Monday, May 22, 2017


Over the years I have seen many clients who have, without first consulting me, taken money from their 401(k) plans, while still employed, to assist in paying for excessive medical expenses, college tuition, or a downpayment on a home.

This is a very expensive way to get money.  A loan shark might be cheaper!

Money taken from a 401(k) plan will be fully taxed on a federal and state level and, if you are under age 59 ½ when you take the money, as has been the case in most of what I have seen among clients, you will also be subject to the 10% premature withdrawal penalty.

In most cases 40% or more of the amount taken from the account will be eaten up by federal and state taxes and penalties!  So if you take $10,000 from your 401(k) you will end up in pocket with less than $6,000.

It is similar with premature withdrawals from a traditional IRA, but with an IRA you might have a “basis” in your traditional IRA investment based on non-deductible contributions so the entire amount of the withdrawal may not be taxable.  With a ROTH IRA you can withdraw your contributions at any time without tax or penalty.

There are a limited number of exceptions that could allow you to avoid the 10% premature withdrawal penalty – but you would still need to pay federal and state income tax on the withdrawal.  Some exceptions apply to withdrawals from both 401(k) plans and traditional IRA accounts, and some apply only to premature IRA distributions.

You can avoid the 10% penalty if you take money out of a 401(k) plan, or a traditional IRA, “to the extent unreimbursed medical expenses exceed 10% (or 7½% if the lower threshold is reinstated) of AGI”.  So you can avoid the penalty on the amount of medical expenses that would be deductible on Schedule A.

If you take $10,000 from your 401(k) to pay for an excessive medical bill not fully covered by insurance (this would NOT include elective cosmetic surgery) and when you sit down to prepare your tax return you determine that your total allowable medical expenses for the year are $20,000 and your AGI is $110,000, you can avoid the 10% penalty on $9,000 of the withdrawal ($20,000 – $11,000 = $9,000).  You would still pay $100 in premature withdrawal penalty.

But in most cases of client 401(k) distributions the money has been used either to pay for college or for a downpayment on a house.  Money taken directly from a 401(k) plan for these purposes will be subject to the full 10% penalty.

However money taken from an IRA account and used for either of these two purposes is exempt from the penalty.  In the case of a downpayment on a home, the exemption is limited to $10,000 withdrawn and only applies for “first-time” home purchases (no home ownership in prior two years). 

According to the IRS, expenses that qualify under the college exception include –

. . . tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance.  In addition, if the student is at least a half-time student, room and board are qualified education expenses.”

The amount of expenses allowed must be reduced by any tax-free educational assistance.

So if you want to invade your 401(k) plan for college expenses or a home downpayment first check with the plan to see if you can have the amount of the withdrawal transferred (rolled over) trustee to trustee from the employer plan directly to your traditional IRA account.  Or take the distribution from the 401(k) and immediately rollover the amount yourself into the IRA account.  When that has been done take the amount of the transfer as a distribution from the IRA account and use the IRA money to make the college or home purchase payments. 

Instead of taking an actual withdrawal from your 401(k) you may be able to take a loan from the account.  Taking a loan from a 401(k) plan is not a taxable event.  However be aware that you must pay the money back to the plan, perhaps with some interest, before you leave the company.  If your employment is terminated you must pay back any outstanding 401(k) plan loan balance within a short period of time or the unpaid balance will be treated as a distribution, subject to income tax and penalty at that time.

The best advice I can give you is do not take the money from your 401(k) plan, or second best that if you are thinking about taking money from your 401(k) plan to pay for anything talk to your tax professional first!  If my clients had come to me they would have saved a lot of money.


