Friday, January 30, 2009

Daschle Paid $100,000 in Back Taxes

First it was Tim Geithner who did not pay his self-employment tax while working for IMF. Now Tom Daschle has the same problem. Didn't Joe Biden said it was patriotic to pay taxes? What message is the Obama administration and Congress telling the general public about paying their income taxes (NOTE: Sen. Daschle did the right thing by withdrawing his nomination on February 3, hours after Nancy Killefer, nominee for a new White House oversight position, withdrew her nomination after it was revealed she too didn't pay all of her taxes. The only good news is that between Daschle and Gaithner, they paid $183,000 to the IRS which they otherwise would not have paid).

Former Senate Majority Leader Tom Daschle, President Barack Obama's nominee for the secretary of Health and Human Services, paid around $100,000 in back taxes after his nomination to pay for a car and driver he was supplied but did not report as income, according to documents being prepared by the Senate Finance Committee.

Mr. Daschle also took two vacation trips aboard a $30 million corporate jet belonging to non-profit lender EduCap, which faces a separate probe by the Finance Committee into its tax status.

The issues will dominate a closed-door meeting of the committee called for Monday afternoon, according to committee aides. His confirmation has been held up for weeks as committee staff pours over tax records and business ties of the former Senate majority leader.

A Daschle spokeswoman didn't respond immediately to requests for comment.

On the back-tax issue, Mr. Daschle was supplied a luxury car and driver by InterMedia Advisors, LLP, an investment firm specializing in buyouts and industry consolidation. Mr. Daschle served as chairman of the firm's executive advisory board. He told committee staff he had grown used to having a car and driver as majority leader and did not think to report the perk on his taxes, according to staff members.

Write to Jonathan Weisman at

Seven Tax Perks

From MarketWatch
By Andrea Coombes | MarketWatch

In all the hoopla surrounding the current stimulus package, it's easy to forget that other stimulus bill -- the one in 2008 that resulted in a good-sized check for many U.S. taxpayers.

Forgetting about that earlier stimulus, and any of the other major tax changes in 2008, could mean missing out on some much-needed cash when you file your tax return this year

There were six "pretty significant pieces of tax legislation" in 2008, said Mark Luscombe, a principal analyst with CCH Inc., a Riverwoods, Ill., tax publisher, including bills related to housing, farming, the military, pensions, and two on the economy.

Still, while all that tax tinkering affects most of us eventually, many of the changes last year were related to arcane rules -- and won't show up on our Form 1040s.

More noticeable for some taxpayers is that their bleaker financial situation may bring good news when they file. Small comfort it might be, but more people may be eligible for perks for which their formerly higher income made them ineligible, such as education-related credits or that stimulus payment from 2008.

"People's circumstances could change sufficiently that these deductions and credits are new for them," said Bob Scharin, New York-based senior tax analyst with Thomson Reuters' tax and accounting business.

Also, homeowners saw plenty of tax changes in recent years. For instance, those who don't itemize now have access to an extra standard deduction for property taxes paid, up to $500 for single filers and $1,000 for married-filing-joint filers. And homeowners who went through a foreclosure on their primary residence won't owe income tax on the forgiven mortgage-loan debt.

Here are seven more recent changes to consider:

1. Recovery rebate credit
You call it the "stimulus payment," but the IRS says "recovery rebate credit." If you weren't eligible for the full payment -- or any at all -- last year, you may get more money now if a layoff or investment losses slashed your income, because the stimulus checks sent in 2008 were based on 2007 returns. The credit starts phasing out with adjusted gross income over $75,000 for single filers and $150,000 for married-filing-jointly filers.

Also, if you had a baby in 2008 you may be eligible for the additional $300 stimulus payment per child. Or if your college-age child now supports herself, she might qualify for up to $600. Parents can't claim a payment for children older than 17 and a dependent can't claim it for him or herself, Scharin said. But "if the child graduated in 2008 and is no longer dependent, then that child could apply for it." See this IRS page for more on claiming recovery rebate credit.

2. Zero capital-gains rate
You might assume your income makes you ineligible for the zero rate on capital gains and qualified dividends in effect in 2008 for taxpayers in the 10% and 15% tax brackets. But don't forget those brackets refer to taxable income, not adjusted gross income.

While your AGI may be higher than the $65,100 which marks the start of the 25% tax bracket for married-filing jointly filers ($32,550 for single filers), deductions and other tax perks may bring your taxable income low enough to qualify for at least a portion of the zero rate.

"A family of four claiming the standard deduction could have adjusted gross income of $90,000 and that would translate to taxable income of $65,100 when you take the four personal exemptions plus the standard deduction," Scharin said. People who itemize may have even higher AGI yet still qualify for the zero rate, he said.

While plenty of people only wish they had gains in 2008, some might have sold long-held investments at a gain, Scharin said.

And, Luscombe said, "even if the gain itself moves you into the 25% bracket, there is still a portion of the gain that may be taxed at the zero percent rate."

3. AMT relief on incentive stock options
Taxpayers who've struggled to pay the alternative minimum tax owed on incentive stock options -- exercising an ISO can result in an unexpected AMT bill -- got some good news in 2008: You don't owe the tax.

"If you had an unpaid AMT liability resulting from an incentive stock option prior to 2008, it was basically abated by the law, so you don't have to pay it now," Luscombe said.

Also, Congress sped up the process by which taxpayers can take a credit against regular tax for previous AMT bills, among other provisions. See this IRS page for more information.

4. Perks for higher-income taxpayers
Even as some wonder whether Congress will allow the 2001 tax cuts to expire in 2010, some of those tax cuts are still going into effect.

Higher earners' ability to take itemized deductions and personal exemptions is limited -- those perks phase out at higher incomes. But thanks to the 2001 tax cuts, those phase outs themselves were slowly eliminated starting in 2006. (In 2010, higher-income taxpayers enjoy these perks with no reduction at all, but as with the other tax cuts, this one expires after 2010.)

In 2008, higher-income earners will find their itemized deductions and personal exemptions are cut by just one-third the amount in effect before the tax cuts.

The phase-out on deductions starts at adjusted gross income of about $159,950 for most filers and on exemptions at $159,950 for single filers and $239,950 for married-filing-jointly.

