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Tax Tip of the Week | All You Need to Know About Student Loan Forgiveness March 27, 2019

Posted by bradstreetblogger in : Deductions, General, tax changes, Tax Deadlines, Tax Planning Tips, Taxes , add a comment

The sheer magnitude of our outstanding student loan debt is beyond my feeble comprehension. According to the Federal Reserve, student-loan debt hit $1.53 trillion at the end of the second quarter of 2018. I may understand “millions” and just perhaps “billions,” but the concept of “trillions” totally escapes me. Almost two-thirds of that total debt or about $900 billion is carried by women.

An article written in the WSJ on December 17, 2018 by Ms. Berman, a reporter at MarketWatch follows. Her article discusses some limited options on having some of the student-loans forgiven, but, very often someone has to jump through some really high hoops to qualify. So keep your fingers crossed, but I wouldn’t hold your breath.

                                                                                                    – Mark C. Bradstreet

“Student-loan forgiveness might seem out of reach for many of the 44 million people who have educational debt. But some of these borrowers may qualify for relief—if they know where to look.

Student-loan forgiveness has gotten somewhat of a bad rap in recent months, largely because of controversy surrounding the federal Public Service Loan Forgiveness program, which allows public servants with a certain type of federal student loans to have their debt discharged after 120 monthly payments.

The first cohorts of borrowers became eligible for forgiveness under PSLF in the fall of 2017 and in the months since, advocates have grown concerned that confusion about the program’s requirements, combined with sloppy implementation on the part of student-loan companies and the government, has made it difficult for eligible borrowers to qualify. Of the roughly 28,000 people who filed an application for debt forgiveness under the program as of June 2018, just 96 had their loans forgiven, government data show.

PSLF may be the best known loan-forgiveness program, but it isn’t the only one. Not only are there other federal programs, cities and states across the country offer some debt forgiveness for people who work in certain jobs or even live in certain areas.

Here is a closer look at some programs and their requirements:

Federal programs

PSLF: To be eligible, borrowers must work full-time in a public-service job for the right type of employer—typically a federal, state or local government or a nonprofit with a 501(c)3 designation. They must have the right type of loan—a federal Direct Loan—and be in an income-driven repayment plan to benefit. Borrowers also need to have made 120 on-time payments toward their debt to have the remainder forgiven under PSLF.

It’s hard to say exactly why so many borrowers who applied to have their loans forgiven were rejected. It could be that many simply hadn’t been working in public service or paying down their loans for the full 10 years. But some data indicate that confusion over the program’s requirements played a role.

Of borrowers who have had at least one employment certification form (the document borrowers can use to ensure they’re on track toward forgiveness) approved, nearly 12% are repaying their loans under a nonqualifying repayment plan, according to the Education Department. Congress authorized a temporary expansion of PSLF earlier this year for borrowers who met all of the program’s other requirements but were using certain nonqualifying repayment plans.

Advocates also worry that borrowers who have Federal Family Education Loans, which don’t qualify for PSLF, are working in eligible jobs and repaying their debt, assuming they’ll qualify for forgiveness only to later face a rude awakening. Borrowers can consolidate FFEL debt into Direct Loans, but they may not know to do that unless they receive information about it from their student-loan servicer. (Borrowers who think they might qualify for PSLF should reach out to their servicer and ask whether they have Direct Loans, and if not, how they can consolidate their student debt into Direct Loans.)

Liz Hill, an Education Department spokeswoman, says the agency’s office of Federal Student Aid is approving every eligible application for PSLF under the “strict rules” established by Congress. It is also conducting regular outreach to borrowers about the program via social media, webinars and in person events.

“FSA is committed to enhancing the process, outreach, and communications related to the program,” she wrote in an email.

Are You Eligible?
Borrowers who want to know if they are on track to qualify for the federal Public Service Loan Forgiveness program can submit an employment certification form. A separate application is needed to claim forgiveness.

Teacher loan forgiveness: Teachers who work for five consecutive years in qualifying schools—typically those serving low-income students-—can receive up to $17,500 in forgiveness on certain federal loans; depending on what subject they teach. They need to have been a new borrower as of Oct. 1, 1998, meaning that they had no prior loans still outstanding as of this date. Also, they must have completed at least one of their qualifying years of teaching after the 1997-1998 academic year.

