Archive for the ‘Obama’ Tag
Back to Basics Part XXXI – Form 8863 Education Credits
Filed under: Back to Basics, Education | Tags: 1098-T, American Opportunity Credit, dependent, education credits, fees, felony, Form 8863, Lifetime Learning Credit, Modified Adjusted Gross Income, Obama, refundable, student, tuition
Leave a comment Originally published in the Cedar Street Times
January 29, 2016
There are two main tax credits for qualified spending on degree seeking higher education: 1) the American Opportunity Credit (AOC), and 2) the Lifetime Learning Credit (LLC). The AOC is generally the more valuable of the two. It is a tax credit of up to $2,500 with $1,000 of that refundable to you even if you paid no tax and have no tax liability. You get 100 percent of the first $2,000 spent, and 25 percent of the next $2,000 spent. Whenever your hear “refundable credit,” think potential fraud. So it is not only an opportunity for college kids, but an opportunity for criminals to make up false returns and claim fake credits. Naturally increased scrutiny follows on behalf of the IRS. But I digress.
The AOC is available to you only during your first four years of college as defined by the educational institution – so a 5th or 6th year senior would still qualify, except that you are only allowed to take the credit for a total of four times no matter how long it takes you to get through school! With that in mind you may even choose to forgo claiming the credit in a particular year if for instance you were attending a community college and had less than the $4,000 of expenses to max out the credit, but knew you would be transferring to a more expensive school, and would still have the opportunity to claim the credit four times before graduating.
The AOC allows you to include tuition and required fees of the school, like athletic fees, and student activity fees (but not health fees or room and board) for the tax year at hand plus the first three months of the next year if paid in the current year, plus the cost of any books or school supplies whether or not bought from the school or any other seller. You have to be enrolled half time in at least one academic period such as a semester or quarter in the tax year, or during the first three months of the next year if the payment was made in the current year for the following year school.
If your modified adjusted gross income (for most people this is the same as their AGI) is between $160,000 and $180,000 for married filing jointly ($80,000 – $90,000 for other statuses), the credit phases out. If a parent is claiming you as a dependent, then you are not allowed to deduct it on your tax returns – only the parent would. Even if a third party paid the fees for a student’s benefit (such as a relative, or an institution), as long as the parent is still claiming the child as a dependent, then the parent is eligible to claim the credit as well. You would need a copy of the 1098-T to claim the credit (this is a new requirement signed into law by Obama in 2015 – all filers must have in their possession a 1098-T when filing their taxes to claim education credits). Another interesting tenant is that you cannot claim the credit if you have been convicted of a felony possession or distribution of a controlled substance.
The Lifetime Learning Credit (LLC) is a nonrefundable credit of 20 percent of the first $10,000 spent – capping out the credit at $2,000. The LLC is available to anyone in their life for an unlimited number of years for post secondary education – even if you just take one course at a time – so you don’t even have to be seeking a degree. You just can’t claim the LLC and AOC in the same year for the same person.
The LLC is eligible for the same expenses as the AOC, except that books and supplies that are not absolutely required to be bought from the school, do not count. The modified adjusted income phaseout is between $110,000 – $130,000 for married filing jointly and $55,000 – $65,000 for other statuses. Also, it is nice to know that you can still smoke crack and deal heroin and be eligible for the credit, as there are no denials of the credit for felony possession or distribution of controlled substances with the LLC!
The form used to claim the expenses, Form 8863 – Education Credits (American Opportunity and Lifetime Learning Credits), is a two page form. You start with the second page, which is basically a flow chart questionnaire determining what you are eligible for, and it also has you transfer some numbers to the first page. The AOC is handled in Part I of page one and the LLC is handled in part II of page one, and these walk you through the credit calculation and limitations.
If you have questions about other schedules or forms in your tax returns, prior articles in our Back to Basics series on personal tax returns are republished on my website at www.tlongcpa.com/blog .
Travis H. Long, CPA, Inc. is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. Travis can be reached at 831-333-1041.
