There’s a deduction for student loan interest … but do you qualify for it?

If you’re paying back college loans for yourself or your children, you may wonder if you can deduct the interest you pay on the loans. The answer is yes, subject to certain limits. The maximum amount of student loan interest you can deduct each year is $2,500. Unfortunately, the deduction is phased out if your adjusted gross income (AGI) exceeds certain levels, and as explained below, the levels aren’t very high.

The interest must be for a “qualified education loan,” which means a debt incurred to pay tuition, room and board, and related expenses to attend a post-high school educational institution, including certain vocational schools. Certain postgraduate programs also qualify. Therefore, an internship or residency program leading to a degree or certificate awarded by an institution of higher education, hospital or health care facility offering postgraduate training can qualify.

It doesn’t matter when the loan was taken out or whether interest payments made in earlier years on the loan were deductible or not.

Phase-out amounts

For 2021, the deduction is phased out for taxpayers who are married filing jointly with AGI between $140,000 and $170,000 ($70,000 and $85,000 for single filers). Thus, the deduction is unavailable for taxpayers with AGI of $170,000 ($85,000 for single filers) or more.

For 2022, the deduction will be phased out for taxpayers who are married filing jointly with AGI between $145,000 and $175,000 ($70,000 and $85,000 for single filers). That means the deduction is unavailable for taxpayers with AGI of $175,000 ($85,000 for single filers) or more.

Married taxpayers must file jointly to claim this deduction.

No deduction is allowed to a taxpayer who can be claimed as a dependent on another’s return. For example, let’s say parents are paying for the college education of a child whom the parents are claiming as a dependent on their tax return. The interest deduction is only available for interest the parent pays on a qualifying loan, not for any interest the child-student may pay on a loan he or she may have taken out. The child will be able to deduct interest that is paid in a later year when he or she is no longer a dependent.

The deduction is taken “above the line.” In other words, it’s subtracted from gross income to determine AGI. Thus, it’s available even to taxpayers who don’t itemize deductions.

Other requirements

The interest must be on funds borrowed to cover qualified education costs of the taxpayer or his or her spouse or dependent. The student must be a degree candidate carrying at least half the normal full-time workload. Also, the education expenses must be paid or incurred within a reasonable time before or after the loan is taken out.

Taxpayers should keep records to verify qualifying expenditures. Documenting a tuition expense isn’t likely to pose a problem. However, care should be taken to document other qualifying education-related expenditures such as for books, equipment, fees and transportation.

Documenting room and board expenses should be straightforward for students living and dining on campus. Students who live off campus should maintain records of room and board expenses, especially when there are complicating factors such as roommates.

We can help determine whether you qualify for this deduction or answer any questions you may have about it.

© 2021


Scholarships are usually tax free but they may result in taxable income

If your child is fortunate enough to be awarded a scholarship, you may wonder about the tax implications. Fortunately, scholarships (and fellowships) are generally tax-free for students at the elementary, middle, and high schools, as well as those attending college, graduate school or accredited vocational schools. It doesn’t matter if the scholarship makes a direct payment to the individual or reduces tuition.

Requirements for tax-free treatment

However, scholarships are not always tax-free. Certain conditions must be satisfied. A scholarship is tax-free only to the extent it’s used to pay for:

  • Tuition and fees are required to attend the school and
  • Fees, books, supplies, and equipment are required of all students in a particular course.

For example, expenses that don’t qualify include the cost of room and board, travel, research, and clerical help.

To the extent a scholarship award isn’t used for qualifying items, it’s taxable. The recipient is responsible for establishing how much of an award is used to pay for tuition and eligible expenses. Maintain records (such as copies of bills, receipts, and canceled checks) that reflect the use of the scholarship money.

Payment for services doesn’t qualify

Subject to limited exceptions, a scholarship isn’t tax-free if the payments are linked to services that your child performs as a condition for receiving the award, even if the services are required of all degree candidates. Therefore, a stipend your child receives for required teaching, research, or other services is taxable, even if the child uses the money for tuition or related expenses.

What if you, or a family member, are an employee of an educational institution that provides reduced or free tuition? A reduction in tuition provided to you, your spouse, or your dependents by the school at which you work isn’t included in your income and isn’t subject to tax.

What is reported on a tax return?

