13 IRS Tax Rules Trump Tax Plan Won't Change

With Republican control of the House and Senate, President-elect Trump and Congress might tell the tax code, “you’re fired!” And as big as the coming tax changes might be, it’s worth noting what is highly unlikely to change. Keeping track of these 13 key tax rules could put dollars in your pocket and ease your interactions with the tax system.

1. Everything is income. 

The IRS taxes all income from any source, whether in cash or in kind. Lottery? Taxed. Gambling? Taxed. You name it, it’s taxed. If you find a diamond ring, you pay tax on its fair market value even if you don’t sell it. 

2. Pay taxes later. 

Most tax planning involves timing. You want to accelerate tax deductions and defer tax payments, subject to constraints such as the constructive receipt doctrine. If you have a legal right to money but say “pay me later,” it’s taxed now. But you can condition payment, such as refusing to sell your house or settle a lawsuit unless you are paid next year.

3. Forms 1099 really count. 

Those little tax forms you get in January are keyed to your Social Security number. The IRS always gets a copy. Pay attention to them—the IRS sure does. These IRS Forms 1099 are critical, and due soon.

4. Beware foreign accounts. 

Foreign bank accounts may generate income, but you won’t receive a Form 1099. Still, reporting them is key. If balances exceed $10,000 in the aggregate any time during the year, you also must file an FBAR. With FATCA, IRS scrutiny is high, and how you transition from failures to report in the past to present compliance can be delicate. Beware, so far, the IRS has collected $10 billion from offshore compliance.

5. Pay small tax bills. 

If you get a small tax bill, pay it even if the IRS is wrong. What’s “small” varies, but don’t risk an audit or dispute escalating by fighting over small dollars.

6. Reply to every IRS letter, unless it says not to. 

This is common sense. Often, fighting the IRS is about attrition.

7. Don’t talk to the IRS if they visit, and never lie. 

If the IRS comes to your home or business, decline to speak and tell them your lawyer will call. Take their card and be polite but firm. If you say anything to the IRS, don’t lie.

8. The IRS can audit 3 years, but keep records for 7, and tax returns forever. 

The usual IRS statute of limitations is 3 years after you file your return. If you understate your income by 25% or more, the IRS gets 6 years. To be safe, keep tax records for 7 years. And keep copies of your tax returns themselves forever.

9. Avoid amending returns, but if you do amend, don’t cherry-pick. 

Don’t take amending tax returns lightly. Amended returns have a high audit rate, especially if they request a refund. The IRS says you “should” amend your return if you discover a mistake after it’s filed. But there’s no legal obligation. The only time you really must amend is if you knew at the time you filed the original return that it was false. If you decide to amend, you can’t cherry-pick which items to fix. The amended return must correct everything, not just the items in your favor.

10. File returns even if you can’t pay. 

Many taxpayers don’t file on time because they don’t have the tax money. They would be much better off if they filed on time. Payment can come later, and might be the subject of an IRS installment agreement. Penalties too will likely be smaller if you file on time.

11. Don’t explain or attach too much. 

Tax returns should be concise. If an explanation or disclosure is needed, keep it succinct. Attachments to tax returns should be limited to tax forms and, where required, plain sheets of paper listing additional deductions, income, etc. Don’t attach other documents. If the IRS wants documents, it will ask.

12. Be careful with big refunds. 

Getting a refund? Consider applying it to next year’s tax payments rather than asking for the cash, especially if it is large. If you are getting a tax refund, not asking for the money back can lower your profile with an initial or amended return. 

13. Get professional advice. 

Handling a tax case by yourself is usually a mistake. You can prepare your own returns with software if you like, but if you have an audit or dispute, hire an accountant or lawyer to handle it. Even simple audits can come off the rails or extend into other areas if you aren’t careful. Whether you need practical procedural advice or technical help on particular issues, find someone with experience in your issue. And don’t wait until the last minute.

2016 Top 10 Year-End Tax Planning Tips

1. Accelerate deductions and defer income. 

It sometimes makes sense to accelerate deductions and defer income. There are plenty of income items and expenses you may be able to control. Consider deferring bonuses, consulting income or self-employment income. On the deduction side, you may be able to accelerate state and local income taxes, interest payments and real estate taxes.

2. Bunch itemized deductions. 

Many expenses can be deducted only if they exceed a certain percentage of your adjusted gross income (AGI). Bunching itemized deductible expenses into one year can help you exceed these AGI floors. Consider scheduling your costly non-urgent medical procedures in a single year to exceed the 10 percent AGI floor for medical expenses (7.5 percent for taxpayers age 65 and older). This may mean moving a procedure into this year or postponing it until next year. To exceed the 2 percent AGI floor for miscellaneous expenses, bunch professional fees like legal advice and tax planning, as well as unreimbursed business expenses such as travel and vehicle costs.

3. Make up a tax shortfall with increased withholding. 

Don’t forget that taxes are due throughout the year. Check your withholding and estimated tax payments now while you have time to fix a problem. If you’re in danger of an underpayment penalty, try to make up the shortfall by increasing withholding on your salary or bonuses. A bigger estimated tax payment can leave you exposed to penalties for previous quarters, while withholding is considered to have been paid ratably throughout the year.

4. Leverage retirement account tax savings. 

It’s not too late to increase contributions to a retirement account. Traditional retirement accounts like a 401(k) or individual retirement accounts (IRAs) still offer some of the best tax savings. Contributions reduce taxable income at the time that you make them, and you don’t pay taxes until you take the money out at retirement. The 2016 contribution limits are $18,000 for a 401(k) and $5,500 for an IRA (not including catch-up contributions for those 50 years of age and older).

