Your credit score is one of the most important aspects of your financial health. It is used by potential lenders, landlords and even employers to analyze your financial situation in one way or another. Here are some tips that might help you improve your score:
- Review your credit report and, if necessary, fix errors. You are entitled to one free credit report from each credit reporting company per year at Annual Credit Report. It is important to check for reporting errors that could be negatively affecting your score. If you find an error, contact the company reporting the information and the credit reporting company to challenge the report. Common errors include closed accounts showing as open, incorrect balances or limits and accounts opened by someone else due to identity fraud.
- Pay off your credit card each month. By making purchases on a credit card and paying the entire balance each period, you are developing a positive credit history and displaying sound financial management skills. This will increase your credit score. To meet this goal you will need to keep your spending under control. If you are unable to pay off the card, you will start to accumulate revolving debt that will hurt your credit score.
- Make your payments on time. Late payments, even by one day, can be one of the most damaging hits to your score. If possible, set up automatic payments for as many bills as possible to lower the risk of forgetting to make a payment. The longer your history of paying on time, the more your score will improve.
- Pay down your debt. Another large chunk of your credit score is calculated based on the amount of debt outstanding. Mortgage lenders specifically use a debt-to-income ratio to determine loan eligibility. In addition to the amount of debt you have, you also need to pay attention to the debt limits you have on your accounts. The closer your debt is to the limit, the worse your score will be.
- Don’t allow an account to go to collection. Collections will stay on your credit report for seven years! Avoid having any of your accounts go to collections if at all possible. Medical bills and other one-time expenses are often the types of accounts that find themselves in collections. If you are unable to pay a bill in full by the due date, call the company and see if they have payment plans or other programs to get the bill paid without going to a collection company.
Regardless of where you are on the credit score spectrum, you should actively monitor your credit. Implementing these ideas will improve your credit score as well as your long-term financial well-being.
As students gear up to head back to school, there are some changes to education deductions that could save or cost you more in taxes and even raise college tuition costs. Here is what you need to know to get up to speed:
What is gone
Continuing Education as an itemized deduction: In previous years, you could deduct expenses paid for job-related continuing education as a miscellaneous itemized deduction. This deduction has been eliminated. However, if your employer will pay for the education, they can cover up to $5,250 tax-free.
Home equity line of credit (HELOC) interest for education expenses: A popular method of generating cash to pay for school expenses is taking out a HELOC. Beginning in 2018, you can only deduct HELOC interest if you use the loan proceeds to buy, build or substantially improve your home. This means that if you plan to obtain HELOC for purposes of paying for education expenses, the interest will not be deductible.
529 plans cover K-12 tuition: Funds from Section 529 savings plans can now be used tax-free to pay for up to $10,000 in K-12 private school tuition per year. Books, supplies or other K-12 expenses are not included in this change, but they are still eligible as legitimate college expenses. Be careful – not all states have adopted the K-12 inclusion, so they might still be taxable at the state level.
Endowment tax of 1.4 percent on certain private colleges: Congress added an investment income tax on private colleges that have large endowments. The tax is expected to impact roughly 30 schools, including Stanford, Harvard and Notre Dame. The effects of the new tax are yet to be determined. However, tuition may increase or reduced financial aid award amounts may be implemented to offset the cost.
What stays the same
Student loan interest deduction: You may deduct up to $2,500 in student loan interest in 2018 as an adjustment to income. To qualify, your adjusted gross income must be below $80,000 ($165,000 for married couples). Phaseouts start to apply at $65,000 ($135,000 for married couples).
American Opportunity Tax Credit and Lifetime Learning Credit: All three of these educational tax benefits are available once again. Here’s a chart with basic information on these options:
||Yes – $1,000
As a reminder, when you make payments for any education expenses, make sure to keep your receipts and retain any Forms 1098T sent to you from qualifying schools.
Often lost in the excitement of large-scale tax change is how they can negatively impact some individual situations. Check out the questions below to see if you might be in for a tax surprise this year.
- Will you pay more than $10,000 in state and local taxes?
Previously, you could take a full deduction for all state income, sales and property taxes as an itemized deduction. That deduction is now capped at $10,000 per year. Take a look at your 2017 itemized deductions to see if your state and local taxes were greater than the new cap. If so, you will now lose any excess amount over $10,000 as a deduction.
- Do you pay for work expenses?
Before this year, employees were able to deduct work expenses (business mileage, uniforms, continuing education and other non-reimbursed expenses) as an itemized deduction. These deductions are now gone. If you typically pay for job related expenses, you might be on the hook for more taxes. Employees who deduct business use of their homes may be impacted even more.