5. First-time home buyer credit
If you're a first-time home buyer (defined as not owning a home in the three previous years) who bought a home after April 8, 2008, and before July 1, 2009, you may qualify for a credit of 10% of the purchase price up to $7,500 on your 2008 tax return. Even if you bought the home in 2009, you can take the credit on your 2008 return, Luscombe said.

But here's the rub: The credit is more like a loan and must be repaid over 15 years. The stimulus bill under consideration now may eliminate the repayment rule for homes bought in 2009, but what's not clear yet is -- if the new stimulus plan does eliminate the repayment rule -- will people who bought a home in 2009 but claimed the credit on their 2008 return be exempt from repaying the credit? (Those who take the credit on homes bought in 2008 will have to repay the credit, under current law.)

If you bought a home in 2009 (before the July 1 deadline), your best bet is to wait until the final bill gets signed into law to see whether to claim the credit on your 2008 return or to wait and claim it next year.

6. Donate land
For those who donate land for conservation by a land trust or other qualified recipient in 2008 and 2009, there's a generous new perk available.

"If you make a qualified conservation contribution like an easement over property or a remainder interest in property, instead of getting a charitable deduction for only up to 30% of adjusted gross income, it goes to 50% of AGI and instead of having a 5-year carryover period you have a 15-year carryover period," said Grace Allison, a tax strategist with Northern Trust in Chicago. "Lots of our clients and people we hear about are doing these qualified conservation contributions."

7. Harvest business loss for a gain
It's not a new perk but plenty of business owners may find themselves ready and eager to take advantage now of the loss carryback that allows them to use a net loss in 2008 to offset a profit from up to two years ago -- and collect a refund for the difference.

"You deduct the loss from your prior year's income and the differential in tax --with the loss and without the loss -- is what you would get refunded," said Maureen McGetrick, tax partner with BDO Seidman in New York. "You file Form 1045 and the IRS generally has to take action on that within 90 days."

Keep an eye on the new stimulus bill being discussed now: The loss carryback perk may get extended to five years, up from two years now.

Note that perks on your federal return may not apply to your state tax bill. For instance, California has frozen the benefit for businesses this year, said Stephen Kunkel, a Los Angeles-based certified public accountant and tax practice leader at CBIZ MHM.

"It continues to carry forward, they just kind of freeze it," he said.

Similarly, Kunkel said California doesn't allow businesses to take the full federal amount of the Section 179 expense deduction. The federal stimulus bill in 2008 increased the Section 179 expense deduction to $250,000 from $128,000. That law includes another perk: 50% bonus depreciation, allowing certain businesses to immediately write off one-half of the cost of a capital expense. Of course, few companies likely were making major purchases, especially toward year-end.

Also for business owners: The IRS raised the standard rate for deducting mileage to 58.5 cents per mile for July through December, up from 50.5 cents from January through June. That compares with 48.5 cents in 2007.

"The IRS on Jan. 1, 2009, dropped it back to 55 cents since gasoline has come down somewhat," Kunkel said. If gas prices decline further, "it may be that in mid-2009 they may adjust it downward again."

Thursday, January 15, 2009

New IRS Free Option
Washington, D.C. (Jan. 15, 2009)
By WebCPA staff

The Internal Revenue Service plans to open its electronic filing season on Friday, Jan. 16, and debut a new service that allows taxpayers to simply fill out forms on-screen and file their taxes for free.

The new service will be available to taxpayers of any income level. It will augment the Free File program, which provides free tax-processing software from 20 different companies to taxpayers whose adjusted gross incomes are $56,000 or less.

The new Free Fillable Tax Forms service is aimed at taxpayers who don't need to go through the interview process included in most tax software packages. They should be familiar with recent tax laws, however, and know which forms to fill out. The on-screen forms let them enter their tax data, perform basic math calculations, sign the returns electronically, print their returns for recordkeeping purposes and electronically file their returns.

The IRS also noted that several tax software vendors are offering free electronic filing options this year. They include Intuit's TurboTax, H&R Block's TaxCut and 2nd Story Software's TaxAct.

"These are tough times, and e-file is the best way for people to get cash in their pocket quickly," said IRS Commissioner Doug Shulman in a statement. "Filing electronically with direct deposit can get refunds to taxpayers in as few as 10 days. Combined with important changes in the Free File program, we believe e-file is a better option than ever before for the nation's taxpayers." Last year, the average tax refund was $2,429.
CAUTION: Taxpayers may still need to file a state income tax return.

Wash Sale Rules

It is generally not a good investment tactic to time the market. But in today's volatile environment, investors are sometimes tempted to buy stocks back after they have sold them at a loss. The general rule is that you cannot recognize the loss if substantially the same security is repurchased 30 days before or 30 days after--within a 61 calendar day range--the sale.

The disallowed loss is added to the basis of the repurchase security.

Here is a good link for the rules:

Tuesday, January 13, 2009

Social Security for Two
CPA personal financial advisers should run the numbers on Social Security, and for their married clients, that goes double.
By Francis C. Thomas
January 2009

  • Part of the consideration of whether to claim early Social Security retirement benefits, for married couples, should be the effect on a lower-income surviving spouse later, after the primary wage earner’s death.
  • Early benefits also are smaller than at full retirement age (FRA), and significantly lower than delayed retirement at 70, when maximum benefits are reached, to compensate for the likely longer benefit period.
  • Spouses can collect the greater of the amount credited for their own earnings or that of their spouse. The "file and suspend" strategy permits a lower-income spouse to collect spousal benefits when the higher-income spouse is postponing benefit collection. The postponement permits the higher-income spouse’s benefits to grow while accruing delayed retirement credits and cost-of-living adjustments.
  • An effective strategy for many couples is for the higher-income spouse to delay benefits until age 70, and for the lower-income spouse to file early for his or her reduced benefits, of which the higher-income spouse can also collect 50% beginning at FRA.
  • A little-known strategy permits a worker who commenced collecting benefits early to re-evaluate and file a new application to collect higher benefits based on his or her older age. Benefits collected are repaid without interest. A tax benefit can be realized for any income taxes paid on the previously collected benefits.

CPA financial planners are often confronted with the question, "When should I start collecting Social Security benefits?" For married couples, the question should be asked in the plural.

