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Tax Tip of the Week | When The Questions Are The Answers June 26, 2019

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

Let’s take a break from tax topics this week. Yes, even I sometimes get tired of talking about income taxes. So, the topic this week is about leadership. All of us lead someone. Of course, the most important person to lead is yourself. And, as the old saying goes, if you can’t lead yourself then how can you lead someone else?

True leaders don’t give out answers. Often, they don’t know the answers. But the good leader knows their staff has inside them the answers that they seek. Good questions from a good leader help reveal these answers.  

This is further explained along with some examples in the following WSJ article, To Be a Better Leader, Ask Better Questions written by Hal Gregersen. It was published on Tuesday, May 14, 2019.  

                               -Mark Bradstreet

It is often said that the definition of insanity is doing the same thing over and over, and expecting a different outcome.

Well, the same can be said of questions: Keep asking the same kind of question, and it is insane to think you are going to get a different kind of answer.

If you want a dramatically better answer, the key is to ask a better question.

In that one simple statement I have found a career’s worth of research, teaching and advisory work. No one raises an objection when they hear it—who could argue with the value of brilliant reframing? But at the same time, that statement alone is rarely enough. Most people want to be handed the five paradigm-smashing questions to ask.

Unfortunately, that isn’t possible. But what is possible is creating the conditions where the right questions are more likely to bubble up. To that end, here are some clear, concrete, measurable steps that any boss—or anyone, for that matter—can take to come up with those paradigm-smashing questions we all seek.

1. Understand what kinds of questions spark creative thinking.

There are lots of questions you can ask. But only the best really knocks down barriers to creative thinking and channel energy down new, more productive pathways. A question that does has five traits. It reframes the problem. It intrigues the imagination. It invites others’ thinking. It opens up space for different answers. And it’s nonaggressive—not posed to embarrass, humiliate or assert power over the other party.

One CEO I know is aware that his position can get in the way of getting honest information that will challenge his view of things. Instead of coming at his managers with something like, “Competitor X beat us to the punch with that move—how did we let that happen?” he gets more useful input with questions like, “What are you wrestling with and how can I help?” He asks customers and supply-chain partners: “If you were in my shoes, what would you be doing differently than what you see us doing today?”

Think about how these questions change the whole equation. People don’t start off defensive. The problem isn’t already tightly framed. The questions are open-ended, and the answers can be imaginative—rather than telling the boss what he wants to hear.

If you want to turn this first point into a trackable activity, how about this: Start noting in a daily diary how many questions you’ve asked that meet the five criteria.

2. Create the habit of asking questions.

Many bosses simply aren’t used to asking questions; they’re used to giving answers. So, in the early stages of building your questioning capacity, it’s helpful to start by copying other people’s questions. It’s the equivalent of practicing your scales. Once you’ve got the scales down, you can start to improvise.

You could do worse than to follow the questions asked by management thinker Peter Drucker, who liked to jump-start strategic thinking by asking: “What changes have recently happened that don’t fit ‘what everyone knows’”?

Another example: A leader in a consumer packaged-goods company constantly asks: “What more can we do to delight the customer at the point of purchase? And what more to delight them at the point of consumption?”

Again, think about what that does. Sure, the CEO could constantly repeat that the company wants to satisfy consumers. But by asking this question, it builds the habit of thinking in questions. And that, in turn, leads to daily inquiry about matters large and small, and an organization that keeps pushing its competitive advantages forward.

3. Fuel that habit by making yourself generate new questions.

Don’t stop with that generic question set, no matter how well you think it covers the bases. It will become just another activity rut reinforcing today’s assumptions if you and others become too familiar with it. Your goal is to generate new and better questions, not to cap your questioning career at the level of playing flawless scales.

New Perspectives, New Solutions

If you or your team are stuck on a problem, stop and spend four minutes generating nothing but questions about it. As in brainstorming, go for high volume and do no editing in progress. This will often yield a new way to look at the challenge and at least one new idea to solve it. Here’s an example of a question burst:

Instead, every day, note something in your environment that is intriguing and possibly a signal of change in the air. Then, restrain yourself from issuing a comment on it—or if it’s your habit, a tweet—and instead take a moment to articulate the questions it raises.

Then share the most compelling of those questions with someone else. Engage with it for a minute. To some extent, this is doing “reps,” exercising your questioning muscles so they’ll be strong enough when the occasion demands. But it’s also more than that, because chances are it will actually be one of these many, seemingly small, questions that yields your next big breakthrough.

Let me offer a well-known example. Blake Mycoskie was in Argentina when by his account he noticed a lot of children running around barefoot. He didn’t need to ask why they didn’t have shoes—obviously they were poor—but here’s the question it brought him to: Is there a sustainable way to provide children with shoes without having to rely on donations? And thus, he launched the social enterprise Toms, with its famous “one-for-one” business model.

4. Respond with the power of the pause.

When someone comes to you with a problem, don’t immediately respond with an answer. This is harder than it sounds, because you have probably internalized a sense long ago that you’re the boss because you’re decisive and have good judgment—in other words, you have the best answers.

Instead, make it your habit to respond with a question—ideally one that reframes the problem, but at least one that draws out more of your colleague’s thoughts on the matter. I’m not talking about the cop-out rejoinder of, “Well, what do YOU think we should do?” Help the person think through how the decision should be made, with questions like: “What are we optimizing for?” “What’s the most important thing we have to achieve with whatever direction we take?” Or: “What makes this decision so hard? What problem felt like this in the past?”

The payoff here comes in two forms. You’re teaching the colleague the value of pausing to get the question right before rushing to the answer. And nine times out of 10, you’re going to wind up with a better answer than the one you would have blurted out with less deliberation.

