Explaining the Pass-Through Income Anti-Abuse Rules in the House Tax Cuts and Jobs Act

An issue regarding taxes that deserve tax payer’s attention is the provision that lowers the rate for businesses that are classified as “pass-through.” Top marginal income remains at 39.6% and pass through the business income to remain at 25%. It is important to note that business income from C corporations are taxed two times. As for the pass-through businesses, such as sole proprietorships, S corporations and LLCs, only have one layer when it comes to taxation. This means that once the income has been passed, then it is passed. This single taxation makes the policy.

Because of this new tax cut, taxpayers are concerned and would prefer to recategorize their earnings as “business income” in order for them to get a rate cut that works for them and is also substantial. For a better example that can explain this situation clearly, an engineer can opt to provide his services as a contractor to his firm as opposed to working 8 to 5. This cuts his income tax liability. If this is the case, then he must pay the employer’s Medicare and Social Security. He could also adjust his contracting fees and the “cost” of this would be the amount the employer has to shell out to hire him.

This would benefit the engineer. For federal revenues, this is a bad deal. Tax collections decrease substantially but there is no economic activity that occurs. This results to the engineer having to carry the similar workload for less pay to bring home due to higher taxes.

As for the sole proprietorship scenario, if the entrepreneur receives taxable and ordinary rates on the wages, then she could benefit from the business income that is within the lower rate. It would be more practical to limit the amount of the wages received. In theory, the portion of the income that the entrepreneur receives is due to the wage income or the labor as well as some portion that is from the ownership and investment stake. The pass-through rate also provides the incentive for the place to generate as much income as possible and put this in the basket.

Lawmakers have also made it transparent that they must provide a cut in the taxes for the businesses. This is targeted mostly to small businesses. Economists can agree to this and also look into the tax-advantages of the C corporations that are taxed twice. The reductions also have to reach a lower minimum rate especially for the businesses that are regarded as “pass-through.” This also encourages the recategorization of the income of a substantial level.

There are three strategies that federal lawmakers can resort to which will solve specific problems that arise to drawbacks when it comes to taxes:

Method # 1:

Choose the formula that will determine the income that can be regarded as wages especially on the business owner’s tax return. This ensures that the income is still subjected to tax rates.

The idea is that the portion of the income is always attributed to the labor and the returns generate the capital for the business profits.

Advantages and Disadvantages

The method deducts the incentives that allow the employees to work as subcontractors, solely for the purposes of tax return. This limits the degree of entrepreneurs to reclassify their income from the overall wages to the profits of their business.

The disadvantage is that this is the tax preference that is likely to induce the least recategorization due to the fact that the entrepreneurs have to pay 70% of the income in the wages.

Another is that this is a blunt instrument that overcounts the business income and also undercount it for the others.

Method # 2

Excluding the owners and the businesses from the expected benefits of the pass through that are at the lower rates.

Advantages and Disadvantages

Attorneys, financial advisers and accountants, who are also regarded as professional service providers, incurs low returns to the capital and also the high returns of the labor, this can then receive the disproportionate advantage through the low pass rate. It is also absent from the sufficient guardrails. Another option to look at is to exclude these service industries from eligibility and to the lower pass-through rate.

It is also important to not note the non-neutral. This favors specific industries above the others but there is a wrong assumption that there is no return to the capital along with the businesses.

Method # 3

There are facts and circumstances that are determined to be holistic. There is also much income that is required to be set as wages.

Advantages and Disadvantages

This method lets the taxpayers show how much percentage of their income is from the business capital and how much of this is from the labor. The disadvantage is that the calculations for these rates are complicated.

For a number of pass through businesses, there is the rule of 70-30. This means that 70 percent is for the wage and 30 percent is allotted to the business income. This is by default. It also means that they can make the most out of the rate that is lower than 30% of the over-all income. This is said to be the derived amount from the returns and to the capital.

As for the businesses that believe there is an accurate assessment of the returns set to the capital, then there is the proof that this can show a depreciation and tangible capital of the business. This is also the purchase that is less than the MACRS depreciation. According to Applicable Federal Rates, this amount is multiplied by 8% and then added 7% to it. The income is usually greater than the 30% of the income in that year. The businessmen would pay lower than the pass-through of the income tax-rate on the specific amount. This is represented in the normal return on the investment.

Another impact is that there are professional business companies such as law and accounting firms that are excluded from the pass-through rate that is in the lower level. This means that the income they generate is preliminary subjected to the ordinary tax rates of the individual. These taxpayers are also able to prove that their businesses generate an income that is based on the property that is of an amount that is depreciated. This is subjected to the maximum rate that is lower and at its 25 percent.

It may sound a bit complicated, but these anti-abuse rules are actually a representation of an approach that is well-thought of with the intent to deal with this sensitive issue when it coms to taxes. Imposing weak rules could only open the opportunities for a certain group of taxpayers to recategorize their income.

How the rich goes around the tax bill’s break

The hallmark of the recently signed tax revamp is a breakthrough for small businesses that are regarded as “pass-through deduction.” This benefits the wealthy most of all, specifically President Donald Trump. To top this off, those who are earning high levels of income can easily skip the restrictions that the bill puts on the pass-throughs.

The target of this deduction are the small businesses. This composes the vast majority of the entities that are defined as pass-through. Its intention is to give a helping hand. When looking at the laws of previous years, the profits from hair dressers, landscapers and corner grocery stores, including small-business entrepreneurs are taxed at the range of its tax rates on a personal income level. This can range as much as 39.6%

Among these small operations are a string of large businesses like the Trump Organization, the Georgia-Pacific wood products company and the Dallas Cowboys Football Club. There are slightly more than two thirds of the income from high 1% of American households, as analyzed by the Treasury Department analysis.

Beyond that, it is also possible for the average entrepreneurs to go through the system and then slide through the restrictions that the lawmakers have placed in the tax bill so the system cannot be abused. For example, the Congress that controls the GOP can ban certain types of firms that are pass-through such as financial service providers and medical practices from receiving deductions. Other than that, it also imposes ceilings on what can be deducted. However, there are ways to go around these.

Let’s take a minute to look at the reason why these small companies are called pass-throughs? Well, first of all, the proceeds can just flow straight to the owners of the business. This avoids the double tax that the government requires large companies that earn at the corporate level as well as the compensation of the employees. As the personal rates on the highest group is lowered to 37% then those responsible for making the law lets the pass-throughs take in 20% reduction from the earnings. This then translates to a tax rate amounting to 29.6% of the owners.

When the new tax bill was signed, Democrats in the Senate and House unanimously voted against this because they believe that this is a provision that benefits the wealthy. However, there are still others who regard the deduction in the pass-through as a way to encourage the risks of entrepreneurial turns, which leads to growth in the economy. This leads to job creation. Despite the merits that the pass throughs encourage, it is still the early stage that appears to be beneficial for the taxpayers. This means that it can still go around the barriers that the Congress have erected. Here are some examples:

  1. Sidestep limits when it comes to reductions

This prevents the law from being the setting where the big bucks are placed. Congress has capped the pass-through in the income of the filers. This results to their inability to take deductions on half of the wages of the company. For real estate owners like Trump, who has few workers and would not get anything from the headcount method, there is another way. Base on this deduction on 1/4 of the wages, 2.5 percent of the real estate assets run through the millions, and sometimes billions. It is important to note that the Trump Organization has more than 500 entities.

  1. Alter your job classification

The new law that the bars submit through the businesses of lawyers, athletes, doctors and financial service providers such as stockbrokers are known in the legislation as “specific services” – and this takes some kind of deduction.

  1. Riding reputations

Famous people can organize the side business interests into the pass-throughs. Celebrities like Gwyneth Paltrow who has their own companies like Goop can sell products and even get better tax rates for products income. However, it is not possible for her to run on her being a celebrity to advertise her products.

Be a contractor

First, entrepreneurs should convince their bosses that they quit and then hire themselves back as contractors after this has been set as a sole proprietorship. Assuming that this can be done for the tax treatment is way better. It also offers the ex-employer the similar services for less than the company has to worry about giving benefits or paying the share for Medicare and Social Security taxes. This specific law requires that the regulations are written and also implemented. However, under the Trump Administration, it is highly doubtful that there will be damage or effect of the GOP vision. It is clear that the administration has some kind of hidden alternative for presenting this bill. It benefits the wealthy more than the working class Americans. Worse, it may even put individuals working in the United States and paying their taxes more in the coming years. The take home may be bigger now because of the cuts in the taxes, but in the long run, it might be more difficult for them to attain the financial stability that they have in mind and desire to have. Only time will tell how this turns out.

Restructuring State and Local Taxes to Maintain Deductibility

Tax reform is expected to eliminate the local and state deductions. The reason behind this is that it encourages the local and state government to increase the taxes. If tax reform manages to eliminate the deduction, then the local and state governments will be facing a bigger and stronger pressure in keeping the taxes low.

Violating Neutrality that is Appropriate in Some Circumstances

The sole purpose of this tax reform is to liberate the economy in order to gain more strength by setting the neutral tax base and is lowered in the tax rates in a revenue-neutral manner. This can also improve the incentives for businesses as well as families along with entrepreneurs and investors that can engage in the activity.