Teachers can’t use this program and PSLF at the same time, so they need to pick that one that best suits their financial needs. The American Federation of Teachers, a national teachers union, tends to advise borrowers to focus on PSLF, which offers superior benefits, unless the borrower doesn’t plan to stay in public service for the full 10 years.

Perkins Loan cancellation: Nurses, firefighters, public defenders and others may be eligible for cancellation of their Perkins Loans, federal need-based loans for both undergraduate and graduate students. Typically, a percentage of the loan is forgiven for each year of service, culminating in 100% of the loan being discharged after up to seven years.

Congress ended schools’ authority to make new Perkins Loans last year, so there won’t be any new borrowers receiving them—at least for now.

Income-driven repayment forgiveness: Borrowers using income-driven plans for federal loans can have the balance of the debt discharged after 20 or 25 years of payments, even if they aren’t working in public service. But under current law, debt relief is taxed as income, so borrowers may face a heftier-than-normal tax bill after their loans are discharged.

State, local programs

States and regions across the country offer a variety of student-loan forgiveness programs, most of which fall into two categories: those tied to a specific occupation or those tied to living in a specific region, or both. Many of these programs cover private student loans, which federal debt-forgiveness programs don’t.

“Almost every single state has at least one program,” says Betsy Mayotte, president of the Institute of Student Loan Advisors, which recently compiled a list of 115 debt-forgiveness programs.

While the list is a good place to start, Ms. Mayotte cautions that the eligibility criteria and funding available for many of these programs changes constantly, so borrowers need to check with the entities offering forgiveness directly before making a financial plan based on them.

In some cases, borrowers may be able to combine a state or local program with Public Service Loan Forgiveness, says Heather Jarvis, an attorney and student-loan expert. For example, borrowers can use some loan-repayment assistance programs sponsored by states, nonprofits or their employers to help defray the cost of their loan payments during the 10 years they’re working to become eligible for PSLF.

Occupation-focused programs typically center on health care, education or legal-services jobs, Ms. Mayotte says.

Michigan’s Department of Health and Human Services will pay off a significant chunk of health professionals’ loans—both federal and private—if they agree to work in primary care in an underserved area. The initiative, which doctors, dentists, nurse practitioners and other health professionals can use to pay off up to $200,000 of debt over eight years, was designed “specifically to recruit and retain primary-care providers in underserved areas in Michigan,” says Elizabeth Nagel of the policy, planning and legislative-services administration at the Michigan Department of Health & Human Services.

Location-based programs, while not as widespread, simply require the borrower to live in a certain region, Ms. Mayotte says.

Kansas launched its Rural Opportunity Zones program in 2011 to encourage educated workers to move to certain rural regions experiencing population decline, says Rachéll Rowand, the program manager.

Borrowers with an associate’s, bachelor’s or graduate degree and a student-loan balance in their own name can become eligible for some debt relief by establishing residency in a ROZ county on or after the date the county opted into the program. They also need a sponsor, which can be an employer or the county itself. Borrowers can receive up to $15,000 in assistance on federal and private student loans over five years. And they can use the program along with PSLF if they qualify.

Of course, when considering any loan-forgiveness program tied to a job or place, borrowers need to ask themselves how committed they are to staying put for a long period.

While a loan-forgiveness program essentially helps to make a low-paying career possible with high student-debt levels, it “really isn’t an incentive to go into a particular occupation,” says Mark Kantrowitz, the publisher of Savingforcollege.com and a financial-aid expert.

“In most cases,” he says, “you might actually be better off taking a job in a different field that pays better.”

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C. Bradstreet, CPA

-until next week

Tax Tip of the Week | 5 Ways to Fail a Sales Tax Audit March 20, 2019

Posted by bradstreetblogger in : General, tax changes, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Uncategorized , add a comment

IRS audits are horrible! Sales tax audits are worse. In some areas, a sales tax auditor has more legal authority than an IRS agent. Yes, that is scary! Some businesses think that it is not a big deal failing to collect sales tax from a “favorite” customer since the customer would be liable anyway in an audit. It is not that easy – the sales tax agent collects this shortfall from whoever they are auditing. You might be paying the sales tax for your “favorite” customer. Good luck trying to get those dollars back from them.

