Taxable Income for Students


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It’s back to college time and lots of students have employment on or off campus.  Here’s a rundown of what is and what isn’t taxable to students.


Scholarships and fellowships:  If you are a degree candidate, you can exclude from your income scholarship money used for tuition and fees, or for classroom books, fees, supplies or equipment.  If you use your scholarship for room and board, that’s taxable.  If you are not a degree candidate, then all of your scholarship or fellowship is taxable.  For example:  let’s say you received a scholarship for $40,000.  Your tuition is $32,000 and your room and board is $8,000.  $8,000 of your scholarship would be taxable.  (Of course, saving your receipts for your books and fees would reduce your taxable portion.)


Most students who receive scholarships are not going to be taxed on them, but every year I come across at least one student who received a free ride and wound up having some taxable income from it.  It’s just something you need to be aware of.


Fulbright students and researchers:  these follow the same rules as scholarships and fellowships.


Fulbright grant for lecturing or teaching:  this is a little different, it counts as a payment for service and that’s taxable.  You need to know the difference once you’ve got a Fulbright.


Pell Grants, Supplemental Educational Opportunity Grants, and State Grants:  these are not taxable as long as they are used for tuition.  I’ve seen cases where students get these grants and don’t go to school and go to school and use the money for something else instead.  (Okay, true story, one got a breast enhancement and went to work for Hooters.)  If you do that, the money will be taxed.  Your Pell Grant is for tuition!


Reduced tuition for school employees and their children:  this is not taxable to undergraduate students, but taxable to graduate students.  There is an exception for the graduate students though, if they perform teaching or research activities, then the reduced tuition is tax exempt.


Contest prizes:  If you win a prize but you don’t use it for education, then it’s taxable.  If it’s used for tuition and fees, then it’s not.


ROTC:  the subsistence allowance that you get paid in advanced training is not taxable, but the active duty pay you get is something like the summer advanced camp and is taxable.


Work study jobs count as wages and you should be getting a W2 for that work just like you would any other job.  That’s taxable income.


Self-employment:  this is really tricky because companies often hire college students for jobs but they’re not employees, they’re contract labor.  In a case like that you have to pay self employment tax.  Right now, that’s 13.3% of your income over and above and other income tax you might have to pay.  I see lots of students get burned at tax time because they didn’t know about that little rule.   It’s often called a 1099 job.  It’s okay to have a 1099 job, but just know there are extra taxes involved.  If you’re thinking about taking a contract labor job, check this site out for more information:

A 1% Tax on Social Security Checks? — The Unholy Resurrection of HR 4646

9/11 Tenth Anniversary Commemoration (201109130005)

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There’s an email going around saying that President Obama’s finance team wants to tax direct deposited Social Security checks at 1% and that’s why everyone will be required to direct deposit their check starting in 2013. The bottom line with this is—it’s a bunch of horse hockey. (I like to keep my blog at a G rating.)


Let’s start with some background on the issue. It’s actually a recirculation of an old email from 2010 when the bill was originally introduced by a congressman named Chaka Fattah of Pennsylvania. He originally proposed this legislation with the name “Debt Free America Act” which was his plan to eliminate the national debt. (Back then the national debt was around $10 trillion as compared with today’s almost $16 trillion.) Here’s a link to his post about the bill which is dated April 15, 2010:


There are two really important things to know about this bill:


1. This is not an Obama Administration bill. It wasn’t a Bush bill either. Now, I’m making a guess but I think I’m pretty safe in saying that Romney would never support this bill either.


2. The bill already died a quiet death in committee. There was never even a floor vote. Nobody supported this bill except for Mr. Fattah.


So why am I writing a blog in 2012 about a phony email that started in 2010? Because the email is still going around! I just got it last week. And when somebody sends me an email about taxes I check it out.


So what else do I know about this bill? Well, Mr. Fattah re-proposed his bill in March of 2011 as HR1125. Once again, it went to committee the same day and nothing has happened since. There are no cosponsors to this bill. Not Tom Harkin, not Peter Defazio, not Nancy Pelosi; nobody.


If you still want more information, check out the article debunking it:


So folks, your Social Security checks are safe. If you get this in your email box, just delete it because it’s not true.

Is My Social Security Income Taxable?

Do I have to pay tax on Social Security?

Photo by Jan Roberg.

People often ask me if their Social Security income is taxable.  No, sorry, I just lied.  When I finish preparing  a tax return for someone on Social Security I’ll often hear, “What do you mean my Social Security is taxable? ”  People who say that are usually angry when they say it too.  But, for many people, Social Security is taxable.

