Individual Tax

Why are we still talking about the 2018 Tax Reform Bill?

Congress has gone on to go against the will of the majority and pushed a tax framework that a multitude of Americans are opposed to. Therefore, it is important to note that there are various leading tax academics, analysts and practitioners that believe various tax games as well as roadblocks and glitches when it comes to the field of tax legislation.

The complex rules have proposed that the Senate and the House bills let the new tax games along with the planning opportunities directed to tax payers who have been advised will lead to consequences and costs that were not anticipated. These costs are not fully shown and reflected at the moment because the official estimates indicate that the bills are now an overall total of $1 trillion to the deficit and will continue in the coming years. There are other proposed changes that are expected to encounter roadblocks and can later on jeopardize the critical elements on legislation. In other words, there are still cases that have technical glitches connected to legislation and are improperly and haphazardly penalized on the benefit of the corporate along with the individual taxpayers.

These are the various problems that the bill can imposed in the respective areas:

* Corporations as Tax Shelters – once the tax rate in the corporate level is reduced because of the absence of anti-abuse measures that are effective, the taxpayers are then able to transform the corporations to a savings vehicle that is tax-sheltered and adept in various strategies.

* Eligibility Games of the Pass-Through – the taxpayers can circumvent the limitations when eligible for the tax treatment that is passed through the businesses.

* Restructuring Local and State Taxes in order to Maintain the Deductibility – by denying the reduction on the local and state taxes, jurisdictions are then incentivized so that it can be restructured to the form that the revenue collection is trying to avoid the change. This results to an undercut of one of the largest raisers of revenue in the entire bill.

* International Games, Roadblocks and Glitches – the complex rules set for the tax reform are meant to make an exemption to the foreign income of the domestic corporations that are derived from the US taxation and is present to various avoidance and tax planning opportunities.

* Money Loophole Machines – the various tax rates that are imposed on the different forms of business income through the years are also invited to come up with the arbitrage strategies whereby the taxpayers are then achieved in an economic benefit that is based solely on the assignment and timing of the income as well as the deductions.

The studies and reports conducted ended with a serious warning. These analysts claim that there will be more problems with the bills. These are likely to emerge. For example, the tax games will eventually reduce the tax revenues and increase the over-all cost of legislation. This results to legislation becoming more regressive than it actually is. In addition, the tax complexities are also necessary so that the policy of new rules can take effect and also prevent the abuses. This ensures that the legislation will also move taxpayers further away from their goals. Before, this was simple, more efficient and more equitable. The IRS and the Treasury may also be overwhelmed when it comes to the efforts in the policy-making of maniputable and new rules especially during a period when funding is reduced and there are constraints in the budget.

Members of the House and the Senate should reassess the process of tax reform as well as the result of the legislative proposals that they create. This is to undertake an approach that is more deliberate and can reach far in terms of legislation. This will definitely affect the economy in a significant behavior which will also benefit the taxpayer.

With that illustration, it shows that the Republican tax-cut bill showers the rich with billions of dollars and not even giving a noticeable boost to the economy. The plan is actually worse than what most Americans think because there are estimates that taxpayers did not even put into account. These are the games, planning and cheating that some of the taxes impose on the bill that was hastily written but quickly encouraged.

In its current form, analysts show that the bill costs more than $1 trillion dollars for the Treasury. This can range to 10 years. A majority of the extra money can also go the wealthiest Americans as well as the most successful and largest multinational corporations.

With this tax reform, instead of the capitalism and unleashing of the productive side, the business planning would be revolving around mining favors from tax code as opposed to creating the economic value. The final legislation can also deliver large benefits to the best advisers than even the current estimates may also suggest. Analyst and the practitioners have also combed through legislation that has been passed by the House and Senate than can uncover the glitches and the loopholes that allow the tax games as well as the aggressive tax planning.

Eventually, the riches 1% of the Americans can hire lawyers and accountants and these people will be busy in mining the bill for potential benefit. Then they also would receive a windfall that averages $48,000 annually.

The US treasure also receives hundreds of billions in revenue. It ratchets the pressure on Congress and also slashes the federal spending on Medicare and Social Security including education and infrastructure.

This new law creates lower tax rates for pass-through businesses and corporations like sole proprietorships and partnerships. It gives individuals large incentives to shift their income as much as possible into the business. The upside to this though is that taxpayers would pay less in taxes.

There is also the proliferation of avoiding the opportunities that leads to the diversion of resources are from productive activity that leads to the tax planning. Instead of unleashing capitalism’s productive side, it unleashes that this side is parasitical. Business planning also revolves the mining favors of the tax code. It creates economic value.

Three Huge Opportunities to Beat the Tax Bill

Individuals and companies must follow these four tax planning opportunities in order to work around the new tax cuts and budgets from the bill.

  1. Using corporations as tax shelters


The conference bill taxes of the C corporations were at 21% in the beginning of the year. This results to tax payers still having the ability to use the corporations and set this on a savings vehicle that is tax preferred. With no protection that comes to the bill, C-corps can then use this to shelter the income from the ordinary income tax rate.


The use of corporations in the form of tax results lead to the labor income taxed at the preferred rate of 21%. This also eliminates the entire second layer of the taxes when the individual revives the dividend and then sells this in the corporate stock form. The incentives of using corporations as tax shelters is reduced under this bill because it is relative to the previous various. This also results to the higher corporate rate. It is from 20% that increases to 21%. The lower top individual rate is also 39.6% that has decreased to 37%. According to reports, these tax savings are regarded as considerable.


