Janell A. Israel & Associates
1585 Kapiolani Blvd., Suite
1604, Honolulu, Hawaii 96814 Phone: 808-942-8817
August 2018 Tax Newsletter
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
- 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
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
- 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
- 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
- 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
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
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
In today's digital age, it is impossible to avoid the internet. Even if you
don't have a computer and actively avoid social media, there is information
about you in some corner of the web. Here are some tips to help you manage your
- 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
- 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.
- Know 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.
Manage Capital Gains Tax
If not tracked and managed properly, capital gains tax can come as a large
surprise at tax-filing time. In fact, many taxpayers don't realize they have a
capital gain until they get their 1099 form in January and see a capital gain
distribution. Here's what you need to know.
Understand capital gains and their taxability
Capital gains are recognized when you sell a capital asset for more than
your basis in that asset. Capital assets are typically something of value like
your home, a car and other investments. Basis is typically the original cost of
the asset being sold. The difference between the sales price of the asset and
your basis is the amount of the taxable capital gain.
The IRS taxes short-term capital gains for assets owned less than one year
as ordinary income up to 37 percent, but taxes long-term capital gains at a
maximum 23.8 percent (20 percent plus a potential 3.8 percent net investment
Ways to manage capital gains tax
- Hold investments for
more than one year. Long-term gains (assets sold more than a year
after acquisition) are taxed at the lower capital gains rate. If you are
able to hold assets for more than a year, you will save tax dollars by
avoiding the gain being classified as ordinary income.
- Sell large gains in
low-income years. If you expect lower income this year, it might
be a good time to sell some of your capital gain investments. Since the
capital gains tax brackets follow the marginal income tax brackets, if you
are in a lower income tax bracket in a given year you may pay a lower
capital gains tax. You can take advantage of this with both long-term and
- Harvest large losses
in high-income years. If you have a high-income year you can save
taxes by selling investments that have lost money. Capital losses help
reduce your capital gains with the tax liability calculated on the net
amount. Be aware of IRS netting rules that require you to net long-term
losses with long-term gains and short-term losses with short-term gains.
If one results in a net loss and the other a net gain, they are then
netted against each other. If the final amount results in a net loss, the
most you can deduct against ordinary income in one year is $3,000. The
excess losses must then be carried forward to future tax years.
- Gift your investments
to your kids. You are allowed to gift up to $15,000 per year to
each of your kids ($30,000 per married couple). If you gift appreciated
investments to a child under 19 and they then sell that investment, each
child can receive favorable tax treatment on up to $2,100 from their
taxes. Be careful if you go over the annual exemption. Higher levels of
unearned income for children, including capital gains, is now subject to
estate and trust tax rates.
- Consider donating
property. If you donate appreciated property to a qualified
charity you can deduct the donation as an itemized deduction. Even better,
if the property is owned by you for more than one year, you can deduct the
current market value without being subject to capital gain tax.
- Sale of primary
residence exclusion. If you sell your home, you may qualify to
exclude $250,000 of the gain from capital gains tax ($500,000 if married
filing jointly). In order to qualify, you need to own the home and have
occupied the home as your primary residence for at least two of the
previous five years. The two years do not need to be simultaneous.
There are many factors that come into play when buying or selling an asset.
Just make sure the tax implications are considered before you make the
As always, should you have any questions or concerns
regarding your situation please feel free to call.
This information is not intended to be a substitute for
specific individualized tax advice. We suggest that you discuss your specific
tax issue with a qualified tax advisor.
information is believed to be from reliable sources, however we make
no representation as to its completeness or accuracy. The information contained
in this newsletter is provided by Mostad & Christensen, Inc. The
information is of a general nature and should not be acted upon in your
specific situation without further details and/or professional assistance. For
more information on anything in this newsletter, or for assistance with any of
your tax, business or financial strategy concerns, contact our office.
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