title>Tax Guru-Ker$tetter Letter Wizard Animation


Tax Guru-Ker$tetter Letter
Friday, December 30, 2005


Ten Year-End Tax Saving Strategies – Act Before December 31! – from NATP


Treasury and IRS Finalize Rules Regarding Roth 401(k) Contributions


Feds still have permanent injunction against promoter of “Tax Toolbox” scheme to deduct personal costs as business expenses.


 The Gain And Pain Of Sarbanes-Oxley


Getting Fired... and Fired Up About Taxes






Working Across State Lines


Subject: One question on out-of-state business

TaxGuru.org has wealth of information.  However, I could not find information on one of my question.  Can you please provide an answer to this following question?

I am Single-Member LLC incorporated in Florida and have the approval of IRS for treating as S-Corporation. Income for my S-Corporation for this year 2005 is fully sourced from Pennsylvania. For Pennsylvania, basically, my business is out-of-state S-Corporation.  My S-Corp gets 1099 from a company in PA.

Assuming that S-Corporation receives 1099 income of $150,000 from PA and me as an employee of S-Corporation receiving a salary of $100,000, I would like to know the tax implications. Let us also assume another 10,000 towards qualified business expenses.

Am I supposed to pay Pennsylvania state tax for my W2 income of $100,000 and business income of 40,000? Can we treat $100,000 salary as Florida Income because it is paid by LLC/S-Corp in Florida and I am also resident of Florida?  In this case, I need to pay PA State tax only on $40,000 income.



You really should be discussing this with your own personal tax advisor.  If you are trying to operate an LLC or S corp without a professional tax advisor, you are asking for big trouble.  This is even more critical when operating in more than one state because the rules for reporting and taxation by each state are different.

Just from the sketchy details you provided, it is apparent that you will have to file an S corp return in PA, as well as a nonresident individual return to report and pay tax on the S corp income passed through to you on the K-1.  How much, if any, of the $100,000 W-2 income is taxable to PA will most likely depend on how much time you spent working inside PA.  There will also be the issue of PA payroll taxes if it is determined that any of your W-2 pay was earned there.

A good tax pro should be able to help you stay in proper compliance with the PA tax authorities.

Good luck.

Kerry Kerstetter


Thank you very much for your response.  I do have a CPA, but he is not familiar with PA taxes.  Looks like I have to check up with some one in PA who are familiar with PA Taxes.

Your input is vary valuable and thanks again for replying me.


My Reply:

Nobody knows everything about all of the states' tax laws.  However, a good tax advisor will know how to research the rules for any one particular state so that you don't have to hire a different tax pro for each one.  The fundamental concept of income-sourcing is fairly consistent in most states; so that only the finer details usually need to be determined for a particular state.

The best place to start is from the SisterStates.com website to take you and your professional advisor to the state's official website.  QuickFinders and Tax Materials, Inc. both have very fine reference books covering the various states' tax issues.  These are what I use when one of my clients either moves to a new state or becomes in other ways required to file tax returns with a new state.

Good luck.

Kerry Kerstetter


New Math?

I know that it’s been a very long time since I was in school; but when did they change the definition of a ton?


Subject: question about site info

hi there,

i read over the info on your site about section 179, and i didn't find a clear answer about the suv's.

can you tell me if i can take the 179 on the durango i just purchased in august of this year? it is only 4.5 tons i think, but the cost was only $25K. i am incorporated, as a S-corp. the durango is owned by my business 100%, it is not for personal use. i bought it mainly as a way to help with my taxes, and now i am confused as to if i am allowed to use this at all.

please help!



You really should be discussing this with your own personal tax advisor.  If you are trying to operate an S corp without a tax advisor, you are asking for big trouble.  Buying a new vehicle just for tax breaks was a mistake.  Don't make matters worse by trying to do this on your own.

I assume that the Durango weighs 4,500 pounds and not 4.5 tons, which is 9,000 pounds.  The maximum Section 179 for a vehicle under 6,000 pounds is much lower than for one over 6,000 pounds.

I have this all explained on my website.

but only a qualified tax pro will be able to give you more specific numbers for your situation.

Good luck.

Kerry Kerstetter



i do have a personal tax advisor. she is on vacation until jan. 2nd, and i needed an answer before the 31st. i didn't buy the vehicle solely for a write off, as it is my business vehicle. but it will act as a write off...
same as my computer equipment, software, and other items necessary for my business to operate. therefore my question was legitimate as i needed to know if i could use the section 179 towards the durango. (which would mean i needed to make another large payment by the 31st). i found out that it does weigh 6600 pounds, which makes it qualify. also, i always thought that 1000 pounds was a ton. i will double check on that math, because i could swear that is correct. then again, i am a just graphic designer... not a mathmatician.


AARP doesn't want younger folks thinking about actually owning their own retirement accounts.

Wednesday, December 28, 2005

The Informed Consumer’s Guide to Hiring a Tax Professional – From NATP


So, you want to learn Bookkeeping – Free online tutorial courtesy of Bean Counter Dave Marshall.  It’s a very good idea to understand the basic fundamental principles of accounting, even when working with QuickBooks.




Generating Year-End Capital Losses


Subject: our stocks

Kerry -

We're considering selling what stock we have left in all our portfolio and using those losses to help offset earnings for this year (2005) and re-investing what money we realize that same day in another stock.  We have at lease $12,500 in unrealized losses.  What do you think?  We were considering Walgreen's for re-investment, would you have any other ideas for a company to invest in?


One thing to be careful of when dealing with capital losses is the fact that they can only be used to offset capital gains and only $3,000 can be used to offset other kinds of income. 

I don't have any stock buying secrets.  In fact, nobody does, which is why I have always believed that real estate is the best investment and have never actually bought any stocks.



Subject: End of the Year 2005
Dear Kerry:

Please do not lump us in with "those spooked EOY" folks who worry about taxes.  But two actions occurred that may have some consequences. We sold some rental properties and failed to do 1031 exchanges

Stock broker says we have a $321.00 loss and we may want to SELL stock for a loss.

Whatchathink?  Go for more losses?


Selling stock just to generate tax losses is not the best way to manage an investment portfolio.  Stocks that have no potential for future gain and possible loss should be dumped and the proceeds put into something more productive.  If the stock has good upward potential, you should keep it.

The tax savings of losses would be about 20%, counting both Federal & State.  A $321 loss would save you only about $64 in taxes.  Selling them just to show a loss wouldn't save enough to cover much more than the commission you would have to pay to your stockbroker.

Another thing to keep in mind in regard to generating capital losses with stocks is that IRS has what's called the "wash sale rule" which prevents anyone from deducting losses on stocks that are repurchased within 30 days of the sale.  This is to prevent people from capitalizing on downturns in stock values to generate paper losses, and then buying the stock back to ride it back up.




