Dinesen Tax Greatest Hits – The 5 Most Popular Blog Posts of 2012

December 26, 2012 in Potpourri of Tax Topics with 1 Comment

ID-10011950Here’s a countdown of the top-5 most-popular stories of 2012 on this blog:

#5: “Take the Money and Run? The Tax Consequences of Winning a Home in a Giveaway, Part 2″

I started this series on the tax consequences of winning the HGTV “Dream Home” with good intentions. But it kind of turned into a train wreck, as I kept thinking of new tax consequences (such as Section 469, short-term rental rules, etc.), resulting in numerous re-writes and clarifications. I think the series ended up being a string of 6 disjointed blog posts. It was a fun undertaking, but didn’t go quite as I had planned.

Take the Money and Run? The Tax Consequences of Winning a Home in a Giveaway, Part 2

#4: “What to Do with that 1099-K”

I published a few little stories about Form 1099-K in early 2012, and suddenly a ton of people came out of the woodwork, e-mailing me with questions. None of those people intended to pay me for my time to respond to their e-mail. All of them wrote way, way too much detail about their situation, and expected that I would reply with the answer to all their problems.

It made me regret writing anything about 1099-K! At any rate, here’s one of my 1099-K stories, which was the 4th-most-popular story on this website this year:

What to Do with that 1099-K

#3: “Small Business Wednesday — Section 179 and Bonus Depreciation for 2012″

In late 2011, I started a series called “Small Business Wednesday,” where I intended to write about tax issues of small businesses every Wednesday. I quickly abandoned Small Business Wednesday, but this story lingers on:

Small Business Wednesday — Section 179 and Bonus Depreciation for 2012

#2: “Will Obamacare Tax Your Home Sale?”

Not surprising that this was a popular story. (And the answer is, “no, it won’t, in most cases.”)

Will Obamacare Tax Your Home Sale?

#1: “Is Section 179 for 2012 $125,000 or $139,000?”

This is the runaway winner of most-popular story on The Dinesen Tax Times this year. In fact, this story ended up with three-times as many hits as the Obamacare story! Wow!

Is Section 179 for 2012 4125,000 or $139,000?

Image courtesy of Salvator Vuono / FreeDigitalPhotos.net

New Preparer Requirements on Earned Income Credit = Higher Fees for Clients

December 21, 2012 in Potpourri of Tax Topics with 2 Comments

The IRS has placed new requirements on tax preparers who prepare tax returns that claim the Earned Income Credit. As Robert Flach (aka, “The Wandering Tax Pro”) says, the IRS is basically making tax preparers become social workers.

For example, if someone who claims the EIC has a qualifying child, we — the preparer — must ask for, and keep copies of, documentation that proves that the child lived with the taxpayer. Examples of documentation we must ask for and keep copies of include: school records, medical records, child care provider records, etc. (You can see the entire list of insanity by viewing the full Form 8867, “Paid Preparers Earned Income Credit Checklist.”)

Preparers have always been required to review data, ask questions, and verify anything that seems suspicious. But we’ve never before been asked by the IRS to play the role of auditor by forcing clients to submit documents such as school records to us to review.

Thankfully I don’t prepare too many EIC returns. But the few that I do prepare will be billed at a much higher rate than in the past.

My fee for returns claiming the EIC will increase more than $30 over what I have charged for EIC in the past. There’s simply too much work involved, and too much risk on my end of me being hammered by the IRS if I don’t check the right boxes on the Form 8867.

An Example of What Could Happen if an AMT Patch Isn’t Passed

December 18, 2012 in Potpourri of Tax Topics with 9 Comments

Update 1/2/13: Mercifully, Congress did indeed pass an AMT patch, and it looks like the patch is permanent this time, so we won’t have to go through this every couple of years. So, this blog post is now a moot point, but makes for an interesting read about what would have happened if we had gone over the “fiscal cliff”.

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Congress will surely pass a “patch” to the alternative minimum tax for 2012 … won’t they? ID-10078737

One would hope so, or a lot of people will get hit with a surprise when they file their tax return.