The article below is advertising from an Avalara blog. I do not know anything about Avalara other than this tongue in cheek article which makes a lot of sense at least from my experience over the years.
                                                      By Mark Bradstreet

 FROM THE AVALARA BLOG JANUARY 23, 2019

 “All businesses relish a good sales tax audit. After all, what’s not to like? And did you know it’s possible to spend more time, money, and resources than absolutely necessary during an audit? It’s true. Simply follow the five tips below and you’ll dramatically increase your chances of having to pay those coveted audit penalties. 

[From the Avalara blog.]

1. Give the auditor a hard time

Spare no inconvenience. Send the auditor on coffee runs. Set the auditor up in your most cramped and unappealing space then make the auditor sort through the messiest records. First impressions matter when it comes to audits, so make yours a terrible one. The harder the experience for the auditor, the more likely that auditor will help you spend more money, resources, and time.

2. Assume you don’t need to collect tax

This is a high-risk move. If you have nexus in a state, you’re required to collect and remit sales tax; and while nexus used to refer primarily to some sort of physical presence, that’s no longer the case.

On June 21, 2018, the Supreme Court of the United States ruled physical presence is not a requisite for sales tax collection. Since the decision in South Dakota v. Wayfair, Inc., more than 30 states have broadened their sales tax laws to include a business’s “economic and virtual contacts” with the state, or economic nexus. That trend is likely to continue until all states with a general sales tax impose a sales tax collection obligation on remote sellers.

If you want to ensure you run afoul of auditors, just keep on not collecting in states where you make significant sales: Tax authorities are looking for you; they’ll likely find you.

3. Put your exemption certificates in a box in the warehouse

This gives you two advantages. First, it forces the auditor to dig through a potentially rat-infested box for the records needed, thus wasting more time. Second, it increases your chances of losing certificates to flood, fire, or vermin.

If you don’t have a complete certificate that proves a customer is exempt, you’ll owe the state for the sales tax you didn’t charge — plus bonus penalties and interest.

4. Keep incorrect records

You want to fail a sales tax audit? Make sure your records don’t match your bank accounts. If you have more or less money in your account than shows up on your sales tax records, you’re begging for an audit penalty.

If incorrect records are too blatant for your taste, strive for incomplete records. Don’t stress about recording every cent of sales tax charged to your customers. Scribble sales tax records down on a sheet of paper so you’ll never know where to find them when you need them. The auditor will linger as long as there’s a clear discrepancy between how much you collect and how much you record.

5. Pay less than you owe

This one’s about your overall method. You can drastically increase your risk of penalties during an audit by manually managing sales tax. Paying less sales tax than what your business owes will substantiate incorrect record-keeping, shoddy certificate storage, and (purposeful) ignorance about nexus. Plus, think of all of the other opportunities for error that await when you manually manage the following:

•    State and local jurisdiction rate changes
•    Filing methods and schedules for each taxing jurisdiction
•    Changing product taxability rules

But seriously

We know you don’t actually want to waste time, money, and resources. So, hopefully these tips give you some ideas of what not to do.

The right technology can turn sales tax management from painful and risky to easy and more accurate. Avalara’s suite of solutions can reduce your risk by automating calculations, certificate management, timely filing, and easy-to-access reports.”

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C. Bradstreet, CPA

-until next week

Five Things to Know About Proposed Tweaks to the Retirement Systems March 13, 2019

Posted by bradstreetblogger in : Deductions, tax changes, Tax Deadlines, Tax Planning Tips, Tax Preparation, Tax Tip, Taxes, Uncategorized , add a comment

The following article, by Anne Tergesen (WSJ), discusses possible revisions to the USA retirement system. These “proposed tweaks” may never happen or if they do, the changes will most likely be different than what follows. When I first began in taxes, an elderly tax practitioner told me to stop worrying about the future tax law changes and to make my decisions based upon the current law. For more often than not, I thought that was good advice. But that is not to say, we should bury our heads in the sand and not consider the provisions that Congress is working on.

