2nd quarter estimated taxes due
Summer is in full swing and the air conditioners are working overtime. Hopefully you are finding ways to stay cool while enjoying your outdoor activities. Included in this newsletter are articles about a new tax trap created by student loan forgiveness, tips to improve your financial situation and ideas to ensure that you are not sharing too much online. For your business, there is an article explaining “economic nexus” for sales tax.
In This Issue:
Student Loan Forgiveness Creates New Tax Trap
There’s a new student loan repayment program that forgives some student loan debt if other payments are made. This new debt forgiveness is creating a tax surprise for the unsuspecting student. Here is what you need to know.
The debt forgiveness program dilemma
To combat the hardship of high student loan debt, a popular new repayment option is the income-based repayment plan. These plans limit monthly payment amounts to a
percentage of discretionary income. They also limit the number of repayment years. If your loan is not paid by a pre-determined future date and you’ve been making the payments as agreed, the balance of the loan is forgiven.
While the prospect of having a portion of the debt canceled is enticing, it can create an unexpected tax burden if you are not prepared. Here’s why it may be a problem:
Canceled debt is considered taxable income. When a portion of a loan is forgiven, that amount is considered taxable income in the year in which the debt is cancelled. While there are exceptions, this is the general tax rule.
A 1099-C is issued to you and the IRS. Upon the forgiveness of the student loan debt, the loan servicing company will issue a Form 1099-C titled “Cancellation of Debt”. A copy of the form will be delivered to both you and the IRS informing both parties of the amount of forgiven debt. This amount needs to be included on your Form 1040.
Taxes are due at filing. The entire amount will likely be taxed at the taxpayer’s highest marginal tax rate. This amount is due in its entirety at the annual tax-filing deadline. If a large amount is due, there may also be additional underpayment fees tacked on by the IRS.
Some exceptions apply
Before you begin to worry about a surprise tax bill, consider your other options:
Tax-exempt debt forgiveness programs: There are a few programs that consider the student loan canceled debt tax-exempt. The two most common are for students that become public service employees and teachers. So when you have canceled debt, conduct a review to see if your employment complies with the possible tax exclusion.
Insolvency exclusion: The IRS provides a way to exclude a forgiven debt from taxable income if you can prove you are financially insolvent. The IRS defines “insolvency” as when a taxpayer’s total liabilities exceed his or her total assets. To claim this exclusion, an additional form is filed with your tax return. Make sure you can back up any claims you make, because the IRS may request to see proof.
IRS repayment plan: If you have a balance due as a result of the canceled debt and cannot pay it in full by the deadline, the IRS has payment plans available. There will be additional penalties, interest and possibly setup fees that will be added to the amount due. This is not a great option, but it is better than not paying the balance at all.
Even with the additional tax liability that is realized, debt relief is generally a good deal for most. The hardship comes if you are not prepared for how to handle the tax payment that becomes due. Before signing an agreement that relieves debt, it makes sense to review your situation to avoid any surprises on your tax bill.
Ideas to Improve Your Financial Health
No-one likes to be blindsided by financial hardship. Listed here are 10 ideas to help ensure your financial situation stays healthy.
Create a safety net. Plan to have a minimum savings balance to cover at least three months’ of expenses (ideally, this should be six to 12 months). If your reserves are light, start saving now. Even if it is a little amount, it can get you on the right track.
Develop a budget. At least once a year develop a basic budget. Set goals and try to hit them. If this seems overwhelming, start simple. What is coming in and what goes out each month? Becoming aware is the first step to improving your financial health.
Make your spouse a financial partner. If you die, does your significant other know where everything is? Can he/she pay the bills? Does he know where account numbers are? Does your spouse know who you use to help with things? If not, it is time to start talking.
Review your beneficiaries. Once a year review beneficiaries on all accounts. This includes retirement accounts as well as names on wills and estate plans. The legal hassle created without this review can be devastating to your surviving family. This is especially important if you had a recent life event (marriage, divorce, birth or death).
Maximize your benefits. Make sure you review your retirement plans to maximize any employer match in your account. Also review your plan’s administrative expenses. If they are too high they can cost you thousands of dollars over your lifetime.
Create a disaster plan. If your home burned down or was flooded, are your important records easily accessible and protected? If not, consider creating a disaster plan. This may include placing important documents in a safe deposit box in another location than your home.
Review your credit report. With the recent increase in identity fraud, plan to check your credit with the major credit agencies once a year. The agencies are legally required to make their report available to you annually without charge.
