it to a bogus address. The scammers even had the gall to refer victims to an actual FTB phone number for reference.

The tax authorities ask everyone to remain vigilant, to never give out Social Security, bank or credit card numbers over the telephone or by e-mail.  Neither the IRS nor the FTB have the ability to process funds from third-party issued debit cards, prepaid credit cards, or wire transfers.  In fact, neither the IRS nor the FTB will initiate contact with individuals by phone, e-mail, text messages or social media to request personal or financial information, including PINs, passwords or similar confidential access information.  These sorts of scams should be immediately reported to phishing@irs.gov.

On the other hand, if you are legitimately contacted by one of the tax authorities, you should act promptly but don’t panic!  There may be many reasons why a notice was sent to you; most cover a specific issue about your account or tax return while others may require payment, notify you of changes or ask you to provide more information.  In all cases, each  notice will offer specific instructions on what you need to do to satisfy the inquiry.  The IRS offers additional tips to taxpayers, including:

  • If you receive a notice advising you that the IRS has corrected your tax return, you should review the correspondence and compare it with the information on your return.
  • If you agree with the correction to your account, then usually no reply is necessary unless a payment is due or the notice directs otherwise.
  • If you do not agree with the correction the IRS made, it is important that you respond as requested. You should send a written explanation of why you disagree. Include any information and documents you want the IRS to consider with your response. Mail your reply with the bottom tear-off portion of the IRS letter to the address shown in the upper left-hand corner of the notice. Allow at least 30 days for a response.
  • You should be able to resolve most notices that you receive without calling or visiting an IRS office. If you do have questions, call the telephone number in the upper right-hand corner of the notice. Have a copy of your tax return and the notice with you when you call.
  • Keep copies of any notices you receive with your other income tax records.

Even easier, contact me!  Make sure to provide me with a copy of the correspondence you received – keep the original in your files – and I’ll do my best to address the issues and offer you peace of mind.  In some circumstances, I will ask you to complete a form granting me the authority to communicate directly with the tax authorities on your behalf.  In other instances, it may be simpler and cheaper to provide you with encouragement to handle the matter on your own.  But it’s always best to check with me first.


January 17, 2014: The Future of US Tax Policy

Exactly a year ago, I wrote that I was “mesmerized by the stunning tableau” of the Malibu coastline from my hilltop perch at the Pepperdine Law School.  At the time, I was bundled up to ward off the “polar cold” of winter winds buffeting the palms and rustling the leaves of eucalyptus and olive trees.  Today, I am wearing a T-shirt and wishing for even a slight breeze to cool the summer-like temperatures beneath endless azure skies.


Reluctantly asked to leave this extraordinary vista, I ventured indoors, put on my sweater, scarf and woolen coat to protect against an overactive air conditioning system and joined internationally recognized academicians as they wrestled with the future of a tax system that they believe is unsustainable in its current form.

Joseph Bankman (Stanford University) explained that we currently have a two-tier tax structure which separates those who are subject to low rates from those who pay – or will pay – exceptionally high rates and proclaimed the inefficiency, not to mention inherent inequity of this system.  To illustrate his point, he randomly assigned male attendees to the low-rate group and females to the high-rate group.  When the ladies in the lecture hall protested, Bankman reassigned short and tall folks to each category until a gentleman who had obviously played basketball in his younger years groaned at the prospect of becoming subject to a proposed 70% rate while his short (and may I mention fat?) neighbor got off scot- and tax-free.  Bankman accommodated by dividing the group into fat/skinny taxpayers, blue- and brown-eyed, and finally – at the pinnacle of political incorrectness – into black and white folks.  Unfair?  No more so, Bankman claimed, than the categories actually in effect:  Current and future taxpayers.

Edward Kleinbard (University of Southern California) asked, “What did our kids ever do to us to deserve the fiscal mess we will leave them?”  Our current federal debt-to-gross domestic product (GDP) ratio is already at 70% and likely to rise to even higher levels.  Believing that the government’s economic projections are based on unrealistic assumptions (including perpetual full employment, along with no recessions or wars ever again!), Bankman said that “we will not grow ourselves out of this.”  Instead, serious tax reform is required.