If a scholarship is tax-free and your child has no other income, the award doesn’t have to be reported on a tax return. However, any portion of an award that’s taxable as payment for services is treated as wages. Estimated tax payments may have to be made if the payor doesn’t withhold enough tax. Your child should receive a Form W-2 showing the amount of these “wages” and the amount of tax withheld, and any portion of the award that’s taxable must be reported, even if no Form W-2 is received.

These are just the basic rules. Other rules and limitations may apply. For example, if your child’s scholarship is taxable, it may limit other higher education tax benefits to which you or your child are entitled. As we approach the new academic year, best wishes for your child’s success in school. Contact us if you’d like to discuss these or other tax matters further.

© 2021


Don’t assume your profitable company has strong cash flow

Most of us are taught from a young age never to assume anything. Why? Well, when you assume you make an … you probably know how the rest of the expression goes.

Many business owners make a dangerous assumption that if their companies are profitable, their cash flow must also be strong. But this isn’t always the case. Taking a closer look at the accounting involved can explain.

Investing in the business

What are profits, really? In accounting terms, they’re closely related to taxable income. Reported at the bottom of your company’s income statement, profits are essentially the result of revenue less the cost of goods sold and other operating expenses incurred in the accounting period.

Generally Accepted Accounting Principles (GAAP) require companies to “match” costs and expenses to the period in which revenue is recognized. Under accrual-basis accounting, it doesn’t necessarily matter when you receive payments from customers or pay expenses.

For example, inventory sitting in a warehouse or retail store can’t be deducted — even though it may have been long paid for (or financed). The expense hits your income statement only when an item is sold or used. Your inventory account contains many cash outflows that are waiting to be expensed.

Other working capital accounts — such as accounts receivable, accrued expenses, and trade payables — also represent a difference between the timing of cash flows. As your business grows and strives to increase future sales, you invest more in working capital, which temporarily depletes cash.

However, the reverse also may be true. That is, a mature business may be a “cash cow” that generates ample dollars, despite reporting lackluster profits.

Accounting for expenses

The difference between profits and cash flow doesn’t begin and end with working capital. Your income statement also includes depreciation and amortization, which are non-cash expenses. And it excludes changes in fixed assets, bank financing, and owners’ capital accounts, which affect cash on hand.

Suppose your company uses tax depreciation schedules for book purposes. Let say, in 2020; you bought new equipment to take advantage of the expanded Section 179 and bonus depreciation allowances. Then you deducted the purchase price of these items from profits in 2020. However, because these purchases were financed with debt, the actual cash outflows from the investments in 2020 were minimal.

In 2021, your business will make loan payments to reduce the amount of cash in your checking account. But your profits will be hit with only the interest expense (not the amount of principal that’s being repaid). Plus, there will be no “basis” left in the 2020 purchases to depreciate in 2021. These circumstances will artificially boost profits in 2021 without a proportionate increase in cash.

Keeping your eye on the ball

It’s dangerous to assume that your cash position is strong—cash flow warrants careful monitoring just because you're turning a profit. Our firm can help you generate accurate financial statements and glean the most important insights from them.

© 2021


Tax-favored ways to build up a college fund

If you’re a parent with a college-bound child, you may be concerned about being able to fund future tuition and other higher education costs. You want to take maximum advantage of tax benefits to minimize your expenses. Here are some possible options.

Savings bonds

Series EE U.S. savings bonds offer two tax-saving opportunities for eligible families when used to finance college:

  • You don’t have to report the interest on the bonds for federal tax purposes until the bonds are cashed in, and
  • Interest on “qualified” Series EE (and Series I) bonds may be exempt from federal tax if the bond proceeds are used for qualified education expenses.

To qualify for the tax exemption for college use, you must purchase the bonds in your name (not the child’s) or jointly with your spouse. The proceeds must be used for tuition, fees, and certain other expenses — not room and board. If only part of the proceeds is used for qualified expenses, only that part of the interest is exempt.

The exemption is phased out if your adjusted gross income (AGI) exceeds certain amounts.

529 plans

A qualified tuition program (also known as a 529 plan) allows you to buy tuition credits for a child or make contributions to an account set up to meet a child’s future higher education expenses. State governments or private education institutions establish qualified tuition programs.

Contributions aren’t deductible. The contributions are treated as taxable gifts to the child, but they’re eligible for the annual gift tax exclusion ($15,000 for 2021). A donor who contributes more than the annual exclusion limit for the year can elect to treat the gift as if it were spread out over a five-year period.