5. Reconsider a Roth IRA rollover. 

It has become very popular in recent years to convert a traditional IRA into a Roth IRA. This type of rollover allows you to pay tax on the conversion in exchange for no taxes in the future (if withdrawals are made properly). If you converted your account this year, reexamine the rollover. If the value went down, you have until your extended filing deadline to reverse the conversion. That way, you may be able to perform a conversion later and pay less tax.

6. Get your charitable house in order. 

If you plan on giving to charity before the end of the year, remember that a cash contribution must be documented to be deductible. If you claim a charitable deduction of more than $500 in donated property, you must attach Form 8283. If you are claiming a deduction of $250 or more for a car donation, you will need a contemporaneous written acknowledgment from the charity that includes a description of the car. Remember, you cannot deduct donations to individuals, social clubs, political groups or foreign organizations.

7. Give directly from an IRA. 

Congress finally made permanent a provision that allows taxpayers 70½ and older to make tax-free charitable distributions from IRAs. Using your IRA distributions for charitable giving could save you more than taking a charitable deduction on a normal gift. That’s because these IRA distributions for charitable giving won’t be included in income at all, lowering your AGI. You’ll see the difference in many AGI-based computations where the below-the-line deduction for charitable giving doesn’t have any effect. Even better, the distribution to charity will still count toward the satisfaction of your minimum required distribution for the year.

8. Zero out AMT. 

Some high-income taxpayers must pay the alternative minimum tax (AMT) because the AMT removes key deductions. The silver lining is that the top AMT tax rate is only 28 percent. So you can “zero out” the AMT by accelerating income into the AMT year until the tax you calculate for regular tax and AMT are the same. Although you will have paid tax sooner, you will have paid at an effective tax rate less than the top regular tax rate of 39.6 percent. But be careful; this can backfire if you are in the AMT phase-out range or the additional income affects other tax benefits.

9. Don’t squander your gift tax exclusion. 

You can give up to $14,000 to as many people as you wish in 2016, free of gift or estate tax. You get a new annual gift tax exclusion every year, so don’t let it go to waste. You and your spouse can use your exemptions together to give up to $28,000 per beneficiary.

10. Leverage historically low interest rates. 

Many estate and gift tax strategies hinge on the ability of assets to appreciate faster than the interest rates prescribed by the IRS. An appreciating market and historically low rates create the perfect atmosphere for estate planning. The past several years presented a historically favorable time, and the low rates won’t last forever.

The Rich Get Ready for Higher Taxes Under a President Clinton

For wealthy Americans, a big win by Hillary Clinton on Nov. 8 could get pretty expensive.

Clinton is proposing higher taxes on Americans who make more than $250,000, including a 4 percent “fair share surcharge” on incomes over $5 million a year. She’s also trying to limit the ability of the rich to lower their tax bills through clever planning. 

This has made the election a hot topic at accounting and advisory firms that cater to the wealthy. The election “dominates the conversations we have with clients today,” said Brian Andrew, chief investment officer at Johnson Financial Group.

Changing tax laws is easier said than done. Even if the Democratic presidential candidate defeats Donald Trump, she’ll probably be negotiating any tax bills with a House of Representatives still controlled by Republicans. 

Democrats would get free rein to set tax policy only if a big Clinton win helps them gain control of both the Senate, which is teetering, and the House. The likeliest scenario is divided government, in which the House will thwart any substantial tax increase, said Joe Heider, founder of Cirrus Wealth Management in Cleveland.

Still, “there’s a growing concern [among Republicans] that this could become a wave election,” Heider said.

Clinton proposes raising revenue by $1.4 trillion over the next decade. Almost all of that burden falls on the top 1 percent of taxpayers, according to the Tax Policy Center. The top 1 percent's after-tax income would fall by an average of 7 percent. Trump, by contrast, would cut taxes by $6.2 trillion over the next 10 years, with the top 1 percent getting almost half that benefit and a 13.5 percent boost to their after-tax income.

Advisers to the wealthy are ready to take evasive action if Democrats make big gains.

“We have to be quick enough to pull the trigger after Nov. 8,” said Alan Kufeld, a CPA and tax partner at PKF O’Connor Davies LLP, who says most of his clients have a net worth of $25 million to $1 billion. “You have to have a plan that is very fluid.”

The rich tend to have more financial flexibility than other taxpayers. If taxes look like they’re going up, they have a few cards they can play. One common tactic is being smart about when to receive income and when to recognize losses and take deductions. To cut the taxes you owe next April 15, for example, you can try delaying income to future years while taking as many deductions and losses as you can this year.

“If you’re going to sell something, sell it next year so you have an extra year to pay the tax,” said Richard Rampell, a CPA and principal at MBAF in Palm Beach, Florida.

But a big win by Democrats could turn that conventional strategy on its head, Rampell said. Instead of trying to minimize this year’s tax bill, you might try to take as much income as possible in 2016 – for example, by selling a winning stock – rather than risk paying higher taxes on that money in 2017 or 2018.

There's a huge question mark hanging over all these tax matters. When would any tax increase be implemented? Ordinarily, a tax bill passed in 2017 would go into effect in 2018, giving the wealthy plenty of time to prepare. The biggest fear is a tax increase passed in 2017 that's retroactive to the beginning of the year, said Michael Kassab, chief investment officer at Calamos Wealth Management.

It’s happened before. In 1993, a tax bill passed at the beginning of Bill Clinton’s administration affected earnings that same year. If it happens again, the wealthy may have only the last several weeks of 2016 to get ready for higher taxes.

“There really is no way to know,” said Brittney Saks, a partner at PwC based in Chicago. “It’s that uncertainty that’s making people uncomfortable.”