5. Brainstorm for questions.

This is an idea that is so simple, and involves an exercise so fast, that it constantly surprises me how effective it is. Whenever you or your team is at an impasse, or there is a sense that some insight is eluding you regarding a problem or opportunity, just stop and spend four minutes generating nothing but questions about it. Don’t spend a second answering the questions, or explaining why you posed a certain one. As in brainstorming, go for high volume and do no editing in progress. See if you can generate at least 15-20.

Eighty percent of the time, I find, the exercise yields some new angle of attack on the problem, and it virtually always re-energizes people to go at it with renewed gusto.

Here’s an example from an innovation team in a consumer-goods company. Struggling to come up with a new concept to test, we tried one of those question bursts. It started with, “What if we launched a response to [a competitor’s product] and did it better?” But soon enough it arrived at, “Are we stuck on assuming a certain price range? What if a customer was willing to give us 10 times that—what could we deliver that would be that valuable to them?” Bingo—the team zeroed in on that question as having real juice in it, and started generating more exciting ideas.

6. Reward your questioners.

Finally, keep track of how you respond when someone in the room asks a question that challenges how you’ve been approaching a problem or feels like it threatens to derail a solution train already leaving the station.

I remember hearing from executives at one company that the boss always surprised his top team by being willing to hear out even the craziest ideas. When others in the room were shaking their heads and hastening to move along, he would be the one to say, “Wait, say more…” to find the part of that flight of fantasy that could work.

If there’s one constant theme here, it’s the idea that bosses should reconceive what their primary job is. They aren’t there to come up with today’s best answers, or even just to get their teams to come up with them. Their job is to build their organization’s capacity for constant innovation.

Their enterprise’s future—and their own career trajectory—depends on their resolve to ask better questions.

Credit given to By Hal Gregersen. Dr. Gregersen is executive director of the MIT Leadership Center, a senior lecturer at the MIT Sloan School of Management and author of “Questions Are the Answer.” He can be reached at reports@wsj.com.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. 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 | IRS Audits June 19, 2019

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

No one in their right mind would welcome an IRS audit. However, sometime during your life, you may expect to have an IRS audit of some sort, even if only a correspondence audit. Other types of IRS audits include what they call a field audit which occurs at your place of business and an office audit which occurs at the IRS office. From time to time, clients will mention to me that they don’t fear an audit because they have done nothing wrong and have all of the necessary substantiation. Even, in the best of cases, audits are no fun – they are ALWAYS a huge time suck for you and for your professional and, thusly, can be quite expensive.

A further note about correspondence audits – at least half of the tax notices you receive from the IRS are incorrect. Yet, too many taxpayers upon receiving a notice with a balance due simply send the IRS a check. Yes, the IRS loves people like that! Upon receipt of any IRS correspondence, please immediately relay it to your CPA for an appropriate review and response.

It is rare, but not entirely unheard of, for an IRS agent to appear at your home or place of business. If that were to happen and regardless of how friendly they appear your best response is typically very simple. Be polite and inform the agent your CPA will be handling the questions on your behalf. Then, give the agent the name and contact information of your CPA. Ask the agent nicely to call your CPA with any questions that they may have. The same is also true for the receipt of an IRS letter notifying you that your income tax returns are under audit. Get that letter to your accounting firm so they can handle the audit on your behalf. It is not in your best interest to speak to the IRS agent before, during or after the audit. That is the job of your professional.  

The below article written by Jane Hodges – HOW MUCH DO YOU KNOW ABOUT IRS AUDITS? was published in the WSJ on March 25, 2019. It provides further information on the IRS process.

                                          –    Mark Bradstreet

The Internal Revenue Service audits tax returns every year—striking fear in the hearts of many whose accidental or deliberate errors may have led them to underpay the U.S. Treasury.

While the prospect can be terrifying, very few returns are actually audited and many audits are resolved through correspondence. The volume of IRS audits has declined in recent years to 933,785 in 2017 from 1.56 million in 2011, according to IRS data. Some audits even result in a refund. Many, of course, result in tax liabilities.

Still, it never hurts to prepare taxes with care, save records and understand changing tax laws (or work with professionals who do) so your returns will be less likely to raise flags.

What follows is a quiz to help readers hone their smarts about IRS audits.

1. What does the IRS call an audit?

A) Audit
B) Examination
C) Tax year review
D) Tax interview

Answer: B. Audits are referred to as examinations, and a taxpayer being audited corresponds with or meets an “examiner” assigned to his or her case.

2. What percentage of returns were audited during 2017?

A) 0.5%
B) 1.5%
C) 3.8%
D) 6.2%

Answer: A. During fiscal 2017, the IRS audited 0.5% of the 196 million returns it received during the calendar year 2016. That was down from 0.7% the previous year.

3. How does the IRS choose which tax returns to audit?

A) It hires private investigators
B) It looks at tax returns associated with filers undergoing existing audits
C) Computer screening
D) It reviews those whose income has more than doubled in a 10-year period

Answer: B and C. The IRS looks at the company that audit subjects keep. “We may select your returns when they involve issues or transactions with other taxpayers, such as business partners or investors, whose returns were selected for audit,” it says in an FAQ about audits on an IRS website. It also uses random computer screening in which algorithms track “norms” for deductions and expenses relative to the filer’s income and other factors.

4. How does the IRS notify a person or business of an audit?

A) By letter
B) By phone
C) Through email
D) Via process server

Answer: A. The IRS typically notifies taxpayers of audits in letters citing what years are under examination and which deductions or aspects of the returns need verification, substantiation or discussion. Once the audit is under way, a representative may call, but the IRS doesn’t initiate audits over the telephone. If you get a call from someone claiming to represent the IRS and notifying you of an audit, it is likely a scam.