The pre-existing safeguards that avoid the consequences are inadequate and can also be in the lighter side of the incentives planning that the rate differential establishes.


  1. Pass through-games

The new bill from the Congress grants a 20% reduction from specific qualified business income. This reduces the tax rate that starts from 37% down to 29.6%. This also provides an incentive for taxpayers to consider their income into the category that is qualified. However, there are complex rules that come with these gaming opportunities. There is also no clear and specific logic to determine who fits into the categories because the game is often played within haphazard lines. As a matter of fact, the conference bill makes the matters more worse. It allows the owners of the firms who earn no wages and specific kinds of property to make the most of the lower rate.


This change also expands the available deduction for the pass-through and greatly encourages businesses to follow the rules and increase the ownership and turn these into qualifying properties. This can also possibly replace the workers in the process.


Service providers can follow the number of steps that qualify to the pass-through deduction. For example, a married employee that has taxable income lower than $315,000 can gain the incentive of being an independent contractor or even a partner, as opposed to being an employee. At the same time, they can still receive the full benefit. Another example is that the higher-income doctors, law partners and other professionals will most likely be able to take part on strategies that access the special rates like buying buildings and also owning these as separate entities.

Another important loophole of the pass-throughs is that they can largely surpass the limits on the expense of the interests. Public corporations can also pass through the subsidiaries and expect these to do the same.


  1. Restructuring State and Local Taxes (SALT) to maintain deductibility

The conference bill caps that the deduction on the SALT amounts to $10,000 and also permits that there is a combination of the taxes required to reach the cap. IN various parts of the country, taxpayers have to pay both the local and the state taxes as well as the excess of $10,000. The states that are affected have the ample incentive of responding creatively to the changes that are in the federal tax law.

Listed under the conference bill, there are three possible responses from the municipalities and the states to restructure the collections of the revenue and to also preserve the SALT deduction.

These strategies rely on replacing the state taxes that are not deducted on the cap with the other taxes along with the sources of revenue like charitable donations, franchise taxes and employer-side payroll.

Taxes imposed on the business can be deducted. States can shift from the non-deductible over the cap state income taxes so that the employer-side payroll taxes remain as such. This new law also permits that there be a shift on the sue of the non-deductibles along with the state income taxes. When this is done, then there is the deductible and charitable contributions for the local and state governments.

As for the franchise taxes, the report also states that the local and state taxes must stay deductible for the pass-through businesses. As long as these are imposed on entities and the individuals.


It is obvious that the tax bill is horribly flawed and also riddled with errors. It must not be assumed that the result is unintentional. The bill does more than its ultimate aims of the Republican gaining leadership in the Congress. It also rewards the wealthy by starving the beasts. This has always been the twin goals of the fiscal policy of the Republicans for decades.

This tax bill also weakens the economy, encourages companies and individuals spend more, and increase the deficit on trade whenever the tax code is complied. The budget can also affect the mortgage rates as well as educational budget after a decade. Taxpayers may be paying less but there is a catch to this. They may not receive the benefits that they expect to get by the time they decide to retire and earn their hard-earned cash that they worked for years to receive.

Almost everything that Republican representatives discuss about the tax bill is a myth. It is not for middle class and it does not pay for itself based on its growth. It does not influence and convince companies to make an investment in America. In other words, it does not make the tax code any simple.

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.

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 Liabilities of a Decedent

Because this is not often encountered, a number of tax practitioners are doubtful whenever they are asked to prepare the decedent’s final illness tax form. Often times, tax practitioners do this differently compared to how a living client would do it. They determine who signs the return especially in the stead of the decedent.

In this situation, it is better that the patient takes control of the situation and then make the form for decedent’s final illness be effective especially when planning the post-mortem. Practitioners can also aim to confidently access the Final Form 1040 and then calculate the tax savings for the family of the decedent.

Here are some necessary information about tax planning as well as preparation for decedent’s final illnesses.

Stop concluding an estimate of tax payments

When a taxpayer dies, this individual is no longer required to make tax payments, especially those that are estimated. There are family members that continue to submit the quarterly estimated tax vouchers especially during their final illness but truth of the matter is, this is not a requirement. In fact, when this is done, funds are taken out of the investment portfolio of the individual. If they do not do this, they could be earning income and growing their business instead.

Another thing to note is that no joint estimate of the tax payments can occur after the death of the decedent. The estate is also not liable to make payments. The tax year of the decedent finishes on the day he dies so the only income that is received until that date is reported on the Final Form 1040. If the deceased paid an amount every quarter in order to cover a tax liability that is expected of him, then he would no longer need to even generate those payments even after the end of that particular tax year. However, the spouse that survives the decedent has to make an estimate of the payments for tax liability of his or her own.

If the taxpayer is already deceased and took advantage of the safe harbor tax in the prior year then he can make estimated payments. The Form 1040 can then end up with balance that is due later that year as long as the tax preparer eliminates the filing of the Form 2210. This is Underpayment of Estimated Tax by Individuals, Estates and Trusts.

Who Signs?

The surviving spouse that files the joint return does not have to do anything in particular. Instead, the spouse signs on the departed’s behalf. If someone aside from the behalf is appointed by any court to administer the affair of the decedent, that personal representative or executor must sign this return and then attach copies of the certificate which clearly shows that an appointment was officially made.