He proposed elimination of all Bush tax cuts [made permanent under the American Taxpayer Relief Act of 2012 (ATRA)] as well as the deductions for mortgage interest, charitable contributions and all other Schedule A items.  The resulting tax savings would yield $4.6 trillion [with a “t”!], $664 billion, $278 million and $1.2 trillion, respectively, over the next five years.

James Repetti (Boston College) offered specific suggestions to improve the estate and gift tax regimes by

  1. eliminating the minority discounts afforded to the transfer of partnership and LLC interests,
  2. ensuring – in contrast to a recent Obama Administration proposal – that the exemptions for estate and gift taxes remain identical to avoid favoring the transfer of assets after death over those transferred during life,
  3. decreasing the exemption to $3.5 million (rather than its current $5.34 million) and increasing the highest marginal rate to 45% (in contrast to the 40% currently in effect),
  4. eliminating Crummey Powers to ensure that gifts eligible for the annual exclusion are indeed gifts of present interest, and
  5. instituting a lifetime cap on Grantor Retained Annuity Trusts (GRATs) used by wealthy individuals to transfer assets with minimal or even zero gift tax consequences.

Bruce Bartlett (former deputy Assistant  Secretary of the Treasury) outlined the history of tax reform from the Kennedy era to the present day and made a compelling case for the need to eliminate tax “loopholes” (known as “expenditures in government lingo).  He argued that sanctioned tax savings – available to the individual taxpayers in the form of Schedule A deductions – are responsible for 70% of the government’s revenue loss.  By the same token, most provisions favoring businesses were successfully eliminated nearly 30 years ago with the passage of the 1986 Tax Reform Act (TRA) and that there’s “nothing left to cut on the corporate side.”  The focus, therefore, must be on individual tax reform.

As though he had been a fly on the wall, absorbing prognostications and recommendations, Rep. Kevin Brady (R-Texas), chairman of the Ways and Means Health subcommittee, recently announced that his “preference is to advance comprehensive tax reform” rather than focus on temporary extensions that do not promote economic growth in the long run.  Nevertheless, while the House has no plans to extend any of the 55 tax provision that expired on December 31st, U.S. Chamber of Commerce President Thomas Donohue does not think that we will see “comprehensive tax in this election period” due to “too many differing interests, combined with an upcoming midterm election.”


March 8, 2013: Results from an Audit

Just yesterday, I sat across from an IRS auditor in the Glendale Examination Office, armed with a meticulously organized file of supporting documentation and a stack of receipts to match every entry claimed on the return.  While we prevailed on almost every issue, we were subject to several sizeable haircuts for car and meal expenses.  I thought I would share the take-away lessons with you:
My client, a travelling salesman, kept a diligent log of business miles noting distance travelled and the purpose of each trip.  To accompany his log, the client provided his day planner verifying his around-town and out-of-region appointments.  While impressed, the auditor never-the-less denied the taxpayer’s claim that he used his car exclusively for business and reduced his previously-claimed deduction by 30% assuming that the taxpayer logically had to drive from home to office [considered a non-deductible commute] and that at least some miles were driven to accomplish personal errands.

RULE:  Whether using the actual expense method or the standard mileage allowance, taxpayers must pro-rate the use of a personal vehicle based on a percentage of substantiated business miles versus total miles driven during the year.  In general, the costs of commuting between home and work are nondeductible personal expenses.  Taxpayers may not convert commuting miles to business miles by making business calls on a cell phone while driving or placing advertising placards on the car.  Taxpayers must substantiate auto deductions with adequate records maintained contemporaneously in an account book, diary, log or trip sheet.

