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NEW JERSEY TAX PRACTICE BLOG by Robert D Flach - SEPT-OCT-NOV 2006

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WELCOME TO THE NEW JERSEY TAX PRACTICE BLOG!  YOUR COMMENTS AND SUGGESTIONS ARE ALWAYS WELCOME.  EMAIL ME AT mailto:rdftaxpro@mail.com.
 
CHECK OUT MY WEBLOG FOR TAXPAYERS "THE WANDERING TAX PRO" AT http://rdftaxpro.tripod.com/weblog .

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THURSDAY, NOVEMBER 30, 2006
 
I am in shock - although pleasantly so!
 
I recently reviewed and responded to erroneous "Statement of Account - Underpayment" notices (it seems lately that all such notices are erroneous) on behalf of two tax clients. 
 
On one income from a pension was reported on the statement as both wages and a pension distribution, and on the other NJ state income tax withheld of $100,000 was not applied.  In both cases the 2005 Form NJ-1040 was correct as originally filed.
 
The notices gave an email address to use to respond, so I sent my responses, pointing out the Divisions errors and ommissions, both via email and via postal mail.
 
To my complete and total surprise, in both cases within less than 2 weeks I received an email reply, each acknowledging the Division's error (the reply for the client not given credit for NJ state tax withheld asked me to fax a copy of the W-2).
 
In the past, when I would write (via postal mail) to the NJ Division of Taxation regarding a client issue I would never hear from Trenton.  In most cases the issue would eventually be taken care of and the taxpayer would receive either the appropriate refund or no further requests for payment - but I would never receive the courtesy of a written response or acknowledgement to my correspondence.  In some cases it would take several unanswered letters on my part for the state to finally resolve the matter properly.
 
I had written to then Division of Taxation Director Robert Thompson regarding a client issue a while back when previous multiple correspondence with the Division over an extended period of time were totally ignored, and included a complaint about the Division's lack of reponse to my client letters.  I received a satisfactory response to that letter from an "underling", and since that time I have sent any client-related correspondence directly to that person.  While I only on rare occasions actually receive a written reply, the client issue is usually satisfactorily resolved, although never in less than 2 weeks.
 
The moral of the story is if you have to respond to the NJ Division of Taxation you should do it via email.
 
As a general rule, when contacting just about any branch of New Jersey government for a variety of issues and matters I have received a relatively prompt and satisfactory response when the contact has been made via email.
 
Any comments?
 
TAFN
 
WEDNESDAY, NOVEMBER 22, 2006
 
At the recent NATP year-end update class I learned something new from the pension act. 
 
I emailed the following to the NJ Division of Pensions:
 
"The recently passed pension bill includes a provision that permits an eligible retired public safety officer to elect to exclude from gross income any distribution from en eligible retirement plan for health insurance premiums, up to $3,000, effective with calendar year 2007.
 
I understand this to mean that a retired police officer or firefighter can elect to have the amount withheld from his/her state pension for health insurance coverage treated as "pre-tax" for federal income tax purposes.
 
How can a NJ retired public safety officer elect this tax treatment?
 
Thank you!"
 
I got a response today:
 
"Dear Mr Flach:
 
This provision is optional and we have not yet determined whether it would be feasible for the NJ Division of Pensions and Benefits to adopt.  If and when a determination is made, we will notify all eligible retirees.
 
Thank you,
 
Valerie Askew, Client Services"
 
HAPPY THANKSGIVING!
 
TAFN
 
SUNDAY, NOVEMBER 19, 2006
 
The IRS has announced a formula that can be used by business and non-profit entities to determine the amount of the refund of federal excise tax paid on long-distance service.
 
 
- - - - - - - - - -
 
At the annual National Association of Tax Professionals year-end update seminar lthis past Friday a representative of the New Jersey chapter of NATP announced that their annual NEW JERSEY STATE SEMINAR will be held on January 13, 2007 at, as usual, the Woodbridge Hilton in Iselin. 
 
Registration will begin at 7:45 am, and the seminar should begin at 8:15 am. 
 
The cost of the seminar is $165 for members and $185 for non-members if the registration is postmarked before January 7, 2007, or $205 for both members and non-members if postmarked on or after 1/7/07 or at the door.  Continental breakfast, lunch and afternoon dessert is included.
 
The topics for the day will include NJ Estate/Inheritance Tax, Sales Tax Update, Electronic Filing Requirements, Corporation Tax Changes, Corporate Dissolutions, and a Philadelphia/Pennsylvania update.  Maureen Adams, the new Director of the NJ Division of Taxation, is scheduled to speak.
 