The earnings on the contributions accumulate tax-free until college costs are paid from the funds. Distributions from 529 plans are tax-free to the extent the funds are used to pay “qualified higher education expenses.” Distributions of earnings that aren’t used for qualified expenses will be subject to income tax plus a 10% penalty tax.

Coverdell education savings accounts (ESAs)

You can establish a Coverdell ESA and contribute up to $2,000 annually for each child under age 18.

The right to make contributions begins to phase out once your AGI is over a certain amount. If the income limitation is a problem, a child can contribute to his or her own account.

Although the contributions aren’t deductible, income in the account isn’t taxed, and distributions are tax-free if used on qualified education expenses. If the child doesn’t attend college, the money must be withdrawn when he or she turns 30, and any earnings will be subject to tax and penalty. But unused funds can be transferred tax-free to a Coverdell ESA of another member of the child’s family who hasn’t reached age 30. (Some ESA requirements don’t apply to individuals with special needs.)

Plan ahead

These are just some of the tax-favored ways to build up a college fund for your children. Once your child is in college, you may qualify for tax breaks such as the American Opportunity Tax Credit or the Lifetime Learning Credit. Contact us if you’d like to discuss any of the options.

© 2021


Many parents will receive advance tax credit payments beginning July 15

Many parents will receive advance tax credit payments beginning July 15

Eligible parents will soon begin receiving payments from the federal government. The IRS announced that the 2021 advance child tax credit (CTC) payments, which were created in the American Rescue Plan Act (ARPA), will begin being made on July 15, 2021.

How have child tax credits changed?

The ARPA temporarily expanded and made CTCs refundable for 2021. The law increased the maximum CTC — for 2021 only — to $3,600 for each qualifying child under age 6 and to $3,000 per child for children ages 6 to 17, provided their parents’ income is below a certain threshold.

Advance payments will receive up to $300 monthly for each child under 6, and up to $250 monthly for each child 6 and older. The increased credit amount will be reduced or phased out, for households with modified adjusted gross income above the following thresholds:

  • $150,000 for married taxpayers filing jointly and qualifying widows and widowers;
  • $112,500 for heads of household; and
  • $75,000 for other taxpayers.

Under prior law, the maximum annual CTC for 2018 through 2025 was $2,000 per qualifying child but the income thresholds were higher and some of the qualification rules were different.

Important: If your income is too high to receive the increased advance CTC payments, you may still qualify to claim the $2,000 CTC on your tax return for 2021.

What is a qualifying child?

For 2021, a “qualifying child” with respect to a taxpayer is defined as one who is under age 18 and who the taxpayer can claim as a dependent. That means a child related to the taxpayer who, generally, lived with the taxpayer for at least six months during the year. The child also must be a U.S. citizen or national or a U.S. resident.

How and when will advance payments be sent out?

Under the ARPA, the IRS is required to establish a program to make periodic advance payments which in total equal 50% of IRS’s estimate of the eligible taxpayer’s 2021 CTCs, during the period July 2021 through December 2021. The payments will begin on July 15, 2021. After that, they’ll be made on the 15th of each month unless the 15th falls on a weekend or holiday. Parents will receive the monthly payments through direct deposit, paper check or debit card.

Who will benefit from these payments and do they have to do anything to receive them? 

According to the IRS, about 39 million households covering 88% of children in the U.S. “are slated to begin receiving monthly payments without any further action required.” Contact us if you have questions about the child tax credit.

© 2021


Student loan interest: Can you deduct it on your tax return?

The economic impact of the novel coronavirus (COVID-19) is
unprecedented and many taxpayers with student loans have been hard hit.

The Coronavirus Aid, Relief and Economic Security (CARES) Act
contains some assistance to borrowers with federal student loans. Notably,
federal loans were automatically placed in an administrative forbearance, which
allows borrowers to temporarily stop making monthly payments. This payment
suspension is scheduled to last until September 30, 2020.

Tax deduction rules

Despite the suspension, borrowers can still make payments if
they choose. And borrowers in good standing made payments earlier in the year
and will likely make them later in 2020. So can you deduct the student loan
interest on your tax return?

The answer is yes, depending on your income and subject to
certain limits. The maximum amount of student loan interest you can deduct each
year is $2,500. The deduction is phased out if your adjusted gross income (AGI)
exceeds certain levels.