https://encrypted-tbn0.gstatic.com/images?q=tbn:ANd9GcTw_KPFOlIJBqks-1rXDPHIZcyYuNF1L4OV9Kng2Squk_jIH1-0TQWhile on the road, my client often stopped for a quick bite to eat – a burger here, a bagel there – and claimed a deduction for business meals.  While his expenditures were quite reasonable [not one 3-Martini lunch was to found in the batch!], the auditor scrutinized each receipt and discounted most of them.  Meals consumed out of town while at a trade show in far-away places seemed to satisfy the auditor’s standard, but meals consumed in the local area did not survive the examiner’s hatchet.  Although some of the disallowed expenses surely represented the taxpayer’s cost of meeting a customer for lunch or dinner, my client sadly did not document these meetings on his receipts.  A simple notation (“Meeting Bob to negotiate purchase”) might have assured the auditor of the taxpayer’s business purpose but without such a quick scribble, the auditor chose to assume that the taxpayer was deducting the costs of his own daily breakfasts and lunches.

RULE:  The cost of entertaining a client or customer may qualify as an ordinary and necessary business expense if it is directly related to or associated with a trade or business.  The taxpayer must be able to show that his purpose was to actively engage in business during a meal or entertainment activity and that he had more than a general expectation of receiving income or some other specific business benefit in the future.  Meals with business associates and co-workers are generally not deductible.


February 22, 2013: College Tax Benefits

http://finance.zacks.com/DM-Resize/photos.demandstudios.com/getty/article/18/250/78495736.jpg?w=600&h=600&keep_ratio=1Various college education tax credits and other benefits are available to eligible students.  While a taxpayer may qualify for more than one benefit, he may claim only one in any particular year.  Benefits are available to all taxpayers, whether they itemize or claim the Standard Deduction. The credits are claimed on Form 8863 Education Credits (American Opportunity and Lifetime Learning Credits) and the tuition and fees deduction is claimed on Form 8917 Tuition and Fees Deduction.

The recently enacted American Taxpayer Relief Act extended the American Opportunity Tax Credit for another five years until the end of 2017. The new law also retroactively extended the tuition and fees deduction, which had expired at the end of 2011, through 2013. The Lifetime Learning Credit did not need to be extended because it was already a permanent part of the tax code.  The American Opportunity Tax Credit will likely yield the greatest tax savings for most eligible students, although the Lifetime Learning Credit may offer better benefits for part-time and graduate students. The tuition and fees deduction may be the right choice for others, especially if they are ineligible for the credits.  All three benefits are available for students enrolled in an eligible college, university or vocational school, including both non-profit and for-profit institutions.  NOTE:  None of the benefits may be claimed by a nonresident alien or married person filing a separate return.

The American Opportunity Tax Credit
  • Offers students enrolled at least half-time in an undergraduate program a maximum annual credit of $2,500.
  • Tuition, enrollment fees, books and other required course materials generally qualify; other expenses, such as room and board, do not.
  • The credit equals 100% of the first $2,000 spent and 25% of the next $2,000, which means that the full $2,500 credit is available only to a taxpayer who pays $4,000 or more in qualified expenses per student. 
  • The full credit may be claimed by single taxpayers whose modified adjusted gross income (MAGI) is $80,000 or less, married taxpayers whose MAGI is $160,000 or less.
  • The credit is phased out for taxpayers with incomes above these levels and cannot be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.  
  • 40% of the American Opportunity Tax Credit is refundable, allowing even people who owe no tax to get a tax refund of up to $1,000 for each eligible student.

The Lifetime Learning Credit
  • Up to $2,000 per tax return is available to both graduate and undergraduate students but unlike the American Opportunity Tax Credit, the limit on the Lifetime Learning Credit applies to each tax return rather than to each student.
  • Though the half-time student requirement does not apply, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills.
  • Only tuition and enrollment fees qualify; additional expenses do not.
  • The credit equals 20% of the amount spent on eligible expenses for all students on the return, which means that only a taxpayer who pays $10,000 or more in qualifying tuition and fees costs may enjoy the full tax benefit.
  • For 2012, the full credit can be claimed by single taxpayers whose MAGI is $52,000 or less; for married taxpayers whose MAGI is $104,000 or less.
  • The credit is phased out for higher-income taxpayers and cannot be claimed if MAGI exceeds $62,000 (Single) or $124,000 (Married-filing-Jointly).