For more information on the seminar you can call 1-800-281-NATP or 908-709-4261.
 
TAFN 
 
MONDAY, NOVEMBER 6, 2006
 
I have finally made it - a posting from my other blog - THE WANDERING TAX PRO - has appeared in the "Blog Carnival" Tax Carnival #6: Decision 1040 at the Don't Mess With Taxes blog written by Texas journalist Kay Bell!  Go to http://dontmesswithtaxes.typepad.com and check out the November 6th entry
 
What is a "Blog Carnival"?  According to http://blogcarnival.com, Blog Carnivals typically collect together links pointing to blog articles on a particular topic - investments, cats, breadmaking, Lutherans, networking, and even "the decline of democracy".
 
Kay Bell's Tax Carnival refers to me under the "Real Estate Roundup" section - "For elaboration on taxes and the sale of your personal residence, Robert Flach, aka The Wandering Tax Pro, directs us to his October 28 posting on that topic."
 
I suggest you visit Kay Bell's Tax Carnival as a way of finding out about the many blogs that discuss federal and state tax issues.
 
TAFN
 
SUNDAY, OCTOBER 29, 2006
 
As a New Jersey tax professional for over 30 years I have seen the “minimum tax” for a NJ corporation go from $25.00 to as high as $2,000.00.
 
Because this is in reality a “franchise fee” and not a tax assessment it must be paid even if the corporation has “0” net income or a net loss.  It must be paid even if the corporation was totally inactive.  Plus the corporation must also pay an “Annual Report fee”.
 
The DFBs (clean version = damned fool bureaucrats) in Trenton recently increased the minimum tax from $500.00 to a sliding scale of up to $2,000.00 based on “gross receipts”.  The average one-man small business corporation with gross receipts of between $100,000.00 and $250,000.00, who will generally have minimal or no net income, will see their NJ corporate tax payment increase by 50% - from $500.00 to $750.00!
 
While my initial knee-jerk reaction was to have clients in this situation convert from a corporation to an LLC, a closer examination indicates that this is not necessarily the way to go.  As with any option available in the tax code, you should do separate calculations for each option, taking into consideration federal, state and local tax consequences.
 
Let us look at a client who has a small retail store.  He is currently a one-man “C” corporation.  When he incorporated NJ did not permit a one-man LLC, so this was not an option to consider at the time.  His gross receipts for the year are slightly over $200,000.00.  He took a salary of $45,000.00, bringing his federal net taxable income to $2.00 - $502.00 for NJ purposes after adding back the NJ-CBT deduction.  As part of the price for the privilege of living in New Jersey he paid $12,857.00 in health insurance premiums for himself and his family through the corporation.  The corporation paid $3,734.00 in federal and state payroll taxes in addition to the $3,681.00 in FICA, SUI and SDI withheld from the $45,000.00 in wages.
 
If the client had operated as a one-man LLC filing a Schedule C for 2006, the net earnings on his federal Schedule C would have been $62,093.00 ($2.00 corporate income + $45,000.00 salary + $3,734.00 payroll taxes + $12,857.00 health insurance premiums + $500.00 NJ-CBT).  His self-employment tax would be $8,773.00 ($62,093.00 x .9235 = $57,343.00 x 15.3%).
 
The additional tax paid as an LLC would be $1,358.00 ($8,773.00 - $3,734.00 corporate payroll tax expense - $3,681.00 payroll tax withholdings).  There would be a very small federal income tax savings - as the net taxable earnings from self-employment, after deducting the health insurance premiums and one-half of the self-employment tax would be $44,849.00 instead of $45,000.00 – but the state income tax liability would be more due to the increased earnings reported from self-employment and possible decreased medical deduction. 
 
The total additional tax cost is substantially more than the increased $750.00 NJ-CBT minimum tax that he would save if he organized as an LLC filing as a sole proprietor.  Plus there is the side benefit that the client is less likely to be audited by the IRS if filing as a corporation.
 
So, because of the way health insurance premiums for the self-employed are deducted on the federal Form 1040 the client is better off to remain a corporation.  However, if health insurance premiums are not a factor it may indeed be cost effective to convert from a corporation to an LLC.  Do the math. 
 
Of course you must also factor into your calculations the fee differential for preparing corporate income tax and quarterly payroll tax returns as opposed to the cost for preparing Schedules C and SE, Form 4562 and quarterly estimated tax payments for the 1040.
 
