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Why Paying Your Bills on Time is So Important

We all know it’s important to pay our bills on time, but we may not fully appreciate why it’s so important. Of course, there’s the worry of getting evicted, a car being repossessed, the lights getting turned off or losing cell phone service. These are all serious concerns to be sure, but there’s another dimension to late bill payments that is a lot more subtle and can have just as serious an affect on your future and your financial health – damaging your credit payment history.

It may be easier not to stress about being late on a payment because there is no fear of any of the consequences mentioned above. But being late on a bill payment gets recorded in your credit report and your payment history is the biggest single factor affecting your credit score, accounting for 35% of it. While you might not feel the effects right away, damaging your credit score could mean paying higher interest when your mortgage renews or not getting approved for a mortgage in the first place, having to take out a high-interest car loan or, again, not finding anyone to approve your loan application and/or in some cases not getting hired for the job you want because of your credit.

The Immediate Effects of Late Payments

There are also immediate effects of late payments. According to Borrowell:

“The typical timeline goes as follows: 30 days, 60 days, 90 days, 120 days, 150 days, and then it will be written off as a loss and categorized as ‘uncollectible.’ It’s extremely important to keep up with payments or be aware that you’re late. In addition to negatively impacting your score, chronically missed payments may lead to higher interest rates, late fees and penalties, reduced credit limits, and even court judgments.”

And according to Equifax (one of the three credit bureaus in America that maintain our credit reports):

“Late payments can remain on your Equifax credit report for up to seven years from the date of the missed payment. The late payment remains even if you pay the past-due balance. Your payment history may be a primary factor in determining your credit scores, depending on the credit scoring model (the way scores are calculated) used. Late payments can negatively impact credit scores.”

Improving Your Payment History

So now that we’ve covered the reasons why it’s so important to make sure you’re paying your bills on time, let’s cover some strategies to do so. A good place to start is with your current payments. Here are some tips to do so:

always make your payments on time
make at least the minimum payment if you can’t pay the full amount that you owe
contact the lender right away if you think you’ll have trouble paying a bill
don’t skip a payment even if a bill is in dispute

Contacting the company for a bill you won’t be able to pay on time is important. You might feel intimidated to do so, but lenders are usually willing to work with borrowers because they understand that life happens and because they want to get paid. They may put a note on your file that stops your late payment from being recorded with the credit bureaus, they may also work out a repayment plan that’s easier for you or they may offer other services like payment deferrals. Just be sure to ask about all the terms and conditions of any services or programs a lender offers you as you may end up paying more money in interest to use them.

Practical Tips for Paying Your Bills on Time

The last thing you want is to miss a bill because of forgetfulness so setting up automatic payments on all your bills would be ideal. Just be sure to set a reminder for yourself on your phone and with a post-it attached to a physical calendar every month (or every couple of weeks as the case may be) to double-check your account and confirm that there’s enough money in it to cover all of the money coming out. You’ll also want to review your bills in detail to make sure there aren’t any issues and that you’re not being overcharged.

If you have any bills that you’re not able to pay from your bank account, again, setting up a repeating calendar event on your phone and writing a note to yourself on a bulletin board, calendar or anywhere else you look at on a daily basis, can help you stay on top of your bills, build up good payment history and maintain healthy financial wellness.

Tax Pros Relied Upon For Pandemic Loan Services

Surcharges related to the expenses of doing business in the pandemic — cleaning, training, personal protective equipment — are starting to appear in businesses such as dentists’ offices and restaurants. Have tax professionals and accountants begun charging more for special accommodations such as in-person meetings or special services such as Paycheck Protection Program loan forgiveness consultation?

Though they’ve certainly shifted how they meet with clients, so far, practitioners say mostly no.

Bruce Primeau, a CPA and president at Summit Wealth Advocates, in Prior Lake, Minnesota, said that his firm isn’t charging for the “handful” of face-to-face meetings over the last months: “I asked the person responsible for setting client meetings to ask each advisor individually first whether they’re comfortable meeting with anyone face to face. Only if they say yes do we offer the option to a client.”

