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6 Strange New Taxes That May Be Headed Your Way

Filed under: Taxes, Tax Changes, Tax LawsBy CHERYL LOCK

It’s tax time!

And while you’re busy scrambling to get together your return for this year, a new Time article points out six new (incredibly strange) taxes that may be coming your way in the ver…

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How Unwary Grandparents Can Wreck Your College Financial Aid

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Grandparents helping with college aidThanks to the ever-rising cost of a college education and the stagnation of middle class incomes, fewer and fewer cash-strapped parents are able to shoulder the burden of college costs all by themselves. Often, that’s where generous relatives come in.

Last month, the AARP teamed up with financial-services company TIAA-CREF to provide information about college savings plans, also known as 529 plans, to AARP members. As TIAA-CREF CEO Roger Ferguson Jr. said in a press release, when it comes to college savings, “getting the entire family involved — parents, grandparents and children — reinforces the importance of setting and achieving savings goals.”

However, despite their best intentions, grandparents who answer the financial call can end up making it harder for their children and grandchildren. If a college savings plan isn’t set up properly, those generous contributions can actually hurt the student’s financial aid package.

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On one hand, grandparents’ assets are not counted at all when colleges determine eligibility for financial aid, and that includes money in 529 plans that they set up for their grandchildren. By contrast, the assets that students and their parents own are included, with schools expecting them to use certain percentages of those assets each year to pay tuition and other college expenses.

But before you try to use grandma and grandpa as a financial-aid shelter, be aware that when grandparents take money out of a 529 plan to spend on college expenses, students have to disclose the withdrawal as their own income.

That has a huge impact on financial aid: Current rules cut aid eligibility by as much as 50 cents for every dollar of student income.

2 Solutions for Grandparents

To avoid causing a big loss in financial aid, grandparents have a couple of options:

  • If grandparents give money to the student’s parents to deposit in their 529 plan accounts for their child, the assets aren’t treated as the student’s income.
  • The other possibility is to wait to use grandparents’ 529 plan money until after the student’s final eligibility for financial aid has been determined. For instance, grandparents’ 529 plan distributions used to pay for a student’s senior year shouldn’t affect eligibility, because the year in which the income will be reported (as income for the previous year) will also be the year in which the student graduates.

Financial aid rules can be complicated, but they’re crucial in helping students make college affordable. Grandparents should make sure their attempts to help out their grandchildren don’t end up being counterproductive.

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New College Guarantee: Graduate in 4 Years or the Extra Tuition Is Free

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University of Buffalo orientation.  photo credit: http://www.facebook.com/photo.php?fbid=10150906651256540&set=a.10150906651201540.399195.34441346539&type=3&theaterBy KIM CLARK

Now that the average college freshman takes more than five and a half years to graduate, a growing number of colleges are trying to entice students with guarantees that they will finish in four years — or the extra tuition will be free.

But most of these four-year guarantees come with fine print that can disqualify many applicants, such as requiring students who sign up for the program freshman year to declare and stick to a major all four years, take inconvenient classes or forgo study abroad. In addition, even the most generous of the guarantees only offer to cover tuition after the fourth year — students still have to pay for dorm and living costs.

To qualify for a guarantee program, students are typically required to complete at least 30 credits each academic year, meet regularly with advisors, and take required courses.

In return, the colleges typically promise to help students finish in four years by eliminating roadblocks to graduation, such as reducing overcrowding, lowering the number of credits required to graduate, and creating standard four-year plans that can easily be followed. If school-caused delays prevent a student who signs up for a guarantee from finishing in four years, the college promises to pay for any extra courses they need.

Last year, for example, the University at Buffalo launched its “Finish in 4” free-tuition guarantee, and added 30,000 extra seats in bottleneck courses to help ensure students could meet their requirements.

The moves attracted hundreds of new applicants, says vice provost Scott Weber. “We had one of our largest freshmen enrollments this fall,” he said.

But some colleges offering these guarantees aren’t making the reforms needed to help students finish on time.

“I would be shocked if [these guarantees were] anything more than a marketing strategy” at schools where a majority of the students take longer than four years to graduate, said Tom Sugar, vice president of Complete College America, a nonprofit that works with states to raise graduation rates.

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Some colleges are setting requirements so high that they are discouraging or disqualifying students from taking advantage of the guarantees.

