No such thing as a bad student

No such thing as a bad student

I am a big proponent that there is no such thing as a bad student, only a bad teacher. I have taught and teach classes and train(ed) young accountants many a time. There is no larger gratification then passing on your knowledge onto others, and seeing someone understand. Isn’t that what life is all about? Being a young father helped me find this passion for educating.

They key to being a good teacher is patience, experience in the subject matter, and practice. I always say to my young students that I wish I had someone like myself explaining topics to me when I was in school and in my junior work days. The fact is, that in the real world, you do sometimes have good teachers and some bad ones, and I have had both types as well. I believe that having a bad teacher serves a purpose as it is actually a good way for someone to begin developing the skill of self-study, as this is very important once you are out of school and on your own.

Understanding the concepts before passing on your experience is crucial to being a successful student as well as teacher. In most professions such as accounting, medicine, and law, similar concepts keep reappearing. For example, in the accounting class, if you understood the concept of capitalization and depreciation, you should be able to understand the concept of amortization. The field of taxation is no different. Concepts repeat and repeat, so if you understood the concept once, you would be able to identify the same concept again without anyone having to tell you. Anyone can Google and find the answer, once told, and any robot can do it as well. However, if you understood the concept the first time, the next time a similar situation would arise, you should have a light bulb pop up in your head; this way you would think to yourself, oh, maybe this is the same concept, and then investigate to confirm by using such tools as Google, IRS publications, etc.

Let us review the concept of state and local income taxes, and how they impact the federal tax returns and how they are adjusted on state tax returns.

On New York State tax forms like IT-201-I, or IT-150, or NYC-202(4) you are charged an income tax either for you individually or for business. As part of the federal form 1040, Schedule A (Itemized Deductions) or Schedule C (Profit and Loss from Business), you are allowed to take state and local income taxes as a deduction. If you itemized your deductions on Schedule A, you included the taxes paid to the state and local taxing authorities. However, the taxes collected from you during the year to the state taxing authorities are almost never the same as the amount of tax due at the end of the tax year, so in a sense, once you are finished calculating your income taxes, you will end up either owing more in taxes or receiving a refund for taxes over paid. This creates a timing difference as well as additional benefit on your federal tax return.

For example, let us create a simple scenario; if you had paid (or had withheld) all of year 20X1 a total amount of $5,000 in state and local income taxes and the amount of total state and local income taxes that became due (after you finished filling in all of your information on the state tax return) is $4,000, you will receive a refund of $1,000 from the state. On form 1040, if you itemize deductions, you are allowed a deduction for income taxes paid, however, you will claim $5,000, although you only really paid $4000 after accounting for the $1000 refund, therefore benefiting on a federal tax return for that extra $1,000. Once the state processes your refund request and confirms that is the correct amount that you should receive, you will have your official refund issued to you.

In the following year, 20X2, you will need to increase your federal income by that $1,000, since you decreased your prior year income by that same $1,000, which was refunded and not actually paid. Hence you would need to recapture and report this amount on line 10 of Form 1040. Since state and local taxes are not deducted or itemized, nor are they considered taxable income, you will need to adjust your income on the state tax return as a subtraction to income, to arrive at the correct income taxable income in 20X2.

As I mentioned before, similar concepts arise again and again. Let us wrap up this blog with a similar situation, but let’s use the federal Form 1040 Schedule C and the MCMT Tax (MTA Tax) as an example. Since its enactment in 2009, the MTA tax (.34% through 2011 and .34%, .23% or .11% for 2012) is a tax on self-employed individuals and employers alike. If you are considered self-employed, you must file Schedule C and attach it to your Form 1040 reflecting the net income from your business endeavors. One of the expenses that you are allowed to deduct on line 23 of Schedule C, are state and local taxes imposed on you as a seller of goods or services that attach to your business. Once this tax is paid on a local tax level (MTA Tax is a local tax) in 2010 for 2009, you will need to deduct the amount paid on your 2010 Schedule C. Again, this is not a deduction on your state tax return, and you will need to add back the amount deducted previously to arrive to the correct taxable income for 2010 tax year.

In effect the concepts cited above are similar; however, they work in the opposite direction, as one is a subtraction from New York State taxable income and the other is an addition to New York State taxable income.

At this point I would expect for that light bulb to go off in your head, raising the question, well, what if the taxpayer in the MTA Tax example, overpaid his/her MTA Tax in 2010, what would be the effect in 2011……Ahhhh, now you are thinking.  

I hope that I will encourage many people out there to teach and guide younger less experienced individuals. So get out there, get motivated and change the world one tax number at a time. Remember, stay sharp, stay focused, and do some of your own research, stop cheating off me, as cheaters never win, and only stand to lose.