DEDUCTING EMPLOYEE MBA EXPENSES by Karla Hopkins

The deductibility of the cost of a Master of Business Administration (MBA) degree as a trade or business expense for an employee is a complex subject with several factors to consider. The costs of an MBA are generally deductible if the degree maintains or improves skills required by the individual’s employment or trade or business or meets the express requirements of the individual’s employer or the requirements of applicable law.

If the MBA will qualify the employee for a new trade or business or is required to meet the minimum education requirements for qualification in the individual’s employment or other trade or business the costs are generally not deductible. However, the determination is fact intensive and depends in part on what the taxpayer did before, during, and after pursuing the degree.

To take a deduction the employee’s trade or business must have been previously established. An individual needs to have started their employment before pursuing a degree. The amount of time necessary to establish a trade or business is subjective and no set standard has been established.

It is clear that individuals are carrying on a trade or business of being an employee if they continue their employment while completing an MBA program. However, where a teacher took time off from employment to pursue a degree and then resumed her employment after, she was considered to have taken a temporary leave of employment and the costs were deductible. While a “one year or less” hiatus is a rule of thumb, it is not a statute but the longer the leave from employment, the more likely the IRS will determine that the individual has abandoned the former trade or business.

Assuming you are engaged in a trade or business, there are then three criteria that must also be met to determine that the costs are ordinary and necessary:

• The education is not required to meet the minimum requirements to qualify for the job.
• It is not part of a program that will qualify you for a new trade or business.
• The education either maintains or improves skills required by your employment or meets the express requirements of the employer.

Under the second item above, the regulations state that a change of duties does not constitute a new trade or business if the new duties involve the same general type of work as the present employment.

On the other hand when an individual’s duties were technical in nature before enrolling in an MBA program and then managerial afterword, a tax court disallowed the MBA costs.

If you are able to fall into the first two categories above, there is one more hurdle. In item three above, there must be a business purpose for incurring the expense which includes it being required for your employment or your employer.

Because the analysis of this type of expense is very fact based, an individual should thoroughly analyze their current job, focusing on the education and skill requirements, and the courses being taken to determine whether they meet the IRS criteria for deductibility.

Cleaning Out Your Financial House by Carolyn Flaherty

Twice a year I do a major house cleaning and reorganization. I polish the cabinets, clean out closets, either put in screens and wash windows in the spring or in the fall I take out and store all the screens and scrub the windows again. I go through all the children’s clothing and lug bags of used clothes to the Salvation Army. However, like the cobbler’s barefoot children… what I don’t always do (but should), is the same kind of spring cleaning overhaul of my finances. But where do you start a financial clean up?

Below is a list of things you can do to tidy your financial home:

1. Organize your filing in a tiered system. Start by purging your filing cabinets of old documents you no longer need to maintain. Keep paperwork that you will need within the next year in easy to access hanging file folders. Move older documents that you save long term such as tax returns into storage bins and consider a fireproof lockable box for items like your social security card, your will and other difficult to replace documents.

2. Get your free annual credit report and review it closely so that you can resolve any incorrect entries made by creditors.

3. Set up your monthly payments such as mortgage, cars, utilities etc. to be paid automatically through your bank and set up electronic reminders to your phone or e-mail so that you avoid late fees for all variable payment monthly bills such as credit cards.

4. If your workplace allows you to direct your paycheck to multiple accounts, set up a transfer from your paycheck to a savings account and then forget it. Allow the deposits to build an emergency fund for your family.

5. Review your insurance policies including your homeowner’s or renter’s policy, your auto insurance policies as well as life insurance, disability insurance, and any business protection or professional insurance you carry. Ensure adequate coverage and consider shopping around to determine whether you are getting the most competitive pricing for your coverage.

6. Reread your will and any other estate planning documents you have to discern whether changes in your life have necessitated revisions. If you don’t have a will or an estate plan, get some references and get the process started. The peace of mind that comes with a properly executed estate plan is invaluable particularly if you have minor children for which guardianship needs to be indicated.

7. While you are examining your estate planning documents, confirm that correct beneficiaries are designated in all instances including your will, any trusts created, and on insurance policies and retirement accounts.

8. Contemplate consolidating your investment accounts with one advisor. Having a single source for your investment information makes monitoring and rebalancing your accounts more efficient.

9. Set up a household budget. Begin by reviewing checks, credit card statements and debit transactions from the prior year. As you evaluate your spending trends you will understand where you spend the most money and where there may be potential to save. Having a working budget and comparing the budget to your actual spending on a regular basis is crucial for any household serious about their financial planning.

10. Develop short term and long term financial goals. Break the goals down in to 1-5 year short term goals and longer term life goals. If you don’t know where you want to go, there is very little chance that you’ll get there. Once you have established your goals consider employing a certified financial planner to compile a comprehensive financial plan.