Here’s an example.

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Setup:

“John and Mary” are a fictional married couple, but their situation is based on a situation one of my clients in real life would face if an AMT patch isn’t passed.

Relevant information:

  • Combined salaries: $77,000
  • They have 1 child
  • They do own a home and make charitable contributions, but they don’t have enough expenses to itemize deductions, so they claim the standard deduction instead.

If an AMT patch is passed, John and Mary won’t owe AMT. If a patch isn’t patched, they WILL owe AMT. (But scroll down to the comment section for a discussion of another option John and Mary may have that would result in them owing more tax but not being subject to AMT.)

Calculation (If AMT Patch is Passed):

  1. $77,000 wages – $11,900 standard deduction – $11,400 personal exemptions ($3,800 x 3)= $53,700 taxable income.
  2. Gross tax owed on $53,700: $7,185
  3. Net tax owed: $6,185 ($7,185 minus $1,000 child tax credit)
  4. Alternative minimum tax calculation: in John and Mary’s case, there are no AMT adjustments to make. Their AMT taxable income (“AMTI”) is their $77,000 gross income minus the $77,000 “patched” AMT exemption (estimated and rounded) = $0 subject to AMT.
  5. AMT doesn’t apply.
  6. John and Mary’s tax owed = $6,185
  7. $6,185 / $77,000 = 8.0%

Calculation (If No AMT Patch):

  1. The first three items above are the same ($7,185 gross tax/$6,185 net tax)
  2. Here’s where the differences kick in. Their AMTI is now $77,000 gross income minus $45,000 “unpatched” AMT exemption = $32,000 AMTI
  3. AMT is essentially a flat tax that imposes a 26% flat rate (or 28% at higher incomes). John and Mary are in the 26% range. $32,000 x .26 = $8,320 gross AMT
  4. $8,320 AMT is $1,135 more than the $7,185 “regular” gross income tax owed, so AMT does apply to John and Mary
  5. Their net tax owed = $7,320 ($8,320 AMT minus $1,000 child tax credit)
  6. $7,320 / $77,000 = 9.5%

So the short version is: John and Mary — a solidly middle class family that doesn’t even itemize deductions — would owe $1,135 more in taxes if Congress doesn’t pass an AMT patch.

According to my calculations, a married couple with income as low as $66,700 would be subject to AMT (just $2 of AMT, but subject to AMT nonetheless).

Image courtesy of www.freedigitalphotos.net.

This Accountant’s Idea for Eliminating Kickoffs in the NFL

December 14, 2012 in Editorial Commentary with 1 Comment

Roger Goodell, the commissioner of the National Football League, has floated the idea of eliminating kickoffs. Instead of a kickoff after a team scores, the team that scored would get the ball at its own 30 yard line in a 4th down and 15 yards to go situation. The team would have the choice of punting, or trying to convert a 1st down (and if they fail, the other team would get the ball in great field position).

I’m a stat geek and a sports fan (baseball is really my first love). When I was in high school, I was the statistician for the basketball team, and worked as a spotter in the football press box.

I also started a fantasy football league when I was 15 — long before fantasy football really became popular. And I even tried to create a football power rating system from scratch.

Yes, I was, and still am, a nerd.

Sports statistics as a teenager were my “gateway drug” into the world of taxes.

So I bounce ideas around in my head about sports all the time. Even before Goodell came out with his idea, I’ve been toying with an idea that calls for not just eliminating kickoffs, but eliminating the entire kicking game from football altogether.

My proposal is this:

  1. No more kickoffs, punts, field goals or extra-point kicks. The objective of football is to get the ball into the endzone. So, reward teams that get the ball into the end zone.
  2. The team that gets the ball first would not receive a kickoff. Instead, the ball would simply be placed at a certain yard line (probably that team’s own 35) and play would proceed from there, the same as always. Except ….
  3. No punting, no field goals. If it’s 4th down, you have to go for it. If you don’t convert, the other team gets the ball.
  4. Touchdowns are still worth 6 points. After a score, the scoring team goes for the 2-point conversion. If they convert, they get to keep possession of the football, 1st and 10 at their own 35. If they fail to convert, the other team gets the ball at its own 35 yard line. Right now, 2-point conversions take place from the 2 yard line, and the conversion rate is usually around 50%. I would propose moving the conversion back to, say, the 5 yard line, to add to the degree of difficulty.