If Clinton gets her plan through, taxes would get both more complicated and harder to avoid. She has proposed new rates on capital gains, so that taxpayers pay higher rates if they hold an investment for less than six years. She’d also give people less flexibility to lower their tax bills with common strategies. 

For example, she would limit the ability of the wealthy to itemize deductions, with the exception of charitable deductions. She'd also require a minimum effective tax rate of 30 percent on incomes over $1 million — the Buffett Rule, named after billionaire investor Warren Buffett, a Clinton supporter, who declared it isn't right that his secretary should pay a higher tax rate than he does. 

Municipal bonds should remain a tried-and-true method for wealthy investors to lower their tax burden. While munis tend to yield less than other bonds, their income generally isn’t taxed. If capital gains tax rates go up, Heider said, investors might also think about investments they can buy and hold for longer periods of time, such as real estate.

There’s good reason to wait and see what actually passes Congress.

“Even if Hillary Clinton is elected president, and even if there is a Democratic Congress, it’s not so easy to change the tax laws,” said Paul Ambrose Jr., a law partner at Cullen & Dykman LLP in Hackensack, N.J., who specializes in estate tax planning. It might not be easy to get lawmakers, worried about their own political futures, to go along with a tax increase.

And not every wealthy person would be affected by a tax hike.

“Just because tax rates may go up next year, it doesn’t mean your tax rate is going up,” said Tim Steffen, director of financial planning at Baird. For example, Clinton’s proposals largely spare high-earning professionals if they have few taxable investments and few deductions.

So while advisers are vigilant, they’re warning clients not to make any big moves until the political future is clearer. Most of all, they say, people shouldn’t let worries about taxes override sound strategies.

“Basic economics should always drive decisions,” Heider said. “Tax benefits, or tax avoidance, should always be secondary.”

10 Tax Saving Strategies The Financial Pros Use

It's not what you make, it's what you keep!

I believe John Wayne gets credit for that line, and if you think about it, this also rings true in today's tax and investment landscape.

Often we see advisers and investors only looking at the investment, and not looking at the tax consequences. While you never want the tax tail to wag the dog, efficient taxable portfolio managers do employ strategies to increase what is most important — after-tax returns.

Here are 10 tax saving strategies to save money on taxes on investments.

1. Long-Term Cap Gains Are Much Better Than Short-Term

If we look at the current capital gain tax rates, we can clearly see that we want to take long-term cap gains rather than short term. Short term capital gain tax kicks in when you sell something at a gain, but you have not held that position for more than one year, versus long term which is held over one year.

The difference can be quite substantial. For those in the 10% and 15% federal income brackets, they will pay no capital gains tax! Someone in the 25%-35% bracket will only pay 15%, a potential 40%-57% decrease in overall tax.

And those in and above the 35% bracket will only pay 20%, a 43% decrease. So as you can see, experienced taxable portfolio managers can customize the tax trading to each client and can create more value beyond the portfolio.

2. Tax Loss Harvesting

So what to do when you want to take those gains? One strategy is to specifically sell positions held at a loss, to offset the capital gain from the sale of the appreciated asset. This is called tax loss harvesting. Losses will offset the gains.

3. Tax Swaps

Those concerned about selling and maintaining exposure to a particular stock/etf/mutual fund could execute a "swap" strategy.

An example: You currently hold Ford stock at a loss but need to sell to offset a short-term gain you generated in Apple; you can buy GM.

Since Ford and GM are both in the same sector and both are auto makers, they will usually have a high correlation to each other. However, a wise portfolio manager would not execute such a move around high volatility events like earnings, new product release, etc.

4. Ordinary vs. Qualified Dividends

Aren't all dividends the same?

No, all dividends are not created equally. Some dividends are ordinary while some are qualified.

What does that mean? Ordinary dividends are taxed at your highest marginal rate, while qualified dividends are taxed at much more favorable long term cap gains rates.

This tax treatment is derived specifically from where the companies are domiciled and do business as well as the holding period (60 days before and after the dividend). Qualified dividends are taxed at the same long term cap gains rates like we discussed above.

5. Tax-Free Income

Yes, that's right, I said it: Tax-free income!

I find it astounding many investors and even some financial advisers fail to utilize tax-free bonds in their overall portfolio (should their goals and objectives call for it, of course).

I've even seen human advisers and robo-advising alike using the least tax-efficient set of bonds, therefore adding the tax drag on the portfolio.

Here is how the preferential tax treatment works: Joe lives in California. Joe purchases a California municipal bond. The interest that bond pays to him every month will not be taxed by the state, but also will not be taxed federally or locally as well! Triple tax exempt is the term to be exact.

Now if Joe purchased a Pennsylvania municipal bond, he would not pay federal tax (the biggie), but he would pay California state income tax.

6. Lower Turnover Ratio

However investors decide to get exposure to the areas they want in their portfolio, one thing remains the same: Low turnover ratio is a good thing!

Turnover ratio is the amount of buying and selling in the portfolio, mutual fund or ETF in a given year. If said portfolio has a 94% turnover ratio, that means on average if the fund has 100 stocks, 94 are bought and sold each year.

Now, is that a good thing? Well, maybe if the fund is buying better stocks…right?

But with everything, there is a cost, and not only trading costs. Remember what we learned earlier: if those 94 stocks have a profit we will be paying short-term cap gains!

We don't want that, so make sure to keep an eye on the turnover ratio. By law, mutual funds are required to distribute over 90% in gains, so sometimes people who have mutual funds in taxable accounts or trusts are paying much more in taxes than what they should be paying.

7. Portfolio Management Costs And Commissions Are Tax Deductible

Remember, the investment management fee and any trading commissions you pay are deductible.