Current financial needs and expected life span may be paramount considerations for a single person. However, the implications of when to begin receiving benefits (and on which spouse’s work record) for spousal and survivor’s benefits not only introduce key points for every married couple to ponder but also create additional strategic opportunities for financial security in their golden years together.

Many couples don’t seem to be approaching the question in the most prudent way. It has been noted, for example, that many married individuals who earned higher wages than their spouses begin claiming Social Security benefits at age 62 or 63, prior to full retirement age (FRA). The Senior Citizens’ Freedom to Work Act of 2000 has made it more advantageous than under prior law for married individuals who earn more than their spouses to postpone claiming benefits. A significant provision of the Act is "file and suspend," which permits spouses to collect spousal benefits when the primary worker is postponing the collection of benefits. Married retirees are often unfamiliar with this provision, and the strategy is underutilized by financial planners.

Furthermore, higher-income spouses often claim Social Security at an age that significantly decreases the couple’s combined benefits, as well as their spouse’s prospective survivor benefits. A 2007 study, "Why Do Married Men Claim Social Security Benefits So Early? Ignorance or Caddishness?" by Steven A. Sass, Wei Sun and Anthony Webb for the Center for Retirement Research at Boston College, concluded the reason was a lack of financial awareness. By educating clients about the full range of Social Security benefits considerations, including marital ones, financial planners can help them make the wisest use of this valuable retirement resource.

Individuals may start collecting Social Security retirement benefits at age 62, but their benefits are reduced by a fraction of a percent for each month remaining before their FRA. Individuals can collect 100% at their FRA (age 66 for those born between 1943 and 1954). If benefits are delayed beyond FRA, the benefits increase until age 70. The Social Security Administration (SSA) Web site,, provides excellent resources to determine and explain early retirement penalties, FRAs and delayed retirement credits (DRCs), as well as online calculators and other helpful facts. See also "Social Security: What’s the Magic Age?" JofA, July 06, page 28

A summary of a 58-year-old worker’s benefits in both today’s dollars and what it will take in future dollars to provide benefits at various retirement ages is shown in Exhibit 1. The monthly data—both current and future dollar amounts—were obtained from the Social Security "Quick Calculator" unveiled in July 2008 at the SSA Web site ( The calculator allows users to input their date of birth and current earnings.

The projected benefits at age 70 from an earlier retirement and at age 85 are extrapolated from the Quick Calculator’s results, using an annual cost of living adjustment (COLA) of 3%. Legislation enacted in 1973 provides for automatic COLAs so that benefits will keep pace with inflation. COLAs have averaged 4.4% since 1975. For a more precise estimate, the planner can modify the assumptions the Quick Calculator makes about earnings history by entering data from the client’s annual SSA report, Your Social Security Statement. But even with its default settings, the Quick Calculator can be an effective aid to stimulate client discussion about collection alternatives. The SSA also offers several more finely tuned calculators at

Clients who start collecting benefits early receive a smaller amount each month and may provide their spouses lower survivor benefits, but they usually collect for a greater number of months. If they delay, they collect larger monthly checks but fewer payments over their lifetime. Using a side-by-side spreadsheet comparison of cumulative monthly benefits (reflecting the 11 months for the first year in which benefits accrue after reaching age 62 and assuming a 3% COLA) planners can show clients how the 58-year-old worker without consideration of a spouse illustrated in Exhibit 1 needs to live to approximately age 75 years, 3 months to compensate for waiting until age 66 versus starting benefits at age 62. If the worker waited until age 70 to start collecting, it would take until age 77 years, 7 months to break even. This analysis does not take into consideration the time value of money. (For a demonstration, click here.)

The differences between the projected benefits at ages 70 and 85, if the client starts collecting at 62 versus a later age, are significant. The benefit, if started at age 70, is 185% of the amount collected at the same age if benefits started at age 62, a difference of $23,314 for the year (see Exhibit 1, second column from right, $50,676 – $27,362), or more than $1,900 per month. The reasons are not only the early retirement penalty and the delayed retirement credit but also the impact of COLAs on the higher delayed benefit. By delaying benefits, the retiree has at least partially transferred inflation risk.

Spousal benefits and survivor benefits are two important features that married clients must understand and should be incorporated into the planner’s analysis. A spouse can collect the greater of (1) the amount credited for his or her income, or (2) a spousal benefit based upon the higher-income spouse’s benefits. Since 2000, a provision permits a married individual to file at FRA and suspend the collection of benefits. This "file and suspend" strategy permits a lower-income spouse to collect spousal benefits once his or her higher-income spouse reaches FRA while the higher- income worker’s benefits accrue DRCs through age 70.

Spousal benefits do not receive DRCs. Therefore, the lower-income spouse should begin to collect these benefits at his or her FRA. If a lower-income spouse starts collecting benefits at or after his or her FRA, the spouse can collect up to 50% of the higher-earning spouse’s FRA benefits. If a spouse starts to collect spousal benefits before his or her FRA, the benefits will be reduced. For a worker with an FRA of 66, the spousal benefit at age 62 is 35% of the higher-earning spouse’s FRA benefit.

When one spouse of a married couple dies, the surviving spouse is entitled to the greater of (1) 100% of the amount the surviving spouse was collecting or (2) 100% of the amount the deceased spouse was collecting. If the higher-income spouse starts collecting at an earlier age, the spouse inherits reduced benefits.

Take, for example, a higher-income husband with a lower-income wife. If the husband has no reason to expect longevity, he may be inclined to begin collecting at age 62 and accordingly collect approximately 75% of FRA benefits. This means that his wife will collect reduced survivor benefits when he dies.

The husband’s decision may change, however, when he considers that his wife is statistically likely to live beyond him. According to the Social Security Period Life Table, a woman at age 65 has a remaining life expectancy nearly three years longer (19.5) than a 65-year-old man (16.7), and the man is 56% more likely than the woman to die before age 66 (probability 0.017976 male, 0.011511 female).

In a 2007 article, "Rethinking Social Security Claiming in a 401(k) World" (—requires free registration), James I. Mahaney and Peter C. Carlson assert that the most effective solution for married couples to maximize their expected benefits is a 62/70 split. The 62/70 split calls for the lower-income spouse to collect his or her benefits at age 62 and for the higher-income spouse to delay collection until age 70. A key point is that the lower-income spouse should consider collecting as early as possible, because the penalty for a lower-income spouse commencing benefits collection early is eliminated when the higher-income spouse dies. Upon the higher-income spouse’s death, the lower-income spouse can start collecting survivor benefits.