Revisit this list annually and take the time to compare your goals to your progress. Next year you will enjoy seeing how the automatic savings you’ve created has grown. You may find it cathartic to purge out documents and move the current year into storage bins and older information in to the shredder. And, you may be surprised when you compare your annual budget to your actual revenues and expenditures. But, most importantly you will have a plan, you will be focused and you will be moving in a positive direction.

REPORTING REQUIREMENTS FOR FOREIGN FINANCIAL ASSETS by Karla Hopkins

Under the Bank Secrecy Act, U.S. persons with a financial interest in bank and other financial accounts in foreign countries are subject to a reporting requirement if the value of the accounts exceeds $10,000.
Failure to report can result in severe civil and/or criminal penalties.

The term U.S. person includes citizens, residents, corporations, partnerships, LLCs, Trusts or similar organizations created under U.S. laws. A resident refers to a noncitizen who is present in the U.S. a certain number of days in the current and preceding two years.

The maximum value of $10,000 is the largest amount of assets appearing on a quarterly or more frequent account statement in a year, converted to U.S. currency.

Foreign financial accounts that are reportable include bank accounts, accounts with persons engaged in the business of buying, selling, trading or holding stock or other securities and “other” financial accounts. The last term includes insurance and annuity policies with a cash value and also mutual accounts with mutual funds or similar pooled investments. Disclosure is not required for individual bonds, notes or stock certificates held by a taxpayer.

Financial interest includes the obvious such as legal title but it also includes a more indirect ownership. A U.S. citizen who directly or indirectly owns more than 50% of the total value or voting power of the stock in a corporation has a financial interest in the foreign financial accounts that the corporation owns. A financial interest also exists if a U.S. person has signature authority over a foreign financial account.

Failure to provide the IRS with the required information creates the potential for significant civil and criminal penalties. A taxpayer who willfully fails to file faces a civil penalty equal to the greater of $100,000 or 50% of the foreign financial account balance. This penalty applies to each year open under the statute of limitation which means that if the nondisclosure lasts several years, the penalty could easily exceed the amount in the account. Criminal penalties include a fine of $250,000 and/or five years prison.

Regardless of whether the IRS has brought this to the attention of the taxpayer, you should proactively volunteer reporting under the Bank Secrecy Act.

ELECTION YEAR TAX TALK – FIVE TERMS YOU SHOULD KNOW by Laticia Michelson

“BUSH TAX CUTS”Several “temporary” tax law changes occurred in 2001 and 2003, the majority of which were supposed to expire around 2010. Some of the changes included: lower federal income tax rates, lower maximum capital gain rates, lower tax rates for qualifying dividends, and increased standard deduction amounts. These are collectively referred to as “Bush tax cuts”. Many of these provisions were already extended at the end of 2010 and are now set to expire at the end of 2012. A significant amount of the election discussion will pertain to the extension of these provisions again for all taxpayers or only for taxpayers who earn less than a certain threshold.

ALTERNATIVE MINIMUM TAX (AMT)
The alternative minimum tax is calculated using a different set of tax rules than those used for regular tax. Under the AMT rules, some deductions taken for regular tax are not allowed or are limited. Also, certain income and expenses are recognized under different rules for AMT. If a taxpayer is subject to AMT, they are required to calculate their taxes twice (once under the regular way and once under the AMT rules) and pay the higher amount. Whether or not a taxpayer is subject to the AMT is directly related to the amount of the AMT exemption. The exemption amounts were increased via the Bush tax cuts and these increases were only extended through 2011. If the exemption increase provision expires, the exemption amounts will revert to significantly lower amounts and a large number of taxpayers will be subject to the AMT (and the resultant higher tax rates) in 2012.

THE “BUFFETT RULE”
During 2011, Warren Buffett, CEO of Berkshire Hathaway, wrote an editorial in the New York Times that essentially said he and his “mega-rich friends” were not paying their fair share of taxes. He noted that the tax he paid was a smaller percentage of his income than the percentage paid by many in his office. This is partly attributable to the lower capital gains rate and the fact that many “mega-rich” incur a significant amount of their income from the sale of capital assets, which is then taxed at a lower rate than ordinary income. President Obama has discussed what he considers a fairer tax treatment - the “Buffett rule”- that taxpayers making more than $1 million annually should not pay a smaller percentage of their income in taxes than middle-class families pay.

VALUE ADDED TAX (VAT)
A value added tax (VAT) is a consumption tax, similar to a sales tax. The difference between a VAT and a national sales tax is the assessment. A VAT is assessed and collected at every stage of production – raw materials, finished product, retailer, and consumer.

FLAT TAX
A flat tax applies a single tax rate to individual income and a separate rate to businesses.