Unfortunately, the expense ratio — the internal cost of running a mutual fund or ETF — is not deductible. Turnover and expense ratios are some of the most important things to look at.

8. Asset Location

Most advisors talk about asset ALLOCATION, but where they may fail is the asset LOCATION.

For investors who want to gain exposure to certain sectors that only create ordinary income (like Real Estate Investment Trusts, for example) one would utilize the asset location of the retirement account instead of the taxable account, thereby still gaining exposure to that sector but not having to worry about the inefficient tax treatment.

9. Have Kids And Want To Save For College? Use A 529 Plan

Instead of having a simple savings account and paying taxes every year on gains and income, if the goal is to use the money for higher education, look into a 529 plan.

A 529 plan allows you to invest funds for children and not only skip the tax bill each year on cap gains and investment income, but also never pay any tax as long as the funds are used for higher learning. Some states give you a tax deduction as well.

10. Defer, Defer, Defer

In situations where individuals are in high tax brackets now but will be considerably lower in the future, deferring could make sense.

Annuities can be used in many ways and act as a tax shelter to defer the inevitable. In a fixed, fixed index or variable annuity, you do not pay any tax on cap gains, income or distributions each year inside of the annuity.

However, when you take the money out, your gains will be taxed at ordinary income rates. So although it is a good way to defer taxes you do still pay the ordinary tax rates at a later date.

Which annuities to use and stay away from is a whole other topic for discussion.

Even after using these strategies, if things are going well you're likely to still have a tax bill of some sort. There are some things a man (or woman) just can't run away from.

I believe John Wayne gets credit for that line, too.

Tax Free Employee Fringe Benefits

If you and/or your spouse is employed, the salary, bonus, and any other pay you receive from your employer is income on which you must pay tax. These taxes consist of federal income tax, your employee’s share of Social Security and Medicare taxes, and, in most states, state income tax.

Wouldn’t it be great if employees could avoid paying taxes on at least part of their pay? Well, guess what, they can.

There is one big exception to the rule that you have to pay tax on anything your employer gives you as payment for your services: 

You don’t pay any taxes on the value of tax-qualified fringe benefits your employer provides. These fringe benefits can include such things as health insurance, medical expense reimbursements, dental insurance, education assistance, day care assistance, and transportation allowances.

When we say tax-free, we mean it: Tax qualified benefits are totally free of federal and state income tax, and Social Security and Medicare taxes. These tax savings can make employee fringe benefits so attractive that in many cases you’d be better off forgoing part of your salary to obtain them.

Of course, you won’t be better off if you contribute part of your salary to obtain an employee benefit you don’t really want or need. But there are plenty of benefits that most people do want, probably including you.

Only certain types of employee fringe benefits are “tax-qualified” and receive tax-free treatment. Employees must pay tax on the fair market value of any benefits they receive that are not tax qualified—for example, a company car they use for personal driving.

Tax-free employee fringe benefits include:

Health Benefits. Health benefits are by far the single most important tax-qualified employee fringe benefit. Health benefits include providing employees with health, dental, and vision insurance, and paying for uninsured health-related expenses.

Long-Term Care Insurance. This insurance covers expenses such as the cost of nursing home care. Premiums paid for such insurance are not taxable. However, benefits received under the insurance may be partly taxable if they exceed limits set by the IRS.

Group Term Life Insurance. A company may provide up to $50,000 in group term life insurance to each employee tax-free. If an employee is given more than $50,000 in coverage, the employee must pay tax on the excess amount. However, this tax is paid at very favorable rates.

Disability Insurance. If an employer pays disability insurance premiums for an employee (and the employee is the beneficiary), the premiums are excluded from the employee’s income. However, the employee must pay income tax on any disability benefits received under the policy. There is an important exception, however: Disability payments for the loss of a bodily function or limb are tax-free.

Educational Assistance. Employers may pay employees up to $5,250 tax-free each year for educational expenses such as tuition, fees, and books.

Dependent Care Assistance. Up to $5,000 in dependent care assistance may be provided to an employee tax-free. For example, the company could help pay for day care for an employee’s child. However, working parents may also be able to obtain a tax credit for child and dependent care. Unfortunately, you can either take the credit or the employee benefit, not both. Which is better? The one that saves you the most taxes, which depends on your overall childcare expenses, your household income, and tax filing status.

Transportation Benefits. Employers may also pay up to $240 per month for employee parking or up to $125 per month for mass transit passes for those employees who don’t drive to work.

Working Condition Fringe Benefits. Working condition fringes are anything your employer provides or pays for that you need to do your job—for example, local and long distance travel for business, business-related meals and entertainment, professional publications, and company cars used for business driving.

Other Fringe Benefits. Other tax-free employee fringe benefits include employee stock options, employee discounts (up to 20% off), moving expense reimbursements, meals provided for the employer’s convenience, adoption assistance, achievement awards, and retirement planning help, employee gyms, and free services provided to employees. Other de minimis (minimal) benefits can also be provided. These are things that cost very little like occasional parties or picnics for employees, and occasional tickets for entertainment or sporting events.

The 25 Countries With The Highest Tax Rates

The World Economic Forum this week released its Global Competitiveness Report on the state of the world's economies.

The group analyzed data including levels of corruption, inflation, and policy stability to compile a picture of virtually every country.

One of the indicators the WEF uses is a country's tax burden, with higher scores indicating lower competitiveness.

To measure tax it uses the World Bank's total tax rate, which accounts for all the taxes on businesses themselves rather than on the employees.

Business Insider took a look at the countries with total tax rates of more than 50%.