Review your insurance plans. Periodically look at your health, life, home and liability insurance. With the legal nature of our society, you might consider the need for an umbrella policy to cover against potential litigation. But also consider flood insurance and a replacement value homeowner’s policy.
Manage your debt. Review your use of credit cards, loans, etc. Understand your net worth (assets minus liabilities). Make progress in reducing your debt load starting with the highest interest obligations first. Is your debt lower than it was last year?
Plan for fun. Just because you are taking steps to improve your financial situation doesn’t mean that you can’t have fun. Be smart about your entertainment spending. If you are planning a vacation, research money-conscience options and have a budget that fits in with your other financial goals.
This list is by no means complete, but if you focus on the areas mentioned, your financial life will become more planned and less likely to be struck by an unforeseen surprise.
Dramatic Sales Tax Change
The U.S. Supreme Court issued a ruling in the South Dakota vs Wayfair case that opens the door for states to impose sales tax on sellers outside their borders. The case highlights a new standard of business presence called “economic nexus” that may have major implications for businesses and consumers alike.
Economic nexus explained
The exact definition varies, but in general, economic nexus makes a connection between a taxing authority (usually a state) and a seller based on certain sales or transaction levels. The Supreme Court agrees with South Dakota that having economic presence is enough to require an out-of-state retailer to register with the state to collect and remit sales tax. For example, the state of South Dakota mandates that if a retailer has $100,000 in annual in-state sales or has 200 separate in-state sales transactions over the previous 12 months, they must collect sales tax on all sales in South Dakota.
What it means for businesses
New, lower threshold for tax exposure: Sales tax nexus was mostly determined by physical presence. If a business has an office or employee located in a state, they likely were required to collect tax on sales in that state. The economic nexus standard removes the physical presence requirement with this ruling. Businesses now may need to compare sales-by-state data to the individual state economic nexus laws to determine whether they have a sales tax obligation in that state.
More tax registrations & filings: Businesses that sell outside their state may need to register in many more states – maybe all 50. With more registrations come more compliance management and more sales tax returns that need to be filed on an ongoing basis. The impact on workload for sales tax staffs could be huge.
Increased audit potential: With each new state registration comes a new potential audit authority. Sales tax audits almost always bring in additional revenue for states, so they will be looking to capitalize on the increased registrations. Sales tax compliance management is more important than ever and could lead to state income tax changes.
As many as 16 states have economic nexus laws in place to try to take advantage of the new ruling, with many more to introduce legislation. By nature, Internet retailers will be hit the hardest and are expected to lobby in states that have not passed economic nexus laws. In addition, it will take states some time to get their systems updated to handle the new laws and increased filings. While there might be some short-term delays during implementation, sales tax changes appear to be on their way.
Are you Sharing Too Much Information Online?
Actively manage your security settings. Every app, social media site and web browser have multiple layers of privacy and security settings. When you download a new app or register with a new site, don’t simply trust the default settings. Look through the options yourself to ensure you are comfortable with the level of privacy. One thing to watch for with apps on your phone is location settings. Some apps will track your location even when the app isn’t running.
Protect your online image. Career search firms now have strategies built entirely around recruiting through social media. According to LinkedIn, more than 20,000 companies use their platform to attract new talent. In addition to recruiting, human resource departments will vet prospective employees by reviewing social media profiles.
What you share and how you portray yourself on social media is extremely important to your career. Pay attention to what others post about you, as well. If you are uncomfortable with what they are sharing, have a conversation with them and ask that it be taken down
Set boundaries for yourself. According to the Pew Research Center, 74 percent of Facebook users visit the site on a daily basis. And 51 percent say they visit multiple times per day. Try to find the balance that allows you to enjoy connecting with others online, but doesn’t negatively impact other parts of your life.
In addition to time spent, draw a bright line between what you consider shareable versus personal information. If you have these boundaries in mind when on social media, it will help you think critically before continuing to scroll or posting something.
your friends. Having friends is fun. Having the wrong friends can be harmful and even dangerous. If you receive a friend request from someone you don’t know, deny it. They might simply be trying to increase their friend count, but they could be looking to access personal data. Review your friends on every platform on a periodic basis, and don’t fret about how many friends you have. Quality is much more important than quantity.
The best defense of your private information is you. Having a plan and actively managing your online profiles is the best way to minimize the chance of your personal data falling into the wrong hands.