If the return has an overpayment of taxes then it is clearly not a joint return associated with the surviving spouse. There is also no court-appointed personal representative or executor. The Statement of Person Claiming Refund Due to a Deceased Taxpayer of Form 1310 must then be filed and attached is the return that a refund must be obtained.

Cases of a Refund

If the decedent has incurred medical expenses during the illness and departed early during the year, this reports to a less substantial income. The family of the policy holder must then consider a separate filing because this would save taxes and let medical expenses exceed the gross income threshold. It creates an overall result for the loved ones of the policy holder.

Savings Bond Interest is Taxable to the Holder of the Bond

Here is a planning strategy for post-mortem. Savings bonds used to be popular among the older generation. Decedents have bonds that contain accrued interest and roll them into bonds that have been converted. These kinds of bonds accrue interest until the policy matures. This accrued interest that has not been taxed will eventually be taxed when the policy holder of the bond cashes this.

There is an exception that lets the accrued bond interest be reported on the final illness Form 1040. This saves the tax and carries these over the beneficiaries of the child’s marginal tax rate. This rate depends if the interest is cashed with the bonds.

It is very important to consider the reporting. The interest that is accrued through the day the decedent passes away is listed on the Final Form 1040. Afterwards, the beneficiaries then cash these bonds. They will then receive Forms 1099-INT or what is called Interest Income. The interest that they receive will be more than what is reported by the decedent final illness. This also continues as a form of accruement on bonds.

Those who have been listed as beneficiaries by the policy holder must report interest on personal returns in order to avoid duplicates from IRS. On the next line that is indicated Schedule B and with the subject Interest and Ordinary Dividends, beneficiaries must deduct it as negative income items with explanations that interest is also reported by the decedent. This is under Sec 454 of the policy. Bonds must also be cashed as quickly as possible. If these are cashed out five to ten years after the passing away of the decedent, it is easy to lose track of the accrued interest. The date of the decadent’s passing away must also be reported so that it can be taxed.

If the decedent turns out to be the beneficiary of the said bond, then this is for the best. When preparing Form 1041 or what is called the US Income Tax Return for Estates and Trust, the one filling up the tax or referred to as tax practitioner controls the process and reports the interest of the bond. The estate eventually reaches the possible rate of the federal tax.

However, if the decedent’s final Form 1040 is of a love tax rate, the family can definitely save from the taxes. It still depends on the value of the bond interest. They can also save if they report the interest of the bond and list this on Final Form 1040.

Allocating the income between pre-and-post death reporting

When a loved one passes away, they list the date of death and then most of the beneficiary, or family members, cannot obtain the federal ID for the estate. They also call the brokers and open new accounts and make sure that this is listed under the estate’s name. Then they transfer the decedent’s assets to those accounts that were newly created. This cannot be completed immediately due to the legal processes especially the appointment of the personal representative or executive. This takes times. The Forms 1099 that is strictly for investment earnings especially for the year when the decedent passed away is messy. This is usually included in activities that have taken place after the day the decedent passed away. It may also include the sales of securities and the basis that it has been adjusted to the values of the date of death.

The income that has been earned prior to the death of the decedent must be allocated to the Form 1040. Any earnings that have been accumulated after the decedent’s death must then be reported on Form 1040 to report this to the estate or to the return of the beneficiary. If this is an asset or a title that must be immediately transferred on the time of the decedent’s death, then the post-death earnings must be considered and reported to the surviving spouse.

Usually, the surviving spouse files jointly alongside the decedent. If this is the case, then this must be moved to a post-death income so that the Form 1041 can let the expenses incur even after the decedent passes away. The administrative expenses that have been incurred because of the policy holder’s death, along with the administrative expenses can also be incurred due to death. The administrative expenses can also be incurred due to death and to the offset of the post-death income. This is to consider the cost that is prepared and listed on Form 1041 that can be used by the expenses and for the income to be offset.

Medical Expenses concerning the Decedent’s Final Illness

Medical expenses can be deducted from the Final Form 1040 or in the form of debt and the federal estate return. This is also called Form 706 or United States Estate Tax Return. This is also Generation-Skipping Transfer. Here, the greatest benefit can be derived. When this is deducted and listed on Form 1040, then any expense that have been paid from that year is also deducted. It does not matter if it was paid before or even after the death of the decedent.

Medical expenses are eligible for the deduction on the Form 706 and the ones that have been paid are only after the decedent’s death. Medical expenses will not and can never be deducted from the Form 1041.

Federal Estate Tax is Not Deductible and State Estate Tax is Deductible

The federal as well as the state estate tax are deducted on the tax return of the federal income. However, beneficiaries can also be entitled to receive itemized deductions for the estate and also use this as what they call the generation-skipping tax that is transferred and eventually attributed to the income tax. This is due respect to the decent (IRD) and then placed on the individual income tax returns allocated for the year that is included in the income. Funeral expenses cannot be deducted on the income tax return.

Federal Income Tax Is Deductible

Amounts that are indebted on the final ITR or income tax return can be deducted as debt on the estate return. This is also called the Form 706. Meanwhile, income tax refunds can also be taxable to estate in the form of accounts receivable.