TAFN

 

MONDAY, OCTOBER 16, 2006
 
As the final deadline for extended returns, today can also be considered to be the official end of the tax filing season - my 35th season in "the business".  This milestone has caused me to wax nostalgic about the "good old days" of the tax profession and how tax laws, regulations and procedures have changed over the years.
 
Those were the days, my friend -

* when a savvy tax preparer could "pull a rabbit out of a hat" and save a client literally thousands of dollars in federal income tax with "Income Averaging" or "10-Year Averaging" (and in doing so be assured a client for life),

* when credit card interest, auto loan interest and personal loan interest, as well as our tax preparation fees, were fully deductible,

* when "Employee Business Expenses" were an adjustment to income and not an itemized deduction subject to a 2% of AGI exclusion,

* when there was no such thing as an Adjusted Gross Income exclusion or threshold or the "phase-out" of a deduction or credit,

* before all the acronyms (PIG, PAL, ACRS, MACRS and so on),

* and when one-half of long-term capital gain just disappeared from the tax return.

I started my career in February of 1972, preparing 1971 tax returns, when a deduction was really worth something and everyone itemized.  As we used to tell clients, "Uncle Sam will reimburse you for up to half of our fee!" 

In 1971 the top tax rate was 70%.  There was a "minimum tax", not yet alternative, and a "maximum tax" (i.e. the maximum tax on "earned income" was 50%).  While we did prepare a few maximum tax forms, I do not recall ever preparing a minimum tax form.  The Alternative Minimum Tax did not begin to affect out clients until the 2nd half of the 1990s.

I went to work for James P Gill, my uncle's tax preparer, during my first year of college, with no experience preparing tax returns.  I had never prepared a tax return before, not even my own!  My education consisted solely of the freshman semester of "Accounting 101". 

I learned the business the absolute best way possible - by actually preparing returns.  On my first day of work I was given a briefcase containing a client's current year "stuff" and a copy of the previous year's return and told to "jump in and swim".  If I had a question I would ask Jim, blessed with the patience of a Saint (a trait I soon learned was essential for a tax preparer), who would stop what he was doing to explain the answer to me.

I worked in a true "storefront" office on the fringe of Journal Square, Jersey City's equivalent of Times Square (made famous in the "Jersey Bounce", which "started at Journal Square"), where we dealt with what Jim affectionately referred to as "the great unwashed masses" on a daily basis.

There certainly were no computers in those days.  During my first few years we did not even have a copy machine in the office.  Returns were prepared by hand on 3-page carbonized forms purchased from Accountant's Supply House.  To this day I still prepare all my 1040s manually - in 35 tax seasons I have never used tax preparation software to prepare a return.

As I started out in the tax preparation business the matching of 1099s to 1040s had just begun.  I remember a client who came into the office during my first or second year with a humungous print-out from the IRS listing by source all the interest and dividends that he had failed to report on his previous year's 1040.

Back then a tax preparer was truly in many ways also a "father confessor".  One day a widow came into the office dressed in her black mourning outfit and waited to see Jim.  Once in the "inner sanctum" she confessed that while her husband was alive she filed a joint return with him, prepared by our office, claiming only his income, and she also filed a single return, elsewhere, under her own Social Security number to report a small pension she received in her maiden name.  In those days only the Social Security number of the husband was required to be entered on the return - and not that of the spouse.  After giving her "absolution" Jim commenced to fix the situation.

During my early years you were also not required to list the Social Security number for dependents claimed on your return.  One year a married client, let's call him John and call his wife Mary, left his "stuff" off at the office, which included a handwritten sheet listing, among other deductions, "dependents" John, Mary, Paul and George.  The college student who prepared the return that year (not me) listed as dependents John, Mary, Paul and George.  The client received the refund requested on the return without question. 

The next year John came in and stayed while I prepared the return.  I asked if he was still claiming his four kids, John, Mary, Paul and George, and he told me that he only had two children - Paul and George!  It appears that the student who had prepared the previous return had forgotten our first, and most important, rule of tax preparation - always review the prior year's return when preparing the current 1040.

At the recent IRS Tax Forum it was reported that in the first year you were required to list a Social Security number for all of your dependents about 5 Million dependents disappeared from tax returns.

Over the years, due to our proximity to New York City, we prepared the returns of some "semi-famous" taxpayers.  One year in the late 1970s we prepared the 1040 for the then captain of the New York Giants football team, who was partner in a local restaurant with one of our long-time clients.  This was well before the days when professional athletes all had multi-million dollar contracts, but I do recall being surprised that his W-2 was only $100,000+.  FYI, this person was one of the rare clients, I can count them on the fingers of one hand, who "stiffed" Jim over the years.

