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Mike DiSabatino CPA

A blog by Michael DiSabatino CPA with topics on Tax Savings, Business, Management and more...

September 2017 DiSabatino, CPA Newsletter

 

news header

September 2017
  • September 4th:
  • Labor Day
  • September 15th:
  • 3rd Quarter Estimated Tax Due
  • October 1st:
  • SIMPLE IRA plan establishment due

Many students are headed back to school as summer draws to a close. This year they won't
be able to take advantage of the expired college tuition and fees deduction, but there are
some good alternatives. This letter also includes tips to reduce your insurance costs over
the long run, as well as some guidelines on dealing with debt collection. And, if you've ever needed to
hire an employee or contractor, there's an article discussing how to decide which is most appropriate.

As always, should you know of someone who may benefit from this information please feel free to
forward this to them.

 

Say Goodbye to the College Tuition Deduction

It's hard enough to watch your child leave for college. Now you also have to say goodbye to the tuition and fees tax deduction. Congress decided not to extend this $4,000 deduction for 2017, leaving many parents worried that college will now be more expensive.

But it isn't as bad as it sounds. That's because Congress left in place two popular education credits that often offer a more valuable tax break:

Bullet Point

The AOTC. The American Opportunity Tax Credit (AOTC) is a credit of  up to $2,500 per student per year for qualified undergraduate tuition, fees and course materials. The deduction phases out at higher income levels, and is eliminated altogether for married couples with a modified adjusted gross income of $180,000 ($90,000 for singles).

Mortarboard and money
Bullet Point Lifetime Learning Credit. The Lifetime Learning Credit provides an annual credit of 20 percent on the first $10,000 of tuition and fees, for either undergraduate or graduate level classes. There is no lifetime limit on the credit, but only couples making less than $132,000 per year (or singles making $66,000) qualify. Unlike the AOTC, this deduction is per tax return, not per student.

So who is affected by the loss of the tuition and fees deduction? If you are paying for your student's graduate-level courses and are making too much to qualify for the Lifetime Learning Credit, the tuition and fees deduction was generally the only means you had to reduce your tax bill.

But there's still hope! In addition to the two alternative education credits, there are many other tax benefits that reduce the cost of education. There are breaks for employer-provided tuition assistance, deductions for student loan interest, tax-beneficial college savings options, and many other tax-planning alternatives. Please call if you'd like an overview of the alternatives available to you.

 

Save on Insurance By Raising Deductibles

Having insurance for your home and vehicle is essential to ward off financial disaster should accidents occur. Unfortunately, insurance policies continue to become more expensive. One of the things you can do to lower your insurance cost is to consider increasing your coverage deductibles.

Higher deductible, lower insurance cost

Deductibles are the out-of-pocket cost you must pay before your insurance company steps in with their coverage. If you are willing to increase your deductibles, your insurance company will lower your monthly insurance premium.

By increasing car insurance deductibles from $500 to $2,000, the average American would save 16 percent a year, according to the online insurance broker InsuranceQuotes.com. The actual amount you would save on either car or home insurance depends on the state you live in, your demographic profile and claims history.

Car key and insurance form

Do the math

Before you decide whether upping your deductibles is right for you, find out how much you would save. Suppose you would save $200 a year by increasing your car insurance collision and comprehensive deductibles to $2,000 from $500. After 7½ years, you would accumulate enough savings to make up the extra $1,500 out-of-pocket cost should you have an accident.

Now consider how likely you are to have an accident. About six in every 100 U.S. motorists file a collision claim every year and 3 in 100 file a comprehensive claim, according to the Insurance Information Institute. If those claims were spread out evenly, that means every motorist would go 16½ years before filing a collision claim and more than 33 years before filing a comprehensive claim.

Of course, claims are not spread out evenly and no one person's experience is "average." Your actual risk will depend greatly on how safe a driver you are, how many miles you drive a year, and where you drive. You have to make a similar estimate of your likelihood of filing a claim on your homeowners insurance.

Avoid the rate-hike game

Insurance companies are renowned for raising your premium after you file a claim. A higher deductible reduces this risk as fewer claims need to be filed.