Neutrality’s principle keeps the taxes in such a way that it does not influence the decisions of the taxpayers on an economic basis. By maximizing the economic growth, the tax reform can institute this in the neutral tax code in a reasonable level. Nonetheless, there are still some instances that violate the neutrality and is still regarded as appropriate.

Whenever there is an anomaly that is historically unavoidable, then this case is exclusive for the employer-provided health insurance. This exclusion is also a historical artifact that dates back to the 2nd World War. Because by eliminating this, there are other reforms that can create the major disruptions that are apparent in the health insurance market. There are also some sensible tax reform plans that can also retain the exclusion and also provide the credits for the families so that they can obtain the health insurance.

A similar instance is when the beneficiary of the specific policy justifies that it is more harmful than neutral. Earned Income Tax Credit is retained so that families that are in the low-income bracket can improve their situation.

Note that tax reforms must eliminate the neutral policies containing negative consequences and intention. When this is done, then neutrality will be eliminated.

State and Local Tax Deduction is Neutral and Must Be Eliminated

The tax code lets the taxpayers deduct certain local and state taxes that include income taxes and sales taxes specifically for the residents of states. These go without the income tax, personal property taxes and real estate taxes. Local and state income taxes also make up around 95% of all the local and state deductions.

According to the tax policy theory, the reductions are neutral because taxpayers may not have to pay on the income tax that they really do not save or spend. The local and state taxes also deprive the taxpayers allow the ability to do both with the taxes and the income that they can claim.

However, the downside to the theory of the tax policy usually does not keep to what is known information on the economic reality. When it comes to the local and state tax deduction is the harmful negative consequences. It also creates the benefit of ensuring the taxpayers that do not pay income tax the reality that they cannot save or spend.

The deduction from this results to another circumstance that warrant and violates the neutrality. This is the very reason why tax reform must eliminate it.

Deduction Encourages the Local and State Governments to Raise the Taxes

The harmful and unintended consequences of deduction is that it influences the local and state governments to increase their taxes. However, higher taxes also let the local and state governments grow larger because there is a need to spend the maximum amount of revenue that is possible for them to collect.

The deduction also encourages the local and state governments that can raise their taxes because it is possible to transfer some of their tax burden percentage from the residents and to the federal government. For example, every dollar that the state taxes one family that pays the 33% federal marginal tax rate, the family can also effectively pay a percentage. Specifically, this is $0.67 of the state tax. The deduction on the federal taxes of the family reduces the tax bill by $0.33.

This deduction in the mentioned price of the state and its required taxes also influences the states to increase their taxes higher. This is because taxpayers can also offer a lower amount of resistance because they really do not pay the full amount of the higher taxes. Taxpayers are also more willing in accepting the higher taxes due to the deduction that the consumers are willing to purchase a service or product especially when the prices decrease.

However, there is no connected reduction in the federal government when it comes to the revenue from the deduction. The federal government does and can borrow freely. This is why Congress spends amounts of tax revenue that is irrespective. The local and state governments have also less latitude in terms of borrowing in order to spend more that is closely matched to the tax receipts.

If this deduction is removed from the tax reform, then the overall amount that the taxpayers pay in terms of taxes are least likely to not change. Tax reform should be in the form of revenue and distributed in a neutral setting. This means that the taxpayers must pay the same amount of federal taxes like they did before. However, the federal taxes can no longer reduce this burden effectively on their local and state taxes.

The taxpayers are now faced with shouldering the burden of local and state taxes. Taxpayers are also more likely to reduce the existing tax burden. By combining these effects, they can restrain the tax burdens on both the local and state government level.

States with the Highest Taxes Would See the Greatest Pressure

The municipalities and states with the highest taxes have the biggest pressure in lowering the taxes of their residents. Taxpayers that are in states with high taxes also tend to have higher incomes. For example, based on a study conducted by the Tax Foundation, Connecticut, New York as well as New Jersey have the highest local and state taxes and burdens. They are also ranked in the top five in regard to the per capita income. The number of the high-tax states usually have relatively high per-capita compensation.

Those who are paying higher income taxes can also claim the deduction in the local and state taxes level. According to the IRS, the taxpayers who earn around $100,000 due to the claim can get a 76% deduction.

Data shows that tax payers who are residing in states with high taxes usually already pay hefty amounts on the local and state taxes. There is also a burden that is reduced through the deduction. If tax reform manages to eliminate the deduction, then the taxpayers can see a big increase in both their local and state taxes. They can also put pressure on these government ordinances in order to stop the increase in taxes and allow them to apply pressure on them so that higher taxes can be reduced.

Lower Rates are an Added Bonus

By eliminating the local and state tax deduction can only be done when it is within the context of the tax reform as an overhaul. Congress must not eliminate this without offsetting the changes in the taxes. In order for them to do this, then there would be unnecessary increases in taxes.

Eliminating the deduction in the total revenue whether it be in a neutral tax reform can also allow the marginal tax rates to be lowered for families. The local and state deduction can also reduce the taxes to $1 trillion over 10 years. Revenue can also be provided for the substantial and additional reduction in the rates. If the rates are lower, then it also enhances the growth-promoting potential of the reforms in taxes. This is also an added bonus when the deduction is eliminated.

Eliminating State and Local Tax Deduction in Order to Pay for Tax Cuts

The tax plan that President Trump and the congressional Republican ends the federal deduction that is allotted to SALT or the state and local taxes. This lets the taxpayers itemize their deductions on the income taxes from a federal level and also deduct the local and state taxes. There are proponents that argue that when this deduction ended, it will not hurt the middle and low-income households because the direct benefits are targeted to the higher-income filters. By eliminating this deduction, the federal income tax will eventually become more progressive. However, it also ignores that the actual tradeoff of the GOP tax plan is proposed. This eliminated the SALT deduction and then resorts to the revenue so that the marginal income from these tax rate cuts can be bad for most Americans, particularly those who are considered to be middle and low class.

The first thing to know is that the rate cuts in the tax plan tend to be tilted especially concerning the SALT deduction. This is the reason why the year 2027, 80% of the net tax cuts are shifted to the top 1 percent of the Americans. This is when they claim that the key elements of the current plan will completely take in effect. The Tax Policy Center has estimated this.

Secondly, the SALT deduction assists the local and states funding especially in the public services. They provide widely shared benefits. Because this deduction is of a high income and a number of people are willing to support the taxes on the local and state level, then repealing this deduction can definitely make it harder for both the locality and the state.

When the deduction is repealed and rejected, then it is harder for the localities and the states to tackle the budget strains. It raises the sufficient revenues especially in the coming years for the government to fund higher education, including K12, and above all, health care. In order to balance the budgets with revenue that is insufficient, the policy maker of the state likely makes cuts in particular services that would make it most felt. It would also push the costs to the low and middle-income people, making the local and state tax systems and make it more regressive in the over-all setting.

States and localities can also respond when raising the fees and taxes that fall heavily on the residents who are within the higher-income bracket. It would also push the costs into the low-and middle-income individuals and make the local and state tax systems more regressive than it already is.

The proposal to end SALT deduction and make it harder for localities and states to fund the current programs that they have in mind allowed the President and the Republicans to come up with a proposal of a 10-year budget that shifts the substantial and new costs to the states. It also sharply cuts the Medicaid and other funding of the health insurance and potential cuts the federal support for the local and state services such as transportation, low income housing, education and environmental protection.

Responding to the criticism of the Republican representatives of Congress who also represent varied states could be a particularly difficult approach if the intent is to end the SALT deduction. GOP leaders have considered a number of compromises that would partly, as opposed to entirely, end it. These also include capping the deduction and then ending that for the income taxes and not the real estate taxes. Letting the filers take the SALT deduction or another like interest deduction and home mortgage. Both cannot be taken. Partially ending this new deduction process is particularly harmful for middle and low-income Americans. However, since the states and localities will eventually weaken, then it is time to increase the adequate revenues.

Trump administration official pointed the estimates that show most of the deductions from SALT on the federal tax benefits go to people earning $100,000. Higher income filers can also benefit more depending on the deduction because these are likely to be itemized, claim the higher amounts of the deductions, which also include the SALT, and resort to higher federal tax rates.

Glitches of the New Tax Bill

The Loopholes and Glitches of the Tax Bill

A number of tax scholars have compiled studies and completed a report that details the glitches and loopholes of the new tax bills that Congress chose to close. There are numerous issues that come with it. In a nutshell, these problems will cost the government more money that predicted because taxpayers shield their money in various ways. However, there are still some tax increases that are unintended as this is happening.

Some of the glitches

The current tax system does not have enough to address the scenario where corporations are given lower tax rates than individuals. The new rate for corporations is also significantly below the individual rate. Therefore, the corporate income is double-taxed at the corporate level and then the rate that the shareholders obtain per capital or dividend. That second aspect of taxes can be avoided and is mitigable in many ways. This results to the taxpayer gaining from the investment of the corporation because it accrues at the corporate rate’s lower level. By simply setting the corporation (this is done by checking the box so that partnership and other entities can be treated mainly as corporation for the sole purpose of paying taxes), their income is accrued and is in the form of profits for the corporate. As for the shareholder and the employees, their wages are reduced so this increased the retained profits of the corporation.