5. Where are audits conducted?

A) In an IRS office
B) At the taxpayer’s home or place of business
C) Via correspondence
D) At the office of an authorized representative (tax attorney, CPA, enrolled agent)

Answer: Any of the above, depending on the degree of the inquiry or where the taxpayer stores records or conducts business and other factors. The IRS generally makes the final determination.

6. What percentage of tax audits are conducted by correspondence?

A) 12.6%
B) 32.5%
C) 50.9%
D) 70.8%

Answer: D. During fiscal 2017, when the IRS examined tax returns for the prior year and before, some 70.8% of audits were conducted by correspondence.

7. How long does the IRS expect taxpayers to keep tax records?

A) Forever
B) Five years following the date a return is filed
C) Three years following the date a return is filed or two years from the date a tax is paid
D) Six years, or seven years if the taxpayer is writing off bad debt or worthless securities

Answer: C, and sometimes D. Generally, the IRS suggests taxpayers keep tax records for three years after filing a return or two years from the date they paid tax. In some circumstances, say, if you failed to report income, didn’t file a return, or were flagged for filing a fraudulent return, it’s advisable to keep records longer.

8. Which household income level experiences a 12.5% incidence of audits?

A) $125,000 or more
B) $200,000 or more
C) $250,000 or more
D) $1 million or more

Answer: D. According to Intuit, 1% of taxpayers earning $200,000 or less are audited. Beyond that, the more a taxpayer earns, the more likely an audit is. Some 4% of those earning more than $200,000 are audited, and 12.5% of those earning $1 million or more are audited.

9. When filing taxes, what form of filing is most error-prone, according to the IRS?

A) Electronic filing
B) Returns filed by mail
C) Returns filed from abroad
D) Returns that are filed after an extension request

Answer: B. According to IRS information provided to TurboTax, those who file a return by mail show a 21% incidence of errors, while those who file electronically show only a 0.5% incidence of errors. TurboTax does not cite a reason why online filers have less errors, but presumably online filing software runs math or does automatic calculations which could reduce math-related errors.

10. How far back does the IRS go when choosing returns to audit?

A) 2 years
B) 3 years
C) 6 years
D) 10 years

Answer: B and C. The IRS generally goes back no more than three years in choosing returns to audit, but if it finds a “substantial error,” the agency says it may go back as far as six years.

Credit Given to: By Jane Hodges. Ms. Hodges is a freelance writer in Seattle and has been audited. She can be reached at reports@wsj.com. This appeared in the March 25, 2019, print edition as ‘How Much Do You Know About IRS Audits?’

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. 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 | Whistle Blowers June 12, 2019

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

Aside from what I read in the newspapers; I know little about the world of the tax snitches. On the surface, it seems as though if you are in the right spot at the right time snitching can make you an easy buck. However, the article below explains some of the harsher realities of being a “whistle blower.”

THE PROFITABLE PROSPECTS OF SNITCHING FOR THE IRS was written by Laura Saunders. This article was published in the WSJ in their weekend edition, April 27-28, 2019.  

                                     –    Mark Bradstreet

These are boom times for snitches who turn in tax cheats to Uncle Sam.

The Internal Revenue Service awarded more than $312 million to tipsters last year, according to a little-noticed report released in February. This total far outstrips the previous record of $125 million awarded in 2012. The 2018 rewards, paid in the fiscal year ended Sept. 30, were for additional collected revenue of $1.4 billion, compared with $191 million in fiscal 2017.

And the agency has already paid $115 million to whistle blowers for 2019, according to lawyers Dean Zerbe, Jeffrey Neiman and Gregory Lynam. They expect more to come.

Some recent payouts have been huge.

Last year, one tipster was awarded about $100 million, nearly one-third of the total, for turning in a multinational corporation. The person, a client of Mr. Zerbe, wishes to remain anonymous—as nearly all whistleblowers do.

To date, the largest known IRS whistle blower award of $104 million went to Bradley Birkenfeld, a former private banker for UBS AG who did go public. His 2012 payment was for turning in the Swiss banking giant, which admitted it encouraged U.S. taxpayers to hide assets abroad.

The surge of recent awards shows that a key expansion of the IRS’s whistle blower program is finally taking hold. The change was enacted by Congress in 2006 and pays up to 30% of the revenue collected to tipsters in large cases, those involving more than $2 million of tax. For smaller cases, the payout has typically been a much smaller percentage.

“The large-awards whistle blower program is now hitting on all cylinders,” says Mr. Zerbe, a former aide to Sen. Charles Grassley (R., Iowa), who sponsored the change.

Despite the surge in awards, people who dream of being rewarded for turning in a neighbor with a new Mercedes but no job should consider the many hurdles they face.

For starters, the IRS rejects about three-quarters of whistle blower claims right away. Of the rest, about one in seven gets paid, says Mr. Lynam. The IRS had 29,000 whistle blower claims open in 2018, but many of them are likely to be rejected.

Last year, the IRS says it paid out 186 small-program awards totaling about $12 million. The explosive growth stems from awards in large cases, which rose to 31 last year from 19 in 2015 and totaled $300 million.

This surge is in part due to a favorable 2018 clarification of the law that raised payments in offshore-cheating cases. The IRS then paid out awards that had been in limbo.

Nearly all successful whistle blowers seeking large awards, and many seeking smaller ones, use specialized tax attorneys to prepare their submissions. Their fee is typically 25% to 40% of an award. The attorneys say the package for the IRS needs to include items such as account statements, internal memorandums, emails and perhaps even voice recordings.

Yes, voice recordings. One whistle blower had to wear a wire to get incriminating information—twice, because the device malfunctioned once. She and another person collected an award of nearly $18 million for submitting evidence that led a Swiss bank to plead guilty to encouraging U.S. tax evasion and pay $74 million.