1. Argentina: 137.4% — The country's turnover tax alone eats up nearly 90% of corporate earnings, before taxes on salaries and financial transactions are taken into account.

2. Bolivia: 83.7% — Bolivia's transaction tax skims 60% of company profits, even before other taxes are taken into account.

3. Tajikistan: 81.8% — The country in Central Asia has increased its rate from 80.9% last year, according to the WEF.

4. Algeria: 72.7% — Algeria has the highest total tax rate in Africa.

5. Mauritania: 71.3% — In 2013, this agriculture-dependent country brought in a withholding tax of 15% to stop people from moving payments to nonresidents.

6. Colombia: 69.7% — The country has reduced its rate from over 73% last year, but its rate is still one of the highest in the world.

7. Brazil: 69.2% — Brazil is losing competitiveness fast. In the context of negative terms of trade shocks and political turmoil, the country fell six positions to 81st.

8. China: 67.8% — China faces a worsening fiscal situation — the budget deficit more than doubled from 2014 to 2015, to reach 2.7% of gross domestic product.

9. Venezuela: 65% — The economy of Venezuela is wracked by inflation, crime, and corruption, according to the WEF. It pursued a higher-tax model, with dramatic increases in taxes for foreign oil companies under former President Hugo Chavez.

10. Italy: 64.8% — Italy's high tax rate is the single most problematic factor for doing business in the country, according to the WEF, beating its government bureaucracy.

11. Nicaragua: 63.9% — The country suffers from high levels of government bureaucracy as well as high tax rates, according to the WEF.

12. Chad: 63.5% — Like Gambia, Chad relies on agriculture and is extremely poor. It taxes 1.5% of turnover or 40% or profits, depending on which is higher.

T-13. Gambia: 63.3% — Without major natural resources, Gambia is among the poorest nations in the world. Taxes on turnover rather than profit raise rates for businesses significantly.

T-13. Benin: 63.3% — The World Bank says the country's corporate income tax runs to only 15.9%, but a bundle of other taxes raise the total rate imposed on businesses significantly.

15. France: 62.7% — The current government has overhauled the tax system and cut corporate levies, but France still has higher levels of tax than its European peers.

16. India: 60.6% — The efficiency of India's domestic market is hindered by fiscal regulations that allow federal states to levy different levels of value-added taxes.

17. Tunisia: 59.9% — Tunisia's rate is high but has decreased from over 62% recorded last year by the WEF.

18. Belgium: 58.4% — The home of the European Union has the fourth-highest rate of tax in the eurozone and the highest outside the "big five" Euro countries.

19. Costa Rica: 58% — The small nation is one of a few countries in Central America to have a tax rate well in excess of 50%. This in part is due to high levels of tax activism in recent years, which has led policymakers to increase total taxes.

20. Sri Lanka: 55.2% — While Sri Lanka's tax rates are high, the WEF cites policy instability and poor access to financing as bigger hindrances to doing business in the country.

21. Ukraine: 52.2% — Businesses in Ukraine have to contend not only with serious geopolitical concerns, but also with some of the highest taxes in Europe.

T-22. Austria: 51.7% — Austria has some interesting quirks with its tax system. For example, couples are taxed separately even when they are married.

T-22. Mexico: 51.7% — Government corruption and bureaucracy are the main hurdles to doing business in Mexico, despite the high tax rates, according to the WEF.

24. Japan: 51.3% — Japan's high tax rates have weighed on the country's ranking in the WEF's competitiveness index. Japan came in at eighth this year, losing three places.

25. Spain: 50% — Spain has reduced its overall rates to 50% from 58%, meaning it no longer has one of the five highest tax rates for businesses in Europe.

The Tax Benefits of Going Back to School

Going back to school, whether to start a degree, finish up one from years ago, or pursue an advanced degree can be both rewarding and stressful.

Working on papers, handling work assignments, and/or taking care of family can be a lot to handle. The good news is that you can lighten your financial load by making sure you claim all the tax benefits you’re entitled to.

Educational Tax Deductions and Credits

While they are somewhat related, tax credit and deductions are different. Tax deductions reduce your taxable income while tax credits lower your tax bill. In addition, some tax credits are refundable meaning you can not only reduce your bill to zero, but get some money back.

With school, some of the biggest tax deductions and credits include:

American Opportunity Tax Credit (AOTC)

This is a refundable tax credit for eligible educational expenses during your first four years for up to $2,500 per student. If you’ve already completed four years’ worth of college work, then you don’t qualify for this credit. You may qualify if your modified adjusted gross income is up to $90,000, or up to $180,000 for married couples filing jointly.

Lifetime Learning Credit

This tax credit can help with tuition and related expenses for up to $2,000 per tax return, provided you’re enrolled at an eligible educational institution. There is no limit to the years you can claim this credit. You may qualify if your modified adjusted gross income is up to $65,000 or up to $130,000 if you are married and filing jointly.

To see if your school is considered eligible, you can check out the FAFSA site and see if it has a Federal School code.

More Educational Tax Benefits

If you don’t qualify for either credit, you may still be able to take the Tuition and Fees Deduction. Have student loans? Make sure you deducting the interest on them. You may be able to deduct up to $2,500 of student loan interest paid. Of course, you’ll do your finances a favor if you can minimize the student loans you take out.

You should also talk with your financial aid office to make sure you’re applying for relevant scholarships and grants.

Student Discounts and Other Bonuses

Besides taxes, make sure you’re taking advantage of your student status and get those discounts! You may be able to snag better deals on tickets to music venues, museums, and movies if you’re a student. The next time you’re out, proudly show your ID. Every little bit helps and the money you save can be redirected towards other goals, like contributing more for retirement.