The Senate is trying to go around the tax advantage for the pass through businesses. These are the businesses that earn their profits and are then passed to their owners because these are taxed in the form of an individual income tax. If this is the case, then the law firm associates can eventually become partners because there is a separate partnership that has to be paid, as long as it is provided by the original firm. The self-employed might also mischaracterize the relationships by rearranging this with the independent contractors, instead of concentrating on the employees.

Meanwhile, the provision of the House encourages the owners to reduce how much they are involve in their companies because its main target is toward the passive owners. In this way, they can acquire the capital from the firm, even if they don’t really need this. An example of this is when the doctors or lawyers buy the buildings where they work.

Both of these bills limit the deductibility of the local and the state taxes which pretty much raises a ton of money. In response to this, the states also shift the revenue efforts of this sources, and this will also be deductible. This bills then allow the property tax deduction of around $10,000. States that are set to come up with policies that are deemed as “circuit breakers” allow the taxpayers to pay lower than what they are supposed to in income taxes, but they will be paying more for the property taxes. They could also get the taxed income through the payroll taxes on these employers which remain deductible. Since the charitable deduction stays, there are states that even let the residents provide to the public coffers and consider this as something that goes against their state tax.

The technical aspects of the corporate reforms can also encourage the companies to locate the investment offshore as well as the real assets. They can also violate the treaty commitments.

There are also a number of provisions that can create the opportunities for tax arbitrage. This is when the deductions are taken alongside the high tax rates resulting to a low generated income rate. When the corporate rate is delayed until 2019, then the business is allowed to fully deduct the purchases for equipment instantaneously. This also encourages a number of investment in 2018. Companies are encouraged to buy equipment this year and then deduct this alongside the 35% tax rate. Then it is a good strategy to just sell this again in the following year. This is because the tax rate will be 20%.

A glitch in this tax that has been overhauled by Republicans can create uncertain future for most companies and its operations. This legislation costs $1.5 trillion and changes the way that taxpayers file their federal income taxes. Millions of Americans are ecstatic about the fact that this does lower their taxes, but it comes with a price.

This new bill is scrutinized because it has a potential impact on the budget of various states. Officials are slowly yet surely recognizing that the federal legislation have enormous and vast influence and effect on the state taxes that makes it a central issue.

Tax experts analyzed the whole bull and there are people who will be negatively impacted by this. There are things that can be done at the state level, but it would still mitigate problems.

Not to mention the fact that the Republicans have moved the bill so fast in order for the President to meet the Christmas deadline that was given to him. This resulted to the GOP leaders abruptly announcing and pushing back their schedules one day after the Senate has ruled the three provisions. This violates the chamber rules.

This decision also forces the highly unusual second vote of the House and this had already been approved 227-203.

This is a major overhaul on the tax code. The rules also glitch and it appears unlikely that this will have impact on the vote totals. This also lowers the individual income tax rates for the filers and then double the standard deduction. For married couples, this can amount to $24,000. This also limits the popular deductions like those for the interest on the mortgage set alongside the local and the state taxes. There is then provision that is claimed by the higher share of taxpayers who earn more than average because they file this in another state.

The bill then lowers the corporate rates that start from 35% to 21%. It then creates a deduction of 20% for the pass-through businesses where the owner can report the business income on the personal return.

Taxpaying individuals will eventually receive cuts around 12%. This means that with the iteration on the bill, the tax cut would now be $1,000 as opposed to $2,530.

The reverberations of the tax changes are created in order to meet the budget goals for the next year. The consensus that the federal tax proposal has a significant influence and impact as well as the said adjustments to each state law. There should be come positive responses to the changes. By taking a conservative approach despite these murky forecasts, then the spending committee can also vote unanimously when setting the goal to reduce the state to $298 million in the form of projected revenue. The gap of the zero in the said budget takes place on July 1.

There is also the bait and the switch especially for those who are looking into the interest loophole. This then lowers the rate on the percentage of the firm’s profits and their clients also pay on the investments. This extends the holding period from a year to a maximum of three years. It is also important to note that the provision does not apply to the corporations that hold the interest and carries this over. The fund manager can then collect the carried interest in the form of a corporation that also does not pay taxes.

The House bill also lets the heirs sell their assets and not pay the income tax. Therefore, a family who gets a fortune from a long-held asset may never have to pay the taxes because of the bulk of the overall wealth that it accumulates. The generation that has founded this can borrow against the stock so that it can meet the expenses along with the next generation and sell it without the income tax. The last time that the estate tax has been repealed was way back 2010. This is because the Congress has changed the rules regarding the inherited assets so that what was previously mentioned can be avoided. Clients are then advised about the tax implications on their investments.

The measure is very beneficial to wealthy clients. It is a total scam on the part of the lawmakers. It is the matter of the tax policy to appear completely indefensible. It also permits that the income in the constitutional sense that is entirely untaxed.

The Unusual Trend of the New Bill

There is an unusual trend in the corporate America along with the finance industry. Despite the 2012 formation of the campaign that was previously called “Fix the Debt”, private equity execs, CEOs and hedge fund managers of the five biggest banks in the United States were given the prospect and opportunity to pay less taxes. This led to the parties not really caring about the tax plan that Trump presented despite it coming up with a deficit explosion.

There have been some conclusions that the country and a number of businesses will most likely do better if the balance sheet of the nation is not overcome with debt. Revenue is generated from the taxes and a part of it has to deal with costs for entitlements and healthcare. This tax overhaul is not tackled as much as it should in the new bill. In the meantime, it would also be nice to witness chief executives articulate this very message, especially when they were so vocal about the topic years ago. When they spoke of the importance of the long-term economic health of the United States and its assurance, taxpayers are actually being lectured that the country is getting fooled.

This new bill is the very sales tax pitch that the Republican Party has been dreaming of getting into fruition the very minute that they started the tax reform. The whole idea really was to make this fair, simple and easy to understand, but that is not the case. Now, the Senate and the House have already hashed out a compromise bill.

It is important to mention that this bill was drafted with so much incredible speed that there was not even any public debate or hearings. This makes the tax bill a complete mess filled with glitches and containing opaque wording with so much complications that there is so much room to debate. Despite the rapid-fire pace of the bill, this group of tax experts presented the glitches and also conducted a survey on whether or not this tax code is efficient and even worth complying with.

A number of analysts believe that there was no need for changes because this will only cause more problems. For one, not only with this tax bill increase the opportunities for the wealthy to be more connected to the leeways of taxcode, they also have higher chances to avoid paying the fair share. This would likely make other people pay for the difference that they themselves should hand in.

The GOP bill encourages more tax shenanigans

This tax code has various ways for rich people to lower their tax rates because they can now classify themselves as a corporation. An individual taxpayer can then incorporate herself and come into some kind of contract with the new corporation which then results to a higher paycheck because there is less tax. Shareholders of the corporation can also run and then they can just pay the manager’s salary and then make up for the difference from the payout of the shareholder. This then pays for the corporate tax as well as the capital gains as opposed to the individual income tax.

This can only be worth it if individuals can afford to hire lawyers and accountants. IN doing so, then they can get a lower effective tax rate. Truth of the matter is, the corporate rate is at 35% and the highest individual rate is 39.6%. This only makes sense for those who understand it. In layman’s terms, these two rates are now further apart and there are more instances for these shady games to be played.


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The Deduction on Job Related Education

During the 80s and early 90s, there was a long-term decline in real average earnings of many US workers. There was also a trade deficit and reductions in manufacturing employment growth. All of these have become public concerns. The notion that was brought about this situation is that there is a required job training and education in order for the work force to improve the economic status. There is also a competitive position in the global market place that has to be met.

The quality of the US workforce matters right now more than ever. Workers have to be motivated and well trained in order for them to produce high quality services and goods at quite a low cost. This can definitely help enhance the competitiveness and industrial productivity and also keep the American living standards at a high quality. Today’s international economy requires workers to be prepared and also change the way they approach and do their jobs so that they can capture the benefits from the technology that rapidly evolves. Training goes hand-in-hand with quality, automation, productivity and flexibility in the best performing firms.

Individuals can deduct their educational expenses that they have paid for, even if this training or further studies have led to an MBA or a post-bachelor degree. However, the deduction may be large so there are rules that are still subject to interpretations. The IRS is aware of this situation so it has increased the number of audits in this department.

America is facing major crisis when it comes to education. There is a large and more significant dilemma and it has been quite apparent recently. Americans must understand the scientific and mathematical principles that can be applied to their everyday problems when it comes to the executive suite and the factory floor. It is also required that Americans who can read and understand the complex technical material must use the knowledge that they acquire in order to perform new tasks.  It is also preferred that more Americans can work individually and in teams and identify and solve problems without relying on the direct supervision or rigid rules of the company. What is also required are more Americans who can converse in foreign languages and then be cognizant of the events that are beyond borders. What is required are Americans who can live and also work effectively with people who come from diverse backgrounds and cultures.

This may seem a bad reflection of the current US educational system but truth of the matter is that there is an improvement in the education and training of workers. There are some general views that have been expounded regarding the relationship of education alongside earnings and how it can also improve the job training systems.

The Most Tax-Advantaged Ways to Reimburse Job Related Education Expenses

 Reimbursing the employees for the expenses for their education strengthens the capabilities of the workforce. It also retains them and makes them loyal to the company. Aside from this, the employer and the employees save valuable tax dollars. However, it is very important to follow IRS rules. Here are some options to maximize savings when reimbursing job related education expenses.