Tuesday, December 27, 2005
Schedule D Details Required

Without a doubt, the most time consuming tax returns are those where the clients have been doing a lot of stock and option trading.  Entering the individual trades into the tax program for Schedule D takes hours and hours.  Luckily, Sherry has been able to enter most of those into Lacerte; but even with her much lower billing rate than mine, the clients’ bills are in the several thousand dollar range for their 1040s.

While it hadn’t been officially blessed by our masters at the IRS, some tax preparers were short-cutting the detailed entry process and just entering summary totals into Schedule D with backup detailed stockbroker reports either attached or “available upon request.” 

With the 2005 Schedule D, it looks like IRS will no longer accept such summary entries on Schedule D and is insisting on each individual trade being entered.  Last night, I downloaded and listened to a very informative podcast from CPA Ed Zollars, where he goes into great detail on this not new, but much more explicit requirement by IRS.  He shares the fears of some tax pros that not including all of the specific trade details could cause IRS to refuse to accept a 1040 as being properly filed.


Ed Zollar’s mp3 podcast on Schedule D instructions

Ed Zollar’s main podcast page

RSS feed to subscribe to Ed Zollar’s podcasts 


Monday, December 26, 2005
Roth 401 (k) Plans


Subject: Roth 401(k) plans

Mr. Kerstetter,
I am an accounting student pursuing my MBA with a focus in Accounting, satisfying my CPA 150 hour requirement. As a young professional I have been keeping my eye on retirement. So I can get out young and rich! I see there is a new retirement plan coming out Jan. 1, 2006 the Roth 401(k) plan. Unfortunately my company doesn't offer it for 2006. But I had some questions regarding it. The Roth 401(k) plan, is made with after tax dollars and employer matches are made with before tax dollars. Being that we are taxed on these dollars, does the share of taxes paid by our employer increase with the Roth 401(k)?

As I have learned in my tax classes, Employers pay taxes based on their payroll. They pay federal income tax, social security and Medicare, and federal unemployment taxes.

I am under the impression that because traditional 401(k) plans lower our AGI, that because we aren't responsible for tax on contributions, that our employer isn't either.

If this new Roth 401(k) plan contributions are based on after tax dollars, doesn't offering this plan increase an employers tax liabilities? If so, what is the motivation to them to adopt this retirement plan?

Your site is great! I read it everyday thanks for the knowledge and inspiration in my journey.


Roth 401(k)s are obviously so new that all of the details of how they function in real life are not yet settled.  Some of the basics are laid out in this free article from the WSJ.

I noticed a few misconceptions in your email.  Employers do pay a number of payroll taxes on the wages they pay their employees.  These include FICA, Medicare and Federal and State Unemployment taxes, plus occasional local taxes.  Employees are also required to pay FICA and Medicare taxes on their gross pay.

The employer does not actually pay Federal or State income taxes on the wages paid out.  Those are paid by the employees, but are withheld by the employer to be sent to the IRS and State on behalf of the employees.

My understanding of the Roth 401(k) plans is that the amounts put aside into the accounts by the employees will be subject to all of the standard income and payroll taxes by both the employer and employee.  The money being contributed to the account is thus after-tax dollars.  The benefit to the employee is that, if the money is in the account long enough and our rulers in DC don't change the laws, all of the money in those accounts can be withdrawn tax free, including the income it earns over the years.

With the conventional 401(k)s, the employees don't have to report the amounts contributed as subject to income taxes, but do have to pay payroll taxes on that money, as do the employers.  The trade-off here is that every bit of money taken out of the 401(k) or subsequent rollover IRA account will be subject to income tax when withdrawn.  

In regard to employer full or partial matching of employee contributions, these amounts are not currently subject to income taxes, but are hit with the normal payroll taxes.  While these are technically pre-tax dollars in conventional 401(k)s, I don' think that will be possible with the new Roth 401(k)s.  Those are only designed to be funded with after-tax dollars. I haven't studied the actual law; but it wouldn't be consistent for our rulers to allow a mixing of pre-tax and after-tax contributions.

401(k)s of both types are generally very popular with employers because they allow their employees to fund their retirement accounts with their own money rather than additional company funds, as normal company sponsored pension plans require.  In a competitive labor market, employers want to allow their workers the same kinds of benefits that their competitors have in order to attract and retain productive people.

I hope this helps understand this issue a little better.

Kerry Kerstetter


Wow, Mr. Kerstetter, thank you for the great response. I am not sure how you do it, I guess my problem was a misunderstanding that employers don't pay anything on our traditional 401k contributions. What I have seen from a couple Roth 401k calculators found on smartmoney.com is that the employer match is put in as before tax dollars. I am not sure how they plan on handling the mixed distribution of those. But thank you for your response again!



Roth 401(k) Offers Tax-Free Bonanza in Retirement – From John Wasik of Bloomberg News.


Fun little free tool to create animated text messages called minifestos, such as these quickies I whipped out, covering some different viewpoints on tax matters.

Sunday, December 25, 2005
Corrections are welcomed

From a reader:

Subject: RE:TaxGuru blog
Hi Kerry,
I ran across your blog today and just wanted to tell you how much I enjoyed it.  I have bookmarked it, as well as your regular website.
I did want to point out one typo I found on your "Glossary of Terms" page, though.  Under "Evil Rich", you have that taxes have to be paid on 85% of SS earnings for married couples who's annual earnings are $25,000.  I believe you meant $32,000.
Merry Christmas!

My Reply:

You are absolutely right about the typo.  Thanks so much for catching it.  I've already corrected it, and was actually amazed that it had been over two years since I had done any editing on that page.  Time flies.

Thanks for being so observant.

Kerry Kerstetter

From another reader:

Subject: Expired Link On Website

The first external link on your Living Trusts page is expired.

Just thought you might like to know.

Thanks for pointing people like me in the right direction on this and other issues.  It helps to have a rudimentary base of knowledge on these issues when talking to tax professionals.

My Reply:

Thanks for catching that.

I've replaced that link with one to Nolo Press' info on living trusts.

Kerry Kerstetter



Investing In Gold – From Gail Buckner


Saturday, December 24, 2005
Does Santa give receipts?

Friday, December 23, 2005

‘Survivor’ Winner Richard Hatch Faces Court Setbacks – This idiot’s new reality show, “Survivor: Tax Evasion,” starts on January 10 with jury selection.  Can his attorney find twelve people who have never heard of him?


How to fix your 401(k) – From Fortune Magazine.


Appropriate accounting skills?

