Julian Block Looks at Marriage, Divorce, Affairs, Engagements, and Cohabitation in the Shadow of Tax

Julian Block has delivered the 2013 edition of “Tax Tips for Marriage and Divorce,” the previous edition of which I reviewed favorably in Julian Block Talks Tax with Married, Divorced, and Other Couples. This edition is no less worthwhile, and in fact is enhanced with new stories, new issues, and new commentary.

The title of the book is somewhat misleading. Though Julian talks about the tax consequences of marriage and divorce, he also talks about other aspects of relationships that aren’t within the bounds of those two events. For example, he discusses the tax challenges facing gay and lesbian couples, pointing out that having their relationships treated as marriages for federal tax purposes isn’t necessarily the best outcome in every instance. The tax consequences of marriage can be good or bad for a heterosexual couple, depending on the circumstances and income levels, and the same variation in treatment awaits married gay and lesbian couples once their marriages are recognized. I could quibble with Julian’s predictions of whether that will happen, but in all fairness, he and I are tax guys and if we start making predictions with respect to other areas of the law, we’re both skating out to thinner ice. As another example, Julian addresses the tax issues that arise when “women . . . receive currency, cars, clothing, dwellings, furs, gems and other valuables from men with whom they are amorously involved.” He has such a nice way with words, Julian does.

Following his introduction, Julian provides a series of questions and answers that focus on concerns that are more likely than not to affect large numbers of couples, married or otherwise. By putting the questions and answers in conversational rather than technical language, Julian makes his book readable by the audience he is attempting to reach. Topics include not only the obvious alimony and property settlement concerns, but also filing status, child support, personal and dependency exemptions, and medical expense deductions, to name several.

Julian then turns to the topic of filing status, picking up on issues such as the marriage penalty and marriage bonus, death of a spouse, personal and dependency exemptions, and joint liability on joint returns. He discusses the tax treatment of legal fees, which can arise not only with respect to divorce but also when prenuptial agreements are being negotiated and drafted, and when child custody and support disputes arise whether or not the parents ever were married. He also provides a down-to-earth discussion of the tax problems faced by same-sex couples. He correctly points out that if the Supreme Court axes DOMA, same-sex couples need to visit their tax advisors sooner rather than later. Julian’s discussion of annulment contrasted with divorce is important. He uses the Kim Kardashian story to illustrate his point. For example, if an annulment was granted, any joint returns that had been filed need to be undone. Though, as I pointed out, Julian is a tax expert, he, not unlike yours truly, does not limit his intellectual pursuits to tax. His commentary on how the 72-day period of Kardashian’s marriage ties in to cabalistic methods of Scriptural interpretation should get the reader’s attention.

Ever aware of the practical side of tax, Julian again explores how a person can use tax returns to “unearth hubby’s hidden assets.” My quibble here is that there are times when it’s the wife who has assets that are squirreled away somewhere. But in his defense, “unearth hubby’s hidden assets” has a much better ring to it than “unearth spouse’s hidden assets.” Julian also provides some advice on dealing with the financial challenges of divorce, aside from the tax ramifications.

Because divorce often involves sale of the family residence, Julian includes a chapter on the tax consequences of home sales generally. He discusses the 3.8 percent surtax that applies to the unexcluded portion of home sale gains. He points out that this makes it even more important to dig out evidence of expenditures that increase adjusted basis in the residence. Because most married and divorced couples, and pretty much everyone else, eventually will receive social security benefits, Julian discusses how they are taxed, and how those computations come into play if the marriage or divorce takes place after one or both of the individuals has started receiving social security benefits.

What can I say that isn’t already evident in the title of the next chapter, “Having an Affair Can Be Taxing”? The stories, based on news reports and court cases, aren’t products of Julian’s imagination. As I tell my students, “We don’t need to make up this stuff.” Julian discusses not only traditional affairs but also the tax treatment of unmarried couples.

As he does with some of this other books, Julian appends several chapters dealing with issues that come up whether or not the primary transactions, in this case, marriage and divorce, are in play. He advises his readers how to deal with withholding computations, how to go about amending a return, how to make use of IRS publications, and how to get tax help. All of these situations affect huge numbers of taxpayers, many of whom can use the advice.

Not surprisingly, I recommend this book. It’s not the first book of Julian’s I’ve recommended, and I doubt it will be the last. He’s a prolific writer. I add this book to the list of his previous ones, "MARRIAGE AND DIVORCE: Savvy Ways For Persons Marrying, Married Or Divorcing To Trim Their Taxes - And They’re Legal," which I reviewed in Tax and Relationships: A Book to Read and Give (Feb. 2006), "THE HOME SELLER’S GUIDE TO TAX SAVINGS: Simple Ways For Any Seller To Lower Taxes To The Legal Minimum," reviewed in A New Book on Taxation of Residence Sales: Don't Leave Home Without It (Aug. 2006), "TAX TIPS FOR SMALL BUSINESSES: Savvy Ways For Writers, Photographers, Artists And Other Freelancers To Trim Taxes To The Legal Minimum," reviewed in A Tax Advice Book for People Who Write and Illustrate Books (Dec. 2006), "Year Round Tax Savings," reviewed in Another Tax Book for Tax and Non-Tax People to Read (Feb. 2007), "Travel and Moving Expenses: How To Take Maximum Advantage Of Every Tax Break The Law Allow," reviewed in Tax Travels and Tax Moves: Book It with Block (Sept 2007), "Ultimate Tax-Saving Resource '08," reviewed in Helping Tax Clients Understand Taxes (June 2008) and "Julian Block’s Tax Tips for Marriage and Divorce," reviewed in Julian Block Talks Tax with Married, Divorced, and Other Couples (Jan. 2011), “Tax Deductible Travel and Moving Expenses: How To Take Advantage Of Every Tax Break The Law Allows!,” reviewed in Julian Block: On the Road Again (July 2011), “Julian Block’s Easy Tax Guide for Writers, Photographers, and Other Freelancers,” reviewed in A Tax Book for Writers (and Others) (Oct 2011), and "Julian Block’s Tax Tips for Year Round Savings," reviewed in Tax Planning: A Chore That Never Sleeps (Jan. 2013).