The Tuition And Fees Deduction
  • Available for all levels of post-secondary education. 
  • Annual deduction limit is $4,000 for joint filers whose MAGI is $130,000 or less and other taxpayers whose MAGI is $65,000 or less.
  • The deduction limit drops to $2,000 for couples whose MAGI falls between $130,000 and $160,000, and other taxpayers whose MAGI falls between $65,000 and $80,000.

Other education-related tax benefits may be available to certain taxpayers as well, including tax-free scholarship and fellowship grants, student loan interest deduction of up to $2,500/year, tax-free interest on savings bonds used to pay for college, and qualified tuition programs or 529 plans.  Taxpayers with qualifying children who are students under age 24 may be able to claim a dependent exemption as well as the Earned Income Tax Credit.  Additional information is available in the IRS Publication 970 or online at the IRS Tax Benefits for Education Information Center.


February 21, 2013: Reporting ROTH Conversions

Here's a friendly reminder to taxpayers who made ROTH conversions under a special rule in effect only during 2010:  While ROTH conversions are generally taxable in the year that the conversion occurs, the special rule allowed taxpayers to include only one-half of the taxable amount in each of the subsequent years 2011 and 2012 (or elect to include the full amount in 2010).  Taxpayers taking advantage of the rule that granted deferred recognition of income must now, of course, remember to report the remaining taxable amount when preparing their 2012 tax returns.

ROTH conversions in 2010 from Traditional IRAs must be entered on Line 15b of the 2012 Form 1040 or Line 11b of Form 1040A. Conversions from workplace retirement plans, including in-plan rollovers to designated ROTH accounts, must be reported on Line 16b of Form 1040 or Form 1040A.  NOTE:  Taxpayers who made ROTH conversions in 2012 or will make them in future years must file Form 8606 Nondeductible IRAs to report these conversions.  Additionally, taxpayers should be aware that income limits no longer apply to ROTH conversions.


February 11, 2013: Mortgage Insurance Premiums & Mortgage Principal Reduction

Mortgage insurance premiums are deductible in 2012 and 2013. However, the 2012 Form 1098 Mortgage Interest Statement does not provide a box to report qualified mortgage insurance premiums paid. As a result, taxpayers should be sure not to overlook a deduction for which they may be eligible. Homeowners, who have purchased private mortgage insurance and use Schedule A to itemize deductions, may write off up to 100% of annual mortgage insurance premiums paid. Borrowers with incomes above $100,000 are subject to a phase-out of this deduction. Not all mortgages require homeowners to pay for a bank's mortgage insurance – generally, conventional mortgages for which the loan-to-value ratio is 80% or less, VA mortgages and most jumbo portfolio loans waive the insurance requirements. On the other hand, FHA and USDA mortgages require mortgage insurance.
http://www.realtown.com/uploads/150915/images/ball_n_chain_house_1600_clr.pngOn an unrelated issue, the Department of Treasury and HUD have developed the Home Affordable Modification Program (HAMP) designed to help financially distressed homeowners lower their monthly mortgage payments. Under this program, mortgage principal may be reduced over a 3-year period by a predetermined amount called the PRA Forbearance Amount (PRAFA) if the borrower can maintain the loan in good standing on the first, second and third annual anniversaries of the program's effective date. During that period, the lender will reduce the unpaid principal balance of the loan by one-third of the initial PRAFA on each anniversary date; thus, if the borrower continues to make timely payments on the loan for 3 years, the entire PRAFA will be forgiven. In some instances, borrowers will receive non-taxable incentive payments from the program administrator to encourage participation. However, incentive payments used to reduce the mortgage balance by more than the PRAFA will be deemed to be income-from-discharge-of-indebtedness, potentially not taxable if the taxpayer is insolvent or the loan qualifies as principal residence indebtedness.


February 10, 2013: The Filing Season Opens

Due to late enactment of the American Taxpayer Relief Act of 2012 (ATRA), the IRS postponed the opening of the filing season so that the tax authority could draft and revise affected forms as well as re-tool computer programs and processing mechanisms. Most taxpayers could begin filing on January 30th, although taxpayers submitting returns containing Form 4562 Depreciation and Amortization were required to wait until this morning at 9 AM Eastern Standard Time (EST). Returns containing Form 8863 Education Credits may still not be filed until Thursday, February 14th.