Wednesday, May 17, 2017


As it is college graduation time I thought I would reprint some advice to recent graduates that I had given in a post from a couple of years back.
Dear Graduate -
1.  Claim Single-1, or Single-0, on your Form W-4 for federal and state withholding.  Do NOT claim more than 1 exemption.
2.  Participate in your employer’s 401(k) or 403(b) plan.  If cash-flow permits, contribute the maximum, which for 2014 is $17,500.  If you cannot contribute the maximum try to contribute at least enough to qualify for the maximum amount of any employer matching contribution.  If your employer offers a ROTH 401(k) or 403(b) option choose this option.  As an alternative, if you are contributing the maximum put 50% in a “traditional” account and 50% in a ROTH account.
3.  If you contribute toward the cost of employer-paid group health insurance premiums via payroll deduction, and you are offered an option, elect to have your contributions be treated as “pre-tax”.
4.  Participate in your employer’s medical expense Flexible Spending Account (FSA).  Be conservative and start with $1,000.  You can increase your contribution in subsequent years once you get a handle on your annual out-of-pocket medical expenses.
5.   If you have any cash from graduation gifts left over open a ROTH IRA account and use this money to fund your 2014 contribution.  The maximum you can contribute to an IRA, “traditional” and ROTH combined, for 2014 is $5,500.
6.  Take an empty coffee can, or other form of “piggy bank”, and put it in your bedroom.  Each week put $10, $20, or $50 in this “bank” (if you choose $20, but $20 in each week).  On January 2nd of 2015 take the money that has accumulated in this “bank” and contribute it to your ROTH IRA for tax year 2015.  Continue this practice for 2015 and subsequent years. 
And if you are thinking about becoming a tax preparer I offer my advice in my new book SO YOU WANT TO BE A TAX PREPARER.
In this book I discuss in detail -
·            THE PTIN
The APPENDIX includes copies of a Code of Ethics, Standards of Professional Conduct, an Engagement Letter and the TAX PROFESSIONAL’S ONLINE RESOURCE GUIDE.
This book can also provide help to tax preparers who would like to expand their practice.
The cost of this book is only $5.45 delivered as a pdf email attachment, or $9.45 for a print version sent via postal mail.
To order your copy of this book send your check or money order payable to TAXES AND ACCOUNTING, INCORPORATED, and your email or postal address, to –