“We had a package (flat fee) that was for consulting on the various programs available and possible impact to cash flow,” said Chris Hardy, an Enrolled Agent and managing director at Georgia-based Paramount Tax and Accounting. “For those who didn’t want to pay for the full package, we did charge hourly for consulting services.”

“I haven’t had in-person meetings after March 15,” said Brian Stoner, a CPA in Burbank, California. “All done by phone, email or Zoom. This is part of my free services this year. I’ve also helped clients with their estimated PPP loan calculation when they applied and also told them what the numbers were for the forgiveness calculation. I never filled out any of the forms, just giving them information to fill out themselves. I haven’t charged for this service this year.”

PPP work

Historically, preparers surveyed tended to raise their tax prep fees about 5 percent a year, with higher increases coming in the wake of tax law changes or the retooling of forms.

But history has little precedent for the pandemic-related programs that created more than an extra-long season for preparers. They also created new work, such as helping business clients secure the PPP loans — and what is likely for many struggling companies to be the all-important loan forgiveness afterward.

“This is a new experience for CPAs,” said Scott Kadrlik, managing partner at Meuwissen, Flygare, Kadrlik & Associates, in Eden Prairie, Minnesota. “Our clients deal with their banks for loan funding and we help provide the information for programs that have been around for a long time. The PPP is new with little guidance from the SBA and the banks know as little as we do about the programs.”

“We have not charged our clients for time spent on PPP issues unless there was significant information and time spent on the process. Mainly our time was spent answering questions and interpreting SBA information,” he added.

“We will certainly charge for PPP loan forgiveness consultation because a successful loan forgiveness application can save the borrower a lot of money,” said Lawrence Pon, a CPA at Pon & Associates in Redwood City, California. “We can help them with this workload.”

“This is similar to a taxpayer representing themselves in an audit versus hiring a tax professional. I’ll certainly be charging this based on my hourly rate,” he added. “We can’t charge based upon the results of the loan forgiveness.”

EA Debra James at Genesis Accounting & Management Services, in Lorain, Ohio, said her firm helped many clients with the PPP loan application process — assembling documentation such as payroll returns, income statements, business schedules and business returns — and in some cases completed the application for the client and spoke to the lenders to answer additional questions.

“Much of this was done without client meetings, and there was no additional charge if a meeting was required,” James said, adding that fees ranged from $150 to $250 “depending on the degree of involvement needed.”

“As yet,” James added recently, “no services have been provided for loan forgiveness applications … When services are requested, time will be billable comparable to the original application fees.”

“I bill hourly. If I do additional work for clients that involves more than a quick response, I bill for it,” said Phyllis Jo Kubey, an EA in New York.

Meetings and obligations

Some firms have a jump on professional social distancing via technology, but basic swapping of information remains different these days. “I work out of my home and I’ve worked with almost all of my clients virtually for many years,” said Kubey, who lives in a doorman building. “Clients can drop off hard-copy documents when they wish and I can leave documents for them to pick up without direct contact. For the few clients who needed an in-person meeting, we met outside, masked.”

California’s Pon said his firm doesn’t charge for special accommodations. In-person meetings in his area stopped in March. “Many clients were very upset when that happened,” he added. “For the upcoming season, we have no plans for in-person appointments.”

“After the 2019 filing season I realized how much of my time was being consumed by client meetings. I added client meeting and a specific charge to each invoice sent out in 2019,” said Mary Kay Foss, a CPA in Walnut Creek, California. Foss said she did close her office and that her whole building was shut down.

“For some clients, I’d meet them at the door of the building to retrieve their hand-delivered packets,” she said. “Our county shut down on March 17 and there were only a handful of in-person meetings before that. Those meetings were included in the 2019 preparation invoice.”