Tax Planning: A Chore That Never Sleeps

Six years ago, I had the opportunity to review Julian Block’s "Year Round Tax Savings," and shared my thoughts in Another Tax Book for Tax and Non-Tax People to Read (Feb. 2007). Now, Julian has published an updated version of this helpful guide to tax planning, renamed “Julian Block’s Tax Tips for Year Round Savings.” As usual, he has done his typically fine job with the topic.

The world of tax handbooks is replete with guides to year-end tax planning. Too often, people and businesses wait until December and then engage in frantic efforts to rearrange transactions to reduce tax liability for the year. Unfortunately, there is only so much that can be done in December. The other eleven months of the year provide opportunities that fade away as the page on the calendar turns to the next month. For some planning opportunities, actions must begin in January if the opportunity is to be maximized.

Julian begins by explaining why tax planning is important, and illustrates the parameters that apply to the process. Though tax professionals might find this explanation to be quite familiar, the typical taxpayer without a tax practice background almost certainly will benefit by reading this chapter. Where there are opportunities to make year-end decisions that make use of available deductions or that reflect the impact of the decision, Julian examines those situations. For example, he explains why two people considering marriage should run the numbers when deciding on a December or a January wedding date.

Julian recommends keeping track of potential itemized deductions during the year so that by the end of the year decisions can be made more sensibly in terms of the timing of payments that can be made in December or January. Sometimes it makes sense to postpone a deduction and sometimes it makes sense to accelerate it. He points out that in many years more than half a million taxpayers claimed the standard deduction even though they would have reduced taxable income had they itemized their deductions. Julian then devotes chapters to each of the major itemized deductions, giving coherent explanations even of the complicated ones such as the medical expense deduction and the charitable contribution deduction.

Julian also examines how to plan for income. There are times when it makes sense to accelerate income into the current year and times when it makes sense to postpone it. However, making the timing decision stand up to scrutiny often requires making arrangements long before December. Julian deals with the opportunities for both the employee and the self-employed individual. He then examines investment income and discusses investment strategies available to taxpayers.

Gift tax planning and dealing with inherited property also get attention from Julian. He also explains how to compute a taxpayer’s “real tax bracket,” a lesson that needs to be learned by the taxpayers who confuse nominal marginal rate with effective rate. His subchapter on “Taxpayer Illiteracy” reminded me of some of the commentary I’ve shared on MauledAgain. He shares my concern that most people do not understand the difference between a deduction and a credit, the meaning of progressive tax, and a variety of other important basic tax concepts. Julian explains why these things are important and why taxpayers should attempt to learn about them. And then his book proceeds to provide a capsule summary of how the overall tax system works, with an eye to helping people take advantage of the year-round planning tips.

After exploring the alternative minimum tax, another concept most taxpayers don’t understand, Julian closes the book with a three-pronged conclusion. He returns to the importance of making tax planning a year-round job, provides suggestions for where and how to get tax advice and to learn more about taxation, and advocates leaving a “letter of final instructions” to help survivors make sense of the decedent’s tax, investment, financial, and other situations.

I recommend this book just as I recommended Julian’s previous books, "MARRIAGE AND DIVORCE: Savvy Ways For Persons Marrying, Married Or Divorcing To Trim Their Taxes - And They’re Legal," which I reviewed in Tax and Relationships: A Book to Read and Give (Feb. 2006), "THE HOME SELLER’S GUIDE TO TAX SAVINGS: Simple Ways For Any Seller To Lower Taxes To The Legal Minimum," reviewed in A New Book on Taxation of Residence Sales: Don't Leave Home Without It (Aug. 2006), "TAX TIPS FOR SMALL BUSINESSES: Savvy Ways For Writers, Photographers, Artists And Other Freelancers To Trim Taxes To The Legal Minimum," reviewed in A Tax Advice Book for People Who Write and Illustrate Books (Dec. 2006), "Year Round Tax Savings," reviewed in Another Tax Book for Tax and Non-Tax People to Read (Feb. 2007), "Travel and Moving Expenses: How To Take Maximum Advantage Of Every Tax Break The Law Allow," reviewed in Tax Travels and Tax Moves: Book It with Block (Sept 2007), "Ultimate Tax-Saving Resource '08," reviewed in Helping Tax Clients Understand Taxes (June 2008) and "Julian Block’s Tax Tips for Marriage and Divorce," reviewed in Julian Block Talks Tax with Married, Divorced, and Other Couples (Jan. 2011), “Tax Deductible Travel and Moving Expenses: How To Take Advantage Of Every Tax Break The Law Allows!,” reviewed in Julian Block: On the Road Again (July 2011), and “Julian Block’s Easy Tax Guide for Writers, Photographers, and Other Freelancers,” reviewed in A Tax Book for Writers (and Others) (Oct 2011).