A fringe benefit

 Qualifying the reimbursements along with direct payments from job related education costs are excluded from the employee’s wages. This is called the working condition fringe benefits. It also means that employees do not have to pay tax. This can also deduct costs and make it appear as employee education expenses. There is no need to withhold the payroll taxes as well as the income tax.

To qualify as a working condition and fringe benefit, the education costs must also be the expenses that the employees were allowed to deduct and file as a business expense if this has been paid directly and were not reimbursed. In a nutshell, this means that the education should be connected to the current profession of the employee. They should also not qualify themselves for another profession. There is no ceiling on the amount that the employees can receive the tax free as the working condition of the fringe benefit.

An educational assistance program

 This is another approach that is used to establish formal education assistance program. This covers the job-related and non-related training for the individuals. The reimbursements include the expenses for:

  • Fees
  • Equipment and supplies
  • Books
  • Tuition for undergraduate or graduate level

The reimbursement of materials that employees can maintain after the completion of their classes (except for books) are not eligible.

It is also possible for the individuals to annually exclude this from the income of the employee and deduct a maximum of $5,250. This can also be an unlimited amount if the training or the higher education is connected to the profession. Other eligible education reimbursements come in the form of the employee benefit expense. They also do not have to withhold their income tax or withhold their taxes from their payroll on these kinds of reimbursements.

Train and Retain

 If the business has employees who wish to take their skills for the job toward the next level, employers must think before they even decide to go to their competitor. When they reimburse their education costs then these turn out to be a fringe benefit and is also set up as the educational assistance program. Employers then keep their staff trained and constantly evolving toward a better future which would let them also save lots from taxes.

In order for the individual to qualify, there are three requirements that must be met:

 The individual’s training and education is maintained and improves the skills for the job. If the individual has worked in one industry before and after he or she has entered graduate school, then the purpose of the study is for the individual to further work on his or her profession. The MBA must be related to the previous occupation. Another scenario is when the education and further training is required by the employer, as stated by the law and the regulations, in order for the individual to keep his or her job, status and present salary. The latter situation has higher chances of getting a deduction.

 The education or further studies must not be required in order to obtain the minimum requirements for a specific business niche or trade. In order for an individual to become a doctor, he or she must attend medical school. For one to pursue becoming a layer, he or she must enroll in law school. These occupations do not deduct the education cost as a form of business expense because it is a minimum requirement. On the other hand, the individual can work in finance or management without an advanced degree. Expenses on this field could definitely qualify especially if he or she is pursuing an MBA degree.

 The education or further studies must not qualify the individual for another business, trade or job. If he or she has limited business and managerial duties in his or her profession before pursuing an MBA, then the MBA should not be used as a way to qualify for another business or trade. Obviously, this would not be considered a deductible. Employers should also be mindful of the change of duties somehow involved in the similar kind of occupation. This is not considered a new business or trade. However, there are also IRS officers that focus on the said specific rule so that they can try and also not allow these deductions for the expenses targeted for higher education.

 What if the Individual is not Audited?

 If the individual is not audited, then it is likely that the IRS is currently questioning whether he or she a) is still in the trade or business if time off from school was taken, b) the education that the individual is taking is indeed giving him qualification for another business or trade and c) the education and further training has truly improved the skills in that specific or business that the individual has entered for graduate school. If these are the cases then these should be regarded as personal enrichment and therefore, not a deductible. For that last item listed, they should also be looked into if the coursework that they are taken is indeed directly related to the business.

Tax Lawyers are Exploiting All the Mistakes in the GOP Bill

Republicans that are in Congress reach the verge of the vote and is connected as the biggest tax overhaul in years. Tax scholars are putting out their concern that there are parts in this bill that has been so hastily crafted and have created the opportunities for the taxpayers who are wealthier than average. A number of lawyers and analysts have already tried exploiting the glitches and the loopholes in this game that the US tax system if playing and they are also adding more to the growing deficit.

Without the right safeguards and also the anti-abuse measures, then these taxpayers can also take advantage of the tax provisions that are riddled with the problems. There are fundamentally change courses on the key provisions, then the bill is quite going to cost more than what has been expected. It is also certain more than the dollars that has been estimated.

The sense is that there are estimates that cannot be taken far into the ways that the taxpayers are also getting through the system and its game.

People have the tendency to exploit the loopholes and also give access to the advice, specifically the taxpayers and the corporations who have high incomes. These are not poor Americans. The Republican plan provides a $1.5 trillion cut that can also disproportionately has the wealthiest Americans that can also pay for the expansion of the national debt. There is the analysis of the final bill in the Tax Policy Center and discovered that the 1% of the taxpayers can also reap the 83% of the tax benefits around 2027 and also see the cut as well as the average amount of $20,660. Whereas the 40% of the households also have the tendency to see an increase in the average of this amount around 2027.

The 13 scholars on taxation have also increased the lawmakers and also mentioned this in the earlier report when they are drafting the legislation that they have already closed and rushed the processes without even providing enough regard for the tax law as well as the intricacies and the risks of the consequences that are unintended.

Another glitch that has already seen this in the overhaul process into the very minute inclusion of the AMT or the alternative minimum tax. Why? This is because it was already set at around 20%. This is similar to the 20% that the corporate tax rate can also be included in the very Senate. The alternative method to this is to lower the corporate tax rate and also make businesses no longer receive the benefits of tax breaks. There are lobbyists that also claim that the inclusion in the tax can also claim the development and the research tax credits that make it more difficult for the prevented banks and the tech companies that are received when getting the credits as well as the investment in areas around the United States that can be described as undeserved. Luckily for the business, then the lawmakers can be struck in the AMT provision along with the final plan.

The tax scholars who also presented this report discovered other issues in the House and Senate Bills. The instance that it reduces the corporate income tax has become 21%, it also encourages the taxpayers to reach the shelter income in the corporation so that it can avoid getting the high rates on the income taxes. It can also happen under the very law but “the cost of this is that there is a high corporate tax that is relatively high and also shows some limits to the benefits of all these strategies.” This is one of the essential points that the paper has brought up. Unlike the individuals, the corporations are also written in the Republican tax bills that can deduct into the local and the state income taxes. This also heightens into the incentive to just start the corporation.

Entrepreneurs can also gain the relieve that the lower tax rate is passed through the income. The changes in the legislation can also result to the substantial tax planning and also go for the lower taxes that can characterize the very livelihood is the right and proper business. The final bill is also serving as the provision for the pass-through companies to make the most out of the 20% deduction on the income. This is without the safeguards that have been placed in the very version of the Senate. It also leaves the companies to reflect something tangible to the employees that have already provided a tax break. There are also other real estate developers.

This is not the exemption that makes it limited to the real estate companies. There are associates that also spin off the limited liability that separate the corporation because of the services provided to the firm. The associates and their company are also considered the pass-through business. The associates can also check into the contract and then make sure that the original firm is the restricted income that amounts to $157,500 to the individual. The $315,000 is for couples and associates can also make the most out of this deduction from pass-through businesses.

Take for example an athlete who can create this brand name and make it into a company that can also lower the rate of the pass-through on the income. The tax experts can also check that there is a loophole that is not very clear cut. The assets of the brand company serve as the reputation of the owner, as opposed to its employees. If it is the latter, then this company cannot be eligible for deduction. IF the athlete allows the pass-through company to take place then it maintains the right to keep its image and its license. It is also the company’s asset to look into its intellectual property and also make it accessible to lower the rate, and then that’s when it can pay off.

According to the experts, the tax games can reduce the revenues and also increase the cost of the legislation that makes it more regressive. The additional tax complexity is necessary that the way for the police to come up with new rules so that this can prevent abuse. It also ensures the legislation that can move it further away from the goals that are more equitable, simpler and efficient tax system.

It is possible to deduct the taxes on the exports along with the incentivize of the firms to also develop the very intellectual property that is found in the United States. It can also export the goods on that very basis. What can also encourage these manufactures to make, claim, call and sell depends on the distributor. They can make the most out of the subsidy on the export and they can also check the low tax rate on the exports and also provide the economic incentive for companies that they said are perverse.

This shows the glitches that work around the tax code that is so complicated. In fact, this new tax bill is not even as simple as they claim it to be due to its host of changes.

25% Rate Pass Through Helps the Wealthy

The real story behind the tax bill is more complicated. It is also expected to become a windfall for the investors that are earning high-income. There are many business owners that also include small businesses. It can also end up letting the pay be as high as 35.22%. Overall, it can also serve as a complication to the tax code that also provides the small business owners. Despite the attempts of small business owners, taxpayers cannot abuse this new system because the proposal that has been laid out prevents them from doing so. It is definitely an opportunity for the business owners and the clever investors that can help the tax lawyers and add this to the game of the system.

Pass-through businesses connected to the partnerships, sole proprietorships and limited liability companies are into the S corporations. Unlike the traditional C corporations, the income is not connected to the business-level income tax and also check into the earnings of the owners. The ordinary income tax rate amounts to 39.6% can equate to the pass through businesses alongside the small businesses. However, this characterization is quite misleading. These kinds of businesses serve as the multi-state pipelines. Other companies include real estate developer, hedge funds, private equity firms and other kinds of large businesses.