So how do you tell if your Social Security is going to be taxed?  Here’s the quick and dirty way to figure it out.  First, take half of all of the Social Security income you get and add that to all of the other income you get.  If you’re single and the amount is over $25,000 you’ll start getting hit with tax.  If you’re married filing jointly—then you’ll start getting hit at $32,000.  If you’re married-filing separately and don’t live apart—then it’s all taxable.

So this can totally mess up your tax rates.  For example—let’s say you ‘re currently in the 15% tax bracket and you haven’t crossed into “Taxable Social Security Land” yet, but you’re right on the border.  You want to take a really nice vacation and it’s going to cost you $10,000.  How much money do you need to take out of your IRA to go on vacation and pay the income tax?

Well, you know you need 15% more for the tax so let’s say you take out $12,000.

$12,000 X 15% = 1800

That means that you’ll have $10,200 for your vacation, right?  (12,000 IRA – 1,800 income tax = 10,200 vacation money)

Looks good, except it’s wrong.  See, if you’re on that border, then half of the $12,000 is going to go into the taxable Social Security pile.  So instead of paying 15% on $12,000 you’re paying 15% on $18,000; that’s another $900 in taxes.  ($18,000 X 15% = $2,700    and    $2,700 – $1,800 = $900) 

Now you don’t have enough money to pay for your vacation.  You’ll need to be taking more out of your IRA and then even more of your Social Security will be taxed.

Because taking that distribution makes your Social Security Taxable—your real tax rate is 22.5% instead of 15%.

$2,700 tax divided by $12,000 distribution = 22.5% tax rate

For lots of people, there really isn’t much you can do.   If your income is high enough, you’re stuck with your Social Security being taxed and there’s no way out.   But for some folks—you can plan ahead to avoid this bumped up tax—or at least try to reduce it.  You’ve got to know about the tax though if you’re going to plan ahead for it.  If you want help figuring out if your Social Security is taxable, give us a call.

Is Your Tax Preparer a Phony?


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One of my biggest complaints is about fake tax preparers.  They’re all over the place.  They magically appear during tax season and then disappear on or before April 15th.  When the IRS letters start showing up, they’re nowhere to be found and their victims wind up paying me (and people like me) lots of money to get them out of the jam they’re in.


For example:  One year I had to assist five different people who received audit letters and all of them had had their returns prepared by the same woman.  Besides the fact that all the tax returns were wrong—the thing they had in common was that all of them said they had been “self-prepared,” even though all five of the people who came to me stated that this woman had prepared their returns and that they each had paid her $200 for the service.  I’ll never know how many bad returns that person did—but if five of them walked through my door, I‘m guessing that there were a whole lot more.


So how do you know you’ve got a lemon preparer?  The best way to know is to see if he or she has something called a PTIN number.  (PTIN stands for Preparer Tax Identification Number.)  A real preparer signs her name on your tax return and puts her PTIN number on it.  A fake preparer does not sign your return and your return will say “self-prepared.”


Most folks don’t know that professionals are required to have PTINs.   Unless you were burned by a bad preparer in the past, it’s not something that would ever be on your radar.  It’s on my radar because I have to tell people they’ve been burned on a regular basis.  It’s never a fun conversation.


So how do you know if you’ve got a real tax professional instead of a fake?  Well now there’s a directory and you can look your tax preparer up.  All you have to do is go to:


You can type in your preparer’s name and if they’ve got a PTIN, you can find them there.  For example:  my last name is Roberg and I work in Missouri.  If you wanted to check my credentials, you’d go to the site and type those in and I’d be there.


Or say you don’t have a tax preparer and you’re looking for someone.  You can go to the website and type in your zip code and it will give you a whole list of preparers in your area.  For example, I work in the 63146 zip code area.  If you type that in, well of course I’m on that list, but so are a whole bunch of other tax folks who work in my area as well.


Click on a name and it will give you the person’s credentials and business address.  EA means enrolled agent (that’s what I am.)  EAs are licensed by the Department of Treasury to represent clients before the IRS.  CPAs are Certified Public Accountants and RTRPs are Registered Tax Return Preparers.  RTRP is the new tax professional designation, it means the person has passed a test demonstrating competency is basic tax return preparation.  Persons with PTINs but no credentials will just have their names listed.


Will hiring a professional with a PTIN prevent you from ever getting audited?  No, I can’t promise that.  But it does show that you’ve hired a professional who’s serious about obeying the law, and that’s something you want in your tax preparer.