At the California State University, San Bernardino, where only 13% of freshmen finish in four years, priority enrollment and free tuition after four years is only given to students who have committed to a major and the guarantee program before the start of their freshman year.

Officials at the University of Maine at Farmington blamed a low signup rate for its four-year guarantee (only 75 of the school’s approximately 480 freshmen signed on last fall) on a contract that was “two-page, dense, and filled with legalese” says associate provost Robert Lively.

Last fall, the school drafted a shorter and simpler contract that it is now promoting to applicants.

Whether or not four-year graduation guarantees actually help students graduate on time, the promises still sound so attractive to applicants that more than 40 colleges offer some sort of pledge or incentive. Among them are many small private colleges, such as DePauw, Juniata College and Washington & Jefferson, as well as many large universities, such as the University of Minnesota, the University of Nebraska and Pace University in New York.

Some other colleges, such as Ball State University and Indiana University, offer “incentives” rather than guarantees. Ball State this winter started paying $500 to students who graduate on time. Indiana University last year announced it would freeze tuition for upperclassmen on track to finish in four years.

To tell whether any of these promises will actually help you graduate on time, experts say applicants should follow these steps:

  • Read the fine print. Every program is different, so make sure you understand what the college requires from you and what it offers in return. Will you be able to complete the number of required credits? Is your schedule flexible enough to enroll in early morning or night courses if those are the only ones available? How soon will you feel ready to commit to a major? What are you getting in return?
  • Avoid crowds. One of the most common causes of delayed graduation is overcrowding in required courses, says Michael Lovenheim, a Cornell economist who has researched the issue. So if you have a choice, avoid colleges where students have to scramble to get into the courses they need.
  • Choose deeds over words. Opt for colleges that are making changes proven to help students graduate on time, whether or not they offer guarantees. Seek out colleges that offer enough classes and set graduation requirements at no more than 120 credit hours, said Complete College America’s Sugar.
  • Accept help. Research shows that students are more likely to stay on track when colleges offer “intrusive advising,” or advisors who step in at early signs of trouble such as dropped courses, Sugar adds.
  • Check the record. Before choosing a college, check its four-year graduation rate — and find similar colleges with better records – by entering the name of any college you’re considering attending into Collegeresults.org.
  • Focus on the bigger goal. Don’t sacrifice your health, grades or important internship opportunities just to finish quickly, advises Dan Black, Americas director of campus recruiting for Ernst & Young. The standard course program for certified public accountants takes five years, for example, but “I don’t care how long it takes them,” (within reason, anyway) he says of the approximately 9,200 entry-level new graduates he plans to hire this year. Instead, Black gives an edge to students with top grades and internships.

Photo Credit: University of Buffalo / Facebook

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Free Tax Help: 4 Ways to Get It

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Justin Sullivan, Getty ImagesYou know you have to do your tax return, but with the tax laws as complicated as they are, it’s tougher than ever to get the job done. If you need help but don’t want to pay through the nose to get it, here are some resources that can get you the assistance you need at a price that’s right: free.

1. Go Straight to the IRS.

The first place to look for help with your tax return is at the IRS website. With a variety of lists of frequently asked questions, tax topic discussions, forms and publications, and other helpful materials, you may well get the answers you need online.

If you don’t, though, the IRS is standing by with its toll-free tax assistance line. Call (800) 829-1040 to get help on your individual tax return questions.

2. Get Free Help In-Person.

The IRS also sponsors volunteer programs aimed at helping millions of taxpayers prepare their returns. The Volunteer Income Tax Assistance program covers those who make $51,000 or less in income and have a particular emphasis on special tax credits aimed at low-income taxpayers.

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Meanwhile, the Tax Counseling for the Elderly program is aimed at those who are 60 or older, with help on how to deal with pension, retirement, and other tax issues that affect older taxpayers.

To find a VITA site near you, use this IRS link. For the TCE, many sites are operated by AARP’s Tax Aide Program; click here to find a site near you.

3. Put the Taxpayer Advocate On Your Side.

If you have a dispute with the IRS and aren’t getting the treatment you deserve, the Taxpayer Advocate Service can help. This free service helps taxpayers around the country handle IRS problems and resolve disputes by getting the responses you need. Click here to get more information, or this link will take you directly to contact information for your Taxpayer Advocate.