UPDATE (2/21/13):  While most individual returns can now be filed, the IRS has just announced it expects to only begin accepting returns in early March that contain forms used to claim various credits (e.g. Form 3800 General Business Credit, Form 5695 Residential Energy Credits, Form 5884 Work Opportunity Credit, Form 8396 Mortgage Interest Credit, Form 8908 Energy Efficient Home Credit, Form 8909 Energy Efficient Appliance Credit, Form 8910 Alternative Motor Vehicle Credit, Form 8936 Qualified Plug-in Electric Drive Motor Vehicle Credit, amongst others), as well as Form 8582 Passive Activity Loss Limitations.

UPDATE (3/8/13):  The IRS is now accepting all returns, including those accompanied by Form 5695 used to claim residential energy credits.  The IRS has completed reprogramming and testing its systems to accommodate the changes mandated by ATRA.  Although the tax season is finally in full swing at this late date, Acting IRS Commissioner Steven Miller has no plans to postpone the April 15th filing deadline.  He also does not expect that the recent federal sequester – defined by the Congressional research service as “the permanent cancellation of budgetary resources by a uniform percentage” – will delay the issuance of taxpayer refunds.  However, the impact of the sequester should be felt by summer when employees will likely be furloughed, resulting in extended waits at taxpayer assistance centers and on IRS telephone help lines.  Further, the Treasury has predicted “billions of dollars in lost revenue” since it expects to audit fewer returns.  But don’t get too excited – I would imagine that those returns that are examined will be subject to greater scrutiny and taxpayers will be held to higher standards as the IRS will be asked to do its part to help reduce the deficit.


January 19, 2013: CA Tax Rate Increases

Governor Jerry Brown's tax increase measure was approved by more than 55% of the state's voters, raising the statewide sales and use tax rate by 0.25% for the next four years (2013 – 2016).  As a result, California has the highest base sales and use tax rate in the nation!

The measure also raised personal income tax rates for high-income earners (those earning over $250,000) – the change affects only 1% of all personal income tax filers, but these filers currently pay about 40% of the state's income tax collections.  The rates were enacted retroactively and will be in effect for seven years (2012 – 2017).  The additional tax dollars raised under Proposition 30 (roughly $6 billion each year) will be allocated to California's schools; 89% to K – 12 schools and 11% to community colleges.


January 18, 2013: Looking Beyond 2013

Just yesterday, I attended a tax symposium sponsored by the Pepperdine University School of Law situated in the hills of Malibu with awesome and distracting views of distant horizons and calm seas.  Mesmerized by the stunning tableau, I had to wonder how any meaningful study could be accomplished until I was directed to a comfortable, functional and utterly windowless lecture hall!
And so I spent an enlightening day in the dark, invited to join top tax analysts, policy-makers, nationally known attorneys, published law professors, scholars, and investigative reporters.  We were gathered to discuss tax policy under the second Obama administration in this year (2013) of the 100th anniversary of the birth of the modern American income tax.
Key take-away points included:

  • https://encrypted-tbn2.gstatic.com/images?q=tbn:ANd9GcS-j-Q_AIpLsAYVDi2AFyYrjhR-OWhS7e9VXnFSXiTv8-r2Kd-bOstensibly enacted to raise revenue, an effective tax system should provide for general welfare and common defense, as well as establish justice, promote tranquility and preserve liberties.  We need a system of taxation that rewards taxpayers for their efforts and prudence, encouraging accountability, responsibility, productivity and economic growth.  Our current system focused on the taxation of income does not effectively achieve these goals.  Emphasis should, instead, be placed on the taxation of wealth.

  • Alternatively (or in addition to the taxation of wealth), a consumption tax should be instituted. Estimates suggest that a national sales tax of 12.3% could remove as many as 150 million taxpayers from the current income tax rolls.