“The key to getting an award is to give the IRS the case on a silver platter,” says Mr. Neiman.

IRS whistle blowers don’t have to be above reproach. The law doesn’t prohibit those convicted of wrongdoing from receiving awards unless they were architects of the cheating. Mr. Birkenfeld, for example, was convicted of conspiring to help a billionaire hide money in UBS accounts and served nearly 30 months in prison. He still got an award because he helped the Treasury recover billions of dollars. Award seekers with accepted cases must be patient. Getting an award often takes at least seven years, according to the 2018 report, and a payout in five years is considered “fast.”

Whistle blowers can receive large awards for reporting corporate cheating, fraudulent gift-and-estate transfers, or cheating by high-net worth individuals. But a big growth area involves reporting offshore cheating, such as by a foreign bank that has assured U.S. officials it has turned over information on all American clients when it hasn’t.

In such cases, says Mr. Neiman, a bank employee or other person can turn in the bank or the customers, collect an IRS whistle blower award, and still remain anonymous. IRS interest in these tipsters, especially from Asia, is on the rise even as its other offshore-enforcement programs have waned.

Whistle blowers who do get awards also owe tax, except for overseas tipsters from some countries. The tax is assessed on awards minus the attorney’s fee, at ordinary income rates—and it is usually withheld. 

Credit Given to: Laura Saunders

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. 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 | 529 Plans June 5, 2019

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

529 PLANS are confusing! And, that is an understatement…especially since on the surface they seem sooooooooo straightforward. But once you look behind the curtain one can start to see their turns and twists along the way with some far-reaching complications that are rarely considered. Personally, I think their tax savings feature is overrated in many cases…BUT having said that, I am not sure of many better ways to save for someone’s education including that of your grandchildren. American families currently have $329 billion in 529 Plans. Hopefully, these 529 Plans will reduce the need for students’ loans. That would be a blessing!  

Chana R. Schoenberger wrote the following article (The 6 Biggest Questions about ‘529’ Plans) for the WSJ as published on Monday, March 4, 2019.  

                                      –    Mark Bradstreet

Four years ago, we started answering readers’ questions on saving and paying for higher education, especially about how best to use tax-advantaged “529” accounts.

In all, we have answered more than 200 questions, with the help of experts. But readers’ questions continue to pour in, in part because the rules about 529s are so confusing—and keep changing. For instance, families are now allowed to use 529 money to pay for private K-12 schooling, not just college. And the Fafsa financial-aid process now looks back two years, not one, at student income when determining aid.

To mark this column’s fourth anniversary, we revisited six recurring 529 questions that we receive in readers’ emails. We asked two experts to help answer these greatest-hits questions: Michael Frerichs, the state treasurer of Illinois and vice chairman of the College Savings Plans Network, an association of state 529 plan administrators; and Mark Kantrowitz, the publisher and vice president of research at Miami-based Savingforcollege.com.

What is the advantage of 529s over other ways of saving for college?

Experts say that 529 accounts are still one of the best ways to save for college, mainly because of the tax benefits.

When you deposit money in a 529 account, it is considered a gift to the beneficiary. It grows tax-free in the account until you withdraw it for the beneficiary’s qualified educational expenses, which can include tuition, room and board, a computer and certain expenses. If you follow these rules, you don’t incur any tax, state or federal, on withdrawals. Some states also offer tax deductions or credits for investing money in a 529, Mr. Frerichs says. (In some cases, residents must invest in their own state’s plan; other states confer these benefits on any resident contributing to any plan.)

There are other benefits. Anyone can contribute, putting in up to $15,000 annually before paying taxes. You can also pre-fund an account, putting in up to $75,000 ($150,000 for married couples filing jointly) at one time and choosing to use up to five years’ worth of your annual pretax limit, Mr. Frerichs says.

What’s more, “most plans have very low minimum-contribution limits, and most accounts are protected from creditors’ claims in bankruptcy, making them attractive to families regardless of income level,” says Mr. Frerichs.

If my child ends up not using all the money in the 529 for educational purposes, how can we withdraw it or use it?

This is one of the most advantageous features of a 529 account: “There is no time limit on when the money in a 529 plan must be used, so you could just keep the money in the 529 plan account, earning tax-free returns,” Mr. Kantrowitz says.

Your child may wish to go to graduate school later on. You also have the option to switch the beneficiary of the account to any of the original beneficiary’s direct relatives, including siblings, cousins or even yourself.

“You don’t need to be pursuing a degree or certificate, so you can use 529 plan money to pay for continuing education,” Mr. Kantrowitz says.

If you leave the money in the account, your grandchildren could one day use it—even if they aren’t yet born today.

“A 529 plan is a great way of leaving a legacy for future generations,” he says.

If you choose to take the money out of the account without using it for qualified educational purposes, you will incur a 10% federal penalty on the gains portion of any withdrawals, plus federal and state income tax on gains, says Mr. Frerichs. Some plans may also charge extra fees or penalties if you withdraw money in this manner, he says.

You won’t have to pay the penalties if you withdraw the money because your child has received a scholarship or because you’re using the American Opportunity Tax Credit for higher education, Mr. Kantrowitz says. But you may have to repay any state-tax benefits you’ve received if you make a nonqualified withdrawal.

What is the best way to have a 529 account for financial-aid purposes: owned by the grandparents or owned by the parents?

“From a financial-aid perspective, it is generally better to have a 529 plan be owned by the student’s parents than the grandparents,” Mr. Kantrowitz says. You can work around this, but it is complex.

The key here is understanding the way that financial aid is computed. Most colleges use the federal government’s standardized Fafsa (Free Application for Federal Student Aid) online application to decide how much money a family can afford to pay for college—the Expected Family Contribution, or EFC—and how much they will need in scholarships or loans. (Some colleges use a different form, the CSS Profile.)

