Although the Tuition and Fees Tax Deduction Is Gone College Tax Benefits Still Exist For Parents

Here is what the IRS is saying:


With back-to-school season in full swing, the Internal Revenue Service reminds parents and students about tax benefits that can help with the expense of higher education.
Two college tax credits apply to students enrolled in an eligible college, university or vocational school. Eligible students include the taxpayer, their spouse and dependents.
American Opportunity Tax Credit
The American Opportunity Tax Credit, (AOTC) can be worth a maximum annual benefit of $2,500 per eligible student. The credit is only available for the first four years at an eligible college or vocational school for students pursuing a degree or another recognized education credential. Taxpayers can claim the AOTC for a student enrolled in the first three months of 2018 as long as they paid qualified expenses in 2017.
Lifetime Learning Credit
The Lifetime Learning Credit, (LLC) can have a maximum benefit of up to $2,000 per tax return for both graduate and undergraduate students. Unlike the AOTC, the limit on the LLC applies to each tax return rather than to each student. The course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. The credit is available for an unlimited number of tax years.
To claim the AOTC or LLC, use Form 8863, Education Credits (American Opportunity and Lifetime Learning Credits). Additionally, if claiming the AOTC, the law requires taxpayers to include the school’s Employer Identification Number on this form.
Form 1098-T, Tuition Statement, is required to be eligible for an education benefit. Students receive this form from the school they attended. There are exceptions for some students.
Other education benefits
Other education-related tax benefits that may help parents and students are:

• Student loan interest deduction of up to $2,500 per year.
• Scholarship and fellowship grants. Generally, these are tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
• Savings bonds used to pay for college. Though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years of age.
• Qualified tuition programs, also called 529 plans, are used by many families to prepay or save for a child’s college education. Contributions to a 529 plan are not deductible, but earnings are not subject to federal tax when used for the qualified education expenses.

To help determine eligibility for these benefits, taxpayers should use tools on the Education Credits Web page and IRS Interactive Tax Assistant tool on IRS.gov.
Keep A Copy of Tax Returns
Taxpayers should keep a copy of their tax return for at least three years. Copies of tax returns may be needed for many reasons. If applying for college financial aid, a tax transcript may be all that is needed. A tax transcript summarizes return information and includes adjusted gross income. Get one from the IRS for free.
The quickest way to get a copy of a tax transcript is to use the Get Transcript application. After verifying identity, taxpayers can view and print their transcript immediately online. The online application includes a robust identity verification process. Those who can’t pass the verification must request the transcript be mailed. This takes five to 10 days, so plan ahead and request the transcript early.
Additional IRS Resources:

• Tax Benefits for Education: Information Center  
• Education Credits--AOTC and LLC
• American Opportunity Tax Credit: Questions and Answers
• Publication 970, Tax Benefits for Education
• Tax Information for Students

Starting a new business? Here is four tax tips from the IRS.

1. Business Structure.  An early choice to make is to decide on the type of structure for the business. The most common types are sole proprietor, partnership and corporation. The type of business chosen will determine which tax forms to file.

2. Business Taxes. There are four general types of business taxes. They are income tax, self-employment tax, employment tax and excise tax. In most cases, the types of tax a business pays depends on the type of business structure set up. Taxpayers may need to make estimated tax payments. If so, use IRS Direct Pay to make them. It’s the fast, easy and secure way to pay from a checking or savings account.

3. Employer Identification Number (EIN).  Generally, businesses may need to get an EIN for federal tax purposes. Search “EIN” on IRS.gov to find out if the number is necessary. If needed, it’s easy to apply for it online.

4. Accounting Method.  An accounting method is a set of rules used to determine when to report income and expenses. Taxpayers must use a consistent method. The two most common are the cash and accrual methods:

a. Under the cash method, taxpayers normally report income and deduct expenses in the year that they receive or pay them.

b. Under the accrual method, taxpayers generally report income and deduct expenses in the year that they earn or incur them. This is true even if they get the income or pay the expense in a later year.

Get all the basics of starting a business on IRS.gov at the Small Business and Self-Employed Tax Center.