There are plenty of flaws with my idea, but it’s something I cooked up earlier this football season (I think I was watching the Chiefs play when I came up with this idea, which may explain why my mind started to wander).

What Couples in Same-Gender Marriages Should Be Doing, Tax-Wise, Before Supreme Court Ruling

December 12, 2012 in Same-Sex Marriage and Taxes with 1 Comment

The U.S. Supreme Court will take up the Defense of Marriage Act in March, and could issue a ruling by the end of June. If the Supreme Court overturns DOMA, couples in same-gender marriages will be treated the same as opposite-gender couples for all federal purposes … including taxes.

So what should couples in same-gender marriages be doing, tax-wise, in preparation for the ruling?

  1. Examine your tax situation for prior years. If you would have benefited from filing a joint return in prior years, you may want to submit an amended, joint tax return to put in a protective claim for refund in the event DOMA is overturned. Note that the IRS will not process your amended return until after the DOMA ruling comes down.
  2. You can go back as far as 2009 to file an amended return. For most people, the amendment window for 2009 closes April 15, 2013.
  3. Make sure to file the proper disclosures with your amended return. Basically, because DOMA is still considered a valid law, you have to include certain language that tells the IRS that you are amending your return based on court challenges to DOMA. You can find much more guidance in this document from GLAD.
  4. For now, DOMA is still the law of the land, and will be until at least June. So, when you file your 2012 tax return, you’ll still have to file as two separate, single people. But after you file those returns, you can always submit an amended, joint tax return. Or….
  5. Put your 2012 return(s) on extension until after the DOMA ruling is released. If DOMA is overturned, you could then file an original 2012 tax return as a married couple and not mess with having to amend. If DOMA is upheld, you would go ahead and file your separate, single returns instead. Note, though, that A) this would mean putting off getting your refund, and B) extensions give you an extension of time to file, but not an extension of time to pay any tax you owe, so if you end up owing on your 2012 tax return, you could be subject to penalties if you don’t pay what you owe by April 15th.

Further Reading

  • Professor Pat Cain at Santa Clara Law School in California maintains a must-read blog about the tax issues of same-gender marriage.
  • GLAD and Lambda Legal are two other good resources on this topic.

No, I Don’t Plan to Take the RTRP Exam

December 5, 2012 in Editorial Commentary with 1 Comment

Some enrolled agents are taking the RTRP exam so they can add the RTRP designation to their name. The logic being, “registered tax return preparer” is more palatable to the public than “enrolled agent.”

But I don’t intend to take the RTRP exam.

While no one knows what an EA is, I can honestly say I’ve never lost a client because of my designation, and it hasn’t hurt me in terms of picking up new clients.

I think most people see the letters after my name and know it means something good. But I also don’t think they care that much about it.

That’s just my personal experience. Approximately 85-90% of my clients come from referrals, either from existing clients, various not-for-profits that I help, or from other professionals such as financial advisors in my circle of contacts. Each year, I get a few clients who find this website while searching for a central Iowa tax preparer. But otherwise, I build organically through referrals.

So when people come to me, they already are confident in my abilities because a friend or trusted advisor is recommending me. They know I have a designation, which I suppose adds some more peace of mind, but I don’t think too many clients care about the specifics of my designation.

Taking the RTRP exam may be more beneficial for an EA who is in an area with a lot of RTRPs, or if the EA is always having to compete with RTRPs for clients.

To be honest, I’m not really hearing a lot of “buzz” about the RTRP designation here in Iowa, anyway.

So as of now, I won’t be taking the RTRP exam. But I reserve the right to change my mind as the landscape of preparer regulation becomes clearer over the next few years.

Are Donations to a 501(c)(4) Deductible?