$329 billion?

The amount that American families have in ‘529’ plans, or an average $24,153 an account.

—College Savings Plans Network

“The smaller the percent value included in the EFC, the greater the potential financial aid,” Mr. Frerichs says.

Colleges make this decision by scrutinizing a family’s income and assets as well as their obligations, such as the number of other children they have in college. When they look at 529s, they note the ownership of the account. If a parent owns the account, or if it is a custodial 529 with the parent as custodian, the account is considered at 5.64% of its value. That is much lower than an account the student owns outright, such as an UGMA or UTMA savings or brokerage account, which would be considered at 20%, Mr. Frerichs says.

If anyone else owns the 529 account, whether it is a grandparent or any other person, that account doesn’t show up on the FAFSA as an asset at all. But when the student begins withdrawing money from the account to pay for school, the money is considered untaxed income on the following year’s FAFSA. That will cut financial-aid eligibility by as much as half of the withdrawal, Mr. Kantrowitz says.

For instance, he says, $10,000 in a parent-owned 529 plan might reduce aid eligibility by as much as $564, which is a lot less than the $5,000 reduction in financial aid for $10,000 in a grandparent-owned 529 plan when the student begins making withdrawals.

If you have a grandparent-owned account and want to get around this problem, there are some fixes. You can switch the account owner to the parent, although some plans don’t allow this unless the original owner has died.

You can wait until you’ve filed the FAFSA, then roll over a year’s worth of distributions from your grandparent-owned 529 into a parent-owned one in the same state’s plan (otherwise, you risk sparking state-tax consequences).

“If you wait until after the FAFSA is filed and use the money before the next FAFSA, it will have no impact on aid eligibility,” Mr. Kantrowitz says.

You can also withdraw money for a qualified expense after Jan. 1 of the student’s sophomore year (if the student plans to finish in four years; otherwise, do this two years before the student intends to graduate). The FAFSA looks back two years, so this will mean that the grandparent-owned plan won’t affect financial aid for college at all. However, this strategy won’t work if the student plans to apply for financial aid for graduate school right after finishing college, he warns.

You always have the option to take the money out of a grandparent’s 529 after college is finished and use it to pay off student loans, but that is an unqualified expense, so expect to pay the penalties and taxes on the earnings portion, he says.

How can we maximize our child’s eligibility for financial aid while still saving as much as we are able to pay for college?

Your best bet here is to use a 529 with the parent as the owner and the student as the beneficiary. “In particular, the money is reported as a parent asset on the FAFSA, so you’re no worse off from a financial-aid perspective than if you had saved in a taxable account in the parent’s name, though you do have significant tax savings,” Mr. Kantrowitz says.

One way to save for college without any impact on financial aid is to open a Roth IRA or qualified annuity in the student’s name. These are treated like grandparent-owned 529s: They’re not counted as assets on the FAFSA, but once you withdraw money to pay for college, it is considered untaxed income to the student, and counted at up to 50%, even if your withdrawal is a tax-free return of Roth IRA contributions, Mr. Kantrowitz says.

The benefit of a Roth IRA for this purpose is it hedges against the possibility that your student won’t go to college; this way, at least you’ll have started saving for the student’s eventual retirement in a tax-advantaged manner.

If your student comes into a large amount of money suddenly, and you’d like to get it out of the FAFSA’s view, annuities are the easiest way. Qualified annuities are ignored as assets on the Fafsa.

“Or invest the money in a small business that is owned and controlled by the family, taking advantage of the small-business exclusion on the Fafsa,” Mr. Kantrowitz says.

Note that these considerations don’t mean that you are better off not saving for college, on the hope that the college will give your student a scholarship. Scholarships are unusual, and full scholarships extremely rare. If you want to avoid student loans, to the extent possible, you should save as much as you can, even if it means your EFC is a bit higher than it would otherwise be.

“It is important to note that saving for college is highly beneficial and will have very limited impact on any potential financial aid,” Mr. Frerichs says.

Is it advisable to use 529 money for K-12 schooling, or should we save it for college?

It is certainly your option, under the new tax law, to use the money for private kindergarten-to-12 tuition and some expenses (though some states aren’t yet conforming to that federal change, as far as state taxes). But this negates the main benefit of 529s.

“529 plans are most attractive to parents because they can save for a longer period of time and prepare for the rising costs of higher-education expenses,” Mr. Frerichs says.

Some people think that sending their children to private school will help their chances of winning a college scholarship. But that is only partially true, Mr. Kantrowitz says. Private-high-school graduates win on average about $1,000 more in scholarships to college, but they’re also more likely to enroll at private colleges, which are more expensive than public colleges. This means that spending family 529 money to pay for private school won’t necessarily mean that the student will face smaller tuition bills for college.

Because your earnings will compound over time, you should start by saving for college first so your money will have time to grow, he says. You would also want a different mix of investments for K-12 school and for college, since you might wish to downshift the riskiness of your investments as tuition bills get closer. If you choose to use 529 money for a K-12 school, you might consider opening two separate 529 accounts for your student, so you can change the investment mix, Mr. Kantrowitz says.

The Savingforcollege.com site has a calculator you can use to explore the trade-offs.

What are the consequences if I change the owner of a 529 account?

Most plans permit the owner to name a successor in case of death, and some also allow a joint account owner.

If your plan permits you to change ownership, note that such a change might affect your student’s eligibility for financial aid (see question above). The owner is the person who holds full control over the beneficiary’s money in the account, so be careful to choose an owner you trust if it isn’t yourself, Mr. Kantrowitz says.