  • The U.S. has the highest corporate income tax rate in the world.  As a result, businesses seek to shift income abroad but keep deductions here.  In this manner, the current tax system is ineffective and unsustainable.  Instead, the US should adopt a territorial system of taxation that exempts all foreign-sourced income from taxation.  But, to preclude inevitable revenue loss and economic distortion, interest-allocation rules should be enacted to prevent multi-national corporations from shifting interest deductions to high-tax jurisdictions and to ensure that only interest allocated to the U.S. would be deductible against U.S. profits.

  • http://www.advisor.ca/wp-content/uploads/2011/05/irs_tax.jpgEarnings totaling $1.7 trillion are sitting untaxed off-shore!  The Foreign Account Tax Compliance Act (FATCA) requires U.S. taxpayers with specified foreign financial assets that exceed certain thresholds to report these assets to the IRS.   Additionally, FACTA requires foreign financial institutions to report information about financial accounts held by U.S. taxpayers to U.S. tax authorities.  Still in its infancy, the law – due to a lack of enforceable reciprocal agreements – lacks effectiveness.

  • By general consensus, tax analysts believe that these and other proposed reforms will not be instituted in the near future.  Pulitzer Prize winning author David Cay Johnson stated that “Obama got what he wanted” with the recent tax code change.  Johnson suspects that there will be “some tweaking” but no major reform during these next four years.

January 17, 2013: Qualified Charitable Distributions

Under a special provision of the newly enacted tax legislation, IRA owners age 70½ or older have until Thursday, January 31st to make a direct transfer to an eligible charity and still have that transaction count toward 2012. Alternatively, if an IRA owner had already received an IRA distribution during December 2012, he may now contribute some or all of the amounts received to a charity in the usual manner (by check or credit card); even though this transfer is not "direct", it will be deemed to be a qualified charitable distribution (QCD) for 2012.

Transferred amounts are not taxable and are not includible when determining income thresholds for the taxability of Social Security benefits or the deductibility of medical expenses. Of course, no charitable deduction may be claimed for any transferred amount.

The American Taxpayer Relief Act of 2012 reinstated and extended for two years the provision authorizing QCDs which had expired at the end of 2011. This allows IRA owners to exclude up to $100,000 from gross income if the distributed amounts are contributed directly by the IRA trustee to one or more eligible charitable organizations. QCDs are available regardless of whether a taxpayer claims the Standard Deduction or chooses to itemize deductions on Schedule A.


December 11, 2012: Year-end Tax Strategies

newspaperThe Journal of Accountancy [11/20/12] ominously warns "failure to enact AMT patch could push start of tax season to March.  "Congress could delay billions of dollars in 2013 U.S. tax refunds" [Chicago Tribune, 8/20/12].  "If the two sides do not reach a deal by the end of the year, tax rates will rise for all Americans [which] could cause the economy to shrink by 0.5% and push the unemployment rate up to 9.1%" [Thomson Reuters Checkpoint Newsstand, 11/15/12].

What to do?  We could wait around, twiddle our thumbs, speculate uselessly, second-guess our Congressmen, lament the legislative delays and bureaucratic snafus, or… take advantage of existing law and various last-minute tax-saving strategies before year-end.

Thanks to the federal Health Care Act and California's recently enacted Proposition 30, we will see tax increases beginning January 1st, 2013.  In anticipation of these scheduled changes and as a prophylactic against existing provisions scheduled to expire on December 31st, 2012, many taxpayers will want to accelerate income (as well as certain deductions).  Traditionally, I have counseled you to postpone income recognition to benefit from the cumulative effects of tax deferral and potentially reduced rates in future years; as a result, you may be surprised by this year's seemingly counter-intuitive suggestions.

Earned Income Surtax

Wage-earners and self-employed taxpayers with incomes in excess of $200K ($250K if married) will see the Medicare portion of the FICA payroll tax increase from 2.9% to 3.8% - this amount is payable by the employee or self-employed individual, not the employer.  NOTE:  Taxpayers required to make estimated tax payments in 2013 must increase their quarterly payments to include any amount attributable to the surtax.