Tuesday, May 16, 2017


* Kay Bell suggests “Trump's continued weekend travel, NYC home security costs raise more tax questions” at DON’T MESS WITH TAXES.
While I, like any tax pro, am interested in the tax treatment of unique circumstances – and Kay does a good job of discussing the tax issues here - the much, much more important questions raised about idiot Trump’s trips are the excessive unnecessary costs to taxpayers and the resulting blatant lining of Trump’s and his family’s pockets based on his choices of venue for week-end trips.
Conflict of interest issues aside, Kay points out that (highlight is mine) –
The cost of just Trump's air travel for two weekends in Florida, according to a recent Wall Street Journal examination, was $1.3 million.”
The post quotes the delusional egomaniac (excellent and spot on description, SC) as explaining –
"The reason I am staying in Bedminster, N.J., a beautiful community, is that staying in NYC is much more expensive and disruptive. Meetings!"
Trump, you arrogant and selfish buffoon, the White House is to be used for meetings.  It is your office!
When discussing the golf outings of the idiot in the White House I do point out one benefit of these trips - the more time the fool spends playing golf the less time he has to do damage to the country and the world.
* Once again I ask - have you seen my latest THE LIBERTY TIMES installment?  I discuss tax reform.  I provide more details on my tax reform proposals and suggestions here.
* Here are some good quotes from an editorial on the dreaded Alternative Minimum Tax by Roberton C. Williams in “Caught Again By the AMT” at TAX VOX, the blog of the Tax Policy Center -
. . . the AMT was created nearly 50 years ago after Congress learned that 155 Americans with income over $200,000 paid no federal income tax in 1967. In 1970, fewer than 50,000 filers paid barely $100 million in AMT. For 2016, nearly five million of us paid AMT averaging about $7,200, raising our effective tax rates by an average of 1.4 percentage points and boosting federal revenues by about 1 percent.”
And -
The AMT was originally intended to prevent people from taking unfair advantage of tax preferences to avoid paying income tax. And the recent high-profile example of President Trump was held out by some as evidence. But in reality, the tax often fails to meet that goal. In 2013, about 12,000 households with income over $200,000 paid no federal income tax, despite the AMT.”
And -
My objection to the AMT is not that I pay too much tax but rather that it makes the income tax even more impenetrably complex. It’s hard enough for people to understand the regular tax without tacking on additional calculations. And taxpayers won’t trust a system they don't comprehend--or believe raises revenue in a fair way.”
The initial creation of the Minimum Tax was an excellent example of the laziness of Congress.  Instead of dealing with the loopholes that permitted the high income individuals to avoid paying taxes they created this second tax system, which has truly grown into a monster.
One of the good things in idiot Trump’s cocktail napkin scribblings that he recently presented as his “tax reform plan” is ending the AMT.  Let us hope this ends up in the actual detailed legislation eventually presented by the Republicans in Congress.
* Want my 1040 insights in your in box?  Click here!
* Russ Fox tells us “The TurboTax Defense Fails Again” at TAXABLE TALK.
If you make errors on your tax return and the IRS audits you, you can’t get off the hook by saying “the software made me do it”.
Russ’s bottom line –
If your tax return has only W-2 income and, say, mortgage interest and property tax, TurboTax will likely do an excellent job. If you have a divorce settlement with a restatement of the amount of alimony due, interest tracing, and a Net Operating Loss carryforward, it might pay to get some expert help.”  
My bottom line – no tax preparation software is a substitute for knowledge of the Tax Code and no tax preparation software is a substitute for a competent, experienced tax professional.  Remember – garbage in, garbage out.
* An interesting story from Kelly Phillips Erb, FORBES.COM’s “TaxGirl” – “Dead Man Talking: How One Taxpayer Convinced The IRS He Was Still Alive”.
I also had a client who received a letter from the IRS telling him that his refund could not be processed because he was dead – although it is odd that if the IRS thought he was dead why were they sending him a letter?  Check out “You Can’t Make This Stuff Up”.
* NJ taxpayers – learn how to experience THE JOY OF AVOIDING NJ TAXES!
While the policies and proposals of President have always been questioned, never in my lifetime has the mental stability of a President ever been questioned to any serious degree.
Many qualified psychiatric professionals have come forward to identify Trump’s severe mental instability and mental incompetence to serve as President.  It is obvious even to the layperson.
When will the so-called leaders of the Republican Party acknowledge the obvious fact that I talk about in the lead editorial here –
The Russia issue is an important one and must be thoroughly investigated.  But so is the issue of Trump’s mental instability.  This issue needs as much press and discussion and investigation as any of the other issues involved with the Trump Presidency – perhaps more.  

Monday, May 15, 2017


You are paying too much New Jersey state income tax – and it’s nobody’s fault but your own!  

Most NJ taxpayers concentrate on their federal tax return and spend minimal time on their NJ return, simply taking numbers from the 1040 and putting them on the NJ-1040.  As a result they are paying more NJ state tax than necessary, often paying tax on income that is not even taxed by NJ.  By becoming informed on NJ state tax law and using proper tax planning you can make sure that you pay the absolute least amount of NJ Gross Income Tax possible for your particular situation.

Whether or not you use a professional tax preparer, the more you know about NJ taxes the more you will be able to properly structure your financial transactions during the year to minimize taxes and the better prepared you will be when giving your “stuff” to your preparer at tax time.

I have been preparing NJ-1040s for as long as there has been a NJ-1040, and federal income tax returns for even longer.  I share my knowledge and experience from over 40 years as a professional tax preparer in my new book THE JOY OF AVOIDING NEW JERSEY TAXES to help you to learn how to pay the absolute least amount of NJ Gross Income Tax possible.



It also contains several valuable schedules and worksheets. 

As far as I am aware, this is the only book in existence that deals exclusively with tax planning for and preparation of NJ state income taxes.
This book is currently in the process of being proofed before publication.  I expect it will be available during the summer.  Once I “go to press” the cost of this valuable resource for NJ taxpayers will be only $9.95 delivered as a pdf email attachment.  A print version sent via postal mail is available for $15.45.

The first 100 people who order this book before I “go to press” will receive a special “pre-publication” discount of 40% - so the cost is only $5.95 delivered as a pdf email attachment (once it has been published) or $9.25 for the print version delivered via postal mail. 