The S Corporation Conundrum

The number one IRS audit risk for S Corporations is the failure to pay adequate salary and wages paid to officers of the corporation.

S corporations or small business corporations are a very smart tax move.  70% of 4.2 million tax returns filed last year were S corporations.  68% of those S corporation tax returns filed had problems.  The number one problem they had was a failure to adequately pay the owner/shareholder/employee/officer, yes we are all that rolled into one, an adequate salary.  In other words, we don’t pay social security taxes on the amount of money we draw out of the business.   

S corporations have long been a vehicle for shareholder-employees to escape social security and medicare tax because of a rule which allows a shareholder to earn a "return" on his investment in the company in addition to compensation for working in the company. While compensation is for work efforts and is taxable for social security and for medicare tax purposes, the "return" payment is for funds invested in the business and is not subject to social security or medicare taxes. Since social security and medicare taxes equal 15.3% of the payment, one can understand why all S corporation shareholder-employees want a majority of their payments to be classified as "return" rather than compensation.

More Art Than Science

When corporations elect subchapter S status, the IRS sends out a notice to shareholders reminding them that shareholder/employees must be paid reasonable salaries. The notice also states that the IRS can reclassify as salaries any distributions to the shareholders. This statement has been sent out since 2005, about the time the IRS determined that it needed to curb abuse of the reasonable-salary rule. Determining what a reasonable salary is maybe more art than science, but the attempt must be made.

Because the IRS’s goal is to collect Federal Insurance Contributions Act (FICA) tax on the salaries, one solution is to pay the maximum amount of wages subject to Old Age, Survivors and Disability Insurance (OASDI, or Social Security) tax, assuming of course this is a reasonable salary, based on the SE’s services actually rendered. The maximum salary subject to OASDI in 2017 is $127, 200. (All wages, without limit, are subject to the other component of FICA, Medicare tax.) This may be appropriate for a shareholder in a full-time executive role, such as CEO or controller, assuming similarly situated executives aren’t paid significantly more in competitive businesses.

A smaller salary may be justified for an executive in a startup or a relatively small corporation. That means us. The corporation could also examine comparable wages within its industry by consulting trade publications. The salary should also consider the stockholder’s experience and skill, the geographic region, customer base, number of employees and time committed to the corporation. What is a reasonable salary depends on the facts of each case. No test is conclusive. It often becomes a judgment call by the IRS.

Furthermore, the IRS has not published criteria to determine what is a reasonable salary or salary range that might be reasonable for various positions in a given industry. Comparable salaries from industry data are usually appropriate. Any tax preparer can use search engines on the Internet to find just about any type of salary in any industry for given regions.

In at least one instance, the Tax Court allowed statistical data from an industry and region to be used as guidance for reasonable compensation (Wiley L. Barron v. Commissioner, TC Summary Opinion 2001-10).

Barron, an Arkansas CPA, was the sole shareholder and CEO of an S corporation. In 1994, the S corporation paid him a salary of $2,000. No salary was paid in 1995 or 1996. He received cash distributions in 1994, 1995 and 1996 of $56,352, $53,257 and $83,341, respectively. The Tax Court accepted the analysis of an IRS consultant, who estimated that reasonable compensation for a CEO of an Arkansas CPA firm of similar size for those years was $45,000, $47,500 and $49,000.

Important stuff. I am required by IRS Circular 230 to warn you about, no let me change that to educate you fellow S corporation owner, that by not paying an adequate salary you are subjecting yourself to higher IRS scrutiny and possible very expensive penalties. I am now required to attach  form 1125 E which not only requires us to report your name, social security number, address, but also the compensation you paid yourself during the tax year. The IRS is in fact getting serious about this issue.

Here is what the IRS says about wages and salary paid to officers of Subchapter S Corporations:

Corporate officers are specifically included within the definition of employee for FICA (Federal Insurance Contributions Act), FUTA (Federal Unemployment Tax Act) and federal income tax withholding under the Internal Revenue Code. When corporate officers perform services for the corporation, and receive or are entitled to receive payments, their compensation is generally considered wages.  Subchapter S corporations should treat payments for services to officers as wages and not as distributions of cash and property or loans to shareholders.