November 28, 2012 in Potpourri of Tax Topics with 1 Comment

The question of whether a person can deduct donations to a 501(c)(4) organization comes up periodically. The answer is, no, you can’t deduct those donations as a charitable contribution. Only donations to 501(c)(3) entities are deductible as charitable contributions.

Donations to 501(c)(4) organizations are not deductible as charitable contributions. The only exception is for donations to 501(c)(4) volunteer fire companies — those donations ARE deductible. But otherwise, you can’t deduct contributions to a 501(c)(4).

Businesses that make donations to a 501(c)(4) might be able to take a deduction as a business expense, such as an advertising expense, depending on the nature of the donation.

For more tax considerations to think about before making a donation, check out William Perez’s article “Tax Tips for Charitable Giving” at the About.com Tax Planning website.

Dinesen Tax Greatest Hits: Thoughts on Preparer Regulation

November 21, 2012 in Editorial Commentary with 2 Comments

Since it’s a holiday week, I’m re-running popular blog posts from the past. Today, my first post about regulation of tax preparers, from January of this year. Interesting to see how views develop and grow throughout the course of a year.

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Originally published January 14, 2012.
I have been asked to give my thoughts on regulation of tax preparers, so here goes!

I agree with the concept of regulation of tax preparers. I just have zero faith the the IRS can successfully oversee it. And I doubt that regulation will change anything for the better.

The IRS is rolling out a new designation — Registered Tax Return Preparer (RTRP). Anyone who prepares a tax return must be a CPA, Enrolled Agent, attorney or RTRP.

This doesn’t sound so bad on the surface. But does this new designation really mean anything? A person can become an RTRP by passing an open-book exam that seems to be based on Publication 17,  for crying out loud. To quote Joe Kristan at the Tax Update Blog:

Considering the exam is an open book exam — which means it measures literacy more than it measures the ability to do tax returns — it also will do little to establish that anyone is “basically knowledgeable and competent in 1040 preparation.”

What’s Going to Change?

I think this is just going to create more government bureaucracy without solving any problems. Will passing the RTRP exam magically make someone a better tax preparer? NO. (Note: the same is true of passing the EA exam, CPA exam or bar exam — it doesn’t mean the person knows how to actually do the job.)

I have met unenrolled preparers who know far more about taxes than me. I have also met unenrolled preparers who claim to deal with a lot of Earned Income Credit returns but who looked puzzled when I mentioned the changes to Form 8867 (true story; the person had never heard of Form 8867).

I have met CPAs who specialize in taxes who are extremely knowledgable. Indeed, I have called CPAs to get advice on how to handle certain complex tax matters. But I have also met CPAs who primarily prepare tax returns but who freely admit that they despise taxes and would rather do audits of financial statements. I have also met CPAs who primarily prepare tax returns but who have somehow never heard of Circular 230.

I have met EAs who are extremely knowledgable. I love going to the quarterly meetings of the Iowa Society of Enrolled Agents and listening to the stories and experiences related by longtime EAs. But even though EAs are directly regulated by the IRS, we have people who have sullied the EA name by brazenly committing tax fraud (such as this EA couple from the Des Moines area).

Will any of this change just because there’s a new designation? No!

As to continuing education, EAs, CPAs and attorneys are all required to take CPE as part of our licensing. Granted, unenrolled preparers don’t have to take CPE — but the good unenrolled preparers do take CPE. The new preparer regulations require 15 hours of CPE each year. Will that really increase quality?

These new requirements will not make the decision-making process easier for consumers. It won’t put unethical or incompetent preparers out of business. If you can flip through Publication 17 you can probably pass the RTRP exam. If you’ve got $63, you can get a PTIN. And you can find cheap outlets for online self-study CPE. None of this seems likely to chase away the incompetent or unethical. If anything, it will chase away the longtime, good, experienced, ethical preparers who would rather just retire than mess with passing a test and getting a PTIN.

If it won’t increase the quality of preparers and it won’t get rid of unethical preparers, then why do it?????

So, What Would Jason Do?