There is an option that is regarded as the deathbed conversion and moving it to Roth IRA. If the tax is then converted to the IRA and then it reduces the over-all size of the federal and taxable estate and then it leads to less income tax and then allocate this to the beneficiaries whenever they take withdrawals. This is what can benefit the loved once. By cashing the IRA as a whole before the decedent passes away, then the beneficiaries can lose the tax-free growth in the account balance which occurs over the expectancy of one life.

Think about taking the IRA withdrawals when the decedent is closing in to his or her final illness. If the beneficiary is near death, then it is enough that his or her income can be quite low and much to the withdrawal of the IRA. This would then proceed and fall to lower tax brackets. By taking that large IRA withdrawal and getting the amount then the resultant federal income tax can also be reduced to the assets of the estate when the decedent passes away. It can also be deducted to  what is already owed to the estate which then leads to the same low figure.

Extending Form 1040 to Facilitate the Planning During Post-Mortem

Form 706 or what is also called the federal estate tax return can also be due nine months after the decedent passes away. Form 1041 or what is called the estate income tax return is also used as a fiscal year end that can also be accepted on the last day of the month which falls in the next year before the month the decedent passed away. Form 1041 is due the 15th days of the fourth month after the end of tax year.

It is often preferred that the Final Form 1040 be extended and then prepared these returns so that all the angles are considered. Form 1040 is due every April 15 and when the decedent or the taxpayer passes away then there is a six month extension that can be received when the Form 4868 is filed. Taking the extension can then provide flexibility in determining that things that have been reported and then obtained to the over-all tax of the family.

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.

Interest of US Savings Bond

Interest on US Savings bonds are the low-risk savings products that usually have to be paid interest for a maximum of 30 years. The individual purchases these bonds though an electronic form care of Treasury Direct. These US savings bond are no longer issued in paper form. When the individual is an account holder of these US Savings bond, he or she can buy, manage and also redeem these interest on US savings bond directly from their browsers.

Purposes of US Savings Bonds:

  •  To finance an individual’s education
  • To supplement retirement
  • To give as a gift

 Rates and Terms of US Savings Bonds

  •  These savings bonds earn an interest at a fixed rate.
  • These savings bonds have interests added to them and they can be paid through cash when the bond is paid.
  • The bonds that have been sold at half the face value is then paid at a rate of $25 for every $50 bond that has been paid.
  • These electronic bonds that have also been purchased are then sold at a face value.

 Redemption Information of US Savings Bonds

  •  The individual must have a minimum term of ownership for 1 year
  • The individual must also have an interest-earning period of 30 years
  • There are early redemption penalties that are either a) before the 5th year with the forfeit of the interest from the 3 most recent months b) after the 5th year, there is no penalty.

 Tax Considerations

 The savings bonds are then exempt from the taxation by the State and the political subdivision of a State except for the purposes of inheritance or estate taxes.

Interest earnings are obviously subject to the Federal income tax

Interest earnings are also excluded from the Federal income tax when the bonds are eventually used to refinance the education. Check the education tax exclusions as well as the restrictions that apply.

US Savings Bonds Rates and Terms: Calculating Interest Rates

 What interest rates can the individual get if he or she buys the bond right now?

 The composite and usual rate for the US Savings Bonds that are issued between May 1, 2017 and October 31, 2017 is 1.96%. The rate that applies for the first six months allow the individual to essentially own the bond.

How do US Bonds Earn Interest?

 US Savings Bonds earn the interest monthly and it begins on the very first day of the month that it has been issued. The interest then accrued and eventually added to the bond and lasts for a maximum of 3 decades.

  • The interest is then compounded on a semi-annual basis. For every six months that the bond has been issued, all the interest that the bond has accumulated in the previous months is the new principal value of the bond. The interest is then earned on the new principal for the six months that follow. In this situation, in the seventh moth, the interest is eventually earned at the original price at the rate of the six months of the interest. On the 13th month, the interest is eventually earned and accumulated on the original set price at 12 months of the interest. (Note that the values that are displayed on the Savings Bond Calculator for the US Savings Bonds are less than five years. These should not be included in the last three months of the interest. These values also reflect the interest penalty of the amount.) If the individual holds the bond for less than five years, when this is cashed and redeemed, the whole amount of the bond is then received and also earned including the amount that was already paid.
  • It is possible to redeem the US Savings Bond after a year. However, if the individual does this before the bond even becomes five years old, then he or she loses the remaining three months of the interest.


How Does Treasury Figure the US Savings Bond Interest Rate?

 The interest on these US Savings Bond is a combination of the following:

  • An inflation rate
  • A fixed rate

In order to determine the current value of the individual’s bonds, he or she is advised to turn to the Savings Bond Calculator. When this tool is used in order to look up the total value of the US Savings Bonds that are usually less than 5 years, the individual must take note that these values usually do not over the remaining three months of the interest. However, it is also important to remember that the Savings Bond Calculator show the amount that these bonds fail to reflect due to the interest penalty.

Fixed Rate

 The fixed rate of the interest will let the individual get the bond once it has been bought. This fixed rate also does not change during the entire lifespan of the bond. The US treasury also has announced that the fixed rate for the US Savings Bond is set every six months. This usually falls on the first business days of both May and November. The fixed rate also then applies to every US Savings Bond that have been issued for the next six months of that time period.

The fixed rate of the US Savings Bond is an annual rate. Note that the compounding is eventually semi-annual.