Buy or Lease Your New Business Vehicle?

Recently I had dinner with friends who run a business. The table conversation turned to buying new cars. Finally, the buy versus lease question was asked of me…the so-called tax expert. As always, I don’t answer any tax questions until I have time to double check the ever-changing tax law. To answer their question, I told them to keep an eye out for my latest blog. So Jeff, here it is!

As with most decisions in life, taxes should only be one of the considerations. Here are a few of the nontax considerations on buying or leasing a business vehicle:

1) Number of miles your drive each year (leased cars- often charged extra fees for miles driven over 10,000 or 12,000/year)

2) How long you keep a car (get a new car every 3-4 years or keep it until its junk)

3) How much do you want to spend on your monthly payments (lease payments are usually quite a bit less than monthly payments on car loan)

Now let’s talk about the tax benefits for the self-employed taxpayer and his car used for business. With both purchased and leased cars, you can deduct the related expenses by using the standard mileage rate or actual expenses.

Note: If you own the vehicle, you can choose the standard mileage rate in the first year and switch to the actual expense method in a later year if it becomes more favorable. If you lease a vehicle, you may also choose the standard mileage rate in the first year but once you use the standard mileage rate you must use it for the life of the lease.

With the standard mileage rate, your business mile deduction will be based on 54 cents per mile for 2016 (down from 57.5 cents in 2015). You can also deduct business-related parking fees and tolls. For the purchased vehicle, you may also be able to deduct a portion of the interest on your car loan.

Under the actual expense rules, for both leased and purchased vehicles, you can deduct the business percentage of your gasoline, oil, insurance, garage rent, parking & registration fees, lease or rental fees, repairs, tires, loan interest, etc.

Here is where the expenses differ between purchased and leased vehicles using the actual expense rules.

Now let’s talk about leased vehicles. Since you don’t own the car, you can’t depreciate it but here’s the good news! You can deduct the business percentage of your lease payments. So if your yearly lease payment is $4,200 ($350 / month) and your business use percentage is 80%, you may be able to deduct $3,360 on your tax return for that year. 

There is one hitch. Since the tax code limits the depreciation on “luxury” cars, it also limits (to a very small degree) lease payments on such a car. It’s called a “lease inclusion amount” and it reduces the deductible lease payments. The higher the original value of the car, the greater the amount.

As the price goes up on the car, leasing usually becomes more preferable. But don’t forget if you purchased the vehicle, you can also deduct the interest on the vehicle’s loan based on the percentage of business use.

If you purchased a car this year to transport passengers like for Uber and Lyft and you bought a sports utility vehicle, you may be able to deduct up to $25,000 of the cost of the vehicle if you use it more than 50% for your business. If you purchased a car for your business you may also be able to deduct up to the depreciation deduction allowed if your business use is more than 50%.

There is one more difference between buying and leasing a business vehicle. That difference is the disposition of the vehicle. When you dispose of a business vehicle that you own, there may be taxable gain or deductible loss. The portion of any gain that is due to depreciation will be taxed as ordinary income. When you return your leased car to the dealer, there is no taxable gain or loss.

Money Lessons for College Students

The new year is here for college students! If you’re a freshman, getting adjusted to your new life may feel overwhelming. But with new beginnings come new opportunities: like getting smart about your finances now to build up your wealth in the future.

Build Wealth with College Living

While college students get a bad rap for wasting money, you can stash away a considerable amount of money if you avoid the “lifestyle inflation” that comes with newly-independent living. Here are some tips:

Live frugally: Get familiar with your new neighborhood and take advantage of free and cheap events around town. Your college or university usually has free events going on every week, plus club-level sports teams you can join. 

Be wise, not cheap: Yes, you can get a package of ramen for a ridiculously low price, but your health is more important than saving a couple bucks. Shop the outside walls of the grocery store (where the produce lives) and find fresh foods on sale.

Learn the art of negotiating. Connect with your network and see if you can get some of your supplies, like textbooks and furniture, at a bargain by buying used or trading.

Get a part-time job. Build your resume, gain skills, and make money with a part-time job. You can do it during the semester or even get a paid internship or full-time temporary job during school breaks.

Make the most of the money you save by both building up an emergency fund and contributing what you can to tax advantaged accounts like a Roth IRA. Time is a huge asset when you invest, so use compound interest in your favor and grow your wealth.

Educational Tax Credits and Deductions

Speaking of tax advantages, you (or your parents if you’re their dependent) may be able to claim education tax deductions and credits. Some big tax credits you may be eligible for include:

American Opportunity Tax Credit (AOTC) 

You can get a tax credit for eligible educational expenses during your first four years of college for up to $2,500 per student. This is a refundable tax credit.

Lifetime Learning Credit

This tax credit can help with tuition related expenses for up to $2,000 per tax return, provided you’re enrolled at an eligible educational institution. Unlike the AOTC, there is no requirement that the credit is taken in the first four years of college and you don’t have to be enrolled at least half-time. Please note: You may qualify for both, but you can only claim one on your taxes.

As far as deductions, you may be eligible for the Student Loan Interest Deduction. Unlike other loans, you may be able to deduct your interest from a qualifying student loan. And if you received a scholarship, make sure you understand if it qualifies as tax-free. Generally speaking, the scholarship has to be used for educational expenses at a qualifying institution to be considered tax free.

Moving? Let Uncle Sam Help Pay for Your Move

Many people pick up and move each month, often to start a new job. Although moving can be very expensive, remember that Uncle Sam may be able to help pay the costs through tax deductions if you meet a few tests.

1. Did you have out of pocket costs? 

If your employer paid all the relocation costs and didn’t include it in your income, you came off scott-free and you don’t have any expenses to deduct on your tax return.

