Tax Deductions for Education Expenses

Here is a great tax tip I read about recently in an article by Julie Welch CPA. Her article Have Employer Pay for Your Tuition and Exclude Cost From Income addresses a tax savings technique that I have personally been using for several years. I decided for personal and professional reasons to learn to speak Spanish. I have devoted hundreds of hours and almost as many dollars to Spanish classes, tapes, and private lessons. I have taken eight semesters of college Spanish at a local universities and have studied Spanish abroad in Mexico and Guatemala. I have Spanish-speaking clients and have been involved in court cases as a referee where the parties have presented their claims and defenses in Spanish.

I have also taken many classes on business, technology, and tax and accounting topics over the years.
As a small business owner, the costs of these classes are deductible business expenses.

Ms Welsh writes in her article that education expenses can reduce taxes in one of three ways:

First, job related education expenses can be deducted, along with other miscellaneous itemized deductions, to the extent they exceed 2% of the adjusted gross income. Education expenses are deductible if they are: job related, do not qualify a person for a new business, and are not taken to meet the minimum educational standards for qualification in a person’s business. The costs of obtaining an undergraduate degree do not qualify because they are usually meeting the minimum educational standards. The costs of obtaining a graduate degree, especially in business, generally qualify if a job is in the same subject area as the classes unless the degree qualifies that person
for a new business, such as law or medicine. Examples of some of the costs that can be deducted include tuition, books, supplies, car expenses, and travel costs.

Second, job-related education expenses [paid by your employer] can be excluded as a working condition fringe benefit. Many employers used this approach when the educational assistance provisions temporarily expired in prior years.

Third, education expenses under an employer’s educational assistance program can be excluded. This is generally the best approach. Check to see if the employer offers an educational assistance plan. If the employer does, up to $5,250 from income can be excluded. Although meals, lodging, and transportation costs cannot be reimbursed, the costs that can be reimbursed tax-free include: tuition, books, supplies and equipment. An employer can either pay the expenses directly to the school or reimburse the taxpayer after they are paid. Proof of the expenses will need to be provided, such as receipts for tuition and books. Unlike the deduction for education expenses, the subjects being studied do not have to be business or job related. Thus, a college degree can be completed or non-business courses can be taken. However, subjects considered a sport, game, or hobby are ineligible unless required as part of a degree program or related to an employer’s business. Graduate courses are also included in this exclusion.

Savings include both income tax and Social Security tax. Additionally, many states do not tax educational assistance reimbursements, thus saving even more.

- Mark S Gleason CPA
  www.lakes-cpa.com

Sloppy Recordkeeping Can Be Expensive

I ran across a recent tax court case that reminded me of some of my clients. Garza v Commissioner is a story about a taxpayer who couldn't convince the IRS that his records substantiated his deduction for auto mileage.

It's not that he don't keep any records, he just wasn't disciplined enough to do it every day. At the end of each month, he made a note of the odometer readings at the end of each month, with occasional additional mid-month readings. But there was no other information relating to vehicle expenses. There was nothing recorded about any personal travel. His entire deduction for auto mileage of $20,085.50 was disallowed by the IRS and Garza took the IRS to the Tax Court.

He lost because he did not record the amount, time, or business purpose for each business use of his truck.
To paraphrase the court, "a taxpayer generally  must maintain adequate records or produce sufficient evidence corroborating his own statement, establishing the amount, date, and business purpose of each expenditure or business use of [an automobile]".

So, my readers, don't let this happen to you.

- Mark S Gleason CPA
  www.lakes-cpa.com

Money Laundering 101

How's that for a catchy title for a blog post?

My friend Richard says that I remind him of Barry the Money Launderer, one of the characters in his favorite TV series, Burn Notice.
I am not an expert in money laundering.  I know next to nothing about it.
This afternoon I ran into an overview of money laundering on the Cornell University Law School Legal Information Institute website.
I thought I would share this information with my readers, some of whom are apparently admirers of Barry the Money Launderer.

"Money laundering refers to a financial transaction scheme that aims to conceal the identity, source, and destination of illicitly-obtained money. 
The money laundering process can be broken down into three stages. First, the illegal activity that garners the money places it in the launderer’s hands. 
Second, the launderer passes the money through a complex scheme of transactions to obscure who initially received the money from the criminal enterprise.
Third, the scheme returns the money to the launderer in an obscure and indirect way."

This article then goes on to discuss the relationship of money laundering to tax evasion. The two go hand-in-hand. 