- Do you own a small business?
There are many business tax changes for 2018. Bonus depreciation and Section 179 expensing are expanded, the domestic production activities deduction (DPAD) is eliminated, and there is a new qualified business income deduction for pass-through entities. It is a near certainty that one or more of these changes will affect your business taxes.
- Did you adjust your withholding allowances?
When the tax cuts were finalized, the IRS adjusted the withholding tables as best they could to fit with your current allowances. As a result, your take-home pay likely increased earlier this year. However, based on a recent report by the U.S. Government Accountability Office (GAO), as many as 21 percent of taxpayers will unknowingly under withhold their taxes throughout the year. If you are one of these people, you will have a tax bill and maybe some penalties to pay next April. It would be time well spent to double-check your withholding for 2018.
- Do you have children?
Some good news! The Child Tax Credit is now double to $2,000 per child versus $1,000 last year. The income limits for the credit are also raised significantly to $200,000 Adjusted Gross Income (AGI) for single status and $400,000 AGI for married couples. In many cases, the additional credit will actually offset the loss of the personal exemption that you could take for yourself, your spouse and children in the past.
Now is a great time to do an assessment of your situation in light of the new tax changes.
Meals continue to be deductible under new IRS guidance. Guidance issued by the IRS on Wednesday clarified that taxpayers may continue to deduct 50% of the food and beverage expenses associated with operating their trade or business.
This is, despite changes to the meal and entertainment expense deduction under Sec. 274 made by the tax law, Tax Cuts and Jobs Act (TCJA), P.L. 115-97 (Notice 2018-76).
The IRS stated that the amendments specifically deny deductions for expenses for entertainment, amusement, or recreation, but does not address the deductibility of expenses for business meals.
This omission has created a lot of confusion in the business community, which the IRS is addressing in this interim guidance. Taxpayers can rely on the guidance in the notice until the IRS issues proposed regulations.
Sec. 274(k), which was not amended by the TCJA, does not allow a deduction for the expense of any food or beverages unless (1) the expense is not lavish or extravagant under the circumstances, and (2) the taxpayer (or an employee of the taxpayer) is present when the food or beverages are furnished. Sec. 274(n)(1), which was amended by the TCJA, generally provides that the amount allowable as a deduction for any expense for food or beverages cannot exceed 50% of the amount of the expense that otherwise would be allowable.
Under the interim guidance, taxpayers may deduct 50% of an otherwise allowable business meal expense if:
- The expense is an ordinary and necessary business expense under Sec. 162(a) paid or incurred during the tax year when carrying on any trade or business;
- The expense is not lavish or extravagant under the circumstances;
- The taxpayer, or an employee of the taxpayer, is present when the food or beverages are furnished;
- The food and beverages are provided to a current or potential business customer, client, consultant, or similar business contact; and
- For food and beverages provided during or at an entertainment activity, they are purchased separately from the entertainment, or the cost of the food and beverages is stated separately from the cost of the entertainment on one or more bills, invoices, or receipts.
The IRS will not allow the entertainment disallowance rule to be circumvented through inflating the amount charged for food and beverages.
The notice contains three examples illustrating how the IRS intends to interpret these rules. All three examples involve attending a sporting event with a business client and having food and drink while attending the game. The examples follow the AICPA’s recommendation that meal expenses be deductible when their costs are separately stated from the cost of the entertainment.
The IRS has plans to issue proposed regulations and is requesting comments by Dec. 2 on the notice. It is also asking for comments on:
- Whether further guidance is needed to clarify the interaction of Sec. 274(a)(1)(A) entertainment expenses and business meal expenses.
- Whether the definition of entertainment in Regs. Sec. 1.274-2(b)(1)(i) should be retained and, if so, whether it should be revised.
- Whether the objective test in Regs. Sec. 1.274-2(b)(1)(ii) should be retained and, if so, whether it should be revised.
- Whether the IRS should provide more examples in the regulations.
The AICPA has written to the IRS ( letter to the IRS ) dated April 2, 2018, where the AICPA has requested that the IRS provide immediate guidance on the TCJA change to Sec. 274. The AICPA recommended that the IRS confirm that business meals (1) that take place between a business owner or employee and a current or prospective client; (2) that are not lavish or extravagant under the circumstances; and (3) where the taxpayer has a reasonable expectation of deriving income or other specific trade or business benefit from the encounter are deductible.
We will keep you updated.