The article also describes an effective method for analyzing the Social Security question, the expected present value of benefits approach. The 62/70 split solution is supported by many other practitioners and academics who write on this subject. Of course, many factors need to be considered, including income levels, resources, life expectancies, survivor benefits and income taxes.

For the higher-income spouse to delay to age 70 may be easier said than done. Many factors need to be considered, including, in addition to those just mentioned, the opportunity costs for assets used during the bridge period—the time between stopping work and collecting Social Security benefits. An intriguing strategy using spousal benefits may mitigate the dilemma and provide significant benefits.

To initiate the plan, the lower-income spouse files early, at age 62 or 63, using the lower-income spouse’s earnings record, and collects reduced benefits. The higher-income spouse waits until FRA, age 66 for this example, and files to collect 50% of the lower-income spouse’s FRA benefits. Then, at age 70, the higher-income spouse applies to collect based upon his or her own earnings history. By waiting until age 70, the higher-income spouse will receive both DRCs and COLAs on his or her benefits, which could result in a significant benefits enhancement. Based on the future dollars data for ages 66 versus 70 from Exhibit 1, the benefit increase is $17,580 per year ($50,676 – $33,096), or $1,465 per month. Additionally, the higher-income spouse collected spousal benefits for the four-year period.

Another little-known and rarely used strategy could be called the "SSA Do-Over." If a client commences collecting benefits early and subsequently re-evaluates the situation, there is an option to pay back the benefits received and then file a new application, allowing the client to receive larger monthly checks. The client must file Form SSA-521, Request for Withdrawal of Application. All benefits including spousal benefits collected must be returned to the SSA. There is no adjustment for inflation or accrued interest charges. The client is entitled to either a tax credit or deduction for the income taxes paid on the benefits previously collected. IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits, provides the instructions and worksheets to calculate the tax benefits. The client can later reapply for the larger eligible benefits.

This strategy almost sounds too good to be true. It provides the CPA/financial planner with another option to the benefits question. The strategy requires the client to have the resources to repay the past benefits, to consider longevity, and to conduct a new break-even analysis. If the client collects early, invests the Social Security proceeds, earns a return on the proceeds, and realizes the tax benefit, he or she should be able to accumulate the funds to repay the Social Security collected. This strategy provides an inflation hedge and can generate higher future benefits for the worker and the spouse.

A key factor in the decision of when to commence collecting benefits is life expectancy. A 62-year-old male has a 50% probability of living until 84, a 25% chance of living until 90, and a 10% chance of living to 95. The data for women is two to three years greater across the percentiles. The 50th percentile is well past the SSA’s breakeven point. Actual life expectancy is impossible to predict precisely, but by using a break-even analysis and the client’s individual circumstances, a good approximation can be made. Of course, individuals with insufficient retirement savings may have no option but to begin collecting benefits at age 62.

Financial planners can help clients make better decisions about claiming Social Security benefits. A discussion of the collection options, impact of COLAs, and importance of survivor benefits for married clients is a good beginning. Social Security is an asset free of investment risk, inflation risk, longevity risk and investment income management fees. The income tax implications of collecting Social Security benefits always need to be considered (see sidebar, "The Bridge Period: Taxes and Investment Income," below). Planners should outline all of the relevant facts, both quantitative and qualitative, as part of the benefits discussion. Education is the key to wealth and will enable clients to maximize the value of their Social Security benefits.

The Bridge Period: Taxes and Investment Income
If a client stops working at age 62 and wants to delay collecting Social Security retirement benefits, he or she needs a source of discretionary cash flow, such as drawing from a qualified retirement account and/or other assets. The period between the discontinuance of a paycheck and the commencement of Social Security is the "bridge period." Analyzing the bridge period and post-bridge period requires consideration of taxes, investment income and inflation.

One approach is to run a side-by-side comparison under two scenarios, with and without the early collection of benefits. The worksheets should depict year by year your client’s retirement assets, retirement income draw, estimated taxes and after-tax cash flow. To maintain the same after-tax cash flow under both scenarios, the client will need to withdraw more from a traditional IRA than the forgone benefits. The maximum amount of Social Security that is taxable for federal purposes is 85%, while withdrawals from traditional retirement accounts are often fully taxable. Only 14 states tax Social Security to some extent. Only three states that impose income taxes exempt withdrawals from retirement plan distributions. Therefore, the client’s average total tax rate would be higher when more cash flow comes from taxable retirement asset sources and lower when more income is derived from Social Security. The type of income also affects the level of taxation. Most CPAs have access to tax planning software to analyze the Social Security collection decision.

Another factor that needs to be considered is the estimated investment income. As clients age, they generally take on a more conservative investment strategy. In conducting a side-by-side comparison, as the level of estimated investment income declines, the option of delaying the collection of benefits is more favorable. Aggressive investors may choose to collect sooner rather than later so that their retirement investments can grow.

Francis C. Thomas, CPA/PFS, is a professor of accounting and finance at Richard Stockton College, Pomona, N.J. His e-mail address is

States seek sales tax on online purchases

Here in California, we are required to report unpaid sales tax on our California income tax returns, Forms 540.
Web-only companies balk at attempt by governments
By Rachel Metz

NEW YORK — Shopping online can be a way to find bargains while steering clear of crowds – and sales taxes.

But those tax breaks are starting to erode. With the recession pummeling states' budgets, their governments increasingly want to fill the gaps by collecting taxes on Internet sales, which are growing even as the economy shudders.

And that is sparking conflict with companies that only do business online and have enjoyed being able to offer sales-tax free shopping.

One of the most aggressive states, New York, is being sued by Inc. over a new requirement that online companies must collect taxes on shipments to New York residents, even if the companies are located elsewhere.

The amount of money at stake nationwide is unclear; online sales were expected to make up about 8 percent of all retail sales in 2008 and total $204 billion, according to Forrester Research. This is up from $175 billion in 2007.

Based on that 2008 figure, Forrester analyst Sucharita Mulpuru estimates that if Web retailers had to collect taxes on all sales to consumers, it could generate $3 billion in new revenue for governments.