S Corp Election


Subject: Information Requested

Dear Kerry,
We have started a corporation in June 2004 in state of Arizona, When we started the company we did not go to any CPA, and we filed 2004 taxes as S Corporation before we get 2553 S corp selection approval from IRS, in some time 2005 September IRS sent us a rejection letter stating that our company not eligible for S corporation because we have not properly filed form 2553, then we contacted CPA she suggested us to sent a latter with some documentation so we did that, and we haven't heard any thing back from IRS yet.
But later we found that we are not eligible for S Corporation status, so my question is since we filed 2004 taxes as S Corp, can we file this year taxes as C Corp? and what we need to do resolve the situation 2) If IRA approves our 2553 form are we become a S Corp and still we can reject ourself as S Corporation status and file taxes as C Corp?
Thank you



You have given a perfect example of why it is crazy to try to set up a corporation without proper professional guidance.

If IRS has not accepted your corp's S election or it is not technically eligible to be an S corp, that means you still haven't filed a proper 2004 tax return, assuming you have elected a tax year ending 12/31/04.  Even if you sent in an 1120S for 2004, you still need to send in the proper form, an 1120.

Since an S corp's income and expense flow through to the shareholders' 1040s, this means all of you shareholders will have to file amended 1040s to remove the S corp info from them.

If IRS accidentally approves your S election for 2005 or 2006 based on erroneous information that you provided on the 2553, you will need to have your professional tax advisor notify IRS of this fact and that any perjury you may have committed by signing the 2553 under false pretenses was unintentional and due to your insanity in trying to tackle this on your own without competent professional representation.

Good luck.

Kerry Kerstetter


Hi Kerry,
I really appreciate and thank you very much for your time and valuable suggestions.
My final question, with help any CPA if we file correction of our 2004 taxes, IRS would not charge any penalty on us or any other problems we may have to face like jury etc?
Thank you



The effects of the amended 1040s will depend on the direction of the net change.

If you erroneously deducted S corp losses on your 1040s, you will have to increase your taxable income and pay additional tax plus interest.  Normally IRS doesn't asses penalties when you voluntarily asses your own increased taxes.  They will hit you with penalties if you don't file 1040Xs and they catch your mistake from their end.

If you erroneously included positive net S corp income on your original 1040s, the amended returns will have lower taxable income, which will probably result in a tax overpayment.  As I have been explaining over the past year or so, IRS has been initiating full blown audits on many 1040Xs that request refunds.  The odds of this seem to be different in the various IRS jurisdictions around the country.  You should seriously consult with your tax pro to see if the coast is clear in your area.  If it isn't safe, you may want to skip filing amended returns for the refunds.  That's what many people have been doing, rather than risk the cost and hassle of an IRS audit.  Intentionally overpaying your taxes won't get you into trouble with IRS because they love it when people pay more than they are legally required to.

You should definitely not try doing any of this on your own.  You have already screwed things up bad enough by failing to use the services of a tax pro from the beginning.  You could very easily make things even worse if you don't get the help of someone who knows what s/he is doing.

Good luck.

Kerry Kerstetter  



Senators propose taxing Internet shopping – An idea that keeps popping up.  (Courtesy of Ohio CPA Dana Stahl).



Thursday, December 22, 2005

Un-Retirees Are Happier If They're Self-Employed – Few who have tasted the freedom of setting their own schedule could go back to working for someone else.


IRS Reminds Taxpayers About Requirement of Written Acknowledgment for Donated Cars


The Worst in Finance for 2005 –  Including the AMT hit millions more people are facing. 



New Merit Badge
Courtesy of the creative folks at Worth1000

AARP doesn't care about younger generations

Wednesday, December 21, 2005

State Budgets Boosted by Bush Tax Cuts, Analysts Say – Just another example of the fact that lower Federal tax rates stimulate more economic activity, resulting in more tax dollars.


Sarbanes-Overkill – John Stossel looks at the biggest beneficiaries of the SOX laws, accountants.


Tax Practice Across State Lines – As I’ve mentioned a few times before, Spidell has been following the issue of whether CPAs who prepare out of state tax returns need to be licensed by those states.  In this latest announcement, Spidell links to Art Berkowitz’s website, where he has an Excel sheet available for download that shows the rules for each state for both individual and business income tax returns. 

After looking over his spreadsheet, it seems that the rules are still very nebulous, with some states allowing out of staters to prepare tax returns, as long as they don’t use their CPA designation, and others that don’t want to regulate unless you actually step foot inside the state.  As someone who prepares tax returns for dozens of states that I never visit, I’m not planning to go through any more licensing than what I already have with Arkansas and the PRC.


New IRS Stats Show Bush Tax Cuts Shrinking Revenues, Magnifying AMT Does anyone else smell some book cooking here? This is a very different spin on the numbers than other reports have shown.   


Tax Cut Conference to Wait Until February, Grassley Says There’s nothing better for tax planning than mid-year changes in the laws.


Manufacturing Tax Gap Figures

I’ve written several times of how the IRS pulls numbers out of thin air as the supposed tax gap in order to justify more power for that agency, as well as how the media slavishly accept those figures without any kind of skepticism.  A new fictional tax gap is in the works now.

Ohio CPA Dana Stahl writes:

Mr Guru - more BS on the so-called "tax gap".  At least, I'm on the right track, aren't I?  I wonder who can be approached to challenge the thrust of this article.

My Reply:


I saw a summary of that report yesterday and figured right away that this was another case of our rulers comparing apples and oranges.  There are so many ways to calculate the value of economic activity in this country (GNP and GDP are just two), that it is impossible to match any of them up with what is shown on income tax returns.  Anybody who claims that such a comparison is possible has been smoking far too much wacky weed to be trusted.

As we have seen for several years, the mainstream media don't care one whit about accuracy when it gets in the way of their agenda.  Giving more power to the IRS has obviously been their goal for a very long time, and anything they can use to bolster that argument will be used regardless of its legitimacy.


More from Dana:

Mr Guru -couldn't agree more.  The MSM just pisses me off royally, with their obvious bias & agenda (yet they continue to deny such!).  Fortunately, there are more options today, with the internet, talk radio, etc. to at least get the true word out.

Fake IRS Notices

Snopes.com looks at the recent wave of phony IRS emails trying to convince people to reveal their Social Security numbers and credit card info.


Exchanging Into Less Expensive Property


Subject: Exchange Question
State:  CT
My parents own our business building.  It is a corporation I believe.
Are corporations not allowed to do the exchange thing.
If they sell the original big building and buy a smaller building can the save tax money with the 1031 exchange?
Lets say they sell the building for 1 million.
Buy a smaller building for 300,000
Can they save on taxes for the 300,000
I assume they are on the hook for the 700,000 difference.



Corporations can do 1031 exchanges just as individuals can. 

The rule to avoid all of the tax is to replace with like kind property costing at least as much as the net sales price of the old property.  When you trade down, you are required to report as taxable income the unreinvested portion or the actual gain, whichever is lower.

In your example, you left out a crucial figure, the adjusted cost basis (after depreciation) of the old property.  Basically, if it is less than $300,000, acquiring a $300,000 replacement property would result in some of the gain being deferred (rolled into the new property). 