For plans that don’t allow ownership changes, you could roll over the balance of your 529 into a different 529 for the benefit of the same student or a member of the beneficiary’s family. It is also possible to do this manually, by taking a distribution from the original account and contributing it to another account within 60 days, Mr. Kantrowitz says. You may need to locate both accounts in the same state for tax purposes.

Be careful that the new account represents the rollover money correctly, with the new statement showing what money you contributed and what was gains, he says.

Credit Given to:  Chana R. Schoenberger. Ms. Schoenberger is a writer in New York. She can be reached at reports@wsj.com. This appeared in the March 4, 2019, print edition as ‘What You Need to Know About the New Tax Law and The 6 Biggest Questions About ‘529’ Plans.’

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. 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 | Real Estate – Tax Basis April 24, 2019

Posted by bradstreetblogger in : Depreciation options, General, Section 168, Section 179, tax changes, Tax Tip, Taxes, Uncategorized , add a comment

In an earlier Tax Tip, different tax categories of real estate were briefly discussed. This week we will discuss how a tax gain or loss is treated upon sale by the various classifications as listed below:

1.    Principal residence – Your gain (loss) is calculated by subtracting your tax basis from your sales price. Your tax basis starts with your original cost, adds in any qualifying improvements, and includes most of the selling expenses you incur when sold. Provided certain tests are met, gain is excludable up to $500,000 on a joint return, or $250,000 for a single filer. Exception: Any depreciation taken after May 6, 1997 is usually taxable. Depreciation may have been taken on an office in the home or any business usage. Any loss upon the sale of a personal residence in non-deductible.

2.    Second home – Your tax basis is calculated in the same manner as a personal residence. Any gain is taxed as capital gain. No exclusion is allowed as with a personal residence. No one may designate more than one property as a personal residence. Just as with a personal residence, any loss upon the sale of a second home is non-deductible.

3.    Rental property – The tax basis is calculated in the same manner as a personal residence with one major exception.   Because rental properties are depreciated over time, basis has to be reduced by the depreciation allowed or allowable. Any gain on the sale of a rental property is taxed as capital gain. However, the gain attributable to the depreciation taken could be taxed as high as 25%. This in known as Section 1250 recapture. Any excess gain is taxed as normal capital gain with a maximum rate of 20%. A loss on the sale of a rental property is normally deductible as an ordinary loss (not subject to the $3,000 per year net capital loss limitation).

4.    Investment property – Depreciation is not normally allowed on investment property. A loss is deductible to the extent of capital gains plus $3,000 per year for joint or single filers, and $1,500 per year for a married filing separate return.

5.    Business property – Same as rental property above if owned individually.

6.    Gifted property – Your tax basis in a property received as a gift is the same as the basis was in the hands of the giver.

7.    Inherited property – Your tax basis in an inherited property is generally the fair market value of the property as of the date of death of the decedent, commonly called a “stepped-up basis”.

As noted above, gains and losses are often treated very differently depending upon the type of property. Please understand what your type of property is and that its character may change for a variety of reasons including your intentions. Being able to substantiate all of this may be important.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. 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 – Norman S. Hicks, CPA

–until next week.

10 Tips for Tiger Woods (Professional Athletes) and the New Tax Law April 17, 2019

Posted by bradstreetblogger in : Business consulting, Depreciation options, General, tax changes, Tax Planning Tips, Tax Tip, Taxes , add a comment

The odds are good that this Tax Tip of the Week won’t reach more than a handful of professional athletes and maybe not even that many. Regardless, in the world of tax, many similarities exist between a professional athlete and an employee who travels around the country. Sadly, those similarities are the only things that I will ever have in common with the likes of Tiger Woods, Lebron James, Stephan Curry and Tom Brady. The commentary below was taken from an article dated April 23, 2018 by Travis Tandy who is a staff accountant with Ferguson, Timar & Co in Fullerton California. As you read through this article, please note that the tax laws are no different for you than for a professional athlete, especially if your job necessitates travelling between various taxing entities and you have been itemizing your deductions in the past.

                                                        – Mark Bradstreet

Whether you’ve provided tax and accounting services for professional athletes in the past or are just getting started, you’ll want to pay special attention to these 10 key issues that are unique to this type of client. Adding to the special circumstances these athletes have faced in the past year is the new tax law. Many business expenses that are common among professional athletes are no longer deductible or are limited. Tax planning opportunities abound for this type of client as we all sort through the ramifications of the new Tax Cuts and Jobs Act. Here are some of the many things you’ll face.

1. Jock Tax: Under the terms of what is commonly called the “Jock Tax,” athletes must report their income in each state in which they play. An additional challenge from a tax planning standpoint is player trades during the year. We may set up a tax plan, only to have the player traded to a different state or team in which they will play in an entirely different set of states.

2. Residency: Establishing residency can be most challenging for rookie players. Rookies are often young and unestablished outside of their parents’ home state. Veteran players have the benefit of choosing a permanent residency based on their tax situation. The key is to establish residency in a favorable county near the home stadium. Establishing residency can be done simply by finding a living space, obtaining a driver’s license in that state and setting up utilities in the player’s name. Many players choose states like Florida, Texas, and Washington that have no state tax requirements.

3. Charitable Giving/Non-profit: Players can take advantage of their status to help others through charitable giving. This allows them to support a cause close to their heart. You can help by explaining the value of maximizing charitable donations.

4. Agent Fees & Unions Dues: As of the tax year 2018, union dues and agency fees directly related to the generation of W-2 income no longer qualify as an itemized deduction. Rookie players have minimum dues exceeding $17,000 per year and agent fees of around 3%. These once-deductible items will need to be removed from the player’s tax plans moving forward, or different tax structures need to be explored. However, we are working diligently to review the NFL Collective Bargaining Agreement in conjunction with the new tax laws in hopes of changing the way this is handled.