To order send your check or money order payable to TAXES AND ACCOUNTING, INC, and your email or postal address, to –

HAWLEY PA 18428 

Tuesday, May 9, 2017


* Have you seen my latest THE LIBERTY TIMES installment?  I discuss tax reform.  I provide more details on my tax reform proposals and suggestions here.
* Catherine Murray provides us with “2017 health care reform: An analysis of the American Health Care Act’s tax provisions” at ACCOUNTING TODAY.
I must remind you that this is NOT a final law – and I expect many changes to be made to the bill in the Senate.  So nothing mentioned in this article is currently, or may actually become, tax law.
The bill does away with the bad of the Affordable Care Act - the individual mandate and the employer mandate, retroactively effective beginning in 2016, the 3.8 percent net investment income tax, the 0.9 percent additional Medicare tax, effective 2023, the higher floor for medical expense deductions, and the various nickel and dime fees and charges.  The current Premium Tax Credit system is replaced with refundable tax credits, which may have an advance payment component, effective in 2020.
Click here, and then click on “Read the full coverage here” under “ACA Repeal and Replacement” to download the CCH Tax Briefing special report on the AHCA.
* Want my 1040 insights in your in box?  Click here!
* Sarah Brenner “6 Things Every Non-Spouse IRA Beneficiary Needs to Know” at THE SLOTT REPORT.
* Sarah also talks about “What the Trump Tax Plan Means for Your Retirement” in a subsequent piece.
In her opening paragraph she suggests “the Trump administration released its highly-anticipated tax reform plan”.  What tax reform plan?  What the idiot “released” was the equivalent of notes on a cocktail napkin.
I am sure the Republican Party will soon be presenting a detailed tax reform plan – certainly more thought out and substantive than what the idiot in the White House “released” – and I expect it will affect retirement planning.  But I would wait until the release of the real plan before spending any time in thought.
* Kay Bell confirms what is obvious to most – the idiot in the White House is truly an idiot with no concern for the country or the American people – in “Trump tweets threaten future funding fight and possible 'good' government shutdown this fall”.
Only interested in his own ego, Trump wants to shut down the government to get the nonsense he wants.
The post has one good item of note regarding the IRS budget -  
* . . . the fiscal year 2017 budget deal keeps the agency's funding at $11.2 billion. That's the same as last year's level.”
The idiots in Congress had been consistently reducing the IRS budget while continuing to erroneously give it additional work related to delivering government benefits via the Tax Code.  At least they have proven, thankfully, that they are not as stupid as the idiot in the White House (nobody is – except perhaps for some of his apologists/explainers), and the IRS budget has not been further reduced. 
Now we only need to rewrite the Tax Code, stop the IRS from being forced to use outside collection agencies, and get some competent management at the IRS.
* Jason Dinesen deals with the question “When Should I Form an S-Corp?” at DINESEN TAX TIMES  .
Jason makes a good point, with which I agree -
In my experience, many people form S-corps way, way too soon, and then get mad because the tax savings end up not being worth the hassles and headaches.”
A benefit of an S-Corp is the ability of the shareholder avoid the double taxation of “regular” corporation dividends when taking cash, other than salary and expense reimbursements, out of the corporation.  And there is also a benefit for new corporations with initial losses – allowing the shareholder to deduct the losses on his or her personal return.  But, as with any other tax option, careful thought must go into the decision to elect Sub-S status.  
Idiot Trump is truly mentally ill and must be removed from office before he does real, irreparable damage to the country and the world.
Hey – it is not just me saying this:

Wednesday, May 3, 2017


One of the skimpy details of idiot Trump’s tax “plan” is to offset lower rates with the removal of tax deductions and “loopholes”.
This is a very sound concept that should be embraced in whatever the eventual tax reform package will actually look like.
I have always strongly felt, and continue to do so, that the tax return should not be used to distribute government social welfare and other program benefits.  So I believe that items like the Earned Income Credit, the Additional Child Tax Credit, the Advance Premium Credit, the various education tax benefits, and other similar “tax expenditures”, while the idea behind them may be appropriate and acceptable, should be removed from the Tax Code.  These benefits should be distributed in other ways.
Here are some of the deductions whose removal from the tax return I would support.
ü  Real estate tax deduction for all personal real estate other than the primary principal residence.
ü  Personal property tax deduction.
ü  State and local sales tax deduction.
ü  Acquisition debt mortgage interest deduction for a second personal residence.
ü  Home-equity debt mortgage interest deduction – the deduction for interest on home equity borrowing not used to buy, build, or substantially improve a taxpayer’s principal primary residence.
ü  Deduction of mortgage insurance premiums as mortgage interest (already gone).
ü  Depreciation deduction for real estate and capital improvements thereto.
ü  Depreciation deduction for business use of a personal automobile.
ü  Auto loan interest deduction for business use of a personal automobile.
ü  Auto lease payment deduction for business use of a personal automobile.
ü  The adjustment to income for Educator Expenses (why should teachers only be given this benefit and not other public service employees like police, fire, EMTs, stc?).
I discuss the reasoning for my choices in detail in A TAX PROFESSIONAL FOR TAX REFORM.
What deductions would you keep and what deductions would you remove?

Tuesday, May 2, 2017


* Most of the recent BUZZ about taxes revolved around the skimpy details of the tax “plan” proposed by the idiot in the White House, and announced by Treasury Secretary Munchkin (apologies to Mnuchin; I realize this is juvenile, but whenever I see his name in print that is all I think of).

I provided my initial reaction to what information was released in the post “My More Than 2 Cents Worth”.

As I said at the end of my post –

. . . do you find it a coincidence that the largest tax breaks in the skimpy details released would benefit idiot Trump and his family ‘bigly’?

I do like what Tony Nitti had to say about the “plan” in “Devoid Of Details, Trump's Latest Tax Plan Nothing But Empty Promises” at FORBES.COM, calling it -

“ . . . a rushed, half-hearted gesture meant merely to meet his minimum obligations.

NY Times columnist Paul Krugman gets to the heart of the matter and explains the real story behind the release of the tax “plan” in “Living in the Trump zone” -

No, what we’re looking at here isn’t policy; it’s pieces of paper whose goal is to soothe the big man’s temper tantrums.”

I certainly welcome and encourage substantive tax reform (click here).  But I do not take anything idiot Trump says seriously, and I will wait until an actual bill, with actual specific details, including how cuts will be offset, is presented by the real Republicans before engaging in any further discussion of the issue. 

Before we leave this topic – check out my comment on the post “6 things to learn from the Trump tax plan proposal” at BANKRATE.COM.

* Fellow tax blogger Russ Fox of TAXABLE TALK has borrowed my title to present his own version of “That Was the Tax Season that Was”.

It seems we both had less GDEs this year than in the past. 

I agree with Russ on the following statements from his post (highlight is mine)–

·   The new law mandating interviews with taxpayers claiming the Earned Income Credit, the Child Tax Credit, and the American Opportunity Credit is annoying for tax professionals and will only stop the lowest of low hanging fruit of tax cheats. Most tax professionals know their clients, and simply aren’t committing tax fraud.”

·   Tax software is great in automating the mundane but not so great in thinking for you.” (although I cannot confirm that tax software is great at doing anything – and would use the word horrible at doing your thinking for you).

·   We need tax reform, and soon. The Tax Code is far, far too complex.”

·   If you’re using a tax professional to prepare your returns, he almost certainly has also set a deadline for receiving paperwork prior to the October 16th extension deadline. You should pay attention to that, and get your paperwork in to your professional timely.”  (my deadline was March 18th this season – and all returns received, with all the needed information, by March 18th were completed in time for an April 18th filing).

* I feel Jason Dinesen’s pain expressed in his tax season in review post titled “My Tax Season Recap: Business is Booming, But I’m Starting to Hate this Crap” at DINESEN TAX TIMES.

Jason is correct that “Being a Perfectionist is Not an Asset in this Field”.  I, too, have sleep interruption issues during the season – but not worrying about what I may have done wrong.  My mind is often so involved with what has to be done on certain returns that are or will soon be “on the table” that I cannot fall back to sleep, and sometime find myself getting up to work after only 4 or 5 hours of actual sleep.  And I find that beginning at the end of February I am doing tax returns in my sleep!