"Tax evasion and false accounting practices constitute common types of money laundering. 
Often, criminals achieve these objectives through the use of shell companies, holding companies, and offshore accounts.
A shell company is an incorporated company that possesses no significant assets and does not perform any significant operations. 
To launder money, the shell company purports to perform some service that would reasonably require its customers to often pay with cash.
Cash transactions increase the anonymity of customers and therefore decrease the government’s ability to trace the initial recipient of the dirty money. 
Money launderers commonly select beauty salons and plumbing services as shell companies. The launderer then deposits the money with the shell company, which deposits it into its accounts. 
The company then creates fake invoices and receipts to account for the cash. Such transactions create the appearance of propriety and clean money. 
The shell company can then make withdrawals and either return the money to the initial criminal or pass the money on to further shell companies before returning it to further cloud who first deposited the money."

None of my former or current clients are hairdressers or plumbers and I have never had a client whom I suspected of engaging in this type of activity.

In 1970 Congress enacted the Bank Secrecy Act which requires banks to report cash and currency transactions of over $10,000.00.
Money laundering is a federal crime under the Money Laundering Control Act of 1986. 

If you are a money launderer, I do not want you for a client.

- Mark S Gleason CPA
  www.lakes-cpa.com

Perhaps The Greatest Tax Cheat in History

Paul Daugerdas, a lawyer and certified public accountant from Wilmette Illinois, seems to have won the world record for the biggest tax cheat in all history. He was sentenced yesterday to 15 years in prison.

He was found guilty of tax evasion, mail fraud, wire fraud, conspiracy to defraud the IRS and of "corruptly endeavoring to obstruct and impede the internal revenue laws."

According to a press release issued yesterday by the Department of Justice, Mr. Daugerdas marketed and implemented fraudulent tax shelters used by wealthy individuals to evade over $1.6 billion in taxes owed to the Internal Revenue Service (IRS), yeilding
approximately $95 million in fees to Daugerdas personally. 

He was ordered to pay $371,006,397 in restitution to the IRS. 

Several other co-conspirators had already been convicted and sentenced for their parts in this massive 20 year scheme.

- Mark S Gleason CPA
  www.lakes-cpa.com

IRS Issues New Taxpayers' Bill of Rights

Here are your rights, according to the IRS:

1. The Right to Be Informed
2. The Right to Quality Service
3. The Right to Pay No More than the Correct Amount of Tax
4. The Right to Challenge the IRS’s Position and Be Heard
5. The Right to Appeal an IRS Decision in an Independent Forum
6. The Right to Finality
7. The Right to Privacy
8. The Right to Confidentiality
9. The Right to Retain Representation
10. The Right to a Fair and Just Tax System

- Mark S Gleason CPA
  www.lakes-cpa.com

IRS Releases Statistics of Income for 2011

The Spring 2014 issue of the IRS's Statistics of Income Bulletin was released last week.
This issue presents some interesting information on high-income individual income tax returns for 2011.
This document is available for download at  IRS.gov/taxstats.
You will find some interesting articles at the above link. I especially enjoyed Individual Income Tax Rates and Shares, 2011 by Adrian Dungan and Michael Parisi, economists with the IRS. This article discusses the individual income tax rates and tax shares and the computation of “total income tax” for 2011 and provides some historical perspective by describing the income tax structure, relevant law changes and concepts of taxation. Here are some of the highlights:

• The top 1 percent of tax returns had adjusted gross income (AGI) of $388,905 and accounted for almost 19% of all individual income for 2011. 
• These taxpayers paid over 35% of the total individual income taxes paid.
• The cutoff for the top 5 percent was AGI of $167,728.

Do you know what your AGI is?

- Mark S Gleason CPA
  www.lakes-cpa.com
 

Youth and Summertime: Dreaming about Tax Avoidance

Summer is almost here.  Although the official beginning of Summer is a couple weeks away, many college and high school students are already have found summer employment and are hard at work. Others will be starting their summer jobs in the weeks to come.

Now is a good time to help these hard working young people get their retirement savings off to an early start. Parents and grandparents (uncles and aunts too) can contribute up to $5,500 to a young worker's Roth IRA.  If properly invested, the funds can grow into hundreds of thousands of dollars by the time these youngsters retire at age 65 or 70. The funds can be withdrawn from the Roth account tax free after age 59 and a half.

This is an uncommon little loophole in our tax system that rewards people for working.
Contributions to Roth IRAs are subject to a dollar limit ($5,500 for 2014 for singles under the age of 50) and an earned income limit: Roth contributions cannot exceed the student's earnings from employment (including self-employment). 

Most students probably need the money they earn in the summer for their education expenses. Without a little help from their families few students are able to take advantage of this tax planning opportunity.  Once they are established in their careers, many of these young people are going to find that their incomes exceed the earnings thresholds under which contributions to Roth accounts are allowed, so now is the time to start thinking about this.

- Mark S Gleason CPA
  www.lakes-cpa.com