A Tax Book for Writers (and Others)

Almost five years ago, in A Tax Advice Book for People Who Write and Illustrate Books, I reviewed Julian Block’s “TAX TIPS FOR SMALL BUSINESSES: Savvy Ways for Writers, Photographers, Artists and Other Freelancers to Trim Taxes to the Legal Minimum. He has now released a new edition, with a modified title, “Julian Block’s Easy Tax Guide for Writers, Photographers, and Other Freelancers.” Once again, Julian has given tax practitioners and taxpayers with any sort of connection to the literary or artistic world a handy and helpful explanation of tax tips that they might otherwise neglect.

Julian opens the book with several questions posed by readers of the earlier edition. What are the tax consequences of writing a book for an agreed price, incurring reimbursable expenses only to discover that the publisher went out of business and did not pay? Are the tax consequences different if the writing business is a part-time one? How should an author react when one publisher sends a Form 1099 net of agent’s commissions and the other publisher sends a Form 1099 showing the gross royalty? Must expense reimbursements included in a Form 1099 be reported? Are the expenses incurred for a spouse who accompanies a writer to a conference deductible? What is the tax treatment of a speaking honorarium that the speaker asks be paid to a charity? What sort of charitable contribution is available for donating papers, original manuscripts, and correspondence to a charity? Is a charitable contribution available for an artist who paints a portrait and donates it to a church bazaar? There are more questions. Yes, there are answers, but to discover them, buy the book.

Julian then discusses, in succession, the hobby loss and for-profit rules, the tax treatment of awards received for writing and other accomplishments, depreciation deductions for writers and artists, how freelancers compute health insurance deductions, automobile expenses, travel expenses for spouses, the tax consequences of hiring one’s children, home office deductions, sales of homes for which home office deductions have been claimed, and clothing expenses. Julian then deals with some planning and compliance issues, including the timing of making payments near year-end, sending payments to the IRS, self-employment taxes, net operating losses, retention of tax records, extensions of time to file, amending returns, obtaining tax advice from the IRS and others. He deals with these topics in language suitable for those who are not familiar with the technical verbiage of the Internal Revenue Code.

Julian’s book was sent to the printer near the end of 2010 and was released later in 2011. Shortly after the book entered printing, Congress lowered the employee FICA rate and the self-employment rate for 2011. The book does not reflect this change. One of the challenges in writing tax books, and I speak from experience, is that the subject of the book too often becomes a moving target. If tax books were judged solely by this standard, no tax book of practical utility would qualify. There are sufficient disclaimers in the book, as there are in tax books generally, alerting readers to consult professionals and to check for the latest changes in the tax law.

Writers and other freelancers, especially those unfamiliar with the impact of tax law on their activities, should get themselves a copy of this book. I recommend it just as I recommended Julian’s previous books, "MARRIAGE AND DIVORCE: Savvy Ways For Persons Marrying, Married Or Divorcing To Trim Their Taxes - And They’re Legal," which I reviewed in Tax and Relationships: A Book to Read and Give (Feb. 2006), "THE HOME SELLER’S GUIDE TO TAX SAVINGS: Simple Ways For Any Seller To Lower Taxes To The Legal Minimum," reviewed in A New Book on Taxation of Residence Sales: Don't Leave Home Without It (Aug. 2006), "TAX TIPS FOR SMALL BUSINESSES: Savvy Ways For Writers, Photographers, Artists And Other Freelancers To Trim Taxes To The Legal Minimum," reviewed in A Tax Advice Book for People Who Write and Illustrate Books (Dec. 2006), "Year Round Tax Savings," reviewed in Another Tax Book for Tax and Non-Tax People to Read (Feb. 2007), "Travel and Moving Expenses: How To Take Maximum Advantage Of Every Tax Break The Law Allow," reviewed in Tax Travels and Tax Moves: Book It with Block (Sept 2007), "Ultimate Tax-Saving Resource '08," reviewed in Helping Tax Clients Understand Taxes (June 2008) and "Julian Block’s Tax Tips for Marriage and Divorce," reviewed in Julian Block Talks Tax with Married, Divorced, and Other Couples (Jan. 2011) and “Tax Deductible Travel and Moving Expenses: How To Take Advantage Of Every Tax Break The Law Allows!,” reviewed in Julian Block: On the Road Again (July 2011).

Julian Block: On the Road Again

Like every traveler filled with wanderlust, Julian Block the tax author cannot sit still. He took a look at one of his books and decided it was time for revamping it. Four years ago, he gave us "Travel and Moving Expenses: How To Take Maximum Advantage Of Every Tax Break The Law Allow." Now he’s back with a new edition, "Tax Deductible Travel and Moving Expenses: How To Take Advantage Of Every Tax Break The Law Allows!" Four years is a long time in tax law. Things change. Julian chauffeurs us through all sorts of tax issues involving travel and moving.