S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes.  Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates.

The Internal Revenue Code establishes that any officer of a corporation, including S corporations, is an employee of the corporation for federal employment tax purposes.  S corporations should not attempt to avoid paying employment taxes by having their officers treat their compensation as cash distributions, payments of personal expenses, and/or loans rather than as wages.

There are no specific guidelines for reasonable compensation in the Code or the Regulations. The various courts that have ruled on this issue have based their determinations on the facts and circumstances of each case.

Some factors considered by the courts in determining reasonable compensation:

• Training and experience
• Duties and responsibilities
• Time and effort devoted to the business
• Dividend history
• Payments to non-shareholder employees
• Timing and manner of paying bonuses to key people
• What comparable businesses pay for similar services
• Compensation agreements
• The use of a formula to determine compensation

Although this IRS interpretation of reasonable salary, which was most recently updated in August 2012, the issue remains as clear as mud. It is extremely important not to overlook paying yourself a salary before the end of the year.  I don’t want to overlook the one important benefit of paying social security taxes….it is all refundable when you retire and increases your benefit.   

Again I want to remind you that the IRS can collect payroll taxes on officer compensation, and the penalty for failing to pay payroll taxes is 100% of the taxes owed. S-Corporations will avoid this payroll tax penalty by paying shareholder-employees a reasonable compensation.

What should you do?

Don’t panic. Call us.  We can help. There is still time to fix any oversights.

Remember what Ben Franklin said an ounce of prevention is worth a pound of cure.  He also said that there are only two certain things in life:  death and taxes.

By the way there has been 25 cases filed in Tax Court since 2008 concerning the reasonable compensation issue and the IRS has won every single one of them.

Sources:  AICPA, IRS.gov  and tax net.com

Charitable deductions are not just about giving money.

Here is information from IRS as something they call a "Summertime Tax Tip."


During the summer, some taxpayers may travel because of their involvement with a qualified charity. These traveling taxpayers may be able to lower their taxes.
Here are some tax tips for taxpayers to use when deducting charity-related travel expenses:

• Qualified Charities.  For a taxpayer to deduct costs, they must volunteer for a qualified charity. Most groups must apply to the IRS to become qualified. Churches and governments are generally qualified, and do not need to apply to the IRS. A taxpayer should ask the group about its status before they donate. Taxpayers can also use the Select Check tool on IRS.gov to check a group’s status.
• Out-of-Pocket Expenses.  A taxpayer may be able to deduct some of their costs including travel. These out-of-pocket expenses must be necessary while the taxpayer is away from home. All costs must be:
• Unreimbursed,
• Directly connected with the services,
• Expenses the taxpayer had only because of the services the taxpayer gave, and
• Not personal, living or family expenses.
• Genuine and Substantial Duty.  The charity work the taxpayer is involved with has to be real and substantial throughout the trip. The taxpayer can’t deduct expenses if they only have nominal duties or do not have any duties for significant parts of the trip.
• Value of Time or Service.  A taxpayer can’t deduct the value of their time or services that they give to charity. This includes income lost while the taxpayer serves as an unpaid volunteer for a qualified charity.
• Travel Expenses a Taxpayer Can Deduct.  The types of expenses a taxpayer may be able to deduct include:
• Air, rail and bus transportation,
• Car expenses,
• Lodging costs,
• Cost of meals, and
• Taxi or other transportation costs between the airport or station and their hotel.
• Travel Expenses a Taxpayer Can’t Deduct. Some types of travel do not qualify for a tax deduction. For example, a taxpayer can’t deduct their costs if a significant part of the trip involves recreation or vacation.

For more on these rules, see Publication 526, Charitable Contributions. Get it on IRS.gov/forms at any time.

Want to get angry? Read this Forbes article about Illinois' courts are bankrupting the state by awarding workers compentation awards.