Inflation rate

 Unlike the fixed rate that does not change for the remaining of the bond, the inflation rate usually and can change, especially every six months. The inflation rate is usually set every six months (as mentioned, it falls on the first business days of both May and November), depend it on the changes of the non-seasonal adjusted Consumer Price Index for every Urban Consumers. This is also called the CPI-U and applies to each item, including energy and food.

However, the change is then applied to the bond for every six months upon issuance of the bond. These dates are then changed and it may not fall on May 1 and November 1.

Combining the Two Rates

 In order to get both the actual rate (which is also called the earnings or composite rate), the inflation rate and the fixed rate are combined.

  • The combined rate should not be less than zero – ever. On the other hand, the combined rate can also be lower than what the fixed rate is. If the inflation rate amounts to something that is negative (due to the deflation and not inflation), it is possible to offset a portion of the fixed rate.
  • If the inflation rate amounts to something negative, then it would just take more from the fixed rate. This is not the ideal scenario. It is just important to stop at zero.


US Savings Bonds Tax Considerations

 Is US Savings Bond Interest Taxable?

 Individuals must know that the interest of their savings bond is also subject to:

  • A federal estate, excise task, gift or any other state estate and inheritance tax
  • Federal income tax that is not associated to the local income tax as well as the state tax

Using the money solely for higher education also keeps the individual from paying the required federal income tax on the bond interest of the savings. It is possible to use the US Savings Bond for Education.

Who owes the Tax from the US Savings Bond

 If you are the sole owner of the bond, you owe the tax. If you use the money in order to buy the US Savings Bond and then put it in both your name alongside a co-owner, you owe the tax. If you purchase the bond and someone else is listed, then the person whose name is listed owes the tax. If you and another person purchase the US Savings Bond together and both of you have put money in order to pay it and are named as both the owners, then you and that person must file a report and pay for the interest in proportion to how much was paid by each of you. If you and your husband or wife live in a community proper state and also purchase the bond which is regarded as a community property and then you eventually file for separate income tax returns on a federal level, then you and your spouse pay half of the interest.

In terms of re-issuing and changing ownership:

 If you surrender the ownership of the bond and then the bond is eventually re-issued, then you owe the tax of the bond that is earned until the day that it’s been reissued. If you are the new and current owner of the bond that has been reissued. You owe the tax on the interest that the bond has earned after it has been re-issued but only when or after this has been redeemed. It also shows that the interest is earned on the date that it has been issued and also includes the interest that has been earned before it has been re-issued.

When must the individual report the interest on his or her tax form?

 The individual has a choice. He or she can report the accumulated interest annually or defer or put off the report of the interest until a federal income tax return has been filed for that year in which these following events have occurred:

  • The individual has redeemed the cash from the US Savings Bond and also received the whole worth of the bond that includes the interest.
  • The individual has given up ownership of the said bond upon the re-issuing of the bond.
  • The individual has stopped earning interest because it has reached the final maturity.

 Reporting the Interest Toward the End

 A number of people defer filing and reporting the interest. They also put this off until they get to the point of filing the federal ITR for that said year. There they receive the worth of the US Savings Bond which also includes the interest.

When this stops earning interest, then these are automatically redeemed and then the interest that has been earned is eventually reported and filed to the IRS. It is possible to see the interest alongside the IRS Form 1099-INT.

  • If the financial institution covers and pays for the bond, then the individual receives what is called the 1099-INT from that financial institution right after the bonds have been redeemed which is usually around the first two months toward the end of the year.
  • If the US Savings Bonds have been redeemed, then this will be made available through the account.

 Reporting the US Savings Bond Interest Annually

 It is possible to choose to report the said interest on an annual basis. Those who do this often find it quite an advantage that they report this and file it under the name of their child. The child can then eventually pay taxes at lower rates even after the maturity of the bond.

The individual as well as the child on the bond do not receive the interest every year if they report it in that method. The interest that this bond eventually earns is then reported on 1099-INT after the redeeming and encashment of the bond or the reissuance in order to reflect that there is a change in taxes and ownership. This same form also shows the interest that the bond has been earned through the years.

Once the individual starts reporting the interest on a yearly basis, then the individual must also continue doing the same process year in and year out – especially for the savings bonds as well as future acquisition. The 1099-INT also shows the interest that the bond has accumulated through the years. For the individual to know more about the Interest non US Savings Bonds, they are advised to go to Publication 550 of Investment Income and Expenses to see the instructions in order for them to know how they can report the interest they can get in the coming years. Once he or she starts reporting the interest obtained per year, they can continue doing this in the following years for all their bonds and not just this one.

The Basics of Health Savings Account

An HAS is a kind of savings that lets the employer and the employee put aside some money as a pre-tax in order to pay for eligible medical expenses. It is important to note that an HAS can only be used if the employee has a HDHP or what is also known as the High Deductible Plan.

The HAS is also a medical savings that has a tax-advantaged made available to all taxpayers in the US. The over-all funds that are in the account may not be subjected to federal tax especially during the time of the deposit. The difference between the FSA or what is known as the Flexible Spending Account, is that the HAS can carry over and also accumulate every year if this has not been spent. The reason for this is because the HAS is owned by the employee, therefore setting it apart from the HRA or the Health Reimbursement Arrangement which is owned by the company. This is also an alternate source for tax-deductible funds. Both, however, are paired with standard health plans or the HDHPs.