If the adjusted basis is over $300,000, such an exchange would make no sense tax-wise, because the overall profit would be less than $700,000.

Something else to keep in mind is the fact that 1031 exchanges don't require a one for one swap.  The corporation could acquire multiple properties totaling more than $1 million and defer all of the profit.

The corporation's tax accountant should be able to work the various what-if scenarios, using the actual numbers, most efficiently for you.

Good luck.

Kerry Kerstetter


Thanks Kerry.

Do you do phone meetings for 15-30 minutes type thing for a fee?

Further details:

Parents have a realty company called T&J Realty.

They own the building.  Bought in 1975.  Mortgages all paid off.

I am pretty sure it is depreciated big time.

If they bought it for $300,000 back then.  What is the tax savings for this:

Building sells for 1.4 million in March 2006.

They buy smaller building for $300,000 in April 2006.

I know they get whacked by the state plus uncle sam big time on capital gains.  Over 30 % I think.


Unfortunately, we are still too backed up to be able to accept any new paying tax or consulting clients.

The best person to do calculations such as you are requesting would be their normal corporate tax accountant, so that s/he can properly take into account the depreciation on the building, as well as any possible operating or capital loss carry-forwards that might offset some of the potential gain. 

Another option that should be considered is an installment sale, where a good portion of the sales price is carried back in a note.  This will allow the taxable capital gain to be spread out over the next several years; ideally keeping it in lower tax brackets than would be the case if all of the money is collected in the first year.

Kerry Kerstetter



Gifts For IRS Employees
Andy Roth at Club For Growth passes along this T-shirt on eBay for those IRS employees on your gift list.

Tuesday, December 20, 2005

The Good, the Bad and the Ugly Of Pay-Option ARM Loans


San Leandro tax preparer pleads guilty to bogus write-offs


Taxing battle over Botox – A tax on vanity would hit people like John sKerry right smack in their faces.


IRS Warns of Questionable Deductions for Donated Vehicles – Need to work with the new Form 1098–C for proper value to deduct.



Dirty SOX

From Ohio CPA Dana Stahl a few weeks ago:

Subject: NYSlimes article on SOX
Mr Guru - thought you'd like this article in the Slimes on SOX.  I haven't really followed SOX, since it doesn't really impact my firm.  Regardless, this article lauds SOX, as you'll read.  However, when I see the media praising something, I'm already suspicious.  What do you think of SOX and of this article.  In your prospective, is the author getting it right?  Has SOX been beneficial or a bust?  Perhaps you can address this in the blog.
My Reply:

For the same reasons as you have, I haven't been following the details on SOX as closely as I would have been a few decades back, when I was an internal auditor for a publicly traded corporation, where I helped prepare the 10Q and 10K reports.

However, the cursory mentions I have seen over the past several months gave me the impression that it was the same as other attempts by our rulers to legislate ethical behavior; a lot of window dressing with no real tangible effects other than to increase the paperwork.  Plenty of loopholes still allow enough opportunity for creative book cooking to continue.

I share your skepticism of trusting anything the DemonRats' official news organ says.  If the NY Slimes claims something is good, the best interpretation is that it is counter to basic principles of capitalism.

I saw another good look at this by Joe Kristan, Jack Ciesielski and Dan Meyer on their blogs:




They seem to share our doubts that SOX has accomplished anything more than adding additional complexity to the accounting game.

Interesting article from the WSJ on how people are making money on the complexity of complying with SOX:

These New Businesses Grew Out of Scandals

Monday, December 19, 2005

Deducting high tech gadgets


How You Can Create Your Own Charity


IRS to Raise Some User Fees in 2006


The Feds Bust Some More Tax Scammers Who Lured In Gullible Fools:

Institute of Global Prosperity’s offshore bank account scheme

Hawaiian woman who sold tax fraud schemes to military personnel


Retirement Plans

Competing With IRS

Our rulers are just too busy to tackle these festering issues.

You need to believe in Santa Claus if you expect this idea from Mallard Fillmore to ever come true.

Sunday, December 18, 2005

A New Flavor For Retirement, Roth 401(k) Plans


Benefits of a Franchise Versus a Solo Operation


Grant Thornton Offers Year-End Tax Planning Guidelines


IRS, Union to Explore New Pay System in 2006 – Commissions based on taxes collected?


IRS Reveals Plan to Reduce Its Telephone Taxpayer Service – Unfortunately, it will most likely be the 20% of IRS employees who give out correct answers who will be reassigned, leaving the bone-heads to field calls. 


Saturday, December 17, 2005
Great New Tax Reference Book

Over the past 20+ years, I’ve written and spoken often about my favorite indispensable tax reference books, from QuickFinders.

Last year, I decided to give the competition a try, so I bought the Kleinrock and CCH QuickFinder clones, as well as all of the authentic QF books.  I have them all on the shelf under my desk, and can honestly say that I only opened the CCH and Kleinrock books a few times in the past year.  I refer to the QF books several times each and every day. 

As many tax practitioners have noticed, a few years back, Thomson Publishing went on a buying spree and acquired several formerly independent companies, such as PPC, Gear Up Seminars and QuickFinders.  They claimed that the QuickFinders books would continue to be produced with the same style we have all become comfortable with.  That didn’t last long when the Thomson management decided to switch its writing staff from actual practicing tax professionals to full-time writers.  I saw their help wanted ads for full-time writers earlier this year, where they were touting the benefits of living in Fort Worth, Texas and not having the normal tax season stress.   

That move seemed counter-productive to me.  What made QF especially useful was the fact that it was written and edited by other real world tax practitioners who could incorporate their real life experiences, and not just academics who write based on the printed laws, regulations and forms.  This was similar to my dilemma several years back.  After teaching seminars around the country for Gear Up for a season, I was offered some big bucks by a competitor to teach full-time.  What I have always believed made my speaking and writing different from others were my real life experiences dealing with complicated client tax issues.  Giving up my tax practice would have dried up the source for many of my stories; so I obviously declined.      

So, in June, when I received an email from Brad Imsdahl, one of the QF editors notifying me that he and many of the others had left the new owner of QF to start their own company, Tax Materials, Inc. (TMI) rather than give up their tax practices in Minnesota and move to Texas to write full time, I wasn’t surprised.  It’s the very same decision I would have made in that situation. We sent a number of emails back and forth discussing  the benefits of a reference book being written by real life tax practitioners over one produced by people with no real world application of the laws.  I was sold on the concept. 

The TMI folks also had an excellent idea to produce one book that covers the same info that QF has in two separate books, covering both individual and business tax returns.  It should be much more convenient to work with than having to shuffle between the two separate QF books, which also have a lot of duplicated info between them. 