Perhaps one reason preparers haven’t followed dentists and restaurants is a sense of continuity with clients. “Our goal during this time is to help our clients maximize revenue, watch expenses and do everything they can to stay in business,” Kadrlik said. “They never forget who helped them through this uncertain time.


Top Tools For Tax & Accounting Professionals To Automate Tasks

In recent years, more and more tax and accounting professionals are embracing computer technology to become more efficient in their practices and to keep pace with their clients’ needs. As a result of the outbreak of the global pandemic last winter and the physical distancing guidelines that followed, tax and accounting professionals are turning to technology to get their work done without having to meet with their clients in person.

As the tax and accounting profession shifts more towards advisory services, leading firms are leveraging technology to automate low value work like data entry, categorization, file exchange and cleanup.  The following article discusses some of the top tools that help firms automate tasks.

Cloud-based Income Tax Software

Browser-based income tax software has many advantages over traditional, desktop software and helps the tax professional’s office run more efficiently with compliance type tasks. This leaves more time to provide advisory services and better work / life balance. Depending on the software here are the potential benefits: A true online offering can run on a Mac or PC and the user doesn’t have to worry about installing and updating the software periodically, like you would with desktop software.  There is no maintenance, IT, and computer servers required — which will save the user time, money, and stress in the long run.  Client data is automatically backed up in the cloud.  The online software is more suitable for remote employees and multi-site firms. 

Cloud-based Accounting Software

Browser-based accounting software has similar advantages as online income tax software and more. Cloud accounting software does the heavy lifting so you can spend your time on other important business tasks. Depending on the software here are the potential benefits: The small business owner and accountant have the flexibility to sign in from anywhere with an internet connection and no hosting service is required.  You can access the account from any device–including laptops, smartphones, and tablets.  Multiple users can be logged in at the same time, working in the same books and making real-time updates.  The business owner can allow the accountant to access the books to answer questions, fix problems and get the books ready for tax time.  This eliminates the need to transfer sensitive data back and forth. Data is routinely backed up to servers in multiple locations. No physical hard drives or computers containing sensitive data that can be stolen are necessary. Since financial information isn’t kept on the premises, the risks of fires and natural disasters are also mitigated.  You can automatically sync your bank accounts so you don’t have to manually import transactions or verify expenses. 

Client Portals & Document Management

Sharing documents and collaborating with clients through a client portal can have lasting benefits and advantages. This is especially true when the global pandemic forced the accountant and client to meet in person less often, or not at all. An integrated client portal (such as Intuit’s Link) makes it easy for your clients to deliver their tax data to you in a timely and organized way. Depending on the solution, you can do the following tasks through a client portal:Collect and organize your clients’ information (such as W-2s and 1099s) through a secure online portal. This avoids the risk of sending your clients’ confidential information by mail, email or unsecured file-sharing and protects the documents with encryption.Request, share documents, and easily apply them to the tax return. This reduces manual input errors by importing the data directly from your clients’ documents and financial institutions.The tax professional can stay in touch with their clients through the portal by delivering reminders about estimated taxes, updates on tax law changes, information about firm events and other announcements. A document management solution allows you to upload documents, store them, view them as you do the return and download them if needed. 

Practice Management

A practice management solution allows tax firms to gain more visibility and control over everything they’re working on, while reducing time spent on recurring tasks so they can be more hands-on with every client. Here are some key attributes of practice management software: Automate and standardize your firm’s operations so nothing falls through the cracks. Get complete visibility into all of your work at a glance or drill into the details, which allows for enhanced efficiency across your workflow. Share data across hundreds of integrated software and go to one place to look at all your applications. An efficient way to conduct and track time and billing responsibilities.

Electronic Signatures

The IRS allows e-signatures for Form 8879, IRS e-file Signature Authorization, for individual tax returns.  To help reduce in-person contact and reduce the risk to taxpayers and tax professionals during the pandemic, the IRS temporarily expanded the list of forms they’ll accept with a digital signature (IR-2020-194).  Check with your state to see if they allow for parallel functionality.  An e-signature solution reduces cycle time, improves the tracking of authorizations and allows for clients to sign via a mobile device. 