In addition to this, there are millions of owners of businesses, both the big and small ones who would not benefit from this low rate because they are not incurring enough wages. Around 9% of the owners of this pass-through business have already paid at a rate of around 25%. The income tax rate cap can also pass through the income that can benefit them at all. By contrast, the ones can also benefit the 25% tax rate cap that has increased in the 39.6%. This is currently the reception of half of all the pass-through income.

Passive owners get quite a deal because there is less risk and they treat wages as business profits. The proposal can also cap the income tax for the pass-through businesses and these passive owners make the most out of 25%. This can also benefit the taxpayers who make more than around $260,000. Otherwise the 35% and higher, then it is possible for the businesses to the unproposed bracket. It is also a business for the capital intensive. The 35.22 percent can also reflects the default rule in the legislations of the 30%. This is deemed eligible so that the 25% rate as well as the remaining 70% is then characterized and be compensated and taxed at the usual maximum rate of 39.6%.

Pass-through businesses are also eligible for 25% because the entrepreneurs are passive. They really do not jump in and contribute to the business. The new bill bases this on the total hours that the taxpayer spends for the business. Taxpayers also document the hours that they are sure tax advantages are considered for active owners. They can also benefit the 25% maximum in the income tax rate. It may also reduce the total hours that they put into the business and then hide the extent of how much they are involved with the IRS. This can be a pretty hard-pressing challenge.

The bill then creates the tax planning opportunities. It also produces the rental and the interest income is also eligible for the 25% and also tax it into 39.6%. Rental activity is also inherently passive and then the rent can be earned to the pass-through businesses. Interest income is passive and can also be earned from the entity. This then trades the money that is lent and borrowed by the hedge fund as well as the private equity funds that are engages in kinds of activities. There are taxpayers that can also invest in the funds. The tax rate on the business income is capped at 25% and instead of buying, it is taxed at the rate that reaches up to 39.6%. They can also invest the REITs which can also go through the mortgage and the rent interest income which is explicit and also eligible for the 25% cap right under the proposal.

Another possibility that can be looked into is that the investors can also borrow the funds. In that way, the investors can deduct the interest at that percentage. From 39.6%, it gets into 25% and the income is then received. Investors can also borrow from kinds of pass-through businesses and then just invest this primarily in the same one, as long as this is run by persons who are not related with one another. Business owners are also borrowed and then contributed to the businesses. They can also deduct this interest. Statutes are then encouraged and separated from performances of the services. It invests in the maximization of the income eligible for 25% by cross investments in the businesses.

Lifetime Learning Credit at a Glance

Due to the rising cost of further education, there are taxpayers who wish that it is possible to offset their school expenses. There is also the option to get the LLC on the federal income tax return. This credit can reduce the tax bill on the dollar-for-dollar basis is the portion of the fees and tuition that the individual pays for themselves.

Lifetime Learning Credit is the qualified tuition as well as related expenses that have been paid for the benefit of eligible students who are enrolled in an educational institution that is deemed eligible. This credit assists students in paying for professional degree courses along with graduate and undergraduate programs. These courses once acquired can improve the job skills of the individual. It is important to take note that there is no limit on the duration of the study and claiming the credit. It amounts to $2,000 for every tax return.

The LLC is provided and made available to tax payers. This credit can be claimed by any student or a family who pays taxes, as long as the student is attending classes at least on a part time basis. The credit is then claimed for the educational costs that have been incurred by the student.

Critics often complained that there are restrictions and complexity when it comes to the eligibility and qualifications. It makes the actual benefits for every student pursuing their post-secondary studies much lower than what is regarded as the theoretical maximum. Even with higher education and tax credits, there is still a remainder of tax-disadvantaged individuals compared to those who turn to these investments.

Who claims the LLC?

 In order to claim LLC, there are three requirements:

The dependent is willing to pay for the qualified education expenses toward higher learning.

  1. The dependent can pay the education expenses for a student who is eligible and is enrolled at an educational institution that is also qualified.
  2. The dependent is listed on a tax return.

 Who are the eligible students for the Lifetime Learning Credit?

 In order for the student to qualify for the LLC, he or she must:

  • Be listed, signed up on enrolled in taking courses at an educational institution that is deemed eligible.
  • Taking higher education classes or courses in order to get a degree or an education that is recognized in order for the individual to learn more and also improve the skills required for the job.
  • Be enrolled for one academic period at least and in the commencement of the current tax year.

Take note that academic period means semesters, quarters or trimesters, depending on the school session of the eligible educational institution. The school determines how the academic periods would be. Schools that resort to credit hours and not academic terms, the payment process is treated as if it were an academic period.

Calculating Lifetime Learning Credit

 The individual can include the fees, tuition and any supplies or books that are a requirement in purchasing directly from the educational institution. This also depends if this is an enrollment or a condition. If the professor suggests and recommends that they purchase textbooks and can enroll in the class even without this, this is not included in the credit.

Filling Out Form 8863

 By the end of the tax year, educational institutions must send them Form 1098-T that also includes the eligible costs. In order for individuals to claim this Lifetime Learning Credit, then these figures must be entered on Form 8863. When this form is prepared, the individual must only complete parts 3 along with parts 6 and then calculate this credit amount that they are eligible for. By transferring this credit amount to the income tax return then make sure that this is attached to Form 8863 before this is sent to the IRS.

TurboTax prepares the calculation for individuals to make filling up the form easier. By answering simple questions regarding the individual’s education expenses, the form can be completed in no time.

No Double Benefits Allowed

 It is not possible for the taxpayer to claim the Lifetime Learning Credit as well as a tuition deduction when he or she has already claimed the American Opportunity credit. The IRS only lets tax reduction for every student every year. However, before the individual can claim the LLC, they should also determine whether they are qualified and eligible enough for the American Opportunity Credit.

For a number of students who are taking four years of further studies, the American Opportunity credit offers more tax savings because the minimum credit that they can get is $2,500. TurboTax is also another tool that can be used to calculate this. It can also determine which credit would give the individual the biggest benefit.

What are the Income Limits for LLC?

 In order to claim the complete credit, the modified adjusted gross income or the MAGI must also be around $65,000 or the below. It can also be $131,000 or less if the individual is married and is also filing jointly.

  • If the MAGI ranges between $55,000 and $65,000. This is between $111,000 but also below $131,000 for couples who are married and filing jointly).
  • If the MAGI is beyond $65,000, the individual is not eligible for Lifetime Learning Credit.

The Modified Adjust Gross Income is the amount of the Adjusted Gross Income that appears on the tax return. This is located on Form 1040A which is the AGI on line 22. This is similar to MAGI. IF the individual files the Form 1040, then the AGI can be found on line 38. It also includes the following:

  • Foreign housing exclusion
  • Income that is excluded from the official residents from Puerto Rico or American Samoa
  • Foreign earned income that is excluded
  • Foreign housing deduction

If the adjusted gross income must be adjusted further in order to locate the MAGI, there are worksheets that can assist the individual to do so.

How to Claim Lifetime Learning Credit

 Usually, students receive the Tuition Statement or what is called Form 1098-T by January 31. This very statement helps in figuring out how much the student gets credit from LLC. The form then has the amount listed on either Box 1 or Box 2 to show that the amounts have been billed or received for the duration of that tax year. However, this amount cannot be the very amount that the individual has access to or can claim.

How Much Is Lifetime Learning Credit Worth?

 The usual amount of the LLC is 20% of $10,000 that is first earned is directed to the qualified education costs. It can also be the maximum of every $2,000 for each return. Take note that Lifetime Learning Credit cannot be refunded. Individuals can also turn to the credit to use this as a form of tax payment that they owe. However, they cannot receive the credit as a form of refund.

Qualifying Expenses

 The qualified tuition as well as the related expenses is also defined as the fees and tuitions that have been paid by the individual at most universities and colleges for the enrollment and attendance of the taxpayer. These expenses that qualify do not include athletic fees, room and board expenses, insurance costs and student activity fees.


 The LLC has limitations. A taxpayer cannot have both the Lifetime Learning Credit and the Hope Credit for one student in a given year. The credit is also subject to limitations that have been designed and reserved in order to benefit the low to moderate income taxpayers. The credit is also gradually phased out when the taxpayer’s MAGI or modified adjusted gross income goes beyond $55,000. Those numbers also exceed $65,000. These numbers are also increased for those who file and amount between $110,000 and $130,000.

Tax Credits and Tax Deductions

 As a form of quick refresher, tax credits have a tendency to gain more benefit than deductions because it also reduces that tax liability on a dollar to dollar basis. Deductions, as opposed to tax credits, can reduce the amount of the individual’s income that is subjected to taxes.

Here is a situation. If the individual is eligible for $2,000 tax, then there is a deduction to a $2,000 from what the individual owes the IRS. This then saves the individual $2,000. If the student gets a deduction, he or she can also get an exempt in the amount from the income that is generated in the taxes. If the tax rate is effective at 25%, then the deduction can also translate to $500 as a form of tax savings. It is also possible for the individual to claim the deductions and the credits as long as they are eligible. The more rack up, then the less tax that they can pay.


Breaking Down the Lifetime Learning Credit


The IRS also provides tax breaks for students. An example is the Lifetime Learning Credit. If the individual claims this, then he or she can get it to $2,000 that is on the taxes for that year. Specifically, credits are calculated to 20%. This is from the first $10,000 that they incur in related expenses along with the qualified tuition. These related expenses incur supplies, books, equipment for studies and mandatory student fees.