A few months back, I sent in an order and check for the Deluxe and All States TaxBooks.  I had been given a sample chapter a few months back, but wanted to hold off commenting until I had seen the actual book, especially the index, which is poorly done or nonexistent in some of the competing products.  UPS delivered the Deluxe book earlier this week.  Over the past few days, I have been using it as my primary reference source in answering client and reader questions.  So far, it has done the job beautifully, and I haven’t had to touch the QF books.

TMI doesn’t offer CD-ROM version of their books.  However, even though I did buy the CD-ROM versions of the QF books for the past few years, I actually used them only a few times.  The old-fashioned paper version is just too handy. 

As I’ve said for decades, while all tax practitioners should definitely make the QuickFinder and TaxBooks part of their library, non tax pros should also consider buying it. It’s so much better than the wimpy laymen books (Lasser, et al) on the market that it will pay for itself with one question that you can look up rather than have to contact your tax pro about.

I am not abandoning the original QuickFinder books.  I am buying their 1040 and Small Business books again, as well as their new depreciation and tax planning books.  However, I don’t see any need to buy the Kleinrock or CCH books again this year.


Section 179 via LLC


Subject: 179 Question

Read the blog page and responses concerning 179.  Searched web can't find this specific answer:
LLC is formed with 2 members.  The LLC is dependent on a machine to generate income.  Member #1 personally purchases a piece of qualifying equipment for $90,000.  The intention is to get the machine into the LLC for liability reasons. Member #1 wants to utilize the full 179 deduction against other personal income rather than a 7 year depreciation period.
How can member #1 effective get the 179 deduction to offset other personal income (which far exceeds the cost of the machine) with this personal income having a federal tax liability of about $66,000 for the year.  The logic is that with the 179 deduction of $90,000 about 30% or $27,000 could be deducted from the total tax bill of $66,000.  Not to get hung up on the numbers or percentages with the main thrust being to take the full deduction.  Thus, for example, the machine is ultimately purchased for $90,000 - 27,000 = $63,000 net cost after taxes.  Again, wanting to get the machine into the LLC for business/liability reasons later during the tax year 2006.
My CPA is a good guy and very knowledgeable.  Any hints/info I could steer his way when I approach him with this would be appreciated by both of us.



LLCs and partnerships don't have to divide their income and expenses equally among the partners/members.  It is very common to have different percentage allocations for each one.  Usually, it is based on the amount of capital each person has invested; but there are other ways in which to specially allocate income and expenses among the members.  As long as it makes economic sense, IRS will accept it.

In your case, if you are the only one contributing the machine to the LLC, it would make sense to allocate its cost recovery to your capital account via your K-1, as long as that is acceptable to the other members.  Your tax pro should be able to program his tax program to do this.  I have done very similar allocations on 1065s for decades.

Good luck.

Kerry Kerstetter


Thanks for the quick answer.  I understand what you are indicating but specifically, can the 179 deduction be taken by the one partner and offset his other personal income.


The Sec. 179 can be allocated to a specific partner's K-1.

Whether you can actually use it all on your 1040 will depend on the level of earned income you are reporting on the 1040.

Kerry Kerstetter


Thanks again.  I appreciate your dedication to people and their questions!



Thursday, December 15, 2005


Feds Bust Some More Tax Scammers

Gig Harbor, WA woman selling corporate sole schemes – This person sounds a lot like someone a former client got involved with.  He became former when I refused to go along with what was so obviously a major league illegal activity. 

Ohio’s Flickinger twin brothers preparing returns using the idiotic theory that income earned in the USA is not taxable.

I may sound cruel, but the clients of these scammers deserve the punishment that will be receiving for being so stupid as to fall for these ridiculous scams.


Can tax receipts rise if taxes are cut? Yes. Here’s more proof




Wednesday, December 14, 2005
Tax cuts keep on working

Primary residence usage


Subject: Primary Residence

Dear sir,
I inqired / read on your web page about primary residence.
Please can you explain to me what it means to live in the primary residence in NJ.

I want to sale my house which I had rented out for exactly 30 month's in the last 5 years. I rented it out the first time for 17 months, then after 3 month (during that time I stayed there-but live as well with a partner in VA. (my incometax - return 2004 was and is sent (this year 2005 as well) to IRS Virginia.
I do not pay any Water etc here in Va, nor do I work.. so I have no Primary Residence here in VA ??

In order to catch the full capital gains for NJ when I sell my house do I have to show that I work in NJ? I pay ,since Nov 1 2005 water etc in NJ for my house. What else do I have to do to show Primary residence in NJ?  Since I do not work? Does just being in my house in NJ mean it is my primary residence ?

again my question is, what constitutes a primary residence since I can live in VA and NJ in my house? I intend to sell my house in spring 2006, after renovations,

Thank you very much for your answer



Just the fact that you weren't renting out the home doesn't make it qualify as a primary residence.  Time when you are not living there or renting it would be more like a second personal residence, which has no special tax breaks for sales. 

In a situation like yours, what's crucial to determine is how many actual days you were physically residing in the NJ home over the five years prior to its sale.  You should get out calendars for those years and do your best to reconstruct where you actually were on each day. 

If your total in the NJ home was more than 730 days over five years, you should qualify for the full tax free exemption of up to $250,000. 

If your total time in the home was less than 730 days, you should work with your personal tax professional to see if you meet one of the criteria for a pro-rated exclusion.

Good luck.

Kerry Kerstetter


Dear Kerry,
thank you soo much for you very good and very fast answer. I will follow your advice...
Have a very merry Holiday Season



Creative Cash Management

Origami for cash courtesy of LinksDaily
Tuesday, December 13, 2005

North Carolina tax scammer busted – Used bogus corporation sole and claim of right schemes.


Tips for Understanding The New IRS Mileage Rates


A New Way To Hedge Against Housing Declines – A new way to literally gamble on real estate values.


The Gipper's Type of Tax Reconciliation


Argentina's taxmen get Claus out – Tax inspectors dressed as Santa seems a bit ironic.



Is Santa a tax refugee?

We're the new scapegoat for media problems

Monday, December 12, 2005
Joint Ownership Of Assets


Subject: A gift tax Question

I am in a domestic partner type relationship (i.e., I am not married but have signed domestic partner papers).  We own a house with a mortgage (title: tenancy in common via a living trust).  If My partner wants to pay of the mortgage will that constitute a gift to me?  I am assuming so.  So let's say the remaining balance is 100,000.  If he pays this off, my half of the note is 50,000 so the amount of the gift is 50,000?  Is there a way to avoid a gift tax on this.



You both should really be working with a professional tax advisor to see that things are set up as you want them to be.

There are some things that should be considered related to your question.

Joint ownership of property doesn't always mean that each owner has an equal share.  It is quite common for one person to invest more money into a property than the other does, giving him/her a higher ownership percentage.  The key is to document this so that a proper accounting can be done of each person's share of a property, especially at the time of sale or death of an owner, when determining what is to be included in his/her estate. 

