Originally published on Passive Activities and Other Oxymorons on May 24th, 2011.
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Boston Tax Alert 2011-19, 2011-20, 2011-21

Lu Gauthier of The Boston Tax Institute has given me permission to republish his newsletter. The BTI newsletter is a regular feature of this blog now going up every Tuesday. Be sure to check out the BTI catalog for great CPE value.

Our thanks to Natalie Choate, Esq. for the following email!

The Massachusetts Department of Revenue should take out a billboard reminding taxpayers that they did NOT receive any Massachusetts income tax deduction for their retirement plan contributions while self-employed (including, in most years, partnership 401(k) elective deferral contributions), or for their personal IRA contributions (even if they were deductible federally). Those Mass.-nondeductible contributions could add up to a substantially higher “Mass. basis” worth thousands of dollars in reduced Mass. taxes upon ultimate distribution of the plan.

Then the DOR should follow up with some television ads explaining how the Massachusetts system for recovering so-called “basis” in a plan or IRA is totally different from the system you follow on your federal return: The Internal Revenue Code uses the “cream in the coffee rule” (distributions carry out pretax and after-tax money proportionately). Massachusetts uses the “your own contributions come out first” approach. Even when the client’s basis is initially the same for both federal and Mass. purposes this difference will quickly make them different, as the Mass. basis will get used up (distributed) long before the federal.

If you are not aware of these vital differences, your client could be leaving a substantial amount of money “on the table” by not claiming income tax exclusions on his Massachusetts return that he’s entitled to. The issue is particularly important this year, due to many large Roth conversions done in 2010 that are being reported in the 2011 filing season. Natalie Choate’s seminar on June 3, 2011, at the Hyatt Summerfield Suites in Waltham will explain the differences between the federal and Massachusetts rules for determining (and recovering) “basis” in a retirement plan or IRA-including the effect of rollovers, the DOR flip flop on partnership 401(k)’s, and how to advise beneficiaries.
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Our thanks to Philip R. Dardeno, CPA, MST for the following email!

For anyone that represents Cellular Telephone Franchises

I was asked by a group of cellular industry franchises to represent them in trying to get DOR to change its policy with regard to sales tax on the sale of cellular phones as part of a bundled transaction. After many meetings and much discussion, we just received a favorable answer in DD 11-2 which allows the franchise to charge sales tax to the customer on the higher of the cost or the sales price (remember: cell phones are heavily discounted in these transactions).

The previous DOR policy was that the sales tax fell on the “fair market value of the phone” which they said was the amount listed as “retail price”, obviously a number much greater than the amount charged.
In other matters:

Income Tax: The DOR is still vigorously pursuing domicile cases and has a project auditing “Excess Trade or Business” deductions.

Sales tax: The latest industry wide audits appear to be “Boat Clubs” and medical equipment sales.

Corporate: There are a number of cases reviewing the Film Credit which always are controversial. These and other issues will be discussed by Phil in his seminars entitled MA Taxes in Review on 06/16 in Randolph and 06/24 in Waltham.
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PAOO Comment – I have worked with Phil over the years on some difficult Mass cases.  He is great.
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Our thanks to Kurt Czarnowski, formerly with the SSA as Regional Communications Director in N.E., for the following email!
Unfortunately, many people do not completely understand how work and earnings impact a person’s ability to collect Social Security retirement benefits. As a result, they may be losing out on monthly payments which are rightfully theirs.

The good news is that the Senior Citizens’ Freedom To Work Act of 2000 eliminated the Social Security annual earnings limitation beginning with the month a person reaches Full Retirement Age (FRA). (From 2000 through 2002, FRA was age 65. However, in 2003, it began increasing, so that FRA is now age 66 for people born between 1943 and 1954.) This means that if you are at Full Retirement Age or older, and you work, you can receive a full monthly Social Security benefit, no matter how much you earn. In addition, any earnings you may have had prior to the month you reach your FRA do not impact your ability to collect benefits from FRA going forward.

But, if you are under FRA, there is still a limit on how much you can earn and still receive full Social Security benefits. In 2011, the annual limit is $14,160, and if you are younger than full retirement age during all of 2011, you lose $1 in benefits for each $2 you earn above that amount.

If you retire in mid-year, you already may have earned more than the yearly earnings limit, but that doesn’t mean you can’t collect benefits for the remainder of the year. There is a special rule that applies to earnings for one year, usually in the first year of retirement. In 2011, this rule lets you collect a full Social security check for any month your earnings are $1,180 or less, regardless of the yearly earnings total.

It is important to note that if some of your retirement benefits are withheld because of your earnings, these payments are not completely lost. Starting at your full retirement age, your benefit amount will be recalculated, and it will be increased to take into account those months in which payments were withheld.

More about the impact of work on the receipt of Social Security benefits, as well as many other issues, will be covered during Kurt Czarnowski’s upcoming seminars on Social Security, which will be offered five times during the week of June 12 and also on 08/12.

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PAOO Comment – As I explained in a recent post nobody will ever get as good a deal from Social Security as my Nanna Lyons did (She wanted FDR to be canonized).  Nonetheless careful planning in this area can lead to good results.