Can You Deduct College Tuition On Your Federal Income Tax Return?

Can You Deduct College Tuition On Your Federal Income Tax Return? There are several options for deducting college tuition and textbooks on your federal income tax return, including the American Opportunity Tax Credit, Lifetime Learning Tax Credit, Tuition and Fees Deduction, and Employer-Paid Educational Assistance, as well as tax-free distributions from a college savings plan.

There is no double-dipping. Each dollar of qualified expenses can be used to justify only one tuition tax break. There are also coordination restrictions that prevent taxpayers from claiming both the American Opportunity Tax Credit and Lifetime Learning Tax Credit for the same student, even if the qualified expenses do not overlap.

The American Opportunity Tax Credit is the best of the tuition tax breaks. It is worth more per dollar of qualified expenses than any other tuition tax break, even a tax-free distribution from a 529 college savings plan. Generally, taxpayers should claim the American Opportunity Tax Credit first, unless they want to preserve its availability for future tuition expenses.

All of these tax breaks can be claimed even if the taxpayer does not itemize.

College tuition may be eligible for a tax deduction or tax credit on your federal income tax return.

American Opportunity Tax Credit

The American Opportunity Tax Credit (AOTC) is a partially-refundable tax credit worth up to $2,500 per student per year. The AOTC covers 100% of the first $2,000 in tuition, fees and course materials (textbooks, supplies and equipment) per student and 25% of the second $2,000. The tax credit is 40% refundable (up to $1,000) if the taxpayer cannot be claimed as a dependent on someone else’s income tax return.

Qualified expenses do not include nonacademic fees, such as student activity fees, athletic fees and insurance.

The tax credit is limited to the four years of postsecondary education and to four tax years per student. Expenses paid for academic terms that begin in the first three months of the next tax year can be counted as though they were paid during the current tax year.

The AOTC is subject to the following eligibility restrictions: The student must be the taxpayer, the taxpayer’s spouse or the taxpayer’s dependents. The student must be seeking a degree or certificate at a college or university that is eligible for Title IV federal student aid. The student is ineligible if they are participating in a dual enrollment program. The student must be enrolled on at least a half-time basis. The student is ineligible if they were convicted of a federal or state felony drug offense for the sale or possession of a controlled substance.

The AOTC is not subject to the Alternative Minimum Tax (AMT). The income phase outs are $80,000 to $90,000 (single) and $160,000 to $180,000 (married filing jointly). Taxpayers who file as married filing separately are not eligible. The income phase outs are not adjusted annually for inflation. About 7.4 million taxpayers (4.8%) claimed the American Opportunity Tax Credit in 2018.

Lifetime Learning Tax Credit

The Lifetime Learning Tax Credit (LLTC) is a non-refundable tax credit worth up to $2,000 per taxpayer. The LLTC covers 20% of the first $10,000 in tuition and required fees.

Qualified expenses may include nonacademic fees, such as student activity fees and athletic fees, but only if they must be paid directly to the college as a condition for enrollment or attendance. Qualified expenses are limited to courses of instruction to “acquire or improve job skills.”

Expenses paid for academic terms that begin in the first three months of the next tax year can be counted as though they were paid during the current tax year.

The tax credit can be claimed for an unlimited number of years.

The LLTC is subject to the following eligibility restrictions: The student is not required to be seeking a degree or certificate, so the tax credit can be used for continuing education. The student must be enrolled at a college or university that is eligible for Title IV federal student aid. The student can be enrolled on a part-time basis. The student is eligible even if they were convicted of a federal or state felony drug offense for the sale or possession of a controlled substance. The Lifetime Learning Tax Credit is often claimed by graduate or professional school students who are no longer eligible for the American Opportunity Tax Credit. The income phase outs in 2021 are $59,000 to $69,000 (single) and $119,000 to $139,000 (married filing jointly). Taxpayers who file as married filing separately are not eligible.