Readers of MauledAgain know that Julian is a veteran at this. In previous posts, I have taken a look at several of his books. "MARRIAGE AND DIVORCE: Savvy Ways For Persons Marrying, Married Or Divorcing To Trim Their Taxes - And They’re Legal" was reviewed in Tax and Relationships: A Book to Read and Give (Feb. 2006), "THE HOME SELLER’S GUIDE TO TAX SAVINGS: Simple Ways For Any Seller To Lower Taxes To The Legal Minimum," in A New Book on Taxation of Residence Sales: Don't Leave Home Without It (Aug. 2006), "TAX TIPS FOR SMALL BUSINESSES: Savvy Ways For Writers, Photographers, Artists And Other Freelancers To Trim Taxes To The Legal Minimum," in A Tax Advice Book for People Who Write and Illustrate Books (Dec. 2006), "Year Round Tax Savings" in Another Tax Book for Tax and Non-Tax People to Read (Feb. 2007), "Travel and Moving Expenses: How To Take Maximum Advantage Of Every Tax Break The Law Allow" in Tax Travels and Tax Moves: Book It with Block (Sept 2007), "Ultimate Tax-Saving Resource '08" in Helping Tax Clients Understand Taxes (June 2008) and "Julian Block’s Tax Tips for Marriage and Divorce" in
Julian Block Talks Tax with Married, Divorced, and Other Couples (Jan. 2011). His latest journey through the tax law is no less concise, readable, and helpful.

The tour begins with a general overview, in which Julian lays the groundwork for what he is doing by explaining “The Basic Rules” and mapping out why he needs to do this in “Most Americans Don’t Understand Basic Tax Terms.” How unfortunately true. When he suggests that too many Americans don’t understand AGI, AMT, standard deduction amounts, and tax credits, he’s right. As with many things on life’s highways, once understood it seems simple but until the light bulb goes on, the challenge appears insurmountable. Julian’s explanation is much like the light switch. It’s there, but it takes an effort to turn it.

After mapping out the rest of the book, Julian turns to strategies that affect all of the deductions he addresses. He shares information about filing status, timing, and “red flags for audit.” His tips for dealing with automobile and travel expense audits will smooth the ride for taxpayers who didn’t quite pay attention earlier when filing returns or even earlier when engaging in transactions. Thus, his tips for “Correcting Past Mistakes” come in handy for those who made a wrong turn during tax return preparation time.

The next stop is the commuting issue. The classic “commuting expenses are not deductible” axiom meets the case of the “Commuting Cops” and one of my favorite cases that I have my students read, Margaret Green v. Comr., involving the professional blood seller, which gave the world the classic explanation, “Unique to this situation, the taxpayer was the container in which her product was transported to market.” Travel between job sites and the hauling of tools and equipment get their proper due.

Automobile expenses may be one of the more confusing, erroneously applied, and audit attracting deductions in the tax world. Both the actual expense method and the standard mileage rate method are examined, along with the impact of home office use. Julian brings not only tax law, in the form of casualty and disaster losses, but also insurance premium computations and liability exposure, into the picture when he discusses the best way to handle the title for a child’s first car.

Another bumpy road on the travel expense circuit is the question of whether the expenses of a spouse who accompanies the taxpayer on a business trip are deductible. One might expect a simple answer, but the analysis of this part of tax law resembles more a detour with missing signs than the wide open road of a lightly-traveled interstate highway. Julian shepherds the reader through this aspect spousal teamwork before turning to the similarly thorny issue arising when spouses work in different cities.

What about travel to and from locations where business-related education takes place? Or travel that in and of itself is educational? Or travel undertaken to find employment? Or travel on behalf of a charity? Or travel in order to obtain medical care? Or travel to attend investment seminars and shareholders’ meetings. What’s deductible? What’s not? Julian explains these rules in ways that are easily understood by someone who is not a tax professional and hasn’t had the benefit of sitting through a tax course. To those of us who have been in tax courses, as students or teachers, or who have prepared tax returns, those questions are familiar ones. Julian then tosses in one to which I’ve not previously given any thought. Are gamblers permitted to deduct the cost of traveling to the places where they are trying to make money? Curious? The answer is in the book.

Julian shifts gears at this point, turning to the moving expense deduction. He explains the distance test, the time test, the definition of tax home, and the classification of the various expenses paid when moving from one house to another. His list of what is not a moving expense is a valuable checklist.

The next chapter, dealing with amended returns, reaches far beyond travel and moving expense deductions. Mistakes can be made not only in reporting those but in all other sorts of transactions. Advice on how to file refund claims and amended returns is helpful but mostly beyond the scope of the book’s topic. Errors with respect to asset basis, casualty losses, medical expenses, and the standard deduction seem to lie outside the travel and moving expense itinerary. The same can be said of the chapter on getting “free” advice from the IRS. Perhaps these chapters can be considered the “surprise bonus,” the unscheduled and previously unannounced stop on the group tour that causes the folks on the bus to conclude that they’ve experienced an even better deal than what they thought they had.

The book concludes with several questions and answers about travel and moving expense deductions, and a postlude offering “Some Presidential Words on Income Taxes.” I’d opt for even more of the former, and if it meant chopping out the latter, so be it. All in all, though, Julian has maintained his usual folksy and effective style, and has delivered another book useful, as I noted in Tax Travels and Tax Moves: Book It with Block , not only to “students who are trying to go further into tax law than time permits their course instructors to take them,” but also “taxpayers and tax return preparers who need to learn or refresh their understanding of these two very specific areas of tax law.”