It's uncertain how much more could come from unpaid sales taxes on Internet transactions between businesses. But even with both kinds of taxes available, state budgets would need more help. The Center on Budget and Policy Priorities estimates that the states' budget gaps in the current fiscal year will total $89 billion.

Collecting online sales taxes is not as simple as it might sound. A nationwide Internet business faces thousands of tax-collecting jurisdictions – states, counties and cities – and tangled rules about how various products are taxed.

And a 1992 U.S. Supreme Court ruling said that states can't force businesses to collect sales taxes unless the businesses have operations in that state. The court also said Congress could lift the ban, which remains in place – for now.

As a result, generally only businesses with a “physical presence” in a state – such as a store or office building – collect sales tax on products sent to buyers in the same state. For instance, a Californian buying something from Barnes & Noble's Web site pays sales tax because the bookseller has stores in the Golden State. Buying the same thing from Amazon would not ring up sales tax.

That doesn't mean products purchased online from out-of-state companies are necessarily tax-free. Consumers are usually supposed to self-report taxes on these items. This is called a use tax, but not surprisingly, it tends to go unreported.

In hopes of unraveling the complex tax rules – and bringing states more money – 22 states and many brick-and-mortar retailers support the efforts of a group called the Streamlined Sales Tax Governing Board. The group is getting states to simplify and make uniform their numerous tax rates and rules, in exchange for a crack at taxing online sales.

In response, more than 1,100 retailers have registered with the streamlining group and are collecting sales taxes on items shipped to states that are part of the agreement – even if they are not legally obligated to.

The streamlining board also is lobbying Congress to let the participating states do what the Supreme Court ruling banned: They could force businesses to collect taxes on sales made to in-state customers, even if the businesses don't have a physical presence there.

New Jersey, Michigan and North Carolina are among the largest of the 19 states that have adjusted their tax laws to fully comply with the group's streamlined setup. Washington was the only state to join in 2008, but three more states are close to becoming full members of the group. Scott Peterson, the group's executive director, expects another seven states – including Texas, Florida and Illinois – to introduce legislation in January that would make them eligible to join.

Undoing the patchwork can be difficult, even if the weak economy increases states' motivation to go after online sales taxes. Similar bills have been introduced in several states and failed, sometimes because of the cost of changing tax laws. New York, for example, decided against joining the streamlining board because it would require extensive revisions to its tax rules.

Besides various states and retailers such as Wal-Mart, Borders and J.C. Penney, the National Retail Federation, the industry's biggest trade group, also supports the Streamlined Sales Tax group.

Companies that handle Web sales only have organized as well. NetChoice, whose members include eBay and online discount retailer, supports the states' tax simplification efforts. But its executive director, Steve DelBianco, says online retailers should have to collect taxes only in states where they have a physical presence.

In California, Gov. Arnold Schwarzenegger and legislative leaders who are deadlocked over closing a $42 billion budget deficit have not proposed changes to the state's Internet tax policy.

However, the governor's proposed increase in the state sales tax, so far not gaining traction, would apply to many types of Internet purchases that are currently taxed.

Last year, lawmakers rejected legislation that would have extended the state sales tax to any Internet retailer regardless of where the business was based. A separate measure that could have led to extending the tax to Internet downloads, such as music and movies, also failed.

Staff writer Michael Gardner contributed to this report.

Monday, January 12, 2009

Obama Plans to Keep Estate Tax

Here is an excerpt from Wall Street Journal's January 12, 2009 front page headline:
Democrats Want to Freeze Levy at Current Levels Instead of Letting It Expire Next Year

President-elect Barack Obama and congressional leaders plan to move soon to block the estate tax from disappearing in 2010, suggesting the levy might outlive the "Death Tax Repeal" movement that has tried mightily to kill it.

The Democratic stance on the estate tax contrasts with Mr. Obama's reluctance to press forward with his campaign pledge to raise income-tax rates on top earners, which he worries could have an adverse economic impact during a recession.

But Democrats are determined to act quickly to prevent the estate tax's scheduled repeal. Elimination of the levy on big inheritances was approved by Congress under President George W. Bush in 2001, with rollbacks phased in slowly and its full elimination slated to take effect next year.

The Senate Finance Committee will move within weeks on legislation to reverse that law, and Mr. Obama is expected to detail his estate-tax preservation proposal in his budget next month, congressional tax writers said.

Under the Obama plan detailed during the campaign, the estate tax would be locked in permanently at the rate and exemption levels that took effect this year. That would exempt estates of $3.5 million -- $7 million for couples -- from any taxation. The value of estates above that would be taxed at 45%. If the tax were returned to Clinton-era levels, it would exclude $1 million from taxation with the rest taxed at 55%.

In making their case for the restoration, Democrats contend that such a large additional tax break for the rich shouldn't go into force halfway through Mr. Obama's proposed economic-recovery package. They argue that the deficit is already in record territory, while their plan wouldn't have any impact on the economy since it would merely keep the estate-tax rate at its current level. Mr. Obama and his party also say that the affluent already have benefited handsomely from the Bush tax cuts.

At the level proposed in the Obama policy, all but the largest estates -- fewer than 2% of annual deaths -- would escape taxation. Over 10 years, the Obama plan would cost the Treasury around $324 billion more than if the Clinton estate-tax levels were maintained, according to the Joint Committee on Taxation. Full repeal would cost more than $500 billion over a decade.

The estate tax was enacted in the early 20th century as a levy on wealth and inherited assets. It was later amended to allow a spouse to avoid the tax.

Write to Jonathan Weisman at

Friday, January 9, 2009

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It's not too early to get started on your taxes; at the least, you can start gathering any receipts and other records you'll need (see our TaxWatch today for seven January tax to-do's). In fact, given the extreme complexity of the tax code, you should consider getting a move on it sooner rather than later.

On Wednesday, Nina Olson, the National Taxpayer Advocate, presented Congress with her annual report (Olson's job, among other things, is to identify at least 20 of the most serious problems taxpayers face). U.S. taxpayers' biggest obstacle, according to Olson, is the complexity of the tax code. That's partly due to a seemingly constant parade of tax-law changes.

"Since the beginning of 2001, there have been more than 3,250 changes to the tax code, an average of more than one a day, including more than 500 changes in 2008 alone," the report said. Who can keep up?

