Archive | Tax Advice

Paying for college when you can’t pay for college

Every year I consult with clients who have children applying to college and who don’t have enough saved–or don’t have anything saved–to cover the costs of a higher education.

In The New York Times, Ron Lieber has a good piece guiding parents–savers and non-savers alike–to figuring out how much a school might actually cost you and how you might pay for it.

People wanting to get a handle on both the cost of schools and the financial aid process can get started by going to the College Board and learning how to calculate how much you might be expected to pay for college.

The initial sticker shock guaranteed when you first see the cost for a year of studying and living at one of our finer institutions (I’m looking at you, $61,920-per-year Bennington!) shouldn’t stop you from learning more and having your child apply to schools. As Lynn O’Shaughnessy, a college consultant and friend of JoeTheTaxGuy, points out, the average grant to freshmen receiving aid now tops 50% of the cost of tuition & fees.

Another good site, from the National Center for Educational Statistics, is loaded with information on not just how much schools cost, but also what percentage of their students receive aid. Seeing that more than 85% of students at a school your child likes get at least some aid may help put a slightly rosier frame on this exercise.

Pay your taxes — or lose your driver’s license! NY State has a cool idea to convince reluctant tax-payers.

I regularly tell clients that cash-starved states have become very entrepreneurial and even aggressive in their tax collection efforts. If you earn money in a state, the tax department will probably be willing to go to court to collect income taxes even if you live hundreds of miles away. (I’m looking at you, New York State.) Revenue departments review business filings and public records to determine if a business has any type of a presence (called “nexus” in tax-geek world) that would make the business liable for state taxes. I even saw an author get a letter from a state tax department informing her that she owed taxes on any books that she sold directly as part of a speaking tour.

And now, something new: Don’t pay your state taxes and you could lose your driver’s license.

Again, we turn our lonely eyes to Albany, where thousands of drivers have had their licenses suspended, as The New York Post reported. The state program targets residents who owe more than $10,000 in back taxes.

The program has resulted in more than $50 million in back taxes coming into state coffers. You can’t argue with success.

Get some reward points when you opened a bank account? Surprise! They’re taxable income!

Did you open a new bank account recently and get rewards points that can be used to buy merchandise? If so, good for you.

Did you know that those points are going to be taxable income? Not so good for you.

In Shankar v. Commissioner (143 T.C. No 5), the Tax Court ruled that the points you get for opening a bank account are taxable income, because they are in essence the equivalent of interest on the money that you deposited into the account. As Forbes Magazine points out, the value of the points becomes taxable when they are actually turned in for something of value.

Banks are expected to issue Form 1099, showing the value of the points, when depositors convert the points into merchandise, whether that’s an airplane ticket, clothing, or even (presumably) a toaster.

If you really have time on your hands you can get a copy of the case by typing “Shankar v. Commissioner” into your web brower and clicking on one of the PDFs that will probably show up at the top of your search request.

By the way, none of this affects the tax-free status of frequent flier points that you get from airlines. So there is that.

IRS security puts taxpayer info at risk

The IRS won’t contact taxpayers by email, because of security concerns. When I am representing a client, auditors generally will not send me emails, for the same reason. And the Service regularly puts out notices telling taxpayers how to maintain their privacy and not get taken in by scammers claiming to be with the government.

But none of this concern for security seems to apply when it comes to the IRS’s own hiring practices. The Washington Post jumped on a report this week that the IRS didn’t do background checks on contractors who were given information on 1.4 million taxpayers–including their Social Security numbers.

The Associated Press, in an article picked up by the Santa Fe New Mexican and dozens of others newspapers, noted that the IRS also had sensitive documents being transported by a courier who had spent 21 years in prison for arson and other charges. Yep.

You can read the whole sad and kinda scary report from the Treasury Inspector General For Tax Administration here.

Corporate Cayman Islands tax shelters rip off U.S. taxpayers

*”Corporations are people, my friend.”
–Mitt Romney, August 11, 2011

Statistic of the day: A single five-story office building is the registered address of more than 18,000 companies.

How is that possible? Well, the building is in the tax haven of the Cayman Islands, and most of those businesses are registered there only for tax purposes.

As Citizens for Tax Justice and the U.S. Public Interest Research Group Education Fund explained in a report earlier this year, more than 70% of the Fortune 500 had subsidiaries in tax havens in 2013. The report estimates that multinationals are using these subsidiaries to avoid approximately $90 billion in federal income taxes annually.

US companies reported $129 billion in earnings in the Cayman Islands, Bermuda, and the British Virgin Islands in 2010. “Assuming you believe those figures, the productivity of workers in those countries is amazing,” Floyd Norris, his tongue almost bursting out of his cheek, wrote in The New York Times. “On average, United States companies had profits of $873,611 per person living in those islands.”

Such ridiculous numbers are merely a product of the process by which multinationals can–legally–reduce their U.S. taxes. Currently there is no significant movement on Capitol Hill to close any of the loopholes or change the laws that make these moves possible.

Why do taxpayers think the tax code is rigged in favor of large corporations? Maybe because it is.