Tax Return $3 Presidential Election Campaign Fund
Filed under: General | Tags: $3, 1974, campaign financing, John F. Kennedy, Obama, Presidential Election Campaign Act, Presidential Election Campaign Fund, Romney, Senator Al Gore, Senator Robert Kennedy, Senator Russell Long, Sr., tax returns
Comments (1) Originally published in the Cedar Street Times
April 18, 2014
Have you ever wondered exactly what that little section is at the top right of your personal tax returns with checkoff boxes for the taxpayer and spouse to send $3 to the Presidential Election Campaign Fund? And why is it on your tax returns?
The majority of people do not check the boxes. There are of course a variety of reasons for this. Perhaps they are just apathetic towards politics, and the boxes appear like additional meaningless gibberish to wade through at tax time. Or perhaps they loathe politics and politicians in general and would dry-heave at the idea of giving three of their hard-earned dollars to a few baby-kissers! Or just maybe they understand campaign finance laws, agree with Congress’ original intent, and have made an educated decision about whether or not to check the box.
Despite the explicit language in that section on the return: “Checking a box below will not change your tax or refund,” many people still think they are contributing extra money out of their pocket to give to the election process if they check the box. In reality, what Congress has done is given you the ONLY direct choice you have about how the tax dollars they just collected from you are going to be spent. This is your one opportunity to pull the purse strings!
The concept of public dollars being used for presidential election campaign financing had its genesis in the early and mid-1960s amidst a series of campaign financing scandals and a growing disparity between the parties’ abilities to raise funds. The idea was to level the playing field for candidates running for president to make it more difficult to buy America’s vote.
The Presidential Election Campaign Act, sponsored by Senator Russell Long was passed in 1966, but was repealed the next year in a challenge led by Senator Al Gore, Sr. Gore and Senator Robert Kennedy felt that the current law did not do enough since it was not the sole mechanism of financing and still allowed the “corrupting influence” of large private contributions. Ironically, the Kennedy family had used vast amounts of its family’s personal wealth to finance and ultimately win the election of 1960 for Robert’s brother, John F. Kennedy, as well as financing Robert Kennedy’s bid for election in 1968 against Johnson.
The issue was then revived and was passed again in 1971 as a tax return checkoff to allocate $1 beginning on the 1972 tax returns. Congress decided that Americans would get to decide how much money would be utilized to fund the elections. President Nixon and most Republicans were opposed to the idea in general, so the IRS was not being pressured to make it easy. It was a separate form that had to be requested and it was not advertised very well – only bringing $4 million into the fund the first year. In 1973, Senator Long did some negotiating with the IRS and the checkoff box was moved to the front of the Form 1040 the next year. By the 1976 election $90 million had been collected.
The intent of the Presidential Election Campaign fund is to provide full funding for the major party presidential nominees in the general elections, provide funds for the party nominating conventions, and provide partial funds for the primary elections.
In order to receive the funds, the candidates must show broad national public support in the primaries; they must not spend more than $50,000 of their own money; in the general elections they cannot accept any private individual or Political Action Committee (PAC) funds; and there is a cap on the maximum that can be spent on the election campaign.
The various caps and funding amounts were indexed for inflation, however the checkoff amount was not. The only change since 1972 came in 1994 when the checkoff amount was raised from one dollar to three dollars by Congress. Making matters worse, its peak participation in 1980 of 28.7 percent of taxpayers utilizing the checkoff has consistently fallen to the 2012 level of only 6.4 percent. If there is a shortfall, then candidates will just get less money prorata.
President Barack Obama and Mitt Romney became the first general election candidates since the program’s inception to turn down public financing and to raise the funds privately instead. And two weeks ago, President Obama signed into law legislation that ends the portion of the law that finances the presidential nomination conventions.
All of these factors combined indicate the pendulum is rapidly swinging the other direction and unraveling the system that has operated over the past 40 years. I suppose after a few more scandals or when one party starts out-fundraising the other substantially there will be outcry again, and the campaign finance laws will be reinvigorated once again.