HSA funds can also be used for eligible medical costs that have no liability or even penalty on federal taxes. Starting early 2011, the medications that are purchased over the counter can no longer be paid using the HSA if there is no prescription from the doctors. The withdrawals for these non-medical costs are also regarded in the same way as those of the IRA or the individual retirement accounts. This is because they can provide the tax advantages if these are taken after they retire. They can also incur penalties when these are taken earlier. These accounts are components of health care that is specifically targeted to consumers.

The HSAs and its proponents believe that these are necessary reforms that can reduce the increase in expenses regarding health care as well as the effectivity of the system. According to these proponents, the HSA can encourage people to save for their unexpected future health care as well as the expenses that go along with it. This allows patients to obtain the necessary care and there is no gatekeeper involved. Usually the gatekeepers determine what the individual can receive as benefits. Consumers are now more responsible when it comes to their own choices in their health care all because of the HDHP.

As for those who do not find the HSA necessary and are opponents of this, they believe that it makes the medical system worse. Health care in the US cannot improve through the HSA because individuals may even hold back on their expenses. They may also spend it in unnecessary circumstances simply because it has already accumulated the penalty taxes just by withdrawing it. Those who have problems in their health have annual costs that are predictable and choose to avoid the HSA so that the costs can be paid by their insurance. There is a current ongoing debate about the satisfaction of the customers who hold these plans.

These usually have lower monthly premiums than most plans that have low deductibles. Using the untaxed funds in the Health Savings Account allows the employee to pay for the medical costs even before the deductible has been reached. This also includes other deductibles such as copayments which are usually payments done from the employee’s pockets. This eventually reduces the over-all value of health care expenses.

The funds from the employee’s HSA carries or rolls over to the next year if it has not been spent in the year it was allocated. The HAS can also earn interest. It is possible for employees to open the HSA through their banks or financial institutions that they have access to.

History of the HSAs

 The Health Savings Accounts were established in compliance with the Medicare Prescription Drug, Improvement and Modernization Act. This is also the enactment of the Section 223 of Internal Revenue Code. This was signed on December 8, 2003 by President George Bush. They were also developed so that it can replace the account system for the medical savings.

Deposits of the HAS

 Deposits to the HSA fund can be made by any individual who holds the policy, as long as this also comes with a HDHP or the high deductible health plan care of the individual’s employer. If the employer makes the deposit to the plan for all his employees then everyone must be regarded equally. This is covered in the non-discrimination rules that is also stated in the act. If the contributions have been made via the plan stated in Section 125 then the rules for non-discrimination also do not apply. Employers have to treat the part time and the full time employees differently. Employers can also treat the family and individual participants n different manner. The treatment of the employees who have not been enrolled in the eligible and high deductible health plan covered by the HAS is not also considered solely for non-discrimination purposes. Employers can also contribute more than usual for the employees who have not been compensated as highly as the others.

The contributions from the employer and to the employee’s HSA can also be made on the pre-tax basis, depending on the preference of the employer. If the said option is not considered by the employer then these contributions are made on post-tax basis and also used to reduce the GTI or gross taxable income on the Form 1040 of the following year. The pre-tax contributions of the employer are also not subject to the Medicare Taxes as well as Federal Insurance Contributions Tax Act. It is important to note that the pre-tax contributions of the employee that were not made via the cafeteria plans cannot be subject to Medicare and FICA taxes. No matter what the method used or tax savings associated regarding the deposit, these can be made by persons that cover the HAS-eligible and high deductible plan that does not include coverage way beyond what is qualified and eligible for the health care coverage.

The maximum deposit on the annual HAS is also the lesser compared to the deductible or what is specified in the limitations of the Internal Revenue Service. Over time, Congress has then abolished this particular limit, basing this on the set statutory and deductible that limits the contributions to its maximum amount. Every contribution that is sent to the HAS, no matter the source, can also be included in the maximum annual amount.

The catch up and statute provision can also apply for the participants of the plan who are aged 55 and older. This allows the IRS to limit the increase. In the income tax year 2015, the limit to the contribution is $3,350 for single individuals and it is $6,650 for married individuals. There is an additional $1,000 increase for those who are older than 55.

Every deposit that is made to HSA can ultimately become the possession of the plan holder, no matter where the deposit comes from. The funds that have been deposited and are not withdrawn can be carried over to next year. Plan holders who also discontinue their qualified insurance coverage from the HSA can deposit even more funds, and the funds that are already placed in the individual’s HSA can still be used.

On December 20, 2006, the Tax Relief and Health Care Act was signed and put into law. It also added another provision that allowed the roll-over of all IRA assets for just one time so that it can equally fund up and amount to a maximum contribution for the HSA that is set for a year. However, the tax treatments on the HSA for every state varies. There are three states that do not let HAS contributions be deducted from the tax earnings or the state income taxes. These are Alabama, New Jersey and California.

Investments on the HAS

 The funds in the HSA can also be invested in the same manner as that of investments that have been done for the IRA or the individual retirement account. The investment earnings that have been sheltered from the taxation until the point that the money has been withdrawn can also be sheltered at that time.

Similar to the IRA that is self-directed, the account for health savings can also be treated as such. A usual HSA custodian offers investments like stocks, mutual funds, bonds, financial institutions and CDs. These also provide the accounts that offer alternatives on investments which can also be made through the HAS. The Section 408 of Internal Revenue Code does not prohibit the investment in collectibles and life insurance but HSAs can also be used to invest in various assets which also include precious metals, real estate notes, private and public stocks and more.