-Mark Bradstreet

“In addition to giving annuities a greater role in 401(k) plans as part of its proposals to tweak the U.S. retirement system, Congress is considering provisions that could serve to expand workers’ access to retirement-savings plans and make it easier for savers to tap their accounts in case of emergencies. Here are five changes Americans could see in their 401(k) plans and individual retirement accounts.

(1)     A New Item on 401(k) Disclosures
Currently, 401(k) plans are required to send participants quarterly and annual account statements with their balance. Under the proposed legislation, plan sponsors would have to show an estimate of the monthly income a participant’s balance could generate with an annuity, a detail akin to the payoff disclosures required on credit-card statements. The goal is to help workers better understand how prepared they are to maintain their income in retirement.

(2) A Repeal of the Age Limit on IRA Contributions
If you are 70 ½ or older, you can’t currently make deductible contributions to a traditional IRA. Congress is considering removing the age cap and allowing people above 70 ½ or older to deposit up to $6,500 a year in either a traditional IRA or a Roth IRA. With a traditional IRA, account holder’s generally get to subtract their contributions from their income but they must pay ordinary income taxes on the money when they withdraw it – something they are required to do starting at age 70 ½ (the bill would do nothing to change that). With a Roth IRA, there is no upfront tax deduction but the money increases tax-free.

(3) More Types of Savings Accounts
Among the proposals under consideration is a new type of universal savings account that would offer more-flexible withdrawal rules than existing retirement accounts, according to Rep. Kenny Marchant (R, Texas) Employers could also be allowed to automatically enroll workers into emergency savings accounts. (Employees would be free to opt out.)

(4)  More Ways for Graduate Students to Fund IRAs
The bill would allow students to contribute taxable stipend or fellowship payments to an IRA, something that’s not currently possible.

(5)  Pooled 401(k) Plans
For years policy makers have tried to make retirement-savings plans more attractive and affordable to small businesses, many of which have no plan at all. About one-half of private-sector employees, many of whom work for small companies, lack access to a workplace retirement plan. Under one measure before Congress, small employers would be able to more easily band together to spread out the administrative costs of 401(k) plans. The proposal would eliminate a requirement that employers have a connection, such as being members of the same industry trade group, in order to join a so-called multiple-employer plan. Congress is also considering expanding a tax credit available to small companies to offset the costs of starting a new retirement plan. The annual credit amount would increase from $500 to as much as $5,000 for three years.”

Credit given to Anne Tergesen, WSJ
Saturday/Sunday July 21-22, 2018

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This week’s author – Mark Bradstreet, CPA
–until next week.

Tax Tip of the Week |Offshore Tax Cheats – The IRS is Still Coming for You March 6, 2019

Posted by bradstreetblogger in : General, tax changes, Tax Tip, Taxes, Taxes, Uncategorized , add a comment

Having an offshore account is not illegal, provided the accounts are in compliance with U.S. tax laws which include appropriate disclosure. And, yes, you can get into serious trouble for failing to attach the appropriate forms to your income tax return. So, please be certain to advise your tax preparer of any foreign assets you may have. But, where things get really dicey, is the situation of using these “secret” accounts to hide your money and not paying any income tax (offshore tax evasions is a criminal act). More details from Laura Saunders follow.

  • Mark Bradstreet

“Hiding money from the U.S. government is a lot harder than it used to be.  

On Sept. 28, the Internal Revenue Service will end (now ended) its program allowing American tax cheats with secret offshore accounts to confess them and avoid prison. In a statement, the IRS said it’s closing the program because of declining demand.

But the agency vowed to keep pursuing the people hiding money offshore and said it will offer them another route to compliance.

What a difference a decade makes.

Before 2008, an American citizen could often walk into a Swiss bank, deposit millions of dollars, and walk out confident that the funds were safe and hidden from Uncle Sam, says Mark Matthews, a lawyer with Caplin & Drysdale who formerly helped the IRS’ criminal division.

Now he says, “Americans hiding money abroad have to go to small islands with sketchy advisers and less reliable financial systems.”