Make the Most out of the Lifetime Learning Credit

 Any taxpayer who has already paid for the educational expenses for the duration of the year can get a breakthrough the LLC. There may be some strict guidelines as well as rules on how to go about it, but the individual can definitely explore this in order to get the best deal out of his money. It also means that it is possible to reduce the amount that is owed on taxes and even amount to $2,000 in the process.

We recommend consulting with a professional to check all the options and then choose the best that fits the situation of the taxpayer. These offerings from the government definitely cushion the blow of all the tuition costs and can also assist in paying the individual for their education or that of their child’s.

Lifetime Learning Credit Facts

Remember that when calculating the amount of the Lifetime Learning Credit, grants, employer reimbursements and scholarships are deducted from the amount, and then whatever is left is calculated. This is done in order for the IRS to know how much to give to the individual.

Paying for 2 or More Post Secondary Students

 The LLC has a strict rule of one for every household tax credit. If the individual pays for more than a single student who is attending post-secondary education, then the maximum amount for this calculation remains at $10,000 despite the total cost. If the taxpayer is paying for the education of the dependent, then he or she cannot claim the expenses under that particular tax credit.

Income Phaseouts

 The LLC sometimes go through what is regarded as the phase-out range. This means that the taxpayer has a MAGI or what is known as the Modified Adjusted Gross Income. The IRS tool can also confirm the eligibility of this amount. If it is minimum or in excess of the phase out amount, then the taxpayer cannot claim the tax credit.

Forms Needed to File for Tax Credit

 In order to claim the tax credit, the individual must have a Form 1098-T. This shows the amount that is billed and also received for the tuition. This is the form that must be filled out in order for the individual to claim the credit and then also attach the tax forms that the individual files.

Other educational tax credits to consider

 If the individual is not eligible to claim Lifetime Learning Credit on taxes, he or she can still check if she is eligible for the other educational tax credits such as Fees Deduction and American Opportunity Credit. The individual must do as much research as possible in order to lessen the fee that they would have to shoulder and take out of their own pockets. As long as they are eligible for that scholarship, grant or loan, they should go for it.

COBRA – Continuation Health Coverage

Are You Covered?

Congress passed the Consolidated Omnibus Budget Reconciliation Act that has health benefit provisions since 1986. This law amends Employee Retirement Income Security Act, Public Health Service Act and Internal Revenue Code. The goal of COBRA is to continue health coverage for groups that must be terminated otherwise.

COBRA has provisions giving former retirees, employees, dependent children and former spouses the right for temporary continuation of coverage on health insurance plans in terms of group rates. However, the coverage can only be made available when this is lost because of specific needs. The Group health plan coverage for participants in COBRA is more expensive than the health coverage of employees who are currently active. Usually, it is the employer that pays the portion of the premium for the employees who are currently working while the COBRA participants pay the full premium themselves. Surprisingly, it is less expensive than the usual health policies.

Employers who have 20 or more individuals in their company are required to provide COBRA coverage for them. It is also their responsibility to notify the employees that this coverage is available. COBRA also applies to the health plans that have been maintained by the employers in the private sector as well as those that are sponsored by local governments and most state.

Who are entitled to COBRA benefits?

There are three qualifications for COBRA benefits. In fact, COBRA has already established specific and clear data for the policy plans, qualifying events and qualified beneficiaries.

Plan Coverage: Employers who have 20 employees under their wing for more than half of the typical business days in the year before are required to be under COBRA. Both the part time and full-time employees are included in the tally of determining whether the health plan is more suitable for COBRA> Every part-time employee is a fraction of the other employee, therefore what one gets is equal to what the others guest, if they share the same number of rendered hours. The calculation is the hours that part time employee rendered divided by hours that the employee will work if he will be rendering full time hours in the future.

Qualified Beneficiaries: To be considered as a qualified beneficiary, the individual must be covered by a health plan for groups on the very day before an even that is considered to be qualifying by either the employee, the spouse of the employee or the dependent child of the employee. There are cases wherein the retired employee or the spouse of retired employee and dependent children of retired employee are also qualified beneficiaries. Aside from this, a child that was born or placed through adoption with an employee who is covered during COBRA coverage is also regarded as a beneficiary that is qualified. Independent contractors, agents and directors who are part of the health care for groups can also be eligible beneficiaries.

Qualifying Events: As mentioned earlier, these are events that cause the employee to lose or discontinue his health coverage plan This kind of qualifying event can also determine who among them will be qualified beneficiaries as well as the time duration that the plan will be offered to cover them through COBRA. The plan, using its discretion, can also provide a longer period of coverage that will continue for a long time.

These are qualifying events specifically for employees:

  • Voluntary termination as well as involuntary termination of the individual’s employment due to reasons aside from gross misconduct.
  • Reducing the total hours of the individual’s employment.

These are qualifying events specifically for the spouses of the employees:

  • Voluntary termination as well as involuntary termination of the individual’s employment due to reasons aside from gross misconduct
  • Reducing the total hours that are worked by the employee who is covered by the plan
  • The individual who is covered by COBRA is entitled to get Medicare
  • The legal separation or divorce of the individual who is covered
  • The death of the individual who is covered

Qualifying events for the dependent children of the individuals who are covered are similar to that of the spouse but has this addition:

  • Losing the status of being a dependent child as listed in the rules of the specific plan.

 What are the Benefits Covered Under Cobra?

 The qualified individuals and beneficiaries must also receive a coverage that is similar and available to those who are situated in the same beneficiary as those not receiving the coverage of COBRA. In general, this is the similar coverage that an eligible beneficiary has as immediately as possible before he or she has qualified for a coverage that continues. If there is a change in benefits due to the specifics of the plan for an employee who is currently working, this will still apply to the beneficiaries who qualify. Qualified beneficiaries can also make similar choices that are offered to the individuals who are not under COBRA, like periods of enrollment in the plan in an open setting.

Who is charged for the COBRA coverage?

The beneficiaries are required to pay for the coverage under COBRA. This premium may not go beyond the 102% of the total cost of the plan especially for individuals who are similarly situated but have no incurred the qualifying events as specified. This also includes the portion that is covered by the employees as well as the portion that the employer has already paid for even before the event that qualifies, atop the 2% rendered to cover the administrative costs.

For beneficiaries who qualify, they receive the 11-month disability that is the extended duration of the coverage. This is also the premium targeted for the additional months that can also increase to as much as 150% for the total cost and coverage of the health plan.

COBRA premiums can also increase if there are costs to the said plan that also increases but these can also be fixed when set in advance for every premium cycle of 12 months. The plan can also let the qualified beneficiaries pay the premiums indicated on monthly basis if they requested for this. The plan can also let them make the payments in other intervals, the choices are weekly basis and quarterly basis.

The initial payment of the premium can also be made during the 45 days after the COBRA election date of the qualified beneficiary. The payment can also cover the coverage period after the COBRA election date that is retroactive to the loss of coverage date because of the event that is considered to be qualifying. The premiums for successive coverage periods are due and set on the date that is stated and mentioned in the plan coverage with 30-day minimum for grace period payments. Payment is also considered to be made accordingly on the specific date that is directly sent to the plan coverage.

If the premiums have not been paid on the first day of the coverage period, then the plan can opt to cancel the coverage until the payment for this has been received and immediately reinstate the coverage as retroactive to the start of the coverage period.

If the amount of payment that was made to the coverage was conducted in error but not significantly lower than the amount due, then the plan requires to be notified by the beneficiary that is qualified and report it as a deficiency. The individual will then be granted a period that is reasonable, which is usually 30 days, to pay for the difference. The plan coverage is also not required to send the individual monthly notices of the premium.

The COBRA beneficiaries stay as subject to the rules especially to the plan and must also satisfy the costs that are related to deductibles and co-payments. These are also subject to benefit limits.

The Federal Government and COBRA

The continuing coverage of COBRA as administered by the several agencies like Department of Treasury and Department of Labor have jurisdiction especially on the private-sector and health group plans. Meanwhile, Department of Health and Human Services also administers the coverage as it continues because it has an effect on the plans for the health of the public sector.

The regulatory and interpretative responsibility of the Labor Department can be limited to the notification requirements and disclosure of COBRA. If further information is needed about ERISA in general, then the individual can just write to the office of EBSA that is nearest to him or her. It is also possible to consult the US Department of Labor as well as the US Government for the listing in the phone directory of the office near them. EBSA is Employee Benefits Security Administration under US Department of Labor.

The Department of Treasury as well as the IRS has also issued regulations on the provisions of COBRA that is related to the coverage, eligibility and premiums. Both the Department of Treasury and the Department of Labor share the jurisdiction for enforcing the said provisions.

COBRA coverage and the Marketplace

When the individual loses the insurance that is received from his job, then he is also offered the continuation coverage of COBRA by his or her former employer, if the latter opts to do so.

If the individual chooses not to take the coverage of COBRA any longer, then he or she can just enroll in the Marketplace plan. Losing the coverage from the job-based health premium lets the individual qualify for the Special Enrollment Period. This is a period of 60 days that allows the individual to enroll the health plan and this can be done even if it is outside the Open Enrollment Period.

Is it possible to change from COBRA to a Marketplace Plan?