In your example, if your partner's pay-off of the loan gives him a comparably higher ownership percentage in the property, there is no real gift to you.  If, on the other hand, he designates that you still own a full 50% of the property, which has seen its equity increase by $100,000, there would be a gift of $50,000 to you.

While gifts between conventional married spouses are not required to be reported to IRS, they don't afford the same status to domestic partners.  If gifts of over $11,000 are made to you in 2005, your partner would have to file a gift tax return (Form 709) to report the total for the year.  Actual gift tax would only be payable if he has already exceeded his lifetime exclusion of one million dollars.  If that hasn't been used up, the excess gift can be applied against that amount.  A running tally of how much of the lifetime exclusion has been utilized is reported to IRS on future 709s, as well as on the estate tax return (706) after he passes away.

What I have seen many people in this situation do in order to avoid having to file 709s is to spread the gift out over multiple years based on the annual exclusion.  For example, he could gift you $11,000 of equity in the house in 2005, another $12,000 in 2006, $12,000 more in 2007, and so on until you are back to completely equal (50/50) ownership.

If you haven't already checked out the books at Nolo Press, they have some excellent ones on how domestic partners can properly document things such as each one's share of jointly owned assets.

Again, these are just some of the points you both will need to discuss with your personal tax advisor.

Good luck.

Kerry Kerstetter



Thanks for your speedy reply.  I like your suggestion of just doing the gifting in various years.  I will read the Nolo books and decide if I should consult a professional to make sure we are doing everything correctly.  Basically most of my stuff is very straight forward and I use Turbo tax when filing.
Of course while I was trying to figure out the gift tax question....I realized we might have messed up.  In the early 1980's my partner changed his brokerage  account from his name to mine and his name in a Joint Tenants type of acct.  The account still had his SS# and he paid all the taxes on the dividends and sales.  10 years ago (1995) we each had an attorney create a Living Trust.  We had the brokerage account changed from both our names to just my partner's trust name.  After reading all the gift stuff....I can see that when we added my name to his account as a joint tenant that might be considered a gift....is it too late to file anything....I mean it has been in only my partner's name for the last 10 years....will the IRS coming chasing after us?
Many thanks for your advice



From the way you described things, it doesn't sound as if there was an actual gift just because your name was added to his account.  It would be a gift if you had actually obtained economic benefit by using the money or stocks in those accounts.  It sounds like it was only a titling for convenience.

This is a very common set-up with elderly parents, who put their kids' names on their bank accounts as either joint owners or POD (payable on death) in order to ensure fewer hassles if something were to happen to them (the parents).  Without this step, if a parent were to pass away or become incapacitated, their accounts would be frozen and it would be impossible for their survivors to pay bills while the estate is probated.  As long as the kids aren't actually dipping into the money, IRS doesn't have any problem and considers this to be a case of "titling for convenience." 

As long as the income being generated by the account is being reported on tax returns, IRS is fine, which is how it sounds with you two.  I'm assuming that you and your partner are each beneficiaries of the each other's living trust, which should give you quick access to any financial accounts in the event of the death of either one.

I hope this helps.

Kerry Kerstetter


This does help.  Thanks so much.  I am getting a Nolo book this week.  We have to go to Cleveland for Christmas stuff and it will give some good time to read up on what we are doing.  I owe you for all this info.  If you come to SF let me know and I will take you to dinner.

Looking for a new tax service?
Courtesy of Dribbleglass.com

Tax Cuts Work

Saturday, December 10, 2005
What kind of person falls for tax protestor scams?

For decades, I’ve been receiving all kinds of hate mail and phone messages from people who don’t appreciate my exposing the lies used in the tax protestor community, such as the idiotic one that taxes are voluntary.

Following is an email I received today from one of these brilliant tax scholars.  As always, this is a direct copy and paste, with no modifications by me.

From: "SHERRY SIMPHER" quartzeagle1@charter.net
Subject: your an idiot hitler
Date: Sat, 10 Dec 2005 12:53:50 -0600
X-Mailer: Microsoft Outlook Express 6.00.2900.2180

the iris told me that they are voluntary and they publish this fact quite often .......have a great day Hitler

Sherry Simpher

Friday, December 09, 2005
S Corp Dividends


Subject: S corp

HI, I have a question.

When an S corp declares dividend, is dividend must be paid or declared before Dec 31, 2005 to show on the books or the dividend can be paid and declared after the year end.
What happens to dividend declared to shareholders, are they taxed personally, does it show up on the K-1, ,
thank you


In a nutshell, dividends from corporations that have always been S don't have any direct tax consequences other than to change the shareholders' capital accounts and personal cost basis in the corp.  Shareholders pay tax on their K-1 income whether or not any is paid out.  S corp dividends are not reported separately on the shareholders' 1040.  Likewise, dividends paid out do not reduce the corp's taxable income.

It does get a little messier for a corp that converted from C to S and had previously taxed retained earnings. 

Your professional corporate tax advisor should be working with you on this.

Kerry Kerstetter


Thank you



No Change in IRS's Interest Rate for First Quarter 2006 - It stays at seven percent. I've updated this on my Quick Reference page.



Real Estate News

Some interesting items from the WSJ’s free RealEstateJournal:

Mortgage Options Available To Buyers of Second Homes

Avoid These Errors In 1031 Exchanges

Buying a Rental Property That Will Generate Cash

U.S. Home Markets That Are The Most and Least Affordable

Investors Start to Retreat From the Housing Market

Strategies to Avoid Paying Private Mortgage Insurance – PMI has always been a big scam.



Thursday, December 08, 2005


Wednesday, December 07, 2005


Tapping Retirement Funds To Start a Business

Best tip: Have a good accountant


QuickBooks For Mac Support

It seems that I wasn’t alone in criticizing the folks at Intuit for their failure to provide us QuickBooks Pro Advisors with the ability to help clients who use Apple Macintosh computers

This was included in the QuickBooks ProAdvisors newsletter than arrived today:

How to Order Your Personal Copy of QuickBooks: Pro 2006 for Mac
Support Your Clients on Macintosh. To help you support your clients who are using the Macintosh, Intuit is offering you your own not-for-resale copy of QuickBooks: Pro 2006 for Mac. This software's new features include improved data sharing with QuickBooks for Windows.*

Please fill out this form to receive your free not-for-resale (NFR) copy. Software will ship at the end of each month with the first shipment happening in December 2005.

* NOTE: QuickBooks:Pro 2006 for Mac can convert files from QuickBooks Simple Start, Basic, Pro, Premier, and Premier Accountant Edition 2004, 2005 and 2006 for Windows (U.S. versions, one way: Windows to Mac). QuickBooks: Pro 2006 for Mac can exchange data with QuickBooks Pro, Premier, and Premier Accountant Edition 2006 for Windows (US versions, round trip: between Mac and Windows).