5. Player Fines: Nobody wants to see a situation where a player does something to generate a fine against them. The fines are often donated in the name of the player, turning the fine into a tax deductible expense to the player. Fines not donated to a charity may be considered a necessary and ordinary business expense to the player, subject to new and limiting tax rules.

6. Athletic Equipment: Footballs, golf clubs, tennis rackets, racquetball rackets, basketballs, etc. are considered ordinary and necessary for the player to continue to play at a high level, and to maintain their employment with their team. Again, new tax rules cause us to reexamine the nature of this former itemized deduction. Look for professional athletes to start incorporating themselves to take advantage of more favorable tax provisions.

7. Royalties: Royalties can sometimes be a difficult issue with athletes. Most are unsure of the amount due to them through the year, making tax planning for royalty income a difficult task. Royalty deals also come and go based on player performance. A fluctuation in a multi-million dollar royalty deal can really change the outcome of the player’s tax situation.

8. Unknown increased salaries: It doesn’t happen all that often, but a veteran player may get sent to the injured list for the season. This means a lower paid backup player will be used to replace the player. Players moving from the bench to a starting position receive a significant increase in pay. This can cause a change in their current tax rate and plan.

9. Signing bonuses: The benefit of a signing bonus all comes down to the form in which the bonus is paid out. If the bonus is paid out properly by the league, it may not need to be included in state income.

10: Taxable Swag: Gifts or swag given to players is not truly a gift and it actually comes with a price tag. The items are almost always given in connection with an appearance or as a bonus for the player’s appearance. Unfortunately, the IRS will want a cut of that swag in the form of a tax payment. These fortunate events create additional taxable income for the players often overlooked in the excitement and lack of notice from the agency providing the swag.

Thank you for all of your questions, comments and suggestions for future topics. As always, they are much appreciated. We also welcome and appreciate anyone who wishes to write a Tax Tip of the Week for our consideration. 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 | Mortgage and Real Estate Scams April 10, 2019

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

Computer hackers/cyber-terrorists are drawn to money like moths to a flame. And, significant monies exist in the mortgage and real estate industries. These types of transactions often involve very large sums of money. Since most people purchase and finance real estate transactions only on a sporadic basis they tend to be very trusting not knowing anything differently. Also, many of these financial institutions have streamlined their process via the internet in an effort to reduce their own expenses. This streamlining opens the doors to the criminals who may even be working for another country. Clicking on this link and that link and not knowing what is really behind the curtain is dangerous. Don’t just assume the email addresses, accounts numbers, and phone numbers that were emailed or called to you are correct. This is true not only for those individuals that are not computer and internet savvy but for the general public as a whole. There is nothing ever wrong with sitting down across the table with your representatives from your financial institution and getting their assistance. Monies that have been incorrectly wired to another country are typically irretrievable. You cannot be too careful!

The accompanying article offers further valuable information. 

                                By Mark Bradstreet

The last thing consumers should have to worry about is being scammed when they buy or rent a home, or consider refinancing options. Unfortunately, criminals are getting more creative in how they target their victims, leading to major financial headaches for their unsuspecting victims.

In 2017 alone, 9,645 victims reported real estate fraud, resulting in losses of more than $56.2 million, according to data from the Federal Bureau of Investigation’s Internet Crime Complaint Center.

Many people are too embarrassed to file complaints, making it harder to catch the scammers who repeatedly victimize unwitting homeowners and homebuyers, says Melinda Opperman, executive vice president of community outreach and industry relations with Credit.org — a nonprofit credit counseling agency and member of the National Foundation for Credit Counseling, or NFCC.

“It’s a huge problem,” Opperman says. “A lot of the time, people don’t realize that using public Wi-Fi connections where they conduct personal business through email or websites opens them up to [these scams] because the communications are not secure.”

Here are four common real estate and mortgage scams to keep on your radar — and tips to avoid becoming a scammer’s next victim.

1. Escrow wire fraud

What it looks like: You get an email, phone call or text from someone purporting to be from the title or escrow company with instructions on where to wire your escrow funds. Fraudsters set up fake websites that appear similar to the title or lending company you’re working with, making it seem like the real deal. Scammers use spoofing tactics to make phone numbers, websites and email addresses appear familiar, but one number or letter is off — an easy thing to miss at first glance, Opperman says.

So you follow the wire instructions and assume all is well when, in fact, you’ve just become the latest victim of escrow fraud. The scammers? They’ve withdrawn the funds from an offshore account somewhere and are sailing into the sunset with your hard-earned money. Meanwhile, you have few options for retrieving it.

How to protect yourself: Before you send money to a third party, go back to the original documents you received from your lender and call the phone numbers listed there to verify the wiring instructions you received. Never click on email or text links, or send money online, without verifying wire instructions with a live person on the phone from a number that you’ve called and verified, Opperman says.

Be wary of any email or text requesting a change to wiring instructions you already have, says Odeta Kushi, senior economist with First American Financial Corporation. Always confirm the escrow account number before wiring money, and call your settlement agent to verify the transfer of the funds immediately after you’re done, she advises.

2. Loan flipping

What it looks like: Loan flipping is when a predatory lender persuades a homeowner to refinance their mortgage repeatedly, often borrowing more money each time. The scammer charges high fees and points with each transaction, and homeowners get stuck with higher loan payments they can’t afford after being duped into borrowing most of their home’s equity, Opperman says.

Seniors with memory impairment are especially vulnerable to these scams because they have significant home equity and may not realize they’re being taken advantage of, Opperman says. Predatory lenders convince homeowners they can help them find a better loan product or use a cash-out refinance to pay for home renovations to make their homes more accessible as they age in place, Opperman says.