At least for now, you still have the option to tell Congress how to spend a few of your tax dollars. If you have already filed your returns for 2013 and have an incredibly intense desire to contribute to this degenerating fund, you can file an amendment to do so. Interestingly, if you now have an incredibly intense desire to uncontribute to this fund, you cannot amend your return to do that! This will lead us to our next topic in two weeks – amending your tax returns!
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
New Retirement Account Option – myRA
Filed under: Retirement Assets | Tags: Employee Benefit Research Institute, G-Fund, Government Securities Investment Fund, income limit, My Retirement Account, myRA, Obama, retirement plan trinkets, Roth-IRA, Thrift Savings Plan, TSP
Comments (3) Originally published in the Cedar Street Times
March 21, 2014
President Barack Obama announced in his State of the Union Address at the end of January, the formation of a new retirement plan option which will likely get started towards the end of 2014. The account type, dubbed “myRA” (pronounced “My R.A.”) is short for “My Retirement Account.” Despite a plethora of retirement plan options already available, one might ask, do we need yet another option to complicate planning? Despite all of the options available, roughly one third of employees in the United States still do not contribute to any type of retirement plan. Another third participates in an employer sponsored plan, and roughly the other third has an employer sponsored plan and some type of IRA as well. In a survey conducted by the Employee Benefit Research Institute, 57 percent of Americans say they have less than $25,000 in total savings (excluding the value of their house or defined benefit plans).
The point of the myRA is to help make it more accessible for the bottom third of savers to work on saving for retirement. My analysis is that in its current form, it may mildly assist in this manner, but could be used by more savvy investors as a way to access, to a limited extent, the G-Fund, a solid short-term investment option only available to people with government sponsored TSP programs.
The problem with myRAs is that they do not automatically enroll employees upon initial employment. This has been a desire of the President, but would require Congressional action. The goal of automatic enrollment would be to make it the default option, unless the employee deliberately opts out of the program. Without automatic enrollment there is very little reason to believe employees would be more likely to join these plans than ones already offered by employers. That said, many small employers currently do not offer plans to employees due to the added expense of operating and/or contributing to the plan, and most of them exclude a lot of short-term or part-time employees.
The myRA would have a very low entry point – with only a $25 opening contribution by an employee, no fees or requirements for the employer to contribute, and a $5 per paycheck minimum contribution, it is theoretically much more accessible, especially for short-term and part-time employees. The plan would also be portable from one employer to the next, helping to reduce “retirement plan trinkets” – my term when people carry around a half dozen retirement plans from all their former employers. The program would be administered by the federal government, and since it would have only one investment option, there should be a lot less questions and hassles to set up. The employer would simply direct a portion of the employee’s direct deposit to the government, instead of the employee’s bank account.
The lone investment option is the Thrift Savings Plan offered G-Fund – Government Securities Investment Fund. This fund invests in United States government securities and its goal is to outstrip inflation but is also guaranteed by the full faith and credit of the United States government. Its guaranteed return is the weighted average of all outstanding Treasury notes and bonds with a four year or longer maturity. So effectively you get a long-term rate, even though your investment could be short-term. Since 1987 its average return has been 5.4 percent per year. In 2013 it returned 1.89 percent – not fantastic, but much better than most short-term investments available today, and with no risk.
One of the key characteristics of a myRA is that it is effectively a Roth IRA. This means you get no tax benefit for putting money into the account, but it grows tax-free forever, has no required minimum distribution when you turn 70 1/2, and there is no tax on the principal or earnings when you withdraw it in retirement. Like a Roth IRA, f you need to take money out sooner, you can take out your original contributions with no penalties (but not earnings). The same income phaseouts for Roths apply to myRAs as well – you must have adjusted gross income less than $129,000 filing Single, and $191,000 Married Filing Joint ton contribute. In addition, the same aggregate IRA contribution limits ($5,500 for people under 50 and $6,500 for people over 50) will apply for all IRAs, including your myRA.
A key provision with a myRA is that once the account balance hits $15,000 (or 30 years) it is automatically converted to a regular Roth IRA. However, people can rollover funds from a myRA to a regular Roth IRA at any time to keep their balance below $15,000. I could see this used by people who like access to the G-Fund as a safe, possibly, short-term investment that provides a decent rate of return.