Right now, anyone who prepares a tax return must have an ID number (a PTIN). So the IRS already has a mechanism for tracking who is preparing returns. Under a Jason Regulation Regime, I would say that if a person has a PTIN, they are subject to Circular 230, regardless of what letters they have after their name. Unethical or incompetent preparers can be tracked and weeded out by having a mechanism for revoking their PTIN.

Yes, I understand that the term “incompetent” would need to be carefully defined. But with PTINs, the IRS can see who is making mistakes. Those preparers, whether unenrolled, EA, CPA or attorney, would lose their PTIN if the mistakes happen too often or too egregiously. Thus, all preparers would be behooved to take CPE, stay current, be ethical and be diligent.

Simple and clean. Or at least, simpler and cleaner than trying to implement the RTRP and the rest of this regulation regime.

What are your thoughts?

Further Reading

  • Robert Flach (The Wandering Tax Pro) comes down in favor of preparer regulation in this article.
  • Joe Kristan at the Tax Update Blog shares many of my views, in this article.

Image: cbenjasuwan / FreeDigitalPhotos.net

That E-mail From the IRS Isn’t Really From the IRS

November 16, 2012 in Potpourri of Tax Topics with 1 Comment

A client called me yesterday to say they received an e-mail from the IRS. The e-mail said my client was owed an additional $169 refund, and that my client would need to provide bank account information before the IRS would pay the refund.

My client wisely deleted the e-mail without opening any attachments or responding in any way.

The IRS never, ever sends e-mails to taxpayers. If you get an e-mail from the IRS … the IRS didn’t send it. It’s a phishing scam. 

In my client’s case, if she really had been owed an additional refund, the IRS would have sent a letter. Same goes for audits or requests for additional information. Those requests will come by regular mail, not e-mail. The IRS also will not send text messages to you.

In rare cases, you might get a call from the IRS, but that’s extremely rare. I’ve only had the IRS try calling (unsuccessfully) a client one time, and that was in a unique circumstance (this was my client going through the identity theft saga with the IRS).

The IRS does investigate phishing scams, so if you receive an e-mail claiming to be from the IRS, you can forward it on to the IRS’s “phishing department” at: phishing@irs.gov.

You can learn more about phishing scams involving taxes by visiting this page on the IRS website.

No to Additional Preparer Testing, Yes to CPE Requirements

November 14, 2012 in Editorial Commentary with 3 Comments

I’ve written before that I don’t think CPAs or attorneys should be required to take the RTRP exam to prepare tax returns. I stand by that belief, even though I am in the minority among people who aren’t a CPA or an attorney (I’m an enrolled agent).

But I do think CPAs and attorneys should be required to show continuing education in the tax field. Currently, the IRS doesn’t require this of CPAs and attorneys.

Enrolled agents are required to have 72 hours of CPE  – 100% in taxation – in a 3-year period. The minimum amount we can get in any one year is 16 hours. (So theoretically an EA could take 16 hours in each of the first two years and then take 40 hours in year 3 and meet the IRS requirements.)

Members of the National Association of Enrolled Agents, such as me, are required to get a minimum of 30 hours a year. Many of us get much more than that. I strive to come in at at least 50 hours a year. I know some EAs who get 90 hours a year.

RTRPs are required to get 15 hours a year in taxation. I think it’s reasonable for the IRS to require 15 hours a year out of CPAs and attorneys, too.

I know that CPE can sometimes be seen as a joke, because at most seminars you can just sit there playing on your computer or phone all day and still get credit. Still, it does show at least some commitment to keeping current and expanding your knowledge of taxes.

To me, a CPE requirement makes more sense than a testing requirement.

To my surprise, The Wandering Tax Pro, Robert Flach, seems to be coming around to my viewpoint on this topic. Robert and I have disagreed on the topic of preparer regulation. But in his most-recent post on the topic, Robert sounds an awful lot like me! (I wrote my post prior to Robert’s post being published. It’s a happy coincidence that our posts on this subject are appearing just one day apart.)

As always, I’ll have more thoughts in future blog posts.

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