My Dog Barks at IRS Agents

Jan's dog Lady! Ruff Ruff!

I know this sounds a little crazy, but my dog barks at IRS agents.  Some people think that this is a good thing, but in my business—no.  It really puts a damper on the whole “working from home” concept.  I figure that I spend a pretty large percentage of my time talking on the phone with IRS agents; I can’t have my dog barking.  It’s just unprofessional.


My husband says that I have a special “IRS voice” and the dog recognizes it as me talking to an enemy and reacts accordingly.  For the record:  I don’t consider IRS agents to be my enemy.  Most of the time we’re trying to achieve the same goal:  getting my client to pay his fair share of income tax.  Where the IRS and I tend to disagree is in the amount of money that would be considered to be a “fair share of income tax,” but overall we’ve got the same goal.


Anyway, the dog barks when I talk to the IRS so she can’t be in the room when I make my phone calls.  (Or I just call from my business office—no dogs there.)


But on days that I’m not doing IRS work, I like to work from home.  My dog likes to nap in the corner of my home office while I’m on the computer.  She’s usually pretty quiet and most of the time I can’t even tell she’s in the room; except for the other day.  Nothing unusual, the phone rang and it was a person asking for advice about an audit letter she received.  It was a pretty normal, friendly sort of call.  I get that type of call all the time and I was just answering questions for a potential client.


But while I was on the phone, my dog woke up and started barking at the phone routine.  It was so embarrassing.  I couldn’t get her to shut up.  I apologized to the caller and explained that she usually only barks at the IRS and I didn’t know what had gotten into her.  The woman on the phone paused for a moment and said, “I do work for the IRS.”


So I learned a couple of lessons:  First, IRS employees are not exempt from getting audited.  And second, my dog is smarter than I thought.

Turbo Tax Users: You Need to do a Three Year Review

Money and Magnifying Glass

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I’ve said it before: I think Turbo Tax is a great product. I also like, the do it yourself software you can get on my website. Good products, good results. But, they’re not perfect—none of them are. And neither are tax preparers, after all they are human and make mistakes as well.


It’s August, generally quiet time in the tax business—but no, not this week. The other day my phone rang nine times—people getting IRS letters. “Hello, I got an IRS letter, what do I do?” I suspect that the IRS must have done a mass mailing the other day for my phone to ring so much. (My phone is usually slow in August.)


Some calls are easy and I can guide someone over the phone, “Oh, just send them a copy of XYZ form, that’s all they want.” Usually though, people need to come in and have me take a look. What I’m often finding this summer—is that people are getting IRS letters saying folks owe money, but when I review their returns, they should be getting a refund instead. And while I think that’s great fun (because I’m a tax geek and that’s the kind of stuff I live for) most people don’t like getting IRS letters saying they owe thousands of dollars at all. (Although they’re usually happy when I show they’ve got a refund coming.)


But here’s the catch—these people wouldn’t know they had money coming back if the IRS didn’t send them the nasty letter in the first place! What about all the people who left money on the table but won’t get an IRS notice?


What I’m finding is that the people with money coming back did their own taxes with Turbo Tax. Not that the Turbo Tax program made a mistake but it is usually just a misunderstanding of what should or should not be listed or possibly a typo. That’s why I’m recommending a three year tax review.


Why three years? If you made a mistake on your tax return, you have three years from the date of filing to file an amendment to get your money back. This is achieved by filing a Form 1040X.


For example, let’s say back on your 2009 tax return, you typed in that you paid $1,000 in mortgage interest when really you paid $10,000. The two numbers look pretty similar but there’s $9,000 worth of deduction there that you just missed out on. If you’re in the 25% tax bracket, that’s a $2,250 refund that you’d be entitled to. Your 2009 tax return was due on April 15, 2010. So, three years from that date is April 15, 2013. If you wanted to get that money back from the IRS, you’d need to file an amended return by then.


You don’t need to do this every year, just bring in three years worth of returns once every three years. Most places charge a fee, but it’s generally much lower than the cost of preparing your returns. (I know one large tax company used to advertise that they’d do it for free.)


If your returns are fine—then you’ve got peace of mind. If you’ve been doing something wrong—well then you’ve learned something. If you get money back—well then you know you did the right thing. It’s a winning situation all the way around.

Summer Job Super Gift

It's fun now

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Do you have a child or grandchild that has a summer job this year? If you want to give a “gift of a lifetime” I’ve got a suggestion for you. Make a contribution into a ROTH IRA account for the child to match the amount of income he or she earns this summer.