The reason:  a historic crackdown on the longstanding problem of U.S. taxpayers hiding money offshore, U.S. officials ramped it up after a whistleblower revealed that some Swiss banks saw U.S. tax evasions as a profit center and were sending bankers onto U.S. soil to hunt for clients.

The defining moment came in 2008, when Justice Department prosecutors took Swiss banking giant UBS AG to court and managed to pierce the veil of Swiss bank secrecy. In 2009, UBS agreed to pay $780 million and turn over information on hundreds of U.S. customers to avoid criminal prosecution.

The Justice Department repeated the UBS strategy, with variations, for scores of other banks and financial firms in Switzerland, Israel, Liechtenstein and the Caribbean. So far, institutions have paid about $6 billion and turned over once-sacrosanct customer information. More major settlements are still to come.

Prosecutors also successfully pursued more than 150 individuals hiding money abroad. Some defendants earned jail time, and many paid dearly – a total of more than $500 million so far. Dan Horsky, a retired business professor and a startup investor, appears to have handed over the largest amount: $125 million for hiding more than $220 million offshore.  

In many cases, a taxpayer can owe a penalty of half a foreign account’s value, if it’s greater than $10,000 and it’s not reported to the Treasury Department. Ty Warner, the billionaire creator of Beanie Babies plush toys, paid $53.6 million for hiding an account with more than $100 million.

The IRS capitalized on tax cheats’ fears of detection with its Offshore Voluntary Disclosure Program, the limited amnesty that’s ending. It hit confessors with large penalties in exchange for no prosecution. Since 2009, more than 56,000 U.S. taxpayers in the program have paid $11.1 billion to resolve their issues.

To be sure, the U.S. crackdown hasn’t reached everywhere – notably Asia.

Edward Robbins, a criminal tax lawyer in Los Angeles formerly with the IRS and Justice Department, attributes the enforcement gap to the widespread use of human beings, rather than structures like trusts, to shield account ownership in Asia.

“In the Far East, individuals often use other individuals who use other individuals to hold assets. Finding the true owner is a tough nut to crack, unlike in the West,” he says.

The crackdown also had drawbacks, making financial life difficult for many of the roughly 4 million U.S. citizens living abroad. Unlike most countries, the U.S. taxes citizens on income earned both at home and abroad. Often expatriates were stunned to find they could be considered tax cheats under the expansive U.S. Law and that compliance would be onerous.

In reaction, more than 25,000 expats have given up U.S. citizenship since 2008, with some paying a stiff exit tax. Others are working to get Congress to change the taxation of nonresidents.

For expats and others, the IRS now offers a compliance program with lesser penalties, or none, for offshore-account holders who didn’t willfully cheat. About 65,000 taxpayers have entered the program and the IRS says it will remain open for now.

Current and would-be tax cheats should take seriously the IRS’s vow to keep pursuing secret offshore accounts, says Bryan Skarlatos, a criminal tax lawyer with Kostelanetz & Fink who has handled more than 1,500 offshore disclosures to the IRS.

Although the IRS’s staffing is way down, he says, the agency and the Justice Department have far better tools for detecting and combating evasion than 10 years ago.

Among these agencies’ tools are the Fatca law, which requires foreign firms to report information on American account holders.This law is providing the IRS with streams of useful information it’s using in prosecutions.This week brought the first guilty plea for a violation of Fatca rules by a former executive of a bank in Hungary and the Caribbean.

The IRS is also mining data from foreign bank settlements and whistleblower information. The payment of $104 million to UBS whistleblower Bradley Birkenfield, apparently the largest ever, has inspired other informers.

To detect clusters of cheats, U.S. officials now can use a “John Doe summons” to force firms to release information on a class of customers suspected of evading taxes – even if their identities aren’t known, and even if the information isn’t in the U.S.

This strategy has been so successful that the IRS has broadened its use to identify possible tax cheats using cryptocurrencies.

“More than ever, there’s no place to hide,” say Mr. Skarlatos.”

Credit given to Tax Report, Laura Saunders, WSJ, September 15-16, 2018

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We may be reached in our Dayton office at 937-436-3133 or in our Xenia office at 937-372-3504. Or, visit our website.

This Week’s Author – Mark C. Bradstreet, CPA

-until next week