Here's another problem, according to the report: Trying to figure taxes owed on forgiven debt. (The value of a loan that you don't repay is forgiven debt -- and it's taxed.) Last year, Congress passed a law eliminating this tax for some homeowners whose mortgage debt is canceled through a foreclosure. But taxpayers have to fill out a form to avoid the tax. That form, No. 982, is "extremely complex," the report said. "The IRS estimates that it takes business taxpayers 10 hours and 43 minutes to complete the form, and the form is not included in many tax software packages available to taxpayers."

Is it any surprise 80% of taxpayers either hire someone to prepare their taxes or buy software to help them get through the chore?

Unfortunately, tax simplification isn't in the cards any time soon.
-- Andrea Coombes, assistant personal finance editor

Wise tax moves for January
Some people are wary of making any tax moves this month because President-elect Barack Obama and Congress are working on a stimulus package with new tax provisions -- but don't let the uncertainty confuse you. Here are seven steps you can and should take this month. See{2E0DF928-5F52-4DDD-9E91-C20B85CA405E}

A kinder, gentler IRS?
The IRS on Tuesday announced new steps to ease pressure on people struggling to pay taxes during the global economic crisis. It's the second time in as many months that the agency has pointed to current events as a reason for changing its enforcement rules. See{63CAB99C-2B55-4DC6-A1F3-C34CEC6F48B6}

Eight tax-filing moves you can make now
Earlier is better when it comes to working on your taxes, for both you and the Internal Revenue Service. By getting a head start on tax preparation, you avoid the last-minute rush, when many filing mistakes are made. And the sooner the tax agency gets your return, the sooner it can process it and get your refund on its way to you. See

Many taxpayers stand to gain from new laws
New Year's Day brought relief for most taxpayers, especially upper-income ones -- even as President-elect Barack Obama is proposing new tax cuts as part of his wide-ranging economic-stimulus package. Starting Jan. 1, the basic federal estate-tax exemption jumped to $3.5 million from $2 million in 2008. This large increase is expected to result in a major decline in the number of estates subject to the tax for 2009. See{85D4E5D8-2BDB-4464-BCEE-6FCEF98BAE98}

New Congress arrives with eye on Obama's stimulus package
A new, more Democrat-heavy Congress arrives in Washington with economic stimulus as its top priority as lawmakers and President-elect Barack Obama aim for quick action to jolt the sagging U.S. economy. Lawmakers will be sworn at noon Eastern time Tuesday as the first order of business for the 111th Congress, and Democrats' ranks will swell in both the House and Senate following electoral wins last November that also carried Obama to victory. See{6EA75993-3DF0-4DEB-A1D8-DB1D26499C64}

Obama pushes $300 billion in tax cuts
Saying the U.S. economy is bad and getting worse, President-elect Barack Obama took his plan for $300 billion in tax cuts to Capitol Hill on Monday, reaching out to lawmakers in an effort to win approval for a massive stimulus plan he says is needed to jump-start the U.S. economy. "The people can't wait. We have an extraordinary economic challenge ahead of us," said Obama at the beginning of a meeting with House Speaker Nancy Pelosi on Monday morning. See{955E8313-4A77-4682-8D8B-3755EF55F719}

Commentary: Tax cuts make sense
President-elect Barack Obama is doing the smart thing politically and economically by including a significant tax cut as part of his plans for a massive fiscal stimulus program to halt the economy's slide into depression. See{2768E386-D4D8-4128-B924-8F5E4C708524}

Tax settlement offers are often scams
If the promise of settling tax debt for pennies on the dollar sounds too good to be true, your instincts are right on the money, say a number of lawyers and accountants who routinely represent clients before the IRS. While thousands of professionals regularly advocate for lower tax bills on behalf of their clients, a breed of settlement firms has cropped up with ads that promise aggressive representation and pie-in-the-sky results. See

How to choose the best deduction method for you
Deductions reduce your taxable income. Less income means a smaller tax bill. What's the best way to reach the smallest possible taxable income level? It depends on your personal circumstances. See

Can Roth IRA penalty tax be avoided?
A reader writes: My daughter is currently living in London and is just now filing her 2005 tax return as married, filing separately. She was married at the end of 2005 and expected her British husband to file married, filing separately, but that has still not occurred. See

Which tax return form should you use?
Most people hate filling out tax forms almost as much as they hate forking over dough to Uncle Sam. That's why you should use the simplest tax return you can, especially if you're still filling out your forms by hand. See

Your e-file options
You've decided it's finally time to take that big technological tax step. This year, you're e-filing. You definitely won't be alone. Almost 80 million taxpayers electronically filed returns last year. See

Deducting exercise equipment
A reader writes: I have extremely flat feet, which is resulting in damage to my knees and hips. While this limits my ability to walk, it does not limit my ability to use a bicycle. My physician has suggested that I purchase an exercycle for use in my home. See

Who has to file taxes?
Believe it or not, some people make it through tax-filing season without any hassle. That's because the Internal Revenue Service doesn't require a return from them. See

When to claim the child care credit
A reader writes: I don't quite get this: I am married and my wife is a homemaker and we have two children in preschool. If my wife worked, we would be able to get a child care credit for the cost of preschool (which is fairly expensive), even though they only go three days a week, up to the $4,800. See

Charitable gifts pay off for all
When preparing your federal tax return, don't forget to count contributions to charitable organizations. Your giving attitude can do more than make you feel good for helping others. When tax filing time arrives, it also might help you lower your tax bill. See

Tax valuation guide for donated goods
As you clean out your closet or reorganize your household, be sure to keep track of the items you give to charity. It's your job, not the charity's, to report the value of the donation to the Internal Revenue Service. See

Special rules for some donations
It's no secret that charitable donations can help reduce your tax bill. But if you give something other than the typical cash, check or credit card donation, you'll have some added tax considerations. In recent years, the IRS has toughened many of its deduction rules, especially when it comes to noncash gifts. See

Thursday, January 8, 2009

New Disclosure Rules and Procedures
Effective January 2009
Are you ready?
December 11, 2008
by Annette Nellen, CPA/Esq.