Saving for the future; sounds boring doesn’t it? I know, it’s not an I-Phone or a new car—but if you were to make a $5,000 contribution to a 16-year-old’s ROTH IRA—and he made no other contributions for the rest of his life—by the time he reached age 65 (assuming it earns an average of 7% interest per year) he’d retire with $138,000 (The Kiplinger Tax Letter, July 20, 2012). Now that’s a pretty sweet present!


Of course, there are rules that have to be met. For one thing, you can’t contribute more than the child actually makes for the year. Also, you can’t contribute more than $5,000 to a child’s ROTH IRA.


Obviously, this isn’t for everybody. You have to be at a certain stage of wealth to be gifting that kind of money to a kid’s IRA. And remember—that’s what it is; a gift. If you’re trying to avoid gift taxes—a contribution to a child’s IRA will count towards your $13,000 gift annual exclusion. You can’t give a child $13,000 and contribute to the ROTH IRA on top of that. You would have to reduce one or the other so that the total came to $13,000 or less or else a gift tax will be applied.


What about people who don’t have that kind of money to give away? You can make a smaller contribution. Maybe a thousand dollars instead; or maybe you make a deal with your child—you’ll match whatever they contribute to a ROTH IRA up to a certain dollar amount. (I recommend starting a ROTH IRA with at least $1000. Smaller sums are usually hit with more fees and wind up losing money instead of growing.)


Why put money into a kid’s ROTH IRA? So many reasons:
1. The money grows tax free
2. When it’s time to take the money out, it’s tax free
3. The money can be used for education, buying a home, or retirement
4. Giving your child a fighting chance for having a decent retirement nest egg


Why a ROTH and not a regular IRA? Regular IRAs are tax deductible when you make the contribution, but taxable when you take the money out. Most teenagers don’t need the tax deduction that comes with a regular IRA, so it really makes much more sense to invest in something that will be tax free at retirement. Note: the deductibility of the IRA goes to the owner of the IRA—so if you contribute to your child’s IRA—you don’t get the tax deduction, your child would.


I realize that this isn’t an option for everybody, but if you can afford putting money into a ROTH IRA for your child (or grandchild), it’s worth some serious consideration.

Olympic Tax Bill

Olympic Flag

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It seems that Congress is falling all over itself trying to make the prize money that our Olympic athletes win in London tax exempt. They’ve had a week to watch the games, think about it, and propose legislation. Pretty fast work for our political leaders. I guess Congress cares about your tax bill if you’re an amazingly great athlete—but they don’t care enough about the rest of us to finish the work for settling the tax code for our 2012 taxes. Yes, I’m talking about this year’s taxes!


Seriously, we’re hearing all of the candidates talk about what they want to do with our taxes for 2013—next year. But as of this date (August 2012) there are several tax issues that still haven’t been decided about your taxes for this year. Did you know that?


Here’s the big thing we don’t know yet:


AMT, the Alternative Minimum Tax. Right now, the exemptions for AMT have fallen to the old 2001 levels. If you were married filing jointly in 2011 and made less than $150,000, your AMT exemption would be $74,450. Using the 2001 rules, the exemption is $49,000. Now for most people, talk about Alternative Minimum Tax sounds like a bunch of mumbo jumbo—but to put things in plain English—if our people in Washington do not settle this issue, 20 million more Americans are going to get hit with the AMT tax this year. Most of those people have no idea this is coming. You could be one of those 20 million and not even know it. And I’m talking about 20 million people who will be added to the AMT rolls; people who already pay the alternative minimum tax will be paying even higher AMT taxes than in previous years. Thousands of dollars more!


Now, in fairness, the Senate does have a bill on the floor that would actually increase the exemption by $4,300. I expect it to pass (I hope), but not until much later this year, like in December. There’s something fundamentally wrong with not knowing what you should have to pay on your income taxes until after you’ve already earned your entire year’s salary.


Some other tax issues for this year that are still up for grabs include: deducting state and local sales taxes instead of state income taxes, the classroom teacher deduction of $250, allowing senior citizens to transfer IRS funds to charity tax free, the tuition and fees deduction for college expenses, and a whole host of business related tax incentives. How can you make a move if you don’t know if you don’t know if you’re allowed to do it or not?


Congressional inaction on current tax issues means that many people will have their refunds delayed next year. That’s not fair to you or to me.