"The commission handling workers’ claims and the courts that supervise it have endlessly expanded the liability of employers, forgetting that the system was supposed to cover only employment-related injuries. One Illinois court held, for example, that a worker was entitled to benefits when he was injured throwing himself up against a vending machine in an attempt to dislodge a stubborn bag of potato chips. The court said that the injured employee was a deserving “Good Samaritan” on a rescue mission to help a fellow co-worker who had deposited the coins. The court thought that the defect in the vending machine “created a need for action to dislodge the bag of Fritos.” (I am not making this up!)


Illinois’ bottomless workers’ compensation system has contributed to the state ranking as one of the most labor-expensive states. In the construction industry, for example, $20 of every $100 of wages goes to workers’ compensation (in neighboring Indiana it’s less than $5). It is perhaps one more reason why the state has lost 300,000 manufacturing jobs since 2000, and why, unlike its Midwest neighbors, it has not enjoyed any manufacturing job growth since the Great Recession.

In the public sector, the effect is even grimmer. State workers file workers’ compensation claims far more often than in any other employment sector, costing more than 4 percent of government payroll. A whopping one third of Illinois state employees have open claims alleging work-related injuries. (Is it really that dangerous to work for the state?) The claimants are often counseled by lawyers, whereas poor Illinois does not have the resources to either defend this Tsunami of claims or pay the insurance premiums.

It is not obvious why the Illinois workers’ compensation system unraveled, but let’s see who benefits from this cash cow. As in any litigation-intensive area, lawyers do well. The paradigm of a litigation-free insurance system is long dead in Illinois, where 52 percent of workers’ compensation claimants—more than in any other state—are represented by an attorney. (In neighboring Wisconsin only 13 percent are represented.) Health care providers also benefit, since the fees for work injury medical treatments are much higher than the fees Medicare pays for the same treatments. But a big part of the blame is on judges. Don't courts realize that dealing out insurance benefits makes premiums more expensive? That such reckless courtroom generosity would drive employers out, and the state’s finances to the ground?"



Read more by clicking on this link. 

Where in the world is the Illinois Department of Revenue Taxpayer Ombudsman? Please sign our petition.

The State of Illinois is in the news again.  "Illinois finances are in massive crisis mode." says comptroller Susana Mendoza.  New court orders to pay medical bills will eat up 100% of the state's revenue she says.  The tax increasing clouds are on the horizon.

 

So you can imagine the State is seeking every dollar it can collect.  In more than 35 years of practice I have never seen the Illinois Department of Revenue as aggressive as it has been in the past few months.  While at the same time more frustrating in its seemingly inability to solve problems in a timely manner.  The Willard Ice Building is a very unhappy place right now.  

 

I had a client come into the office a few weeks ago practically in tears because her deceased husband's business had just been turned over to an attorney for collection by the Illinois Department of Revenue.  This is wrong in so many ways. I guess it was the straw that broke the camel's back.  I had enough.  I am going to write the governor about some of the collection issues we have been happening.  Not just a complaint letter, but one that offered a solution as well.  But first some background.  

 

According to Wikipedia an ombudsman or public advocate is an official, usually appointed by the government or by parliament, but with a significant degree of independence, who is charged with representing the interests of the public by investigating and addressing complaints of maladministration or a violation of rights.

 

As fearful as the IRS is they have a very effective Taxpayer Advocate.  The IRS website says "the Taxpayer Advocate Service (TAS) is your voice at the IRS. We ensure you are treated fairly, and know and understand your rights. If you are having tax problems and have not been able to resolve them with the IRS, you may be eligible for free TAS help. We know this process can be confusing, but the worst thing you can do is nothing at all!"

 

Our neighboring state Kentucky has a tax ombudsman as well.  From the Kentucky website "the Taxpayer Ombudsman is an advocate for Kentucky taxpayers. The mission of the Taxpayer Ombudsman is to instill confidence and integrity in administration of Kentucky's tax laws by ensuring strict adherence to the letter and spirit of the Taxpayer's Bill of Rights."

 

Illinois has one too.  According to regulations on the Illinois Department of Revenue website all such written taxpayer contact shall include the phone number of the Taxpayer Ombudsman.  But somehow, somewhere the office of the Illinois Department of Revenue's Taxpayer Ombudsman doesn't exist.  And the collection notices clients have received to date make no mention to the Taxpayer Ombudsman.