Invoice clients sooner rather than later and avoid entering into deferred compensation agreements in 2012.

Investment Income Surtax

Investment Income SurtaxBeginning in 2013, net investment income in excess of threshold amounts ($200K if single, $250K if married) will be subject to a Medicare tax of 3.8%.  Investment income includes dividends, interest, net capital gains, annuities, royalties and net rents as well as the gain on sale of a principal residence in excess of the §121 exclusion; income sources specifically excluded  are tax-exempt interest, VA benefits, self-employed income, IRA and pension distributions.  NOTE:  Taxpayers may be subject to both earned and investment income surtaxes!


Close escrow on your home and request anticipated pension or annuity distributions before the end of 2012.

Capital Gains

The 0% and 15% rates on long-term capital gains expire on December 31st.  It is anybody's guess whether these rates will be extended or comparable rates introduced.  Regardless, net capital gains are considered to be "investment income" subject to the Medicare surtax.


Sell assets and harvest accumulated gains before year-end.  If assets sold at a gain are then promptly repurchased, taxpayers can reset their basis, incurring only nominal transactional costs.

Medical Deduction Threshold

Medical Deduction Taxpayers accustomed to claiming an itemized deduction for medical expenses may be surprised to discover that these expenses will have to exceed 10% (rather than 7.5%) of Adjusted Gross Income (AGI) in 2013 and beyond, although seniors – those who reach age 65 before year-end in 2013 through 2016 – may still benefit from the lower threshold.  NOTE:  No tax deduction is allowed for medical marijuana.


Pre-pay next year's medical expenses in 2012.

Itemized Deduction Phase-out

Although the federal reduction of allowable itemized deductions for high-income earners was eliminated for 2012, rumors persist that it may be reinstated for 2013.


Taxpayers with incomes in excess of roughly $150K may wish to bunch itemized deductions into 2012 by pre-paying discretionary expenses such the 2nd installment of the property tax, legal and professional fees.

Charitable Contributions

CharitableRules for substantiation of deductions have remained unchanged and are stringently enforced – taxpayers must have a proper letter of acknowledgment issued by the donee organization in hand before the filing deadline if claiming a deduction for a donation in excess of $250.  Detailed lists and even photos of non-cash items contributed should be attached to receipts obtained from Goodwill and similar organizations. As always, contribution of appreciated assets will help taxpayers avoid tax on accumulated gains.


Use the same bunching technique as with all itemized deductions to accelerate contributions into 2012 or defer them into 2013.  If you do not have deductions in excess of the Standard Deduction in one year (2012:  $5,950 if single; $11,900 if married) to warrant filing Schedule A, bunching may help you to exceed the threshold at least every other year.

Qualified Charitable Deduction (QCD)

IRA owners over the age of 70½ who have not yet taken their annual distribution must do so before December 31st and may wish to consider a direct IRA-to-charity transfer.  Transferred amounts are not included in income which helps senior taxpayers minimize the taxability of Social Security benefits as well as lower AGI thresholds for medical and miscellaneous itemized deductions.  NOTE:  Amounts contributed via QCD transfers are not deductible as charitable contributions.


The QCD provision has expired for 2012 but may (?) be reinstated retroactively – taxpayers may wish to make a transfer before year-end, knowing that they will have to include their annual Required Minimum Distribution as income and claim a charitable deduction for transferred amounts if the law is not enacted.

Education Credits & Student Loan Interest

The American Opportunity Tax Credit as well as the deduction for student loan interest is scheduled to expire at year-end.


Pre-pay 2013 tuition and pay any student loan currently in arrears.

Estate & Gift Tax

Gift TaxBarring code changes, the unified credit currently set at $5.12 million is scheduled to revert to $1 million in 2013; the maximum tax rate currently set at 35% will rise to 55%.  Without Kevorkian-like measures, death prior to year-end is likely not possible (or desired) but gifting and estate planning is a must!  NOTE:  If some or all of the spousal exclusion remained unused in 2011 or 2012 [not available in 2013 or beyond], a Form 706 must be filed to elect portability.