If the individual’s COBRA is running out, he or she can still change during Open Enrollment. It is also possible to change outside Open Enrollment as long as the individual qualifies for the Special Enrollment Period.

If the individual is ending his or her COBRA coverage earlier than expected, he or she can still change to the Marketplace plan during Open Enrollment. It is however a different case outside Open Enrollment. The individual can no longer change from Cobra to Marketplace in this scenario. He or she has to wait for the COBRA to run out and for him or her to qualify for the Special Enrollment Period in one way or another.

If the COBRA costs have changed because the individual’s former employer have also stopped contributing and is required to pay the full cost of the coverage, the individual can still change to the Marketplace Plan during Open Enrollment. It is the same during outside Open Enrollment. He or she can still change especially when he qualifies for the Special Enrollment Period.

More information on COBRA

COBRA also qualifies as the health coverage or what is also regarded as the minimum essential coverage. That being said, if the individual has the COBRA coverage, then he or she does not have to pay the complete fee that other people who are not covered by COBRA are required to pay.

If the individual has already signed for COBRA coverage but then eventually finds the premium and payments to be too expensive, his or her options depend entirely on whether it is the Open Enrollment Period. He or she can change to the Marketplace but that can cost him or her more than usual because he or she has to opt out of the coverage.

As for people who are wondering if it is possible to switch to Medicaid from their COBRA coverage but outside the period of Open Enrollment, it is important to note that it is also possible to apply for as well as enroll to be covered by Medicaid at any time. The process is to drop the COBRA coverage earlier than expected and to check if the individual qualifies for both Medicaid and CHIP. This is done by people who leave the employers and those who find the COBRA coverage more expensive than expected.

Treatment of Transportation Expenses When Not Traveling Away from Tax Home

When you ride a cab or get in your own car to do business somewhere, have you ever thought of your transportation costs and how much of it you can actually write off? So many materials have been written about deductible expenses when people travel away from their tax homes for business, but those that tackle deductible expenses when not traveling away from home are scarce.

Here, let’s focus on your transportation costs when you are technically not traveling away from home. But before we go to your expenses, remember first that you are considered traveling away from home if you meet the following criteria:

  • Your business or job requires you to be away from your tax home considerably longer than your ordinary day at work.
  • You need to sleep to meet the demands of your work.

If you don’t meet the above mentioned criteria, then you are not traveling away from home so this chapter is for you.

You probably know that the law mostly does not allow deductions for personal expenses, so we’re talking about business expenses here.

Transportation Expenses

By definition, transportation expenses cover your cost of transportation– may it be by rail, bus, taxi or air, as well as the cost of maintaining and driving your own car.

According to the IRS rule, these expenses include all ordinary and necessary costs of the following:

  • Going from one location to another while conducting business or performing your profession, as long as you are traveling within the general area of your tax home.
  • Visiting your customers or clients.
  • Going to a business meeting that is not within the area of your regular workplace.
  • Temporarily going from your home to a workplace when your business or job requires you to have more than one regular place of work. Here, it doesn’t matter whether your temporary workplaces are within the general area of your tax home or not.

Remember that generally, the transportation expenses that will be discussed in this chapter do not include those that you incur when you travel away from your tax home overnight, though the rules here apply when you use your own car to travel away from home overnight as this will cover car expense deductions.

Basically, the transportation expenses that you incur daily when traveling from your home to one or more of your regular workplaces are considered nondeductible. That means that if you ride a bus to travel from your home to one of your regular workplaces, you are generally not allowed to write off the commuting expenses that you incur. However, there are certain exceptions to this rule.

If you go between your home and your temporary workplace outside the general area of your residence, you are allowed to deduct the transportation expenses that you incur. You can also deduct your daily transportation expenses in the following situations:

  • If you have at least one regular work location away from your home.
  • If your home is your regular workplace or place of business and you incur transportation expenses when you go to your home and another work location. However, that work location should fall in the same industry or business, regardless of the distance and regardless of whether the work you do there is permanent or temporary.

When Transportation Expenses are Deductible

Before we go into the finest details, here is a summary of the key locations you should consider and the instances when you can and cannot deduct your transportation expenses:

  • This home is not necessarily your tax home but the place where you live. The transportation expenses that you incur when you travel to and from your regular or main place of work are considered personal commuting expenses and are therefore nondeductible.
  • Regular or Main Job. This refers to your main place of work or business. In the event that you have more than one job, you can determine which of your workplaces your main workplace is by considering the time you spend at each, as well as the activities you have at each and the income you earn at each. While your transportation expense from your main job to your home are nondeductible, your expenses from your main work location to your temporary work location or second job and vice-versa are always deductible.
  • Temporary Work Location. Your temporary work location is any place where you are expected to perform your job in a year or less. You can only write off your transportation expenses to your temporary work location if it is not within your metropolitan area, unless you have a regular workplace or place of business.
  • Second Job. You are allowed to deduct your transportation expenses when you get from one workplace to another if you have more than one job and are required to regularly work in more than one place in a day. Whether or not your two or more jobs are for the same employer, your transportation expenses are always deductible. However, you cannot deduct your transportation expenses if you’re coming from your home going to your second job. Remember that you have to go directly from your first job to your second job for your transportation expenses to be deductible. If you go somewhere else after leaving your first job, the amount you spend for your transportation going to that place is nondeductible.

The above-mentioned rules apply when you incur transportation expenses since you have a regular job away from your home. If your main workplace or place of business is your home, do not use the rules for reference.

How to Know if Your Work Location is Temporary

 If your regularly incur commuting expenses because you have more than one regular work location in the same business away from your residence, you can write off the transportation expenses that you incur for your daily round trip between your home and your temporary workplace, regardless of how near or far that workplace is from your home.

In case you are expected to complete your employment at a particular workplace in a year or less, then your employment is considered temporary. Your employment is not considered temporary if your employment at a work location is expected to last for more than a year.

But what if your employment was initially expected to last for less than a year, but due to unavoidable circumstances, you are suddenly expected to work for more than a year?

In that case, your employment will be treated as temporary and same rules on tax deductions apply. If your temporary workplace is not within the general area of your regular workplace and you stay there overnight, then you are considered traveling away from home and the treatment of your transportation expenses depends on the rules under the Traveling Away From Home section of the IRS Publication 463.

 If You Do Not Have a Regular Place of Work

 If you do not have a regular place of work but usually works in the metropolitan area of your residence, you can write off your daily transportation expenses between your home and temporary workplace that goes beyond that metropolitan area. The IRS defines this metropolitan area as the area which covers the area within the city boundaries, as well as the outskirts of the city.

Keep in mind that you cannot write off your daily transportation costs if your temporary workplace is located just within the metropolitan area because these expenses are considered nondeductible.

When You Have Two Places of Work

 Some people have more than one job in a day, and therefore have to go to two work locations in a day. If you are one of them, you are allowed to deduct your transportation expenses when you get from your first work location to the other and vice-versa. That is regardless of whether or not your two jobs are for the same employer.

But what if for some personal reason you fail to go directly from your first work location to the next?

In that case, you are not allowed to deduct your transportation expenses because the rule states that you cannot write off more than the amount it costs you to go directly from your first workplace to the next.

For instance, it’s your day off from your main job and you incur transportation expenses when you go between your home and your part-time job, such costs are considered commuting expenses and are therefore nondeductible.

When You are a Member of the Armed Forces Reserve Unit

 Specific laws are set in place for people who are members of the Armed Forces reserve unit.

Say you have a meeting in that unit. If that meeting is held on a day when you are not off from your main job, then the venue of the meeting is considered as a second place of business and the transportation expenses you incur in getting there from your main workplace are deductible.

However, if the meeting is held on a day when you don’t work at your regular job, your transportation expenses become nondeductible.

The story is different if the place where the meeting is held is temporary and you have more than one regular place of work.

Say you regularly work in a certain metropolitan area but not at any specific location in that area, and the meeting is temporarily held outside that metropolitan. In that case, you are allowed to deduct your travel expenses.

Your transportation expenses also become deductible if your being a reservist requires you to travel more than 100 miles away from your residence. If you travel that distance in connection with your performance as a reservist, you can deduct some of your costs not as itemized deductions but as an adjustment to your gross income.

Commuting Expenses

 Generally, commuting expenses are the transportation costs you incur when you commute from your home to your main place of work and vice-versa. The costs of taking a trolley, bus, taxi or subway between your home and your regular work location are nondeductible since the law sees them as personal commuting expenses.

Regardless of how far your residence is from your regular place of work, you cannot deduct your transportation expenses.

You may ask, what if you still work during the commuting trip?

Performing your job during your commuting trip does not change your commuting expenses from personal to business expenses.

Take this as an example. You use your phone to make business calls while commuting. Or you have your own car and colleague rides with you on your way home. During you travel, you engage in a business discussion. In both cases, your transportation expenses remain personal and nondeductible.

When you commute to and from work, your taxi fare usually is not the only cost covered by your transportation. Take a look at these accompanying commuting expenses:

  • Parking Fees. When you bring your own car to work and pay to park your car at the parking lot of your business location, the parking fee is nondeductible. The only parking fee that is considered deductible is that which you pay for when you visit a client.
  • Advertising Display on Car. Just because you put display material advertising your company does not necessarily mean that your car is for business use, so the expenses you incur for putting such displays on your car are all nondeductible.
  • Car Pools. When you use your car in a nonprofit car pool, you still cannot write off the cost of doing that. You should not include the payments that you receive from your passengers in your income. However, you may do otherwise if you operate a car pool for a profit. In that case, you may include their payments in your income and then deduct your car expenses.
  • Hauling Tools or Instruments. Hauling instruments in your car when you are commuting to and from work does not make your transportation expenses deductible.