How to protect yourself: Elderly homeowners who have cognitive issues should involve a trusted relative or friend in any key financial discussion, especially about tapping home equity. If you’ve recently completed mortgage refinance, it’s usually not in your best interest to do another transaction right away, Opperman says.

If predatory lenders are actively seeking you out and you haven’t requested their help, that’s another warning sign that something is off. Work only with known banks or lenders, and question all fees and penalties presented to you, Opperman says. Lenders are required to provide loan estimates and closing disclosures that list all fees and third-party costs; review these documents carefully, or have a trusted advisor do this, if you are refinancing your mortgage.

3. Foreclosure relief

What it looks like: People who fall on hard times and get behind on their mortgage payments can become desperate to save their homes. That’s when scammers, who have access to public records of homes in pre-foreclosure, swoop in with offers of foreclosure relief to capitalize on homeowners’ vulnerability, Opperman says.

“Scammers will claim that they can help homeowners save their homes and reduce their mortgage payments for a large, up-front fee,” Opperman says, “but they often leave our clients in worse financial shape.”

Some fraudsters claim they’re affiliated with the government or government housing assistance programs, and can swindle homeowners out of hundreds or even thousands of dollars in fees, according to the Federal Trade Commission, or FTC.

How to protect yourself: The best way to avoid foreclosure is to work directly with your loan servicer to modify your existing loan, request forbearance, or make some other arrangement. Homeowners can first enlist the help of a HUD-accredited housing counselor to see what options they have, then include their counselor on a three-way call to their lender to find solutions, Opperman says.

“A scammer will tell you not to talk to your lender, and that’s a huge red flag,” Opperman says. “It’s hard to speak to your lender when you’re in imminent default or become delinquent because you’re afraid it might speed up [losing your home]. But you have to open the lines of communication with your lender.”

4. Rental scams

What it looks like: Scammers post property rental ads on Craigslist or social media pages to lure in unsuspecting renters, sometimes using photos from other listings. The scammers, who have no connection to the property or its owner, will ask for an upfront payment to let you see the property or hold it as a deposit. In reality, they’re just looking to get quick cash through nefarious means.

Rental scams are alarmingly common. An estimated 5.2 million U.S. renters say they have lost money from rental fraud, according to a recent survey from ApartmentList. Younger renters are the likeliest victims, with 9.1 percent of 18- to 29-year-old renters having lost money on such a scam, compared with 6.4 percent of all renters, the survey revealed. And of those who did lose money to scammers, one in three lost more than $1,000, likely after paying a security deposit or rent on a fake rental property, ApartmentList found.

How to protect yourself: Be suspicious of anyone who asks for a cash deposit upfront to see a property, says Nicole Durosko of Warburg Realty in New York City. Ensure you’re dealing with the real property owner before negotiating rental terms or seeing a property in person. You can search the local property appraiser’s website to find out who the current property owner is and look for contact information online.

“Avoid doing transactions via email or on the phone,” Durosko says. “It’s best to be face-to-face to confirm the property ownership, sign any required documentation, and [make a] payment.”

Use a check (never cash) to make a payment so you have an automatic receipt of it, Durosko advises. Finally, always insist on speaking with the property owner before signing a contract or making a payment if someone says they’re representing the owner. If someone claims to be a real estate agent, ask to see their license and take a picture of it so you can confirm the information online through your state’s division of real estate licensing, Durosko says.

Next steps to take if you’re targeted

Trust your gut if something doesn’t feel right or seems too good to be true. Work with only professional lenders associated with local and/or national trade associations, and ask for referrals from family members and friends. If you’re an older homeowner (or a caregiver to someone who is), be on your guard when companies pressure you to tap your home equity.

If you suspect a scammer is trying to target you, don’t open any email links or respond to any messages. Instead, report the activity to your local police department. To report fraud, identity theft or financial scams, visit the FTC’s complaint website, click on the FTC Complaint Assistant icon, and answer the questions.

Credit given to:  DEBORAH KEARNS@DEBBIE_KEARNS JANUARY 16, 2019 in MORTGAGES (BankRate)

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 | 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 |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

Tax Tip of the Week | Sales Tax (Where You Have No Physical Presence) February 13, 2019

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

Sales Tax ( Where You Have No Physical Presence)

I would rather have an IRS audit than a sales tax audit for a multitude of reasons that I won’t bore you with. Just take my word for it! Too many taxpayers are more diligent with meeting their IRS tax compliance than with their sales tax requirements.  You better be diligent with both of these taxes or you have a lot to lose!

Excerpts from an article follows on South Dakota v. Wayfair, Inc., U.S. (2018).  As businesses increasingly use internet to sell, their sales tax compliance has become even more cumbersome and complex.

I have spared you a lot of history in this article and just shown the author’s FAST FACTS.  You may also go directly to the online article if you are interested in more details.

-Mark Bradstreet

Credit to Rich Molina, CPA, CPA Voice, The Ohio Society of Certified Public Accountant, Sep/Oct 2018

FAST FACTS:

1.    “Reversing precedent, the U.S. Supreme Court finally upheld a requirement that retailers withhold and remit sales taxes for purchases made by customers in states in which the retailers have no physical presence.
2.    South Dakota, like other states, experienced a substantial decline in tax revenues as more and more of its residents purchased goods and services online from out-of-state retailers.
3.    On a national level, states were losing $8-33 billion of tax revenue per year in uncollected sales taxes by out-of-state sellers. In addition, at the time the Supreme Court rendered the Quill decision in 1992, less than 2% of Americans had internet access while that number is 89% today.
4.    The court’s holding has evolved along with modern day commerce just as the court is finding itself having to adapt to new areas in other parts of the law, including privacy in the digital age.”

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.