Deductible out-of-pocket costs include the expenses of packing and moving your belongings to your new home, temporary storage for up to 30 days, insuring your goods, utility connection costs (but not car registration), shipping pets, and the expenses of traveling to your new home, and lodging expenses on the trip and when you first arrive at your new location.

But surprisingly, meals aren’t included, so if you wine and dine along the way, don’t expect Uncle Sam to foot the bill. Helpful hint: You don’t have to itemize your deductions to claim moving expenses, and no limitations, income thresholds, phase-ins or phase-outs will reduce what you are allowed to claim.

2. Did you move because of a job? 

If so, your new job must be at least 50 miles farther from your old house than the distance between your old house and your old job. Got that? Let me explain with an example. Let’s say your old commute from home to the office was 10 miles. Now you have a new job in a neighboring town that is 65 miles away from your old house. You pass the test, because the distance from your new job to your old house (65 miles) exceeds your prior commuting distance (10 miles) by at least 50 miles. Helpful hint: It doesn’t matter if the job is your first job, a new job, or the same job in a different location.

3. Did you work full time in the new location? 

During the first year after your move, you have to work full-time for at least 39 weeks. That means that you can move to a new location and look for work, but you’ll need to land your new job and start work within three months. (If you are self-employed, the period is two years, during which you have to work at least 78 weeks.) Helpful hint: The worked weeks don’t have to be consecutive or even with the same employer.

Those three questions will cover most work-related moving situations, however here are a few special circumstances that have can result in cost deductions as well.

Your move is delayed. Let’s say that you are in a hurry to begin your new job, so you travel to your new location and stay in temporary housing until you can afford the time to make the move. Or your spouse may be finishing up her employment or the kids are finishing school in the old location. You must move within 12 months of starting your new job, or no deduction.

Your spouse was employed in old location but not in the new location. If your spouse has trouble finding work in the new location, or decides to stay home with the kids or go back to school, no problem. Only one spouse needs to meet the employment rules. But you and your spouse can’t alternate working and still get the deduction, since one of you must work 39 weeks in the first year – you can’t combine both your employment histories to satisfy that requirement.

You return to the USA to retire. If you’ve been living and working abroad, and now are retiring in the US, the IRS waives the requirement that you work full-time in your new location. That means that the costs of the move are deductible, regardless of whether you are gainfully employed.

Your tax return is due before you reach the 39-week mark. You can write off your costs even if you haven’t reached the 39-week mark, but beware. If you deduct moving expenses and then don’t pass the time test, you must file an amended tax return or include the moving expenses in your income the next year.

You lose your job. If your employer lays you off, the IRS will waive the 39-week test. The same is true if you are transferred and have to move again before you’ve worked a full 39 weeks in the new location.

Your employer pays part of the moving costs and includes it in your salary. If your employer adds the moving expense reimbursement to your salary, then you have to claim the expenses on your tax return to get your deduction. And if your boss paid for some costs that the IRS doesn’t allow and includes those in your income, you’ll have to pay tax on those reimbursements.

Please note, if you are a member of the armed forces and your move was due to a military order and permanent change of station, you do not have to satisfy the distance or time test.

Student Loan Options When You’re Self-Employed

Student loans can be a huge financial burden when you first start working. This is especially true if you are self-employed. As if the challenges of self-employment weren’t enough, you have student loan payments on top of it!

Paying off your student loans is just one of the cornerstones of managing your money after graduation, so let’s start by reviewing the programs that can help.

Fortunately, there are several payment plans for low income earning holders of federal student loans. While we explain the details of the various plans, the simplest way to discover which one is best for you is the use the repayment estimator offered by the U.S. Department of Education. It will tell you the best option.

Income Based Repayment Plan

If you are on an Income-Based Repayment (IBR) plan, which is one the most common income-driven repayment plans, on your federal student loans such as Direct and FFEL loans, you have a reprieve. IBR plans cap your monthly payments based on your income and family size. This doesn’t apply if the loan was made to your parents though.

The first step is determining your income. Whether you qualify for an IBR plan depends on your income relative to 150% of the poverty level. The rule regarding eligibility is that if it takes more than 15% of the amount you earn above 150% of the poverty level to pay off the loan on a 10-year payment plan, you qualify.

In summary, if you earn less than 150% of the poverty level, your payment will be $0. If you earn more, it’ll be capped at 15% of whatever you earn. After 25 years of qualifying payments, your outstanding loan balance will be forgiven.

Income Contingent Repayment Plan

The Income Contingent Repayment (ICR) Plan is similar to and predates the IBR Plan. Both forgive the loans after 25 years. The big difference is that ICR can only be used with the Federal Direct Loan Program, and Parent PLUS Loans.

The monthly payment requirement is higher with the bar at 20% of your income versus 15%.

Pay As Your Earn (PAYE) Plan

Another popular repayment plan is known as Pay As You Earn (PAYE) and is similar to IBR but applies only to Federal Direct loans made to the students. To be eligible, you must have taken out your first federal student loan after September 30th, 2007 and at least on after September 30, 2011.

The requirements for this program are less strict, with the bar set at 10% of your income above the 150% of poverty level (instead of 15% for IBR). Another significant difference is that any outstanding balance on your loan after 20 years will be forgiven.

Revised Pay As You Earn (REPAYE) Plan

This fourth and newest program, announced June 2014, is an expansion of the PAYE plan. It permits Direct Loan borrowers to cap monthly student loan payments to 10% of monthly discretionary income with no date requirements on the loans. The payments are capped at 10% of your income above the 150% of poverty level and if your payment doesn’t cover interest, the government will cover it for the first three years.