But back to the Olympic athletes: I’m an Olympics junkie. I love watching the games and I admire our athlete’s accomplishments. And when NBC does its little heart tugging stories on our athletes’ struggles, I understand wanting to give them all a break. But how much of a tax break do we really need to give folks like Serena Williams, Michael Phelps, and LeBron James? They’re already making millions of dollars a year. Here’s the thing—if Congress were to pass the new AMT exemption—it would essentially make Serena’s gold medal prize money tax free, while at the same time helping millions of other Americans who could probably use the tax break a little more than Serena does.


I get it, the Olympics is news and talking about them gets our politicians some media exposure. (Guilty as charged, I’m blogging with an Olympic theme myself.) But there are some very real tax issues this year for the rest of us that Congress hasn’t addressed yet – and we deserve to have our leaders settle the issues sooner, rather than later.


PS: As far as the medal earnings for the athletes that are not already millionaires is concerned—any decent accountant will be able substantially reduce the tax on Olympic winnings, and in many cases reduce it down to zero. From a serious tax standpoint, it shouldn’t even be an issue.

Let the IRS Help You Pay for Your Vacation

Saving with the IRS.

If you have trouble saving money, then withholding extra in your taxes might be the way to put money away for a vacation. (Or whatever else you want to save for!)



Okay I can hear you now, “How can you get the IRS to pay for your vacation?”  That’s not what the title said; it says “help pay” for your vacation.  If I had a way for the IRS folks to pay for my vacation, I’d be blogging this from London instead of my living room.  (Olympics are on, I’m an Olympics junkie.  I’m working in front of the TV set today.)


But how can the IRS help you pay for your vacation?  By helping you save for it!


Face it; some people are great at putting money away and saving up for whatever they need.  This blog post isn’t for them.  This is for the folks that have trouble saving up for the things they want—like a vacation.  If you’re not a good saver, then this plan might work for you.


First, you need to figure out how much money you need for your trip.  I was looking at a little trip to Disney World, with my husband, Mark.   I think we can do it for $3,000.  Mark gets paid twice a month—so over the course of the year, he’ll get 24 paychecks.


(Yes, I’m using his paycheck for this example.  I’m self employed.  If I’m thinking about buying something with my own money I use “How many tax returns to I have to prepare to go to Disney World?”  But I don’t have withholding—I have to pay estimated taxes so this program will not work for me.)


So to save up $3,000 first we’ll have to figure out how much of a refund we’ve got coming (or how much we’ll owe) if we don’t make any adjustments.  So how do you figure that out?  You use the IRS withholding calculator.  Here’s a link:,,id=14806,00.html


You’ll want to have a copy of your latest pay stub and your last tax return with you when you do it.  Just go to the site, answer the questions, and it will tell you what your expected refund (or what you’ll owe) will be.


I did this back in February and it looks like we can expect a refund of just about $1,000 next year.  We will need to save another $2,000 for our Disney vacation.  Since we did this in February, that gave us 10 months to save up.  Let’s do the math:

10 months times 2 paychecks per month = 20 paychecks

$2,000 divided by 20 paychecks = $100 per paycheck


So for us to have adequate savings for Disney World, Mark would need to withhold an additional $100 per paycheck to give us a $3,000 income tax refund.


If you want to change your withholding, you’ll need to go to your human resources department and complete a new W4 form.  If you know exactly how much extra money you want to save, just put that dollar amount on line 6 of your W4:


If you’re just interested in getting a bigger refund, but don’t know who much extra you want to save, you can change the number of allowances you’re claiming on line 5.  For example, if you’re currently claiming 3 exemptions and your refund is very small, change your withholding to 2 exemptions and your refund will be larger (assuming that everything else on your tax return stays the same.)


Realize that if you do this, you will have less money to spend from every paycheck.  What you’re doing is making a trade off.  Money later versus money now.


I’m going to be perfectly honest with you—most tax professionals would never, NEVER, recommend saving money by letting the IRS hold it for you.  Two reasons:  the first argument is that you can save the money yourself and earn interest on it in a savings account.  My answer to that is—the interest rate on my savings account right now is .2491%.   If I had the whole $3,000 in the bank for the whole year, I would earn $7.47.  I think actually being able to save $3,000 is worth that price.  This isn’t such a good argument these days.


The second issue is a little more serious:  If the IRS is holding your money—you cannot access it until you file your tax return next year.  If you have a financial emergency, there’s no way for you to get your hands on that cash.  It’s important that you understand that.  The whole point in having the IRS hold your money is so that you can’t spend it, it’s a good idea to have a little savings cushion—but this is a strategy for people who aren’t good at saving, so there’s a bit of a catch 22.


Like I said, this strategy isn’t for everyone—but there are lots of people who use it and they use it successfully if saving money is a problem for you.