When the drummer for the original off-Broadway production of ONE MO' TIME became sick and a local union musician, whose return we prepared, took his place we welcomed as new clients most of the members of the cast, who came up to New York from New Orleans where the show had originated.  It was the first year we added the Louisiana state income tax return to our repertoire.  I remember having complimentary tickets for the show upstairs at the Village Gate and going backstage after the performance to deliver finished returns.  We also did the tax returns for the road company.

Our clients were extremely loyal.  If they moved out of state they would continue to mail their tax returns to us.  We had one client who had retired to the Netherlands and still had us prepare her 1040!

Some clients were also compulsively consistent, coming in to have their returns done on the same day each year.  Back when Abe Lincoln had his own separate legal holiday February 12th was a busy day for us, especially with teachers.  We also had our share of clients who would wait until the very last day of each tax season, generally April 15th, to come in.  When we saw Wally Weinmann, usually the last person on the last day, we knew that it was over!  We even had a tv repairman who was always a year and a day late - he would come in on April 16th of 1975, for example, to have his 1973, not 1974, tax return prepared!

Of course in the "good old days" we never filed an extension.  We finished all the returns on April 15th - even if we had to stay up until 3 am to do so!

A lot has changed since those days.  Reagan completely rewrote the tax code with the Tax Reform Act of 1986, doing away with a lot of the loopholes and deductions we had used to work magic.  Jim decided to retire when he turned 75 and handed his practice and office over to me.  He would come in to help during the last weeks of the season until he passed away three years later. 

As you may know, I now work out of a home office and no longer take on new clients.  While I do not miss dealing with the "great unwashed masses" I do miss the "good old days".  Every now and then a long-time client, faced with a large balance due to "Sam", will ask if we can Income Average and I think back to the days when we could "pull a rabbit out of a hat".

And of course, most of all I miss the days when come April 15th it was truly over - and we didn't have to spend the next six months dealing with GD extensions!

Do you have any tales of the "good old days" you want to share?

TAFN

THURSDAY, OCTOBER 12, 2006
 
The Pension Protection Act of 2006 allows an individual age 70 1/2 or older to directly transfer up to $100,000.00 from an IRA to a qualified charity tax-free (the amount of the transfer is not included in the taxpayer's AGI).
 
The NJ Division of Taxation ha announced that it will not follow the federal law in this situation.  There is no change to the NJ state tax treatment of IRA distributions, regardless of the recipient of the funds.  Go to http://www.state.nj.us/treasury/taxation/pensionGift.htm.
 
- - - - - - - - - -
 
Here's an idea...
 
 
TAFN
 
FRIDAY, SEPTEMBER 29, 2006
 
It seems every other day I hear from another client about the problem with the NJ Division of Taxation discussed in the Tuesday, September 12th posting.
 
I have not heard of any other tax pros who have had similar problems with balance due clients.  As I do not use tax preparation software, and therefore do not e-file, I have satisfied my NJ electronic filing requirement whenever possible by submitting the NJ-1040s via NJWebFile.  It appears that all the problems have been with returns submitted via NJWebFile.
 
No word yet on my letter to the NJ Division of Taxation regarding this problem.
 
- - - - - - - - - -
 
The Tax Policy Center has prepared a "Summary of Major Enacted Tax Legislation from 1981-2006".  This special report briefly outlines the major provisions of each of the 39 tax laws passed during this period (9 of which were enacted under George W).
 
To download a copy of this 30-page report go to http://www.taxpolicycenter.org/Publications/legislation.pdf.
 
TAFN    
 
TUESDAY, SEPTEMBER 12, 2006
 
There seems to be a serious problem with the NJ Division of Taxation's processing of the payments of balance dues on 2005 Form NJ-1040s.
 
I have heard from 6 clients so far who have received balance due notices from the Division of Taxation for 2005.  In each case the client had remitted the balance due on their 2005 Form NJ-1040 on a timely basis - and each had documentation that the check was received and cashed by the DOT - but they were not given credit for the payment on the balance due notice!
 
It appears that the Division of Taxation credited each of the 2005 payments to the client's 2004 Form NJ-1040 account!
 
A few clients contacted the DOT directly and were told of the error and that the payments would be transferred to the correct tax year.
 
I have written to the Division of Taxation about this problem.
 
Have your clients also been getting this erroneous balance due notices?
 
TAFN

COPYRIGHT (c) 2006 BY ROBERT D FLACH LLC