Julian Block Talks Tax with Married, Divorced, and Other Couples

To be precise, Julian Block isn’t so much talking with the married and divorce, but sharing explanations of pretty much every sort of issue couples will encounter, beginning with a set of questions and answers that he has constructed to put the issues into realistic contexts. He does all of this in “Julian Block’s Tax Tips for Marriage and Divorce.” The range of topics and the folksy way in which Julian defuses the anxiety that accompanies tax questions for most people are impressive considering he had a mere 120 pages in which to tackle puzzlers such as joint returns, tax traps for same-sex couples, property settlements, dependency exemptions for children of divorced parents, taxation of social security benefits, withholding, and even the tax consequences of having an affair. It’s not surprising that Julian moves through these topics with clear explanations written for taxpayers rather than tax professionals. In my reviews of his earlier books, I noted the same strengths in his writing. "MARRIAGE AND DIVORCE: Savvy Ways For Persons Marrying, Married Or Divorcing To Trim Their Taxes - And They’re Legal" was reviewed in Tax and Relationships: A Book to Read and Give (Feb. 2006), "THE HOME SELLER’S GUIDE TO TAX SAVINGS: Simple Ways For Any Seller To Lower Taxes To The Legal Minimum," in A New Book on Taxation of Residence Sales: Don't Leave Home Without It (Aug. 2006), "TAX TIPS FOR SMALL BUSINESSES: Savvy Ways For Writers, Photographers, Artists And Other Freelancers To Trim Taxes To The Legal Minimum," in A Tax Advice Book for People Who Write and Illustrate Books (Dec. 2006), "Year Round Tax Savings" in Another Tax Book for Tax and Non-Tax People to Read (Feb. 2007), "Travel and Moving Expenses: How To Take Maximum Advantage Of Every Tax Break The Law Allow" in Tax Travels and Tax Moves: Book It with Block (Sept 2007), and "Ultimate Tax-Saving Resource '08" in Helping Tax Clients Understand Taxes (June 2008).

The folksy style pops up early, when in the preliminary chapter, Julian replies to the question, “It pays for me to file jointly. But I don’t want to reveal my income to my wife. Suppose I have her sign a blank return and then fill in the figures?” with a quick, “Don’t bother.” He follows up with an explanation that the taxpayer’s wife would be able to get a copy of the return from the IRS. We’re not told why the taxpayer wants to hide his income, but perhaps Julian doesn’t know. He also deals with more mundane question, such as shifting from married filing separately status to joint returns, and vice versa, the prohibition against one spouse itemizing and the other claiming the standard deduction, the tax treatment of a surprise “additional alimony payment . . . not required by our divorce decree,” and deductions for contraception and gender change surgery. He also gets into the deductibility of payments to girlfriends hired to manage rental properties or to do office work for the taxpayer.

Part 1 focuses on filing status, and includes discussion of when status is determined, amending returns, the scope of joint liability on joint returns, and the advantages and disadvantages of filing separately. Julian alerts those immersed in wedding preparations that they ought not ignore the tax issues. He explains the marriage penalty and the marriage bonus, and how the scheduling of weddings planned for near the turn of the year provides tax planning opportunities. He also explains the tax treatment of surviving spouses, and tax traps for same-sex couples. Julian’s summary of how the Defense of Marriage Act affects unmarried couples, how it came to be enacted, and what would happen if it was repealed or declared unconstitutional is itself worth the price of the book.

Part 2 deals with the tax consequences of divorce, which can bewilder couples who are going through personal upheavals and encountering an array of financial and property decisions. Among other topics, the tax treatment of the legal fees, the effect of invalid divorces, and the difference between the tax consequences of an annulment and a divorce, and the determination of which parent claims the dependency deduction for children get close attention. Part 2 concludes with a section as interesting as its title suggests, “Unearthing Hubby’s Hidden Assets.” It is a good introduction to forensic accounting, as it explains what sorts of information can be derived from the information appearing on a joint return.

Part 3 explores the tax consequences of home sales by married couples, divorcing couples, divorced couples, and unmarried couples. It concludes with a look at the tx consequences of leaving property in both names while one of the two live in the house.

Part 4 untangles the taxation of social security benefits. Julian explains the computation of modified adjusted gross income, and provides examples to help readers understand what is one of the more complicated elements of individual federal income taxation. Part 4 includes some planning advice with respect to the impact on the computation of taxable social security benefits of filing jointly or separately, and concludes with some reminders about the use of social security numbers in connection with tax returns.

Part 5 is titled “Oddball Situtations,” a title that makes sense when one examines the subtitles within Part 5. What’s discussed in “Having an Affair Can Be Taxing” is obvious and well worth reading. Several of the cases, and most of the issues, have inhabited my basic federal tax course for many years, because they are, as I tell my students, simply too good to pass by. More than a few taxpayers will be interested in “Dependency Exemptions for Live-in Lovers,” for reasons that should be readily apparent.

The book concludes with two short segments. Part 6 examines changes in withholding that might be necessary when taxpayers marry or divorce. Part 7 discusses amending returns.

This is a book worth reading. Someone needing or wanting to make a small gift to a friend or relative who has announced an engagement or shared the unsettling news of a divorce should consider giving the person a copy of Julian’s book. It might not be a glamorous present, but it’s a useful one, and one for which the recipient will be appreciative. The book is published by PassKey Publications.