I filled out the application for the copy of the program and hope they send it soon.  I will now have to get serious about buying my first Mac computer. I’ve been waiting for this kind of good reason to get a Mac, especially after reading reviews such as this one from Walter Mossberg of the Wall Street Journal.



IRS Issues Proposed Regulations to Safeguard Taxpayer Information

A key principle underlying the proposed guidance is that tax return preparers may not disclose or use tax return information for purposes other than tax return preparation without the knowing, informed and voluntary consent of the taxpayer.


Tuesday, December 06, 2005

Tax Scam Promoter Judge Rizzo and Wife Sentenced To Prison – Involved with that illegal offshore Global Prosperity Group scam that I've blasted on several occasions. 


It's not clear how much the economy would be affected if taxes go up in a bid to reduce the deficit. – Yes it is; and the DemonRats want to do everything they can to destroy the economy and hurt Bush in the process.


White House Reportedly to Postpone Tax Reform Until After 2006 Gutless GOP.  If they can’t get their changes passed with control of both houses and the Oval Office, how do they expect to do any better after possibly losing seats in November 2006?


Who pays the taxes – The evil rich pay most of the taxes.



Monday, December 05, 2005


Seniors Beware: Variable Annuities May Not Make Sense For You! – Good advice.  (Courtesy of Milt Baker, CPA)


Investment guru Wade Cook charged in tax evasion case  (Courtesy of Russ Fox)


Shocker: Gas-guzzling SUVs are today's best buys  (Courtesy of AutoBlog)


Tax credits for hybrid owners still being ironed out for 2006   (Courtesy of AutoBlog)


U.S. Comptroller Warns About Exotic Mortgages – Make sure you know all of the future details of any new loan scheme you sign up for.  Having it reviewed and explained to you by your own accountant would be much better than accepting the word of the loan agents, who often don’t completely understand all of the ramifications, or are so desperate for a commission that they will ram unsuitable programs down your throat.


The FairTax and its Implications for the U.S. Economy


Gutless GOP rulers wimp out again:

When Even Supply-Siders Say Taxes Must Rise, an Unpopular Policy Looks Inevitable

This Alternative Tax? Hey, Wait! Ouch! – The insane AMT is poised to attack more and more people if our rulers don’t get off their butts and address this issue ASAP.

Tax Cuts Could Wait Until 2006, Frist Says – As if they will have more guts in an election year.  Not likely.

Why are Republican leaders governing like Democrats? – Good question from former GOP leader Dick Armey

Republicanism in decline – from Tony Snow


Sunday, December 04, 2005
Never trust a DemonRat when it comes to tax policy


GOP Pushing for Spending and Tax Cuts – This is very difficult to take seriously given their recent track record.




Financial-service ads pander to baby-boomer narcissism

There are 76 million of these folks, born between 1946 and 1964. The oldest among them are just starting to tap their retirement accounts. This audience isn't just enormous; it's also wealthy, with something like $2 trillion in spending power.


The Ups and Downs of Flipping Property in Today's Market


Saturday, December 03, 2005
IRS doesn't like competition:


Report suggests taxing hybrids, billing drivers by mile to boost funds – Another look at how better gas mileage is affecting our rulers’ thirst for tax revenue.  Excellent quote from AutoBlog:

the federal government isn’t known for consistent taxation policy, so is it possible that hybrid owners could get hit with tax breaks and extra fees? It’d be criminally stupid, but somehow I don’t put it past our Washington crew.


Friday, December 02, 2005

There is still a very big marriage penalty in our income tax system.

New Anti-Tax Song

Thanks to fellow Libertarian Neal Boortz for the heads-up on the conservative musical group, The Right Brothers.  I was browsing through their very interesting songs and came across one that is right up my alley, It’s My Money.

After checking out the lyrics and the sample excerpts they have on their website (the MP3 version sounded better to me than the WMA version), I paid them the 99 cents to download the full version of this country-flavored song with the sentiments many of us share.  With so much of the entertainment world filled with leftists, it’s actually encouraging to see some artists supporting the capitalist philosophy.

Following are the song’s lyrics from their website:

It's My Money
Written by: Aaron Sain/Frank Highland
Lead vocals: Frank Highland

I pay the Fed tax and the FICA tax before I cash my check
And then the sales tax and this and that tax get most of what?s left
They're taxing me to death and it's my money
They say the wheel tax and the property tax are going up again
I don't like that I'm gonna fight that every way I can
They spend it like it's theirs, they've got to understand

It's my money, it belongs to me
It's mine, I made it
It's as simple as it can be
Enough's enough how much more do you need
It's my money

I wanna earn some and spend some on my family
I wanna save some and give some to those in need
I wanna do what I please with my money
I wanna risk some and invest some up on Wall Street
I'd like to blow some just to have fun occasionally
And maybe I could if they wouldn't take so much from me

Repeat Chorus

If it was up to them well I think they'd take every dime we make
They don't wanna hear it, but they're gonna hear it
When we all stand up and say

Repeat Chorus 2X

It's My Money

© 2005 Curbcourt Music (ASCAP) Pool Guy Music (ASCAP) / All Rights Reserved / International Copyright Secured



The Real Benefit of Dollar-Cost Averaging


Congressional Republicans make French socialists look like Ronald Reagan


IRS Announces 2006 Standard Mileage Rates

 Beginning Jan. 1, 2006, the standard mileage rates for the use of a car (including vans, pickups or panel trucks) will be:

  • 44.5 cents per mile for business miles driven;
  • 18 cents per mile driven for medical or moving purposes; and
  • 14 cents per mile driven in service of charitable organizations, other than activities related to Hurricane Katrina relief.

The new rate for business miles compares to a rate of 40.5 cents per mile for the first eight months of 2005. In September, the IRS made a special one-time adjustment for the last four months of 2005, raising the rate for business miles to 48.5 cents per mile in response to a sharp increase in gas prices, which topped $3 a gallon.




Within the Cranium passes along this Random Chuck Norris fact:

When Chuck Norris sends in his taxes, he sends blank forms and includes only a picture of himself, crouched and ready to attack. Chuck Norris has not had to pay taxes ever.


While the Enron and other creative accounting scandals have lowered our profession’s reputation with the public, at 39% we are still far ahead of lower forms of life, such as the 16% given to stockbrokers, Senators and Congressmen, according to this Gallup poll, as posted by Andy Roth at Club for Growth.  Telemarketers, at just 7%, win the prize for least respected; a good call. 



Thursday, December 01, 2005
Media Myths: The Housing Bubble is Bursting  -  The media love gloom and doom stories of suffering and have been pushing this myth for a long time now.