 When Your Home Qualifies as a Principal Place of Business

 If you consider the place where you live as your main place of work or business, your daily transportation costs between your home and your other work location are deductible. Take note, however, that the work you do in your home and in the other workplace must be in the same business.

All things considered, it is safe to say that nothing in tax law is straightforward, no matter how easy you may find identifying deductible transportation expenses is.

Meal Expenses: How Much Can You Deduct?

Treating your customers and employees occasionally is one of the best ways to build your business. Going the extra mile to make them feel valued goes a long way, although you may not see that now. If you worry about the expenses you may incur taking them out for a meal, you shouldn’t because meals are considered a legitimate business tax deduction. In fact, even your own meals can also be deductible. But of course, there are limits on what you can write off.

Meals become a legitimate tax deduction only in these two situations:

  • You are traveling away from your tax home for your business or job and need to stop to get considerable rest somewhere so you can perform your duties well.
  • The meal is related to your business or job.

If you satisfy either of the two situations, then your meal becomes a deductible expense.

Now let us set aside business-related meals and focus on the first situation. The IRS law states that when you are traveling away from your tax home for work–may that be for your job or business—your meal expenses become deductible. Does that mean that you can eat whatever you want while on duty and completely write everything off? The answer is no.

Actually, there are meals that you can completely write off, while there are meals that are only subject to 50% deductions. You can also not eat too lavish or extravagant meals and expect them to be deductible. In that case, you purchase your meal at your own expense.

Too Lavish or Extravagant Meals

 The law states that meals that are too lavish or extravagant are never deductible. But how do you gauge the lavishness or extravagance of a meal?

Simple. As per the IRS Rule 463, “An expense isn’t considered lavish or extravagant if it is reasonable based on the facts and circumstances.” Just because you conduct business at a high-end restaurant does not necessarily mean that you are being lavish. In fact, the law won’t disallow your meal expenses just because the meal takes place at a deluxe restaurant or hotel.

If you are treating a potential client you are trying to close a deal with, treating him to a sumptuous meal at a high-end restaurant is reasonable enough. However, if you are only conducting a business meeting with your employees to discuss your Christmas party, treating them to a buffet restaurant doesn’t seem reasonable at all. Again, it depends on the facts and circumstances.

Now it’s clear that you cannot deduct expenses for lavish and extravagant meals. However, that is not the only exception. While lavish meals are totally not subject to deductions, some meals are subject to deductions but only to a certain limit.

50% Limit on Meals

 In the law, there exists this 50% limit when it comes to meals and other entertainment expenses. Determining which of your meal expenses are subject to this limit is necessary to know how much you should write off. You use the following methods to figure your meal expenses:

  • Actual Cost.
  • The Standard Meal Allowance.

Notwithstanding the method that you use, remember that you are allowed to deduct only 50% of the unreimbursed cost of your meals. In case you are reimbursed for the cost, how you apply the limit solely depends on the reimbursement plan of your employer. Is it accountable or non-accountable? On the other hand, if you are totally not reimbursed, the limit applies regardless of what the unreimbursed meal expense is for. That means that whether your meal is for business entertainment or business travel, your unreimbursed meal expense is always subject to the limit.

Now let’s go back to the two methods that you can use to figure your meal expenses–the actual cost and the standard meal allowance.

Actual Cost

 This method is less complicated compared with the other method. You simply use the actual cost of your meals to determine the amount of your expense before reimbursing the cost and applying the 50% limit on deductions. If there is one important thing that you should remember when using this method, it’s that you should always keep your records to prove your expenses.

Standard Meal Allowance

 If you do not want to use the actual cost method, you are free to use this method in figuring your expenses for meals.

Generally, this alternative method lets you make use of a set or fixed amount for your daily meals and incidental expenses (M & IE) instead of backing up your actual costs with records, particularly receipts. Well, of course you can still keep receipts for future reference, but you won’t need them as much as you will need them when you use the actual cost method. Under this method, the set amount hugely depends on where and when you travel.

The standard meal allowance method makes mention of a fixed amount for daily meals and incidental expenses. You may probably ask, what are those incidental expenses?

Incidental Expenses

 According to the IRS Publication 463, incidental expenses refer to the fees and tips that you usually give to baggage carriers, porters, hotel staff and the likes. Since they are only incidental, they are not your main expenses. However, these incidental expenses supplement your main expenses.

While these expenses are only considered supplementary expenses, they do not include the money you spend for laundry, lodging, pressing of clothes, mailing cost and telephone or telegram charges.


 There are days when you do not get to incur any expense for your meals. If that is the case, then you may use the incidental-expenses-only method in determining the amount of deductions you are entitled to. This method is an optional method that you can use instead of the actual cost method if you want to write off your incidental expenses only. When you use this method, you can deduct $5 a day from your expenses if you did not spend anything for your meals.

You should also note that you cannot use the incidental-expenses-only method just whenever you want, or on any day that you apply the standard meal allowance method in determining your deductions. The proration rules for partial days strictly apply to this method. However, it is not subject to the 50% limit on meal deductions.

But how will you know if your meal allowance is subject to the 50% limit? Well, this limit is a bit tricky so you have to learn the ropes.

50% Limit on Meal Deductions

Say you are not reimbursed after applying the standard meal allowance method for your meal expenses, or you used the same method but are reimbursed under a non-accountable plan. In that case, you are allowed to write off only 50% of you standard meal allowance.

This goes the same way if you are reimbursed under an accountable plan and are writing off expenses that are more than your reimbursements. In that case, you are allowed to deduct only 50% of the excess amount.

Are You Allowed to Use the Standard Meal Allowance Method?

 Whether you are an employer or an employee, you are free to use this method. It also doesn’t matter whether you are recompensed for your traveling expenses or not because either way, you can use the same method. But while the law is somewhat lenient when it comes to the use of the standard meal allowance, you should remember that there is also a limit as to where you can use it.

If you are traveling for investment or other income-generating activities, you can use this method in treating your expenses. If you travel for qualifying educational purposes, that is also acceptable. However, if you travel for charitable or medical purposes, you cannot use this method in figuring the cost of your meals.

Is There Any Standard Rate for the Standard Meal Allowance?

 The standard rate for the standard meal allowance is equivalent to the federal M & IE rate. As of 2016, the standard amount for travels in most of the small localities in the United States is set at $51 per day. This rate does not apply to the country’s major cities and localities, which are considered high-cost areas. In their case, higher standard meal allowances apply.

If you want to know the amount of standard meal allowance in the state you are in, you may visit for the per diem rates of each state for the current fiscal year. You just have to enter the zip code of the city or state that you want to know the per diem rates of through the dropdown menu.

What if You Travel to More Than One Location in a Day?

 If that is the case, then you have to use the applicable rate in the location where you stayed longer to take a rest or sleep. However, the same rule does not apply if you are working in the transportation sector. Workers in the transportation industry are entitled to special rates and are not covered by the mentioned rate for the standard meal allowance.

But how do you know that you are working in the transportation industry? Take a look at these requirements:

  • Your job directly involves transporting goods or people by plane, bus, train, ship, barge or truck.
  • You are regularly required to travel away from your tax home and in one single trip, you become eligible for different standard meal allowance rates.

Once you confirm that you are actually working in the transportation sector, remember that you are allowed to claim a standard meal allowance of $63 a day for your travels. You become entitled to this special rate so that you no longer need to know the standard meal allowance that applies to each and every area where you stop for sleep. When reporting on your income tax return, make sure that you use this special rate for all your travels and not the regular standard meal allowance rates for each state.

When it comes to the federal government’s fiscal year to use, it’s up to you. Once you visit the GSA website to check out the list of the per diem rates of each city or state, you may either choose the rates from the 2016 fiscal year table or the 2017 table to report your travels, which is crucial in determining your income tax return for one fiscal year. However, you have to be consistent. If you use the 2016 table in reporting one travel, then you must use the same table for all the other travels you are reporting.

What if You Travel Outside the U.S.?

 The Department of Defense has assigned locations which can be considered foreign areas and non-foreign areas. The standard meal allowance rates mentioned above do not apply to these areas.

There are special rates that apply to non-foreign areas like Alaska, Hawaii, Puerto Rico, Guam, the Northern Mariana Islands, U.S. Virginia Islands, American Samoa and Wake Island, as well as to non-foreign areas which are geographically located outside the continental U.S.

If you travel to a non-foreign area outside the U.S. and want to know the per diem rate that apply to your travel location, go to But if your travel location is a foreign area, you must go to Under the Foreign Per Diem Rates, click on Travel Per Diem Allowances for Foreign Areas. You will then see the list of per diem rates in the area that you are looking for.

 Whether you are allowed to use the standard meal allowance, entitled to special rates, travel in the U.S. or outside the U.S., it is always critical that you maintain proper records to substantiate all your meals. Always be on the safe side by making sure that you have something to present to back up your expenses once the need for an audit arises in the future.