Helping Tax Clients Understand Taxes

Julian Block has written yet another book. This time, it's "Ultimate Tax-Saving Resource '08." Like his three books in 2006, reviewed in Tax and Relationships: A Book to Read and Give, A New Book on Taxation of Residence Sales: Don't Leave Home Without It , and A Tax Advice Book for People Who Write and Illustrate Books, and the one from 2007, reviewed in Another Tax Book for Tax and Non-Tax People to Read, this latest volume is ideal for taxpayers who want to understand taxes and their tax advisors without sitting through an LL.M. (Taxation) or M.T. program. Too often, tax practitioners rattle through Code sections and arcane tax language when answering client questions or mapping out tax planning strategies. Too often, to make the explanations comprehensible to the client, the practitioner needs to provide a condensed introduction to taxation course while the client anxiously glances at the professional's billing clock. This book would make a nice handout for practitioners to bestow on their clients. Perhaps when they see in print many of the same things their advisors keep telling them to do, clients will be more likely to keep good records, think about taxes throughout the year, and keep their tax attorneys, tax accountants, and tax return preparers informed of changes in the client's life.

Ultimate Tax-Saving Resource '08 is a hefty edition, exceeding 400 pages. The book is packed full of explanations, tips, warnings, examples, and other resources. Rather than looking at each topic in detail, I've selected the segments that particularly resonated. That's not to say the rest of the book is any less helpful or worthwhile.

The first chapter makes a good first impression. Julian begins with an important point, typically overlooked by all those folks who think federal income taxes are on stage during early April and in the wings the rest of the time. In "Year-End Tax Tips," Julian goes through the decisions and transactions that need attention before the ball falls in Times Square, and that ought not be tucked away until the tax return visit with a tax practitioner in February or March of the following year. It's not that Julian has discovered an array of heretofore unknown planning tips. It's that he makes it clear to the reader why these are important and why they deserve attention while there is still time to do something that is good for the taxpayer's tax health. One segment of the chapter advises the reader to "make tax planning a year-round job." That is excellent advice. If I could quibble, I would have used "Tax Planning is a Year -Round Job" as the chapter title. But for all I know, that's a quibble with an editor and not with Julian.

In chapter 2, Julian turns to one of the most confusing topics in the tax law for the typical taxpayer. It's time to help people understand the rules applicable to dependency exemptions. This area of the law was substantially revised several years ago, and it tossed out many principles and concepts that tax practitioners and taxpayers alike thought they had mastered. It has become time to re-tool. Julian pays close attention to several of the thornier issues in this area, dependency deductions for the children of divorced parents, and dependency exemptions for live-in lovers. It's not just seasoned, and thus cynical, tax experts who will appreciate the inclusion of Charles Osgood's Ode to POSSLQs that Julian has included. When working with taxes, if one does not find time and reason to laugh, one very well may end up crying, and they won't be tears of joy. Humor is a fine seasoning for a tax book or a tax course.

What's next? In chapter 3, Julian addresses the tax consequences of home sales. As is the case with chapter 2, Julian has selected a tax topic that impacts many taxpayers. Do tax practitioners and taxpayers need to read this down-to-earth explication of section 121, its regulations, and the niceties of the many rulings and judicial decisions interpreting them? Yes, indeed. Just the other day, my mother said to me, "I heard some tax advice on a radio news show and I think it was wrong." After listening to what was said, I -- ever the teacher -- asked my mother why she thought it was wrong. It was wrong on two counts, and my mother spotted both errors. The person giving the advice treated the sales price as the gain, and used $250,000 rather than $500,000 as the exclusion for a married couple. So let me add to the list of people who should pick up a copy of Julian's latest book. Yes, people who give tax advice on radio news shows. How my mother has become adept at taxes, and she's not a tax professional or practitioner, is another story. I need to ask her if she's been reading Julian's books.

Subsequent chapters look at the tax consequences of marriage and divorce, travel expenses, moving expenses, and itemized deductions. In chapter 8, Julian explores tax tips for businesses. Though there are many, many taxpayers whose income is reflected on Forms W-2 and perhaps 1099s, there are more than a few who operate businesses, particularly small businesses, and who can learn much from what Julian shares. Ask any tax practitioner or tax return preparer what it is like when a client reveals that during the previous calendar year, the client opened and operated a business. How likely is It that what the client did and did not do is not what would have been advised? Now tax advisors can say to their clients, "If you happen to open a business before we meet again, read chapter 8 in this book. In fact, read the entire book." Similarly, chapter 9 examines investment strategies. Chapter 10 is the chapter every taxpayer hopes is important for someone else. It explains how audits work. Yet it begins with a discussion of record keeping, which in some ways is insurance against adverse audit outcomes that are attributable to the lack of evidence justifying deductions, credits, and exclusions. It certainly isn't in the "I'll read this if I get audited" category. Again, I would have made the chapter title more persuasive and powerful, but that's a minor concern.

The last three chapters address filing tips, figuring and paying taxes, and social security taxes. Many taxpayers need and want to know about extensions, the advantages and disadvantages of IRS advice, adjusting withholding, the AMT, and what is subject to social security taxation. Julian takes the reader through a solid overview of topics that are complicated in their fullness. He does so in the same way he does in the other chapters, by using stories based on actual tax cases. When I noticed that he takes the reader through the Harris case, which I use in my basic tax course, I understood he uses one of the techniques I used to persuade my students that tax is not boring. All I will say here about that case is that it involves a wealthy elderly widower, two twin sisters who were Playboy Bunnies and became the widower's mistresses, payments by the widower to the two sisters, and the arrival on the scene of the IRS, special agents, and the Justice Department, and tax fraud prosecution. How does it turn out? Tax practitioners, read the case. Taxpayers who don't want to slog through the legal analysis, read Julian's book.