The income phase outs are adjusted annually for inflation.

About 2.8 million taxpayers (1.8%) claimed the Lifetime Learning Tax Credit in 2018.

Tuition and Fees Deduction

The Tuition and Fees Deduction is an above-the-line exclusion from income for up to $4,000 in tuition and fees. The deduction is reduced to $2,000 for taxpayers with income within the income phase out ranges. Course material costs can also qualify if paid directly to the college and if they are required for enrollment or attendance. Expenses paid for academic terms that begin in the first three months of the next tax year can be counted as though they were paid during the current tax year.

The tuition and fees deduction can be claimed for an unlimited number of years.

The Tuition and Fees Deduction is subject to the following eligibility restrictions: The student is not required to be seeking a degree or certificate. The student must be enrolled at a college or university that is eligible for Title IV federal student aid. The student can be enrolled on a part-time basis. The student is eligible even if they were convicted of a federal or state felony drug offense for the sale or possession of a controlled substance. The income phase outs are $65,000 to $80,000 (single) and $130,000 to $160,000 (married filing jointly). Taxpayers who file as married filing separately are not eligible. The income phase outs are not adjusted annually for inflation.

Employer-Paid Educational Assistance

Up to $5,250 in employer-paid educational assistance can be excluded from income. Qualified expenses include tuition and fees, books, supplies and equipment. This tax benefit is available for an unlimited number of years. The student must be the employee, not the employee’s spouse or dependents. The employee does not need to be seeking a degree or certificate. There are no income phase outs.

Tuition Gift-Tax Exclusion

Tuition paid directly to an educational institution is not subject to gift taxes. However, direct payments of tuition may reduce the student’s eligibility for need-based financial aid. This tax break can be claimed for an unlimited number of years. There are no income phase outs.

Qualified Scholarships

Scholarships, grants and fellowships that are used to pay for tuition, fees and course materials (books, supplies and equipment) are excluded from income if the student is seeking a degree or certificate. Tuition waivers are also eligible. The money must not be a fee for services provided by the student, with a few exceptions, such as teaching and research assistantships. There are no income phase outs.

Education Savings Bond Program

Interest on Series EE bonds issued in 1990 or a later year and all Series I bonds is excluded from income if it is used to pay for tuition and fees, or rolled over into a 529 college savings plan, prepaid tuition plan or Coverdell education savings account. The income phase outs in 2021 are $83,200 to $98,200 (single) and $124,800 to $154,800 (married filing jointly). Taxpayers who file as married filing separately are not eligible. The income phase outs are adjusted annually for inflation.

529 College Savings Plans and Prepaid Tuition Plans

The earnings portion of a qualified distribution from a 529 college savings plan or prepaid tuition plan is tax-free. Qualified expenses include tuition and fees, books, supplies and equipment, and expenses for special needs services. Room and board is a qualified expense if the student is enrolled at least half-time. Qualified expenses may include up to $10,000 each in student loan payments for the beneficiary and the beneficiary’s siblings. 529 plan contributions may also be eligible for a state income tax deduction or tax credit. In most states contributions are eligible for the state income tax break even if you immediately tax a distribution to pay for qualified expenses. This effectively provides a discount on college tuition and other qualified expenses. There are no income phase outs.

Coverdell Education Savings Accounts

The earnings portion of a qualified distribution from a Coverdell education savings account is tax-free. Qualified education expenses include tuition, fees, books, supplies and equipment. Room and board is a qualified expense if the student is enrolled at least half-time. There is an income phase-out on contributions, but not distributions. The income phase outs are $95,000 to $110,000 (single) and $190,000 to $220,000 (joint). Taxpayers who file as married filing separately are not eligible. The income phase outs are not adjusted annually for inflation.