For 2020, the deduction is phased out for taxpayers who are
married filing jointly with AGI between $140,000 and $170,000 ($70,000 and
$85,000 for single filers). The deduction is unavailable for taxpayers with AGI
of $170,000 ($85,000 for single filers) or more. Married taxpayers must file
jointly to claim the deduction.

Other requirements

The interest must be for a “qualified education loan,” which
means debt incurred to pay tuition, room and board, and related expenses to
attend a post-high school educational institution. Certain vocational schools
and post-graduate programs also may qualify.

The interest must be on funds borrowed to cover qualified
education costs of the taxpayer, his or her spouse or a dependent. The student
must be a degree candidate carrying at least half the normal full-time
workload. Also, the education expenses must be paid or incurred within a
reasonable time before or after the loan is taken out.

It doesn’t matter when the loan was taken out or whether
interest payments made in earlier years on the loan were deductible or not. And
no deduction is allowed to a taxpayer who can be claimed as a dependent on
another taxpayer’s return.

The deduction is taken “above the line.” In other words, it’s
subtracted from gross income to determine AGI. Thus, it’s available even to
taxpayers who don’t itemize deductions.

Document expenses

Taxpayers should keep records to verify eligible expenses.
Documenting tuition isn’t likely to pose a problem. However, take care to
document other qualifying expenditures for items such as books, equipment,
fees, and transportation. Documenting room and board expenses should be simple
if a student lives in a dormitory. Student who live off campus should maintain
records of room and board expenses, especially when there are complicating factors
such as roommates.

Contact us if you have questions about deducting student loan
interest or for information on other tax breaks related to paying for college.

© 2020


529 plans offer two tax-advantaged education funding options

Section 529 plans are a popular education-funding tool because of tax and other benefits. Two types are available: 1) prepaid tuition plans, and 2) savings plans. And one of these plans got even better under the Tax Cuts and Jobs Act (TCJA).

Enjoy valuable benefits

529 plans provide a tax-advantaged way to help pay for qualifying education expenses. First and foremost, although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred. In addition, some states offer tax incentives for contributing in the form of deductions or credits.

But that’s not all. 529 plans also usually offer high contribution limits. And there are no income limits for contributing.

Lock in current tuition rates

With a 529 prepaid tuition plan, if your contract is for four years of tuition, tuition is guaranteed regardless of its cost at the time the beneficiary actually attends the school. This can provide substantial savings if you invest when the child is still very young.

One downside is that there’s uncertainty in how benefits will be applied if the beneficiary attends a different school. Another is that the plan doesn’t cover costs other than tuition, such as room and board.

Fund more than just college tuition

A 529 savings plan can be used to pay a student’s expenses at most postsecondary educational institutions. Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer equipment, software, Internet service and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.

In addition, the Tax Cuts and Jobs Act expands the definition of qualified expenses to generally include elementary and secondary school tuition. However, tax-free distributions used for such tuition are limited to $10,000 per year.

The biggest downside may be that you don’t have direct control over investment decisions; you’re limited to the options the plan offers. Additionally, for funds already in the plan, you can make changes to your investment options only twice during the year or when you change beneficiaries.

But each time you make a contribution to a 529 savings plan, you can select a different option for that contribution, regardless of how many times you contribute throughout the year. And every 12 months you can make a tax-free rollover to a different 529 plan for the same child.

Picking your plan

Both prepaid tuition plans and savings plans offer attractive benefits. We can help you determine which one is a better fit for you or explore other tax-advantaged education-funding options.

© 2018


Personal Finance Tips for Young Adults

As a young person, considering anything finance-related can seem light years away. In reality, knowing how to manage your finances and plan for the future should occur in your early years. This will help in learning responsibility at a young age, giving you a clearer perspective on money management. Learning how to appreciate money and use it wisely at a young age will also help with accumulating savings and being able to do things without going into debt.

Here are a few tips:

Get a financial education

It’s wise to know about finances as you are going through grade school. Learning how to write a check, balance a checkbook, what a stock and bond is, and how credit cards and credit works are all important. The more education you have, the better prepared you will be.

Open an account

tax planning 2015 bostonHaving a savings or checking account can assist in learning how to save money. Young adults should have some mechanism that will allow them to save and watch their money work for them. Learning how to save for what you want, while earning some interest on that money will impart good finance habits early on.