A word of caution

Remember that increasing your deductibles can create a financial hardship. In our example, you'll now have to have $2,000 on hand to cover the cost of an insurance claim. Before you change your policy you need to be prepared by having enough cash in a savings account to cover your higher deductible.

 

Know Your Rights When Debt Collectors Call

At some point you may be on the receiving end of a debt collection phone call. It could happen any time you are behind on paying your bills, or if there is an error in billing. In the U.S. there are strict rules in place that forbid any kind of harassment. If you know your rights, you can deal with debt collection with minimum hassle. Here are some suggestions.

Bullet Point Phone Ask for non-threatening transparency.When a debt collector calls, they must be transparent about who they are. The magic words they must utter are: "This is an attempt to collect a debt, and any information obtained will be used for that purpose." In addition, debt collectors cannot use abusive or threatening language, or threaten you with fines or jail time. The most a debt collector can truthfully threaten you with is that failure to pay will harm your credit rating, or that they may sue you in a civil court to extract payment.
Past due notice
Bullet Point Rules Know the contact rules. Debt collectors may not contact you outside of "normal" hours, which are between 8 a.m. and 9 p.m. local time. They may try to call you at work, but they must stop if you tell them that you cannot receive calls there. Debt collectors may not talk to anyone else about your debt (other than your attorney, if you have one). They may try contacting other people, such as relatives, neighbors or employers, but it must be solely for the purpose of trying to find out your phone number, address or where you work.
Bullet Point Action Take action. If you believe the debt is in error in whole or in part, you can send a dispute letter to the collection agency within 30 days of first contact. Ask the collector for their mailing address and let them know you are filing a dispute. They will have to cease all collection activities until they send you legal documentation verifying the debt.
Bullet Point Stop Tell them to stop. And, whether you dispute the debt or not, at any time you can send a "cease letter" to the collection agency telling them to stop making contact. You don't need to provide a specific reason. They will have to stop contact after this point, though they may still decide to pursue legal options in civil court.

If a debt collection agency is not following these rules, report them. Start with your state's attorney general office, and consider filing a complaint with the U.S. Federal Trade Commission and the Consumer Financial Protection Bureau as well.

 

Contractor or Employee?

Knowing the difference is important

Is a worker an independent contractor or an employee? This seemingly simple question is often the contentious subject of IRS audits. As an employer, getting this wrong could cost you plenty in the way of Social Security, Medicare, and other employment-related taxes. Here is what you need to know.

The basics

As the worker. If you are a contractor and not considered an employee you must:

Bullet Point Employee Pay self-employment taxes (Social Security and Medicare-related taxes)
Bullet Point Employee Make estimated federal and state tax payments.
Bullet Point Employee Handle your own benefits, insurance and bookkeeping.
Company benefits

As the employer. You must ensure your employee versus independent contractor determination is correct. Getting this wrong in the eyes of the IRS can lead to:

Bullet Point Employer Payment and penalties related to Social Security and Medicare taxes.
Bullet Point Employer Payment of possible overtime including penalties for a contractor reclassified as an employee.
Bullet Point Employer Legal obligation to pay for benefits.

Things to consider

When the IRS recharacterizes an independent contractor as an employee they look at the business relationship between the employer and the worker. The IRS focuses on the degree of control exercised by the employer over the work done and they assess the worker's independence. Here are some guidelines:

While there are no hard-set rules, the more reasonable your basis for classification and the more consistently it is applied, the more likely an independent contractor classification will not be challenged.
Bullet Point Consider The more the employer has the right to control the work (when, how and where the work is done), the more likely the worker is an employee.
Bullet Point Consider The more the financial relationship is controlled by the employer the more likely the relationship will be seen as an employee and not an independent contractor. To clarify this, an independent contractor should have a contract, have multiple customers, invoice the company for work done, and handle financial matters in a professional manner.
Bullet Point Consider The more businesslike the arrangement the more likely you have an independent contractor relationship.
 As always, should you have any questions or concerns regarding your situation please feel free to call.

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