Fortunately my practice is different from Jason’s, and that of most other tax preparers.  I have not accepted new clients for several years, so I have history of varying lengths with all my clients.  Many have been with me, and my mentor before me, for decades, and I now do several generations of a family.  A substantial % of my 1040 clients are, or have become, actual personal friends.

I work alone out of my home 50-100 miles from my clients.  Only a handful of true long-timers are permitted to actually make the trip up to NE PA to see me – and then I never do the return while they wait.  I receive, and return, most of the returns I do via the mail.  On many days I forget to turn the phone on (it is always off on Wednesdays) – and when it is on the answering machine often is not, and I only answer the phone when it suits me (I have caller id so I know who is calling – and never answer “cold” if it is an unknown or unidentified caller).

I don’t “hate” the business yet – although I will admit I do not cherish it as much as I did when I worked with my mentor.

Jason ends the post by telling us his wife has recommended that he “disappear for a while” after April 18th.  I have been doing that at season-end – going to the Jersey shore for several days to recover – since almost the very beginning (there was a time, when my uncle was alive, that I boarded a cruise ship and crossed the Atlantic after the season was over to recover).

* Staying with Jason, we learn that he agrees with me that Quickbooks is the best bookkeeping software (although, to be fair, I have not tried any other software) in “Bookkeeping Software is Deceptively Simple”.

However, Jason tells us -

Here’s the problem with Quickbooks, or any other software solution for bookkeeping: it’s deceptively simple.”

Why is that a problem?

The problem is, the simplicity is deceptive. It’s easy to enter transactions, but it’s also easy to enter things the wrong way, thus creating trainwrecks that people such as I have to fix.”

In answering the question “Should I Keep My Own Books” Jason explains –

“. . . when you’re keeping the books yourself, know your limitations and when to stop and ask for help.

Because again, Quickbooks will accept whatever you put into it, and it’s not going to tell you if you’re doing something wrong.”

As with any software program – garbage in, garbage out.  This is just as true for bookkeeping software as it is for tax preparation software.  If you don’t understand bookkeeping and accounting and payroll you should not be doing your own books, and if you are not familiar with the intricacies of the mucking fess that is out Tax Code you should not be using DIY software to prepare your tax returns.

I “keep the books” (make all software entries) for my few remaining business clients using Quickbooks, with one exception (the client attended the official Quickbooks training class with me – and he knows to ask me if he is not sure about an entry), just so I do not have to fix any “trainwrecks” after the fact. 

* “Having a Garage Sale or Yard Sale? What to Do First” is explained by Jean Murray at THE BALANCE.

Jean explains –

Several issues are involved with the "business" of holding a garage sale:

1. Local permits and licenses for garage sales or yard sales
2. Income taxes on the profits from the sale, and
3. Sales taxes on the cost of the items sold.

Before you decide to have that garage sale or yard sale, consider these local, state, and federal laws, taxes, and permits.”

* Have you checked out the May 2017 “issue” of THE LIBERTY TIMES yet?

* Good news from Kay Bell in “Lewis aims to end latest private tax debt collection effort” at DON’T MESS WITH TAXES.

Kay quotes Lewis as correctly saying (highlights are mine) -

"For the record, I want to be crystal clear — in today's world, private debt collection will only make a bad situation much worse.  We have been down this road before. It has been tried and tried again. Each and every single time, private debt collection fails. It creates confusion and wastes taxpayer dollars. Most importantly, the program does not help or serve the American people."

Using private collection agencies is wrong for many reasons.  Let us hope that H.R. 2171 - "Protection of Taxpayers from Abusive Tax Collection Practices" – is passed by Congress. 

* I wholeheartedly agree with the advice of Peter J Reilly at FORBES.COM - “You Should Just Hang Up On IRS Collection Calls Legitimate Or Not”.

I have always opposed the erroneous practice of the IRS, and state tax agencies, using private collection agencies for alleged tax debt.  You should refuse to deal with an outside agency – and deal only directly with IRS or state agency.