Auditor: Volunteers make errors on taxes – While I got my start in tax preparation with the IRS’s VITA program back in 1975, I would be the first to admit that you get what you pay for.




Subject: Subchapter S Corp vs Sole Proprietorship


I read information on your website showing the advantages/disadvantages between C and S Corporations. But I could not find any literature from you on S Corps vs Sole Proprietorships. I have been looking to go from a Sole Proprietorship  (Sched C) to Incorporating and Filing for Subchapter S status.  The reason I am contemplating this is that I was told I can avoid paying social security and medicare taxes on my income.  I know the shareholders of a C Corporation can take dividend distributions. Is this true of S Corporations?  And is this the means to avoid paying ss and medicare taxes.

I would appreciate your input.



Using a corporate structure instead of sole proprietorship is one of the easiest ways to drastically reduce your tax burden, as well as give you additional personal liability protection.  I discuss many of these points on my main website, as well as  in several blog postings.

Before you do anything, you should work with a professional tax advisor who understands how small corporations work, to see how your particular circumstances can most efficiently utilize a C or S corporation.

To save time and money with the tax pro, it would be a good idea to get a copy of one of the basic books on incorporating to familiarize yourself with the fundamentals of how corporations work.  Two of the best are from:

          Nolo Press - printed book    

          Corporate Publishing - free online virtual book

Good luck.

Kerry Kerstetter

Placed In Service


Subject: Section 179 and taking delivery

Hi Mr. Ketstetter;
I am looking to buy a qualifying peice of equipment per Section 179 and I was told it may not get delivered (and put into service) until 1/2006.   Can I still take the 179 deduction in 2005 if I only purchase the equipment and not take delivery?



No, you may not claim the Section 179 or any depreciation expense on your 2005 tax return for an asset that is not placed into service in 2005.  The law is very explicit on this point.

You really should be working with a tax pro who can help you with basic issues such as this.

Kerry Kerstetter



Reduced Social Security Benefits


Subject: Social Security early-retirement rip-off? + C-CPI-U: Escher staircase?

Approaching 62 years old, I have discovered that – should I take the early, reduced Social Security retirement benefit – and then go on working normal hours -- my benefits may be reduced to zero until my full retirement date -- thought I will be locked into the reduced benefit for life. 

Before your full retirement year, Social Security reduces benefits $1 for every $2 earned above $12,000 a year.  For the tax year in which you retire the formula changes to $1 out of $3 above $31,800 until you reach the magic month.  [http://www.ssa.gov/pubs/10069.html#howmuch]


Most people opt to begin benefits at 62.  I wonder how many are blind sided by this upside-down reduction?  Social Security should at least make this benefits sink hole extremely clear to would be early retirees (perhaps even getting them to sign a form stating they understand before jumping in)?


If the majority of the citizenry were informed of this Pearl Harbor short-change, change would be forced overnight.  The motivation to discourage work – or whatever the intention – is a miniscule social goal next to the need to provide our elders (hey; that’s me!) with sufficient money to survive. 


At the very least, early-retirement benefits lost in one year should upgrade benefits later.  In the age of computers this would entail almost no administrative effort at all.


The new inflation measure that Bush’s BLS is trying to foist (C-CPI-U; the extra “C” stands for "chained") to reduce Social Security cost-of-living adjustments takes into account consumer substitutions when the prices of one commodity rise faster than another’s.


Depending on how computed, C-CPI-U may be an Escher staircase.  For instance, inflation will be lower if we substitute chicken for pork if the price of pork goes up faster this year – but, what happens when we switch back for the same reason next year: does C-CPI-U reflect the CONTINUING price of chicken or just the current year's change (the latter practice sounds like some formulas labeled “chained”)?


If C-CPI-U is not an Escher staircase, then C-CPI-U may not result in much more than one-time – even temporary reductions -- in the inflation rate and benefits  (doesn’t sound like a Republican style set-up to me – better watch out!).


I understand your disgust with the benefit reduction scheme used for SS recipients under a certain age.  However, this is not in any way a new development and should not have been a surprise to you.  It has been the policy for as long as I have been in the tax business.  In fact, it used to apply to all ages.  Over the years, the penalty on excess earned income had no maximum age applicability.  It was later changed so as to only apply to recipients under 70, and then a few years back was changed again to only apply to those under 65.  It now applies to anyone under the age of eligibility for full benefits, which is 65 and four months for those starting to draw benefits in 2005.  This will be increasing every year, as the SSA continues to raise the retirement age and hope that more people pass away before starting to claim any benefits. 

Depending on how you earn your income, avoiding this penalty may or may not be an easy task.  The earnings limit only applies to compensation for services, most often in the form of W-2 gross wages and 1099-MISC non-employee compensation (NEC) as reported after expenses on Schedule C.

A common strategy to avoid this limit is to change your income from "earned" to "unearned."  Examples of unearned income include payments reported on Schedule E (rents and royalties) and Schedule B (interest and dividends).  If you own your own business, it's a simple task to set up a corporation and use it to convert earned income into unearned.  I actually learned this technique from one of the first CPAs I worked for, back in the 1970s.  He was in his 60s and had his accounting practice incorporated so that it could pay him rents instead of professional fees.  He was thus able to continue receiving full SS benefits because the rents weren't counted against his earned income limit.  That loophole is still available today.

If you work for someone else, you will need to negotiate ways to convert salary to other kinds of income, such as leases or royalties or even 1099 NEC that you can run through a corporation.  A competent tax professional who understands how this strategy works can help you properly arrange things.

Expecting our rulers in DC to remove this unfair penalty is almost hopeless.  The financial "solvency" of the SS system depends heavily on people not being able to draw out all of the benefits they have paid in.  Not having a penalty for opting to receive early benefits would go completely against this requirement that as many people as possible die before recouping their payments in and thus forfeit them to the system. 

It is the case that I normally advise clients to choose the earliest pay-out from SS; but that is always partnered with a strategy to avoid hitting the limit on earned income and being subject to the benefit reduction penalty. 

I have to admit that I haven't studied the new CPI formula.  However, your description of it does fit the standard MO of our rulers; to fiddle with formulas to give the false impression of improving accuracy, while actually just sweeping the real problem under the rug.  It is how our rulers, who have no regard for any time beyond the next election, prefer to pull the wool over our eyes rather than actually do anything bold to tackle the underlying problem.

Thanks for writing and sharing your thoughts.

Kerry Kerstetter


Thanks much for the helpful tax info.
I should have included: I wonder what C-CPI-U's take is when you switch from gassing up the SUV to taking the subway or to less pork and more rice?  On the flip side, C-CPI-U wants to fully assess the performance improvement my modern Timex makes over an ancient Rolex.  C-CPI-U seems to want to include as much value change or exclude as much as needed to lower the inflation rate!  :-)
Thanks again.

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