4. Beware of Scams.

Unfortunately, taking advantage of those seeking tax help is one way scam artists get sensitive information like your Social Security number or bank-account information. Email is the most common method these scammers use, but fake websites can often lure unsuspecting taxpayers into giving up their information. The best solution is to stick with known reputable sources of free information. If you get a suspicious email, contact the IRS here.

You can follow Motley Fool contributor Dan Caplinger on Twitter @DanCaplinger or on Google+.

 

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The IRS Wants to Tax Your Illegal Income

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Tax illegal incomeBy By STEVE HARGREAVES

Dealt some drugs? Stole some cash? There’s a line on your income tax form to declare it.

As ridiculous as it sounds, the federal government requires that money acquired through illegal means be reported and taxed just like legitimate income. It’s right there on the official IRS tax instructions: “Income from illegal activities, such as money from dealing illegal drugs, must be included in your income on Form 1040, line 21, or on Schedule C or Schedule C-EZ (Form 1040) if from your self-employment activity.”

Not surprisingly, tax experts say few criminals declare their loot.

But some do, often when they’ve either been caught during that tax year or think they are about to be caught, says San Francisco tax attorney Stephen Moskowitz, who has helped several clients document their illegal gains. Their goal is to avoid getting charged twice: once for their initial crime, and again for evading the taxes on their windfall. After all, it was tax charges that ultimately put away Al Capone.

Many of today’s criminals who choose to declare their illegal income are facing embezzlement charges, according to Moskowitz.

Like Tom Hughes, a New England accountant who was caught — multiple times — stealing money from his clients.

“I knew the money was taxable, there was no doubt about that,” says Hughes, who now runs an anti-fraud consultancy called Hire-a-thief. “I had already been caught, and I didn’t want to face federal tax charges.”

He paid taxes on his illegal gains in 1999 and 2001, and again in 2004, after he stole from another client. After a nine-month prison stint, Hughes swears he’s now reformed.

So how many self-confessed crooks does the Internal Revenue Service deal with each year? The agency isn’t saying. A spokesman declined to discuss the issue, saying only that declaring illegal income “is what the law requires.”

Documenting illegal income is tricky, Moskowitz says.

The IRS doesn’t require any details on the return beyond an approximation of how much you made. The hard part comes if you get audited. There’s usually no paper trail, so IRS agents will typically ask for the names and contact information for people that may have been part of the illegal transaction, Moskowitz says. The agency will then try to verify your numbers with them.

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If you tell the IRS you made $1 million from stealing money or dealing drugs, does the agency tip off the cops?

Legally, it can’t, unless a law-enforcement agency gets a court order granting it access to a specific taxpayer’s return. The IRS isn’t supposed to proactively alert other agencies about misdeeds unless terrorism is involved. In that case, it still needs a court order to disclose anything, but the IRS can initiate the legal process on its own.

The rules are all spelled out in an IRS guide to “section 6103,” the law that covers tax-return confidentiality. Like many legal statutes, it’s complex and filled with loopholes. For example, the IRS might not be allowed to share the contents of actual tax returns on its own initiative, but it can divulge supplemental information obtained from outside sources — like witnesses interviewed in an audit investigation — “to apprise federal criminal law enforcement agencies of possible crimes,” according to the agency’s guide.

In practice, Moskowitz says he thinks information about illegal activities gets shared.

“Do they report you to other agencies?” he asks. “Absolutely.”

Other experts agree.

“The IRS would most certainly immediately report it to law enforcement,” says Joseph Henchman, vice president of legal and state projects at the Tax Foundation, a think tank.

The IRS’ spokesman declined to comment on the issue.

Here’s one upshot to declaring ill-gotten gains: If taxes are paid on it initially, and restitution is part of any settlement or judgment, that restitution is then tax-deductible, says Moskowitz.

If you decide to disclose your illegal loot, make sure to do it with the assistance of a tax attorney, not any old accountant.

“If there’s anything we suspect is criminal, the first thing we do is tell people to get legal advice,” says Gil Charney, principal tax researcher at H&R Block’s (HRB) Tax Institute. “We don’t have attorney-client privilege. If The IRS or any law enforcement agency contacts us, we have to provide that information.”

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