Personally, I think we need to consolidate and simply our retirement plan options, and not create more animals to supervise. But for now, the tax code continues to grow more complex – benefitting some, and making things more confusing for most.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Your Future Tax Return: Romney Versus Obama
Filed under: General, Tax Rates | Tags: American Opportunity Credit, Buffett Rule, candidate, Capital Gains, child tax credit, corporate rates, dividends, earned income credit, Education, election, Estate Tax, FICA, foreign earnings, health insurance, HSA, income exclusions, interest, itemized deductions, Medicare, MSA, net investment income, Obama, retirement plans, Romney, student loan interest, Tax brackets, tax positions, tax-exempt interest, territorial tax system
Comments (2) Originally published in the Cedar Street Times
November 2, 2012
If tax positions would sway your Tuesday vote, here is what Obama and Romney would like to see. Keep in mind, however, you don’t always get what you want!
Tax brackets: Romney reduce to 80% of current levels. Obama keep the same as 2012 except allow top bracket to split into two higher brackets like pre-2001. (Romney, Current 2012 Rates, Obama, 2013 rates if no congressional action ) (8%, 10%, 10%, 15%), (12%, 15%, 15%, 15%), (20%, 25%, 25%, 28%), (22.4%, 28%, 28%, 31%), (26.4%, 33%, 33%, 36%), (28%, 35%, 36% and 39.6%, 39.6%)
Capital gains, interest, dividends: Romney reduce tax rate to zero for AGI below $200K. 15% max if AGI above $200K. Obama increase long-term capital gains rate to 20% max and up to 39.6% on dividends – leave interest taxed at ordinary bracket rates.
2013 3.8% Medicare surtax on net investment income and existing 0.9% medicare surtax for married filers over $250K AGI and others over $200K: Romney repeal. Obama keep.
Itemized deductions: Romney cap itemized deductions (maybe $17,000-$50,000 cap) and maybe eliminate completely for high income. Obama reduce your itemized deductions by 3% of your AGI in excess of $250K married, $225K HOH, $200K single, and $125K MFS (up to 80% reduction of itemized deductions) and limit the effective tax savings to 28% even if you are in a higher bracket.
Income exclusions: Romney keep as is. Obama cap the effective tax savings to 28% on exclusions from income for contributions to retirement plans, health insurance premiums paid by employers, employees, or self-employed taxpayers, moving expenses, student loan interest and certain education expenses, contributions to HSAs and Archer MSAs, tax-exempt state and local bond interest, certain business deductions for employees, and domestic production activities deduction.
AMT: Romney repeal. Obama keep but set exclusion to current levels and index for inflation.
2009 expanded Child Tax Credit, increased Earned Income Credit, and American Opportunity Credit: Romney – Allow to expire as scheduled 12/31/12. Obama – Make permanent.
Buffett Rule: Romney “Not gonna do it.” Obama households making over $1 million should not pay a smaller percentage of tax than middle income families. This is accomplished by raising the rates on capital gains and dividends as discussed earlier.
Temporary two percent FICA cut you have been enjoying in 2011 and 2012: Both candidates favor allowing to expire at 12/31/12.
Estate tax: Romney repeal. Obama set at $3.5 million and index for inflation with top rate of 45% on excess.
Top corporate tax rates: Romney 25%. Obama – keep at 35% for 2013 but maybe reduce to 28% in the future.
Corporate international tax: Romney don’t tax U.S. companies on income earned in foreign countries. Obama discourage income shifting to foreign countries.
Corporate tax preferences: Romney extend section 179 expensing another year, create temporary tax credit, expand research and experimentation credit. Obama increase domestic manufacturing incentives, impose additional fees on insurance and financial industries, reduce fossil fuel preferences.
Prior articles are republished on my website at www.tlongcpa.com/blog.
IRS Circular 230 Notice: To the extent this article concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.
Travis H. Long, CPA is located at 706-B Forest Avenue, PG, 93950 and focuses on trust, estate, individual, and business taxation. He can be reached at 831-333-1041.
Travis H. Long, CPA, Inc. Blog 