IRC §7216, Disclosure or Use of Information by Preparers of Returns, provides a criminal penalty for certain information disclosure. While this rule has been part of the tax law since 1971, the IRS recently modified the regulations to improve the ability of taxpayers to protect their tax return information (TRI). Prior to this revision, the §7216 regulations had remained mostly unchanged since 1974. As noted in the proposed regulations (REG-137243-02 (PDF); December 2005), existing regulations addressed a “paper-filing era” and thus, failed to address disclosure issues inherent in an electronic environment. The new regulations (TD 9375 (PDF); January 2008 and TD 9409 (PDF); July 2008) modernize the disclosure rules.
This article provides an overview to §7216 and related rules and the new guidance.

Privacy and Consumer Protection
No doubt, the ability to easily transfer electronic data makes us more concerned about protecting key personal information such as Social Security numbers (SSN) and contact information. Thus, the IRS determined that disclosure rules needed to be rewritten with electronic communication in mind.

In addition to privacy concerns, some people wanted to see the disclosure rules protect taxpayers from preparers marketing products to clients, such as refund anticipation loans (RALs) and IRAs. They encouraged the IRS to draft the final rules such that even taxpayer consent would not allow for disclosure of TRI (see, for example, PennPIRG testimony, April 2006). The IRS did not follow this recommendation in the final regulations, instead opting to recognize the right of taxpayers to control their TRI (TD 9375 (PDF)).

The IRS did issue an Advance Notice of Proposed Rulemaking (Ann. 2008-7 (PDF); January 2008) requesting comments on a possible rule preventing preparers from obtaining consent to disclose or use TRI for marketing RALs and similar products.

IRC Provisions
Two IRC provisions address disclosure or use of return information by a tax return preparer. Accompanying §7216 is §6713, Disclosure or use of information by preparers of returns, added by the Technical and Miscellaneous Revenue Act (TAMRA) of 1988 (PL 100-647; November 1988). The language used for both disclosure penalties is similar as noted below.



(a) General Rule

If any


person who is engaged in the business of preparing or providing services in connection with the preparation of, returns of tax imposed by chapter 1, or any person who for compensation prepares any such return for any other person, and


who knowingly or recklessly—

(1) discloses any information furnished to him for, or in connection with, the preparation of any such return, or
(2) uses any such information for any purpose other than to prepare, or assist in preparing, any such return,

shall pay a penalty of $250 for each such disclosure or use, but the total amount imposed under this subsection on such a person for any calendar year shall not exceed $10,000.

shall be guilty of a misdemeanor, and, upon conviction thereof, shall be fined not more than $1,000, or imprisoned not more than one year, or both together with the costs of prosecution.

(b) Exceptions

The exceptions specified at §7216(b) and Reg. §301.7216-2 apply for both penalties.

Preparer intent

Not relevant.


Type of returns

Chapter 1 (income taxes).

Overview to New Guidance
The regulations and related Revenue Procedure 2008-35 (replacing Rev. Proc. 2008-12 (PDF)), guide return preparers in knowing whether disclosure or use of TRI is allowed and when taxpayer consent is required. As described by the IRS (R-2008-2; January 2008):

“The final rules affirm a general rule in place for more than three decades that taxpayers, not the IRS, control their own tax return information held by preparers and, within appropriate limits and safeguards, taxpayers are able to direct preparers to disclose tax return information as taxpayers see fit.”
The regulations include many of the same rules from the original regulations. However, there are more details, examples and changes to address today’s ways of doing business. Selected highlights of the new guidance follow.

  • Defines the terms used in §7216 and the regulations including “tax return preparer,” “tax return information,” “use” and “disclosure.”

  • The definition of tax return preparer under §7216 is broader than under §7701(a)(36) applicable to the §6694 preparer penalty. For example, an administrative assistant to a CPA is subject to §7216 if he is compensated for assisting with return preparation, but he is not a preparer under §7701(a)(36).

  • Explains how the Gramm-Leach-Bliley Act and §7216 interact. (Also see Notice 2002-6 (PDF).)

  • Explains the types of disclosures that do not require taxpayer consent, such as disclosure of TRI to an IRS employee.

  • Explains the procedures for obtaining consent for disclosure or use of TRI.

  • All consents must be knowing and voluntary, written, include the taxpayer and preparer names, identify the specific intended purpose of the disclosure or use, the TRI to be disclosed or used, For any type of Form 1040, the specific recipient of the TRI must also be identified.

  • Consent format: For taxpayers filing any type of Form 1040, the procedures are in Rev. Proc. 2008-35. For taxpayers filing other income tax returns, the form and content guidance is at §301.7216-3(a)(iii) that generally allows for any format including an engagement letter provided the general requirements of §301-7216-3(a)(3)(i) are followed (see prior bullet).

  • Generally, a taxpayer cannot consent to the disclosure of their SSN to a preparer outside of the U.S. unless the SSN is only disclosed using “adequate data protection safeguards” and this information is included in the consent (§301.7216-3T).

  • Retroactive consents are prohibited.

  • A consent for soliciting business unrelated to tax return preparation is not allowed after the preparer provides the completed return to the taxpayer.

  • If the taxpayer does not consent, the preparer may not ask again.

  • If no time limit is specified, the consent is effective for one year from the date signed.

  • The taxpayer must be given a copy of the consent.

Rev. Proc. 2008-35:
  • Explains the format and content of both paper and electronic consents to disclose or use TRI of taxpayers filing any type of 1040 return.

  • Specifies the paper and font size and mandatory language on informing the taxpayer that he does not have to sign the consent, that he can specify a time period and what a taxpayer should do if he believes his TRI has been improperly disclosed or used.

  • For electronic consents, the requirements for an electronic signature are provided.

For further details and examples, the regulations and revenue procedure, as well as the IRS Web site on §7216, should be reviewed.

Related Guidance
In addition to the penalty provisions, preparers may be subject to disclosure and confidentiality rules of their licensing authority and professional organizations. For example, AICPA Professional Conduct Rule 301 addresses confidentiality of client information. The AICPA Statement on Standards for Tax Services also address some confidentiality considerations.

Looking Forward
The new disclosure rules in the §7216 regulations are effective for disclosures or uses of TRI after December 31, 2008. Thus, preparers who have not yet reviewed them should do so and be sure their office procedures are updated where necessary. Additional guidance is expected on disclosures and uses of TRI that may be prohibited (even with consent) such as with respect to solicitation of RALs.