HSAs can roll over from one fund to another and HAS cannot roll into the IRA or the 401k. Funds from these investment vehicles can also be rolled into the HAS, except for the IRA transfer that is done one time as mentioned in the previous paragraph. Unlike the contributions to the 401k plan, the HAS contributions that belong to the plan holder, no matter the deposit source, is already his or her possession. An individual that is contributing to the HSA has no obligation whatsoever to contribute to the HSA that is sponsored by his or her employer. However, employers require payroll contributions be made to the HSA plan that is sponsored.

Withdrawals for HSA

 Policy holders of the HSA do not have to get the advance approval are of the trustee of the HSA or the medical insurer for them to withdraw their funds. Funds are not also subject to taxes if these are for eligible medical costs. The costs include expenses for items and services that have been covered by the plan but is also subject to the cost-sharing of the company like coinsurance, copayments and deductible. This can also over the expenses that are not included in the medical policies. These are vision, dental, chiropractic care as well as the medical equipment that should last for a long time, specifically hearing aids and eyeglasses. Transportation that is connected to medical care are also included in this health plan.

There are many ways to fund the HSA can be obtained. There are HSAs that come with a debit card. There are others that give the policy holders checks so that this can be used. Some have reimbursement processes that is close to having a medical insurance. A number of HSAs also have a number of possible methods for withdrawal of the HSA. The methods that are available vary from one HSA to another. The debits and checks cannot be made payable to provider of the health plan. The funds can also be withdrawn for this reason. Withdrawals are not documents when it is not a qualified and eligible medical costs. These are subject to taxes with a penalty of 20%. This is waived for individuals who are aged 65 and older and have unfortunately become disabled during the time when the withdrawal is done. The only tax that is paid in this situation is taken into effect when the account has already become tax-deferred, somehow similar to the IRA. Medical expenses remain to free of taxes.

The account holders are also required to retain their documentation to show the qualified medical costs. The failure to do this and to show documentation can also cause Internal Revenue to rule out the withdrawals that have not been qualified for the medical expenses along with the over-all costs and subject to the additional penalties of the taxpayer.

Self-reimbursements have no deadline for qualified medical costs that are incurred after HSA has been established. The participants can also make the most of paying for these medical costs fresh from their pockets and also retain the receipts as long as their accounts are tax-free. Money can also be withdrawn for reasons to the value of the recipients.

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.

Child Support and Taxes: Non-Custodial and Custodial Parent FAQs

Child custody arrangements and income are two factors that are very important when determining child support and income tax return. Generally, the non-custodial parent of the child (the parent who takes care of the child for less than half) pays child support to the custodial parent (the one who primarily cares for the child every day.) Custody, child support and income are connected, therefore the responsibilities due to child support also affect the tax returns of the non-custodial parent.

Income affects Child Support orders

When a child support order is established, a judge follows specific guidelines from the state. Those guidelines are “income driven.” This means that the support amount is determined by the income of both parties involved. Income also goes beyond salary and wages. Nonetheless, it is also important for parents to comprehend the funds that are defined us “income” when talking about the guidelines of child support. Take this for example, the new spouse’s income, if the income is deducted from the expenses of the custodial parent, then it is regarded as the income for child support.

The IRS does not consider child support as income

According to the IRS, payments from child support cannot be considered as income that is taxable. This means that child support payments will not be deducted by the noncustodial parent (the payer) and not taxable to the custodial parent (payee). When calculating for the gross income to check if the payer and payee are qualified for filing of tax return, one must not include the payments received from child support.

 Form 8332 affects the Child Tax Credit

Certain individuals can claim tax credit for their children, as long as they have been claimed as dependent. Only the tax paying parent can use the dependency tax exemption when claiming the Child Tax Credit. A parent who is custodial can use Form 8332 and release the exemption for the parent who is non-custodial. Based on the circumstance, the latter can qualify for the dependency exemption and the Child Tax Credit. For explanation on the qualification for Child Tax Credit and its calculation, there are Instructions for Form 1040 as well as Instructions for Form 1040 index for Child Tax Credit.

The non-custodial parent cannot be eligible for EIC even if he or she has received permission from the custodial parent to claim the tax return.

The Earned Income Credit is tax credit for who work and earn income that is less than a specific amount. There are rules that individuals must meet in order to qualify for an EIC. There are some parents who can receive EIC if their child is considered to be a qualifying child. Generally, non-custodial parents have no claim for the EIC because the children do not live with them. This means they do not qualify and pass the residency test. Since the custodial parents meet the requirements, then he or she can claim the EIC.

Child Support is not Tax Deductible

The person paying for child support cannot deduct payments on the tax return. Neither is child support included in the income of the person in charge of making those payments.  IRS states that Child Support payments are not deducted from the payer and not taxable for the payee. Furthermore, when calculating the gross income, child support payments that have been received are not included. The reason behind this is that two tax laws work together in determining the tax for child support. On one hand, it can be said that child support is taxable because of the rule that gross income is all income from the source. However, there is an important qualifier. This is ruled that if it is stated in the subtitle, gross income pertains to any source. Therefore, this includes amounts that have been received as separate maintenance payments or alimony.

But there is also a general rule for exceptions for child support.  Any payment, in terms of divorce or separation as a sum can be considered as payable for Child Support of the payor’s spouse.  In other words, Child Support cannot be regarded as gross income of the recipient of the funds.