What I like about this book is that it introduces readers to tax concepts, tax terminology, and tax principles without compelling them to dig through the Internal Revenue Code, it regulations, IRS rulings, cases, and other legal material. That effort is best left for tax practitioners, and, of course, law students enrolled in tax courses. Someone not educated in tax law but who has read this book will have a more productive conversation with his or her tax advisor. It is also more likely that record-keeping will improve, decisions will be made in timely fashion, advice will be sought before the client enters into transactions, and deeper appreciation for what the tax advisor is trying to do will evolve.

To order a copy, contact Julian Block at 3 Washington Sq., #1-G, Larchmont, NY 10538 or go his website, julianblocktaxexpert.com. Or, as was the case with the previous books, email Julian at julianblock@yahoo.com.

EDIT: To order the book please visit www.nucostore.com
or click on this link.

Capital Gains, Dividends, and Taxes

A friend asked me for some help the other day. He was doing a tax return for a small trust. He's not a "tax guy" but he's a smart, educated fellow who surely would do at least as well, and most likely better, than many or most of the students in the basic federal income tax course that I teach. He's been doing this trust's tax return since its inception, so I asked what's the problem? His reply was that he was bewildered by the tax computation portion of the Form 1041 Schedule D. The trust had a small amount of capital gains distributions and also received dividends qualifying for the lower tax rates.

So I agreed and he stopped by. He laughed and said he figured I could punch the numbers into "that tax program you have." Well, I do have Turbotax. So does he. But the Turbotax we have doesn't do trust tax returns. There is software available from Turbotax to do trust tax returns, but when there's only one return to do and the total income is less than $800 it isn't worth the expense.

The ultimate good news was that because the trust distributed its income and is allowed a $300 exemption deduction, it had no tax liability. The bad news was that at first I forgot to subtract the $300 so I ended up plowing through the tax computation portion of the Form 1041 Schedule D. The good news is that despite that portion of the form not being needed, it wasn't a waste of my time because I had the education experience of making direct contact with a the tax computational portion of a Schedule D other than through Turbotax. Yes, the Form 1041 Schedule D is a bit different than the Form 1040 Schedule D (the one used for individuals), but they're very similar. They share a level of complexity that to most folks looks like a differential calculus exercise.

Sometimes I think this is all part of a vast conspiracy among tax software manufacturers, lobbyists, members of Congress, and the Treasury Department. Then I do a reality check and remember that as long as there are taxes there will be a need for tax software, and that the folks at Turbotax are probably (strange as it may seem) among those in the forefront asking for tax simplification. Why? Because programming this tax complexity isn't easy, and the more chances for mistakes, the more mistakes get made. Issuing updates to fix mistakes is expensive. Early in its history, Turbotax required several updates each tax season to deal with errors, but now it's become almost perfect. The years when I would be on the phone with the Turbotax people educating them and explaining how the software wasn't tracking the tax law have faded into the past. They were always very polite but I should have held out for a lifetime subscription!

So why is the Schedule D of Forms 1040 and 1041 (and others) so complicated? Because the Congress insists that certain capital gains, and now, certain dividends, should be taxed at rates lower than those that apply to salaries, interest, pensions, the taxable portion of social security, book royalties, etc. In other words, stock market and other investing and corporate ownership is seen as more important (or at least, deserving of less taxation) than is earning a living through sweating, being retired, or conducting a business in partnership or LLC form. (To be technical, capital gains are taxed at a variety of lower rates, not just one lower rate. To keep this analysis from getting unduly complex, I'll ignore those complexities upon complexity.)

Someone, a few years ago, wrote a brief article in which they listed the arguments made by the advocates of low (or no) capital gains taxation and the arguments made by those who think capital gains should be taxed as is any other income. There were more than 6 dozen arguments on each side. This is hardly the place to list all of them or to analyze each of them. Let's instead consider the major premises.

The advocates of low (or no) capital gains taxation claim that they are being taxed on "phantom" income because some of the gain represents adjustments in price that reflect inflation. They point out that adjustments for inflation exist in the tax law for a wide variety of items (for example, the personal and dependency exemption amount, the standard deduction, the cut-offs for the phase-out of various deductions and exclusions, etc.) But they overlook the fact that the tax rate schedules themselves are adjusted for inflation. Not good enough, they reply.

The answer, therefore, is simple. Make an inflation adjustment to the basis in the asset being sold. Capital gain reflects the difference between the net selling price and the amount invested ("basis") in the asset. So if T buys stock for $100 and ten years later sells it for $400, T has capital gain of $300. If T is in the 30% marginal bracket, T pays tax of $90 on the gain. But T argues some of the gain reflects inflation. How that justifies taxing T at a rate of 5% or even (as the advocates admit is their goal, zero percent) is impossible to understand, let alone accept. Why should T's tax on the gain be $15 or $0? Let's assume that during the 10-year period in question inflation was 35% (that's roughly 3% a year compounded). What makes sense is to let T adjust the basis from $100 to $135. Then T's gain would be $265 ($400 minus $135). Taxed at 30%, T would have a tax liability on the capital gain of $79.50. That's lower than $90 but not near the unfathomable $15 or $0 that T thinks is "fair."