While the new rules aim to safeguard TRI in the hands of return preparers, they are limited. For example, §6713 ad §7216 only apply to income tax returns. Also, while preparers have mandatory language to use in consents related to 1040 TRI, taxpayers will only get that from compliant preparers. The IRS needs to find ways to inform all taxpayers of their rights to the protection of their TRI when dealing with return preparers as broadly defined in the §7216 regulations.

Annette Nellen, CPA, Esq., is a tax professor and Director of the MST Program at San José State University. Nellen is an active member of the tax sections of the ABA and AICPA. She serves on the AICPA's Individual Income Taxation Technical Resource Panel. She has several reports on tax reform and a blog.

Monday, January 5, 2009

Fund vs Index
A 10-Year Streak
Little-known Manning & Napier fund has beaten the S&P 500 each year for a decade

Heading into 2008, 14 stock and balanced mutual funds had beaten the Standard & Poor's 500-stock index for nine years in a row and had a shot at extending their streaks to a full decade.

Now, just one of those funds has stayed ahead of that widely watched U.S.-stock benchmark. It's Manning & Napier Pro-Blend Maximum Term Series -- a relatively small fund that researcher Morningstar Inc. has called "one of the best funds most people have never heard of."

To be sure, investors in this $318 million fund are more likely to be bemoaning their losses for 2008 than toasting the fund's benchmark-beating record. Manning & Napier Pro-Blend Maximum handed investors a negative 35.4% return for the year. While that's better than the S&P 500's negative 37% return (including reinvestment of dividends), "we are not happy at all to be down over 30%," says Patrick Cunningham, a managing director of Manning & Napier Advisors Inc., the fund's management firm, headquartered near Rochester, N.Y.

Still, looking at the past decade as a whole, the fund delivered positive returns for investors while the S&P 500 was in the red. The fund returned an average of 5.4% a year, while the S&P was down more than 1% a year. That performance ranks Manning & Napier Pro-Blend Maximum in the top 2% of Morningstar's "large blend" category over the 10-year period.

Different Approach

Manning & Napier, an employee-owned firm that primarily manages money for institutions, is different from many other management firms in a couple of ways. For one thing, "we do not have portfolio managers per se," Mr. Cunningham says. Analysts recommend individual securities for purchase, and the decisions about which securities to add to portfolios are made by committee.

And while the firm, which was founded in 1970, is happy to highlight its success versus the S&P, its portfolio-building approach is "benchmark agnostic," the Manning & Napier executive says. That means there's no attempt to have the same industry weightings as the S&P 500 or any other index -- and also no concerted effort to beat a chosen index by overweighting and underweighting sectors or individual stocks in the benchmark.

Mr. Cunningham believes not being tied to a benchmark actually helped Pro-Blend Maximum beat the S&P 500, the most widely used benchmark for U.S.-stock funds: "The key, I think, to beating it in bull markets, bear markets and sideways markets is the flexibility to move where the opportunities are," he says.

Manning & Napier manages a total of about $16 billion, with a little more than a quarter of that in 25 mutual funds. Pro-Blend Maximum is the most aggressive of a series of four "lifestyle" funds that hold a mix of stocks and bonds and are mostly marketed as offerings for 401(k) plans. The fund typically keeps 70% to 95% of its assets in a widely diversified portfolio of stocks; that figure was 91% as of Sept. 30.

Reducing Risk

Manning & Napier aims to buy the shares of attractive businesses when the stock-market value of such a company is no more than 70% or 80% of what a rational buyer would pay for the whole operation.

About 30 "bottom up" stock analysts search for companies (from large companies to small, and around the globe) that fit the firm's criteria. They get input from 10 "top down" economists and analysts who study, for instance, which countries are most promising. Separately, a half-dozen fixed-income analysts research individual bonds.

The stock and bond analysts present their buy recommendations to a senior research group made up of five bottom-up and two top-down staffers, which decides on the securities that go into the firm's portfolios.

"If you buy a good business and you buy it when it is undervalued, you have taken out the majority of the risk of owning that stock," Mr. Cunningham says. "That is, assuming you don't have a credit crisis," he adds with a rueful chuckle.
—Ms. Damato is a news editor for The Wall Street Journal in South Brunswick, N.J.

Write to Karen Damato at

Sunday, January 4, 2009

He owes a nickel and is due 4-cent refund
9-cent IRS dilemma leaves lawyer confused

"It's not the money; it's the principle" is an old saying that usually brings a knowing, world-weary scoff from veteran Detroit criminal defense lawyer James Howarth.

"But I think this time with the IRS, it is the principle," Howarth said.

After all -- this is about 9 cents.

While many may fight the Internal Revenue Service over thousands of dollars, Howarth said he's in a dilemma with the federal agency, and he insists it's no chump change controversy.

"We are talking the IRS here," he said.

In mid-November, Howarth received notice that his FICA account, even after an adjustment, was out of whack.

He owed the IRS a nickel. And the IRS was serious.

It advised him to act promptly "to avoid additional penalty and/or interest."

Howarth started calculating how much that nickel was going to cost him.

As he figures it, there is the 5 cents plus the cost of a check -- payment must be made by check or money order. Then there is his CPA's fee, an envelope, his secretary's time, his own time and a 42-cent stamp.

"The costs are several hundred percent over the nickel," he said.

But then a second letter arrived. This one said Howarth had a refund coming.

The amount? Four cents. But to get it, Howarth would have to ask for it because it was less than $1.

"When I owe them a nickel, I must pay them," he said. "It's not optional. But when they owe me, I have to ask for it."

Howarth said it is unclear from the letters what connection -- if any -- the 5-cent obligation has to the 4-cent refund.

He said he is unsure if he now owes one penny or if there was a recalculation resulting in a 9-cent swing in his favor.

"I just don't know," he said. "But I do know that if I were to walk into the IRS office with pennies taped to a piece of cardboard, they wouldn't accept it."

Howarth said he called the 800 telephone number on his letters, but gave up after "an inordinate amount of time on hold. And I'm sure the agent would have been delighted to have this file land on his desk."

IRS spokesman Luis D. Garcia said the agency does not comment on individual accounts.

As for Howarth, he said he's consulting his accountant -- and he might try to follow the lead of Wall Street financiers in seeking a resolution, although he fears his Detroit address will work against him.

"I might apply for a bailout," Howarth said. "But, for us, there seems to be some sort of stigma."

Contact JOE SWICKARD at 313-222-8769 or