Find ways to earn money

Learning how to earn and appreciate money should come at a young age. This means saving some of your allowance, taking on small jobs and perhaps getting a job in high school prior to graduating to contribute to your future endeavors. This also helps in being responsible for money and will paint a clearer picture of how much things cost and how quickly large sums can be blown.

College

learn about money for teenagersThinking about whether or not you want to go to college should happen as you’re going through middle and high school. Even though this is a major investment, it can pay off in the future. Getting your degree while you’re still young and don’t have as many responsibilities is advantageous. Additionally, you or your parents will qualify for education credits that can help during tax time.

Parents may wonder whether or not their teenager should file a tax return if they are working. There are certain criteria that will help you determine whether or not they should file. You should look at how much your teenager made and whether or not they can be claimed as a dependent on your tax return.

There are limits to how much they can make before they are required to file. If they earned less than $6,300 in 2015, they do not have to file.

What makes the teenager a dependent?

  • If the teenager is under the age of 19 up to age 24 and a full-time student,
  • If they live with you more than 50% of the year; and
  • If they do not provide more than half of their financial support.

As your young adult begins to work more, having a background in finances can help them avoid excessive debt. If they obtain a credit card, teaching them how to be responsible in using the credit card will make a huge difference in the way they view money. Additionally, educating them on student loans and how they can potentially get out of hand is also very important.

These tips and suggestions should assist in keeping your young child or teenager financially aware and prepared to use money wisely, as well as make responsible decisions on how their money is used now and in the future.


February Student Special from Dukhon Tax!

It’s tax season again and one of our firm’s favorite things during this time of year is to give a little something special to Boston’s students. For the Month of February, we are running a Student Special for tax preparation! If you are a student and have a qualified basic tax return, Dukhon Tax is offering a student special price of $100 for tax preparation and filing during the month of February.

What is a Basic Return?

A basic return includes Form 1040 and MA flings, with up to 4 Forms W-2, education credits, student loan interest and no other deductions or schedules. A valid student ID or, other proof of being a currently enrolled student, is required to qualify for this special.

Why use Dukhon Tax?

We were once students too and we know how busy you can be. As such we’d like to show how much we appreciate the great minds of our local college community by offering a special price on tax preparation and online tax filing. Instead of using online tax software or waiting in line at the big-box tax store, come see us in February and take advantage of this special.

How does it work?

  1. Contact us and let us know you are looking for the $100 Student Special
  2. Fill out a quick questionnaire about your taxes
  3. Upload your tax documents to our secure Client Portal
  4. Let the magic happen and have us prepare your returns while you cram for that exam or go to a career fair.
  5. Once the returns are prepared and ready, you will receive a copy to electronically sign
  6. We will file your returns and you will receive your refund.

School can be hard, but taxes can be easy. Choose Dukhon Tax for your 2015 tax preparation and come see us in February for our student special. We look forward to serving our local students!


We love students!

At Dukhon Tax and Accounting, we have a special place in our heart for our local student population. Remember, we were once students too – and of course, we always remain studious and continue learning! As such, we’d like to show how much we appreciate the great minds of our local college community by offering a special price on tax preparation. Plus, we’ve made it very easy to upload your documents and connect with us.

tax accountants for studentsDuring the month of February, we will be offering a special price for tax preparation to local students. We know that winter semester is a busy time. However, getting your tax refund quickly and easily should brighten up your spirits!

For local students who present a valid student ID, we will be offering a flat rate of $100 for basic preparation of tax returns*.

Instead of using online tax software or waiting in line at one of the large national firms, come see us for tax expertise and a modern service model.

  1. Contact Dukhon Tax and Accounting by
    PHONE: 617-651-0531
    EMAIL: [email protected]
    ONLINE FORM: Click Here »
  2. We will send you a link to our client portal and contact you to discuss your situation. If you’d like to stop by our office to chat, we can setup an appointment.
  3. Upload your tax forms (W-2s, 1098-T, Student Loan Interest Statements)
  4. We prepare your return and you receive your refund by direct deposit.

Fast and accurate tax refunds – make sure you get all the money that is owed to you. No need to lose a weekend using the “do-it-yourself” software.

We look forward to serving our local student population and all of our clients during this tax season!

Sincerely,

The Staff at Dukhon Tax and Accounting

*Basic return are 3 or less W-2s, education credit, student loan interest, and no other deductions or attached form schedules. Valid student ID required. Offer lasts 02/01/2015 to 02/28/2015, please contact our office during that time.