One last point to remember about all of these programs, should you qualify, is that if your payment doesn’t cover the interest, it will continue to accrue and capitalize into the loan (unless paid by the government). If it doesn’t cover the principal, it will also continue to accrue. On Subsidized Stafford Loans, the government will pay the interest for the first three years of IBR. After three years, and on other loans, the interest will be added to your loan.

Don’t forget, at tax-time you can save money by deducting your student loan interest you paid up to $2,500 and you don’t even need to know how to deduct it. Hopefully we have shared information about student loans that will help put your mind at ease as you run your own business.

Self-Employed for a Few Months? What You Should Know

If you lose your job or are disgruntled at work, the temptation is to strike out on your own. Be your own boss, and you’ll never lose your job again – plus you don’t have to report to anyone, you can work whatever hours you like, and keep whatever you make for yourself rather than having it all go to your employer.

If you have recently taken the steps of becoming self-employed, here are some tips for you on how to survive the ups and downs of starting a business. 

Consider combining working and self-employment. When you begin a business, the revenue stream isn’t always steady. It’s good to have part time or intermittent employment to fall back on to pay the bills, at least until you get your business reliably generating income. It may take burning the midnight oil as you work two jobs at once, but it won’t be forever.

Plan for success, or you’ll plan to fail. Though you can get a business going without a solid business plan, sooner or later you’ll hit a wall. That’s because keeping a business going and expanding it will require careful planning and monitoring. Once you have a business plan drawn up, run it by others in similar businesses to yours to see how realistic it is. Use social media to find other business owners who would like to meet with you to support each other for mutual success.

Hunker down and tighten your belt. The less money you are spending on your day-to-day living expenses, the more at ease you’ll feel with the income fluctuations of your own business, especially in the early months. And when you do create a surplus, don’t loosen your belt until you have several months of living expenses socked away in savings. That way, you’ll be able to survive periods of underperformance – and believe me, they will come – without panicking.

Pay attention to the details. It’s a lot more fun to run a business than to record the transactions of that business, but record-keeping is an absolute necessity if you are going to succeed. Without those records you won’t know the score of how you are doing.

Don’t ignore Uncle Sam. Self-employment taxes can gobble up a whopping 15.3% of your bottom line net income, and that’s on top of income taxes that you must pay on your total earned income. Estimate the taxes that are due and make estimated tax payments each quarter so you don’t get caught short at the end of the year and owe penalties on top of the taxes.

Who Can I Claim As a Dependent?

The question “Who can I claim as my dependent?”, has remained a confusing topic for many taxpayers and an area where tax deductions are often missed or misstated on tax returns.

Did you know, you may be able to claim your couch potato friend as a dependent? Did you realize that support of your struggling aunt who didn’t live with you may qualify you for the dependency deduction? Don’t feel bad, you would be surprised how many people scratch their heads about dependency tax laws.

The bottom line is a dependent must be your “qualifying child” or “qualifying relative” and meet specific tests in order for you to claim them.

There are 5 tests that will qualify a child as a dependent as follows:

• Relationship: Must be your child, adopted child, foster-child, brother or sister, or a descendant of one of these(grand or nephew).
• Residence: Must have the same residence for more than half the year.
• Age: Must be under age 19 or under 24 and a full-time student for at least 5 months. They can be any age if they are totally and permanently disabled.
• Support: Must not have provided more than half of their own support during the year.
• Joint Support: The child cannot file a joint return for the year.

There are 4 tests that will qualify a relative as a dependent as follows:

• Qualifying Dependent Relative: They are not the “qualifying child” of another taxpayer or your “qualifying child”.
• Gross Income: Dependent earns less than $4,000 in 2015 ($4,050 in 2016).
• Total Support: You provide more than half of the total support for the year.
• Member of Household or Relationship: The person (a friend, girlfriend, non blood relative) must live with you all year as a member of your household or be one of the relatives that doesn’t have to live with you.

Many taxpayers are surprised to find they may be able to claim a boyfriend, girlfriend, domestic partner, or friend as a qualifying relative if:

• They are a member of your household the entire year.
• The relationship between you and the dependent does not violate the law (you can’t still be married to someone else. Also check your individual state law. Some states do not allow you to claim a boyfriend or girlfriend as a dependent even if your relationship doesn’t violate the law).
• You meet all the other criteria for “qualifying relatives” (gross income and support).

Here are some common questions from our users we have answered for you here:

Question: My 26 year old is living with me. He works and has made more than $4,000. Can I claim him as a dependent?

Answer: No, because your child would not meet the age test, which says your “qualifying child” must be under age 19 or 24 if a full-time student for a least 5 months out of the year. He may be considered a “qualifying relative”, but his income must be less than $4,000 in 2015 ($4,050 in 2016).

Question: I start work in September of this year and had my baby in March. Can I claim my baby as a dependent on my taxes?

Answer: Yes, even if you have a baby on December 31, you can claim them as a dependent on your taxes.

Question: My boyfriend fully supports me. We live with his mother, but we pay for our full support including rent. His mother wants to claim us as dependents. Who can claim the deduction?

Answer: As long as your boyfriend is not married (be sure to check your individual state law regarding claiming a boyfriend or girlfriend some states don’t comply with the federal law), supplies over half of your support, and you lived with him the entire year, you did not earn more than $4,000 in 2015 ($4,050 in 2016), you would qualify as his dependent. His mother could not claim you since she did not provide more than half of the support.

Question: My spouse has not worked all year except for a month, can I claim him as a dependent?

Answer: You cannot claim a spouse as a dependent. If you file married filing jointly, you will get a personal exemption of $4,000 in 2015 ($4,050 in 2016) for each of you.