 

Here is my letter to Bruce Rauner:

Bruce Rauner, Governor

Office of the Governor

207 State House

Springfield, IL 62706

 

In 2014 CEO.net ranked Illinois as one of the three worst states to do business in. Here is one comment from CEO.net, "Illinois is rated in the worst category; their taxing scheme is deleterious (harmful) toward small business.The Illinois Dept of Revenue seems most adversarial with respect to small business support and promotion."

 

As a Springfield based accountant for very small business I can tell you that things have gone from bad to worse at the Department.

 

Here are four examples:

 

A few weeks ago a client stopped by our office just in tears.  Her deceased husband's business had been turned over to an attorney for collection of a past due balance tax account by the Illinois Department of Revenue.  Does she have to pay the bill?  

 

A client who was a victim of identity whose social security number was used to obtain a sales tax number in the 1980's have their refund of $544.00 applied to a 1989 sales tax liability that she doesn't owe, never incurred and is not liable for. Ironically the notice issued by the Department directing the client to call the "phone number below for the location your overpayment was applied"…..has no telephone number.  By the way when we contacted the Department, the obviously burdened and frustrated employee recommended that the only way to clear up the matter was to have our representative intervene.  Otherwise it would take at least four to six months to process our inquiry.

 

A client made a mistake in reporting his payroll tax wages and liabilities.  Our office prepared the necessary amended payroll forms and filed them with both the Internal Revenue Service and the Illinois Department of Revenue.  No problems with the Internal Revenue Service.  The returns were accepted as filed. Not so with the Illinois Department of Revenue.  The Department rejected our amended returns based on our failure to include corrected W-2 forms.  Of course we did include the forms.  No explanation of what happened to them after they reached the Department for processing.

 

A single parent of two children just had his bank account levied by the Illinois Department of Revenue in the amount of $200.00 to meet his past due liability. I can understand that the state is knee deep in serious financial difficulties, and should collect every dollar owed. But $200.00 is not going to make much of a difference in things in the long run.  I can assure you that the $200.00 makes all the difference to this struggling taxpayer.  Common sense should prevail in all enforced collection issues.  It appears that the chase for tax dollars is lacking a very humane approach by the Department.

 

We can do better.  I read with interest your "Cutting the Red Tape" initiative. Good start on what may be Mission Impossible in the State of Illinois.  Still solutions to the day to day problems listed above should not be the sole responsibility of our State Representative. No one is acting as an ombudsmen at the Illinois Department of Revenue to help taxpayers such as the Taxpayer Advocate Service does with the Internal Revenue Service.

 

Ironically the Department regulations make reference to a "Taxpayer Ombudsman."  I have quoted below from Title 86, Section 205.20 Illinois Department of Revenue Regulations.

 

Department Responsibilities

 

The Department of Revenue shall have the following powers and duties to protect the rights of

Taxpayers:

 

1. To furnish each taxpayer with a written statement of rights whenever such taxpayer

receives a protestable notice, a bill, a claim denial or reduction regarding any tax. Such

statement shall explain the rights of such person and the obligations of the Department

during the audit, appeals, refund and collections processes. All such written taxpayer

contact shall include the phone number of the Taxpayer Ombudsman.

(Section 4 of the Act).

Restoring the office of "Taxpayer Ombudsman" is a good start.  

 

Thank you for your prompt response.

Signature Donald C. Fuener

 

Here is the response I received from the Governor:

 

I posted a link here.

 

Not much of a response.  A form letter?  Really?

 

But I am not going to take this sitting down.  I have to ask you a favor. Maybe if we can show that there is more than a little old tax guy interested in restoring the office of the Taxpayer Ombudsman we can move the Governor off center.  You never know, you may just need some help some day.

 

Take a moment to sign our online petition asking Governor Rauner to restore the office of Taxpayer Ombudsman.

 

Here is the link to the online petition.

 

Thank you in advance.  Let's see what happens next.

Where is the Illinois Department of Revenue Taxpayer Ombudsman hiding? Our responde from Governor Rauner

Here is the form letter response to our letter requesting the restoration of the Taxpayer Ombudsman.