Maximize gifting opportunities ($13K per person in 2012; $14K in 2013) but delay §529 plan contributions and consult an attorney to draft a will or trust or have your existing estate plan reviewed.

§179 Deduction for Business Equipment

The allowable threshold of $139K is scheduled to drop to $25K, although various proposals suggest reinstatement at higher levels.  Similarly, bonus depreciation allowances will expire at the end of 2012.


Reluctant to bank on the whims of Congress, you may wish to make necessary equipment purchases and place the assets into service prior to year-end.

Business Entities:  California requires businesses to pay a minimum franchise fee for each calendar year (in addition to a tax on income above certain thresholds).


Consider postponing registration of a new business with the CA Secretary of State (SOS) until January or dissolving an existing entity before December 31st.  Note that bureaucratic wheels turn slowly and that dissolution is not effective until the SOS has given its approval.

Retirement Planning

Retirement PlanningIn hopes of avoiding the AGI limitation on ROTH contributions (not applicable to conversions) some taxpayers have contributed to non-deductible Traditional IRAs and then promptly converted from Traditional to ROTH IRAs.  While it remains unclear whether the IRS will invalidate such step transactions, what is clear is that any amounts withdrawn from Traditional IRAs serve to increase AGI.  The withdrawals in and of themselves are not subject to the Investment Income Surtax but an AGI increase may cause investment income from other sources to fall victim to additional tax.


Request discretionary distributions that may be planned for 2013 now and make ROTH conversions before December 31st.

Alternative Minimum Tax (AMT)

Without a last-minute extension, AMT exemption amounts for 2012 will revert to $33,750 if single ($45,000 if married), subjecting many more middle-class taxpayers to the onerous tax.  Stay tuned for news regarding enactment of temporary relief…


The refundable credit that afforded partial relief in a current tax year for AMT tax paid in a prior year will expire at year-end.  Estimated tax payments may have to be increased in 2013 to ensure that taxpayers meet higher tax obligations due to the potential loss of this and other tax credits.

Estimated Tax (ES) Payments

(ES) Payments Always important to make all scheduled ES payments, it is equally crucial to track them to ensure proper crediting of your federal and state tax accounts.  In CA this year, it is even more critical to verify amounts already paid with amounts yet due since the recently enacted tax hike was made retroactive to the start of 2012.  As a result, high-income taxpayers may find that they have under-paid estimated tax liabilities originally based on tax rates no longer in effect.  Quarterly payments may be verified by checking your bank records, calling the IRS at (800) 829-1040 or logging on to www.ftb.ca.gov  NOTE:  CA taxpayers with quarterlies >$20K must pay electronically (http://www.ftb.ca.gov/online/webpay/index.asp.


To avoid potential assessment of an underpayment penalty, affected taxpayers should plan to pay all taxes due for 2012 on or before April 15th, 2013 when filing their completed tax return or extension request.


Not all issues apply uniformly to all taxpayers nor have all states conformed to all federal Code changes.  Therefore, kindly contact me at your earliest convenience so that we may discuss matters as they specifically relate to you.

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Disclaimer: The information contained herein should not be used in any actual transaction without the advice and guidance of a professional tax advisor who is familiar with all of the relevant facts of your personal situation since the information is general in nature and not intended as legal, tax or investment advice but is merely educational. Furthermore, the information contained herein may not be applicable to or suitable for an individual's specific circumstances or needs and may require consideration of other matters. To ensure compliance with certain U.S. Treasury Regulations note that, unless expressly indicated otherwise, any advice in this website relating to any federal or state tax issue is not intended or written to be used and cannot be used by any person for the purpose of avoiding any federal tax penalties. Monica Haven assumes no obligation to inform any person of any changes in the tax law or other factors that could affect the information contained herein. And Monica Haven does not offer legal advice or services in any jurisdiction in which she is not licensed; nothing herein should be interpreted as the creation of a fiduciary or client/attorney relationship. This website is not intended for use by viewers in any state in which the site may fail to comply with the regulatory and ethical restrictions imposed by that state.