The person paying can deduct amounts that qualify as alimony. However, because child support is not regarded as alimony, then the person who is paying child support cannot reduce the payments as part of any tax deduction or alimony. In order to qualify as child support, there are payments that must be designated as such in a separation agreement or divorce.

Child Support in Arrears

The Treasury Department re-directs federal tax refunds from those who have not been paying their child supports.  As mentioned in Treasury Offset Program, the government pays the tax refund money to the child support agency of the state and they then get the funds to the child. There are a number of single parents who are not sure how child support can impact their tax bill. This also holds true to parents who have been receiving the child support for their children as if they were the ones who were paying it monthly.

Child Support is Not Taxable

The parents who are receiving child support must know that money does not affect the taxes that they need to pay. The commonly asked questions are “Will I owe more taxes this year? And “Is child support taxable?” These are nagging questions and the US government does not regard child support as taxable income in whatever form.

While individuals regard child support as part of their income because these checks arrive monthly, the government does not see this the same way. Here’s the truth: people pay income tax on their income. On the other hand, child support is the money that is received for the kids. For the government, it is not income so there are no taxes. Therefore, for single parents, these make it easier for them.

For those who are on the receiving end, this is what they can take away from it: Any money that has been received as child support for the income tax year is not regarded as taxable income and they won’t pay federal or state taxes from it. They will not pay for it today, nor will they pay for it tomorrow.

As mentioned earlier, child support is not deductible. It is actually two fold. The payments from child support cannot be deducted. A lot of parents ask this because they do not miss a single payment of child support. There are tax breaks for single parents but this is not counted as one. If parents pay child support to their children, they cannot reduce this from their total income so that they can adjust their taxable income. However, they must not forget that providing financial support to their children is a contribution to the well-being of their lives and therefore is a meaningful act. They must keep doing it even if they will not receive any deduction in doing so.

Another upside is that parents who pay child support can declare their children as dependents, and this in turn, provides them with the tax benefits that they are requesting for. If the children are living with them for more than six months, then they can file the income taxes as Head of Household status and also regard them as dependents. The money for child care can then be qualified for Child and Dependent Care Tax Credit.

If kids haven’t been living with the tax payer for more than six months, they should consider that in some cases there are parents who have a right to claim the children as their dependents but opt not to do so. If this is the case and it is alright with the ex-spouse, then the tax payer can pay a Form 8332 with the IRS or the Internal Revenue Service, then they can claim their children as their dependents in their place. If this is the case, the ex-spouse should be the one to file the form first because the children cannot be claimed as the dependent of both parents. This might make the taxpayer vulnerable to an audit conducted by the IRS.

The IRS treats the payment as child support when the child is still a minor. It may come in amounts in the form of fluctuating income and childcare needs. These qualifying childcare expenses and specific healthcare costs for minors, school expenses, and college tuition can have deductions but these are not often discussed. Tuition and Fees Deduction and the American Opportunity Tax Credit can allow that payers to deduct a total of $8,500 from these.

The Tuition and Fees Deduction can also reduce payments that the tax payers made for the tuition and fees of their dependents. Total deduction is $4,000 annually and this is for a single filer with income that amounts to as much as $65,000. It reaches up to $130,000 for those who filed jointly. It’s $2,000 for a single filer who earns between $65,000 and $80,000 (It’s between $130,000 and $160,000 for those who filed jointly.)

The American Opportunity Tax Credit is also regarded as refundable credit for those who qualify for graduate expenses like tuition, school supplies and books. These are pretty much for the tax payers who earn more than $80,000. If they file jointly, it’s $160,000. The payor can also claim his or her own expenses of that of the dependents, like the child’s.

The credit is $1,000 for the first $2,000 from the expenses that have been paid and what follows is an additional 25% from the $2,000 that follows, therefore generating a potential of $2,500 credit. 40% of the whole $4,000 is also refundable so that is more than $1,000 that will come back to the tax payer.

Paying child support for dependent children who do not live with the tax payers mean the taxpayer cannot claim the children as their dependents.

As mentioned previously, there is no child support tax deduction that is available in this setup. Also, for the child to be qualified as dependent, he or she must not be providing for his or her own child support for the income tax year. The child must have also been residing with the tax payer for more than six months. So, for the child of separated or divorced parents, the qualifying child is declared of the parent who is living with the child. According to the tax law, this person is regarded as the custodial parent.

For the non-custodial parent, the child can be a qualifying child if these requirements are met:

  • One or both parents have provided for more than half of the total support of the child for the year.
  • One or both parents have the custody of the child for more than six months.
  • The parents are legally separated or divorced and have been living apart the whole time for the past six months.

If this is the case, then the noncustodial parent takes the dependency exemption:

The custodial parent has given up the exemption and signed the Form 8332 which is Release Revocation of Release of Claim to Exemption for Child by Custodial Parent. The noncustodial parent then attaches this specific form to his income tax return.

The noncustodial parent also attaches that the agreement has taken effect. He must declare:

  1. That the noncustodial parent claims the child without any condition, specifically payment of support
  2. The years that the noncustodial parent is eligible to claim the child
  3. That the custodial parent will not claim the child during mentioned years

In a nutshell, child support does not affect taxes as much as alimony does:

  • If the taxpayer pas child support, this cannot be deducted. The tax payer just has to report their actual income and not decrease the amount of the payments they make for child support.
  • If they receive child support, then they should not include that in taxable income. They also cannot regard this as earned income for them to qualify for an EIC.