So the advocates of low or zero capital gains rates turn to other arguments. One is the "lock-in" effect. They claim that owners of assets who do not need to sell will not sell if the gain is taxed at regular rates, because they know that at death their heirs will take the assets with a basis equal to fair market value, thus letting the gain arising during lifetime escape taxation. There are several problems with this argument. First, it relies on ANOTHER BAD TAX POLICY to justify a SECOND BAD TAX POLICY. There is no logic in letting gains go untaxed if the property is held until death. The justification is "we don't know what the decedent's basis is." Hogwash. If the decedent made a lifetime gift of the asset, the donee's basis is the decedent's basis and there are ways of figuring it out. It's done all the time. Basis isn't information that the decedent takes to the grave. (And taxing unrealized appreciation (the technical name for these gains) at death would justify total repeal of the estate tax; of course, it would raise more revenue than estate tax repeal would lose, so it's easy to see how members of Congress would sort themselves out on this one.) The second problem with the "lock in" argument is that it presupposes that non-tax factors compelling or strongly encouraging lifetime sales do not exist. Anyone who makes investment or ownership decisions based SOLELY on the tax law is going to be poor, barring extraordinary luck. Investment advisors are known to suggest that "holding on too long" is a bad thing.

Another major argument dragged out by the low/no capital gain tax crowd is that taxation of capital gains impedes capital formation. Supposedly, if capital gains are taxed at regular rates, people will not invest in capital formation (such as corporations, LLCs, and partnerships). Well, I ask, will they bury their money? Spend it? If they spend it, what will be done with the money by those who receive it? Oh, they'll spend it. Inflation will run rampant. So savvy folks will invest to shield themselves from inflation. And that, in turn, will generate capital investment, and loosen the consumption pressure on the inflation rate. Perhaps people would invest their discretionary income (money left over after paying for the necessities of life) in interest-bearing accounts. Which, of course, means that the banks and other financial institutions would have cash that would be used for (a) making loans to people who would invest in true capital, such as equipment, machines, buildings, etc. or (b) investing in the stock market or other equity arrangements.

I could continue on and on with the dozens of arguments put forth by the advocates of low or no capital gains tax. I could add the dozens of arguments made by the opponents (and I already have outlined some of them). I could dedicate paragraphs of analysis to the question of why, if it is so good to tax capital gains at 5% or 0%, is it not just as good to tax salaries and interest and pensions at 0% or 5%. I could (and I may, in a future post) explore how we will end up with an income tax on salaries and not much else (especially if the proposal to make most contributions to savings accounts deductible). Add in the imposition of social security taxes on salaries (but not capital gains, interest, or dividends) and one quickly begins to see how two economic classes will come to exist in society. That is something that is flat out not healthy for survival of the nation. Am I beginning to sound like Howard Dean? Maybe if I refrain from screaming I'll avoid being mistaken for him. (After all, he is a Maule descendant (as you can see here ) so he must be right about something, and so I'm guessing it's probably in the tax area...)

Now, of course, with tax rates on capital gains having been lowered and then lowered again, to the point where a zero rate is rapidly approaching, the low/no capital gain tax rate folks turned to dividends. So dividends are taxed at these lower rates. Why? Supposedly it will encourage corporations to pay dividends (as to whether it does, see Story Number Five in my earlier posting on that topic. That makes no sense if the concern is capital formation, because under that theory, the corporations should retain cash to invest in additional property acquistion, in more jobs, and in business growth. Why distribute earnings to shareholders?

Easy. So that they can invest in other corporations. And get more capital gains. And have their net worth grow at an after-tax rate that far exceeds (relatively speaking) the net worth growth rate of folks who earn salaries and put their money into bank accounts to insure against next month's job loss. See how the gap between society's owners and society's workers is widening? When I use the phrase "economic slavery" to describe this phenomenon I get a lot of static from all sorts of people, but give it some thought.

What's really going on is the "don't tax you, don't tax me, tax that fellow behind the tree" phenomenon that has afflicted tax law development since the beginning of tax time. (The quote is attributed to former Sen. Russell B. Long.) Who's you? Who's me? Simple. You and me are the folks making the laws, that is, bringing their proposals in for enactment as rewards for campaign contributions. Where do they get all that money to contribute to the soft-money organizations? Hmmm... And who's behind the tree?

One response is to point out that most Americans own stock through their pension plans and thus share in the benefits of lower capital gain taxation. First, for many Americans in pension plans investing in stock, their stock ownership is remote and the benefits subject to the risk that the plan will go under, as has happened. Second, for many Americans, adding a few dollars of capital gains to their income would not push them into the high brackets where the benefits of 5% and 15% capital gains rates generate the most significant savings. Third, because pension plan income is not taxed to the participant until retirement (when it is taxed at regular rates), the existence of a low or zero capital gains rate for those pension plan capital gains is specious. It's like giving a person ineligible for a driver's a preferred appointment time for a driving test.

I began this discourse with a description of the complexity generated by taxing some capital gains and some dividends at lower rates than those applying to salary, pension, interest, and other income. Though the cry "it's too complicated" ought not always win the day (because sometimes there is no choice but complexity, as is, for example, the case with the chemisty applied to design life-saving pharmaceuticals), adding complexity to a system of any kind (including tax law) needs to be justified. The burden needs to be on those advocating the complexity. I submit to you that in this instance, the advocates of lower taxes on certain capital gains and certain dividends have not met that burden.