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Every Friday evening, my husband’s college friends have a Zoom happy hour: it’s practicing social distancing and being social at the same time. The conversations have been dominated, of late, by the COVID-19 pandemic and how it’s affecting our families. One popular gripe? College tuition and room and board.

During the pandemic, students are being sent home from college, and some classes are being canceled. That means students are left with semesters cut short or a move to online courses, leaving unused or barely touched housing and meal plans. Schools are dealing with this in different ways. Some are offering partial tuition and fee refunds, while others are choosing to keep fees intact, suggesting that the underlying expenses (like administration and the costs of paying faculty) haven’t really changed.

According to Inside Higher Ed, 90% of parents with children already enrolled in college say they are not “comfortable” with the current landscape. That number ticks up a little – to 93% – for parents of students attending private institutions. Of those, 47% expect a “meaningful reduction in price.”

Mark Kantrowitz, publisher of SavingForCollege.com, reports that about 70% of colleges are offering refunds. The refunds are typically 40%-60% of the room and board cost for the spring semester.

For those parents who are fortunate enough to get a partial refund of tuition and fees, there are some potential tax traps. Let’s start with the obvious: tax deductions and credits.

  • The tuition and fees deduction was extended to cover qualified education expenses paid in 2018, 2019, and 2020. The tuition and fees deduction is based on qualified education expenses used to pay for yourself, your spouse, or your dependents. It’s an above-the-line deduction, which means that you can claim the deduction even if you don’t itemize. For the 2019 tax year, the deduction is allowed for qualified education expenses paid in 2019 for an academic period beginning in 2019 or in the first 3 months of 2020. You only can claim a tuition and fees deduction for qualified education expenses not refunded when a student withdraws.
  • The Lifetime Learning Credit (LLC) offers up to $2,000 for qualified education expenses paid for all eligible students per return. In other words, the LLC is limited by return, not by student. Like the tuition and fees deduction, the LLC is based on qualified education expenses you pay for yourself, your spouse, or your dependents. Similarly, the credit is allowed for qualified education expenses paid in 2019 for an academic period beginning in 2019 or in the first 3 months of 2020. For example, if you paid $1,500 in December 2019 for qualified tuition for the spring 2020 semester beginning in January 2020, you may be able to use that $1,500 in figuring your 2019 credit. You can claim the LLC for qualified education expenses not refunded when a student withdraws.
  • The American Opportunity Credit (AOC) offers up to $2,500 for each qualifying student on your federal income tax return. Unlike the LLC, that means you can claim the AOC for each qualifying student on your federal income tax return. It’s also partially refundable. Like LLC, the AOC is based on qualified education expenses you pay for yourself, your spouse, or your dependents. The credit is allowed for qualified education expenses paid in 2019 for an academic period beginning in 2019 or in the first 3 months of 2020. And as before, you can claim the AOC for qualified education expenses not refunded when a student withdraws.

According to the Internal Revenue Service (IRS), a refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year.

  • If you receive a refund after 2019 of qualified education expenses paid on behalf of a student in 2019 and the refund is paid before you file an income tax return for 2019 (remember, Tax Day has been moved to July 15), the amount of qualified education expenses for 2019 is reduced by the amount of the refund.
  • If you receive a refund after 2019 of qualified education expenses paid on behalf of a student in 2019 and the refund is paid after you file an income tax return for 2019, you may need to repay some or all of the credit.
  • But if you pay qualified education expenses in both 2019 and 2020 for an academic period that begins in the first 3 months of 2020 and you receive a refund, you may choose to reduce your qualified education expenses for 2020 instead of reducing your expenses for 2019.

You should also pay attention to the source of the funds. If you’re paying as you go from already-taxed funds, or from loans, there’s typically no tax impact to you when you receive a refund. But if you receive a refund of funds that you originally paid out of a tax-favored account, there may be tax consequences.

If you return money from a 529 college savings account to the account – for the same student – it remains tax-free. Generally, the money has to be put back within 60 days of the refund (that’s the result of the PATH Act). But the IRS made clear in Notice 2020-23 that if the 60 day period ends between April 1, 2020, and July 15, 2020, you can stretch the return of the contribution to July 15, 2020. 

The College Savings Foundation warns that refunds of money that originated from a 529 plan could be subject to federal and state taxes and penalties if it remains outside of the plan and is not used for qualified educational expenses. If you don’t return the funds to the account, they could be considered non-qualified distributions and subject to tax and a 10% tax penalty. But if you’re headed back to school this year, you may want to hold onto the money: check with your financial advisor or a tax professional for more info.

There’s additional tax relief for families who qualify for grants and other free money. Students who receive emergency financial aid grants under the Coronavirus Aid, Relief, and Economic Security Act (or CARES Act) qualify for tax-free treatment under section 139 of the Tax Code. And you already know that some students may be eligible for the Economic Impact Payments (EIP), or stimulus checks: those are tax-free, too.

The Internal Revenue Service (IRS) has issued guidance for some taxpayers who took out federal or private student loans to finance attendance at a nonprofit or for-profit school. The guidance offers relief for students whose loans have been discharged by the Department of Education and who meet specific criteria.

Typically, a discharge of indebtedness is a taxable event: The cancellation of debt is treated as income to the debtor. Under this recent guidance, affected students will not recognize income as a result of the discharge. That means that the taxpayer should not report the amount of the discharged loan on his or her federal income tax return. 

The break applies to students who:

  • Participated in Closed School discharge process. The Closed School discharge process allows the Department of Education to discharge a federal student loan obtained by a student (or the student’s parent) who attended school at the time it closed or who withdrew from the school just before it closed.
  • Borrowers who participated in the Defense to Repayment discharge process. The Defense to Repayment process allows the Department of Education to discharge a Federal Direct Loan obtained by a student (or the student’s parent) if the borrower can prove that a school’s actions would give rise to a cause of action against the school under applicable state law.
  • Borrowers who participated in legal settlement discharge actions. There have been several lawsuits brought by federal and state governmental agencies to resolve allegations of unlawful business practices, including unfair, deceptive and abusive acts and practices, against for-profit schools and specific private lenders that offered student loans at those schools.

The guidance is an extension of relief provided in Rev. Proc. 2015-57Rev. Proc. 2017-24 and Rev. Proc. 2018-39. As with previous guidance, the Treasury Department and the IRS believe that federal and private student loan borrowers may be able to exclude discharged loans under the insolvency exclusion under section 108(a)(1)(B). A taxpayer is considered insolvent if the taxpayer’s liabilities are more than their assets immediately before the discharge.Today In: Taxes

Student loan borrowers may also be to exclude income under fraudulent or material misrepresentations made by schools or specific private lenders to the students or other tax law authority.

However, figuring which exclusions might apply to individual taxpayers would require a detailed look at each taxpayer’s facts and circumstances. That creates a significant compliance burden for taxpayers and a disproportionate administrative burden on the IRS. As a result, the IRS established a safe harbor—if they meet the criteria—to allow those students some relief.

The relief is also extended to any creditor that would otherwise be required to file information returns and furnish statements to affected students. To avoid confusion, the IRS strongly recommends that creditors not provide students (nor the IRS) with a Form 1099-C, Cancellation of Debt – Internal Revenue Service.

For more information, see Revenue Procedure 2020-11 (downloads as a PDF). 

My daughter has been sending me steady reminders about filling out the Free Application for Federal Student Aid (FAFSA) form. If you–or your child–plan to attend college or grad school between July 1, 2020, and June 30, 2021, the FAFSA form became available for filing on October 1, 2019. The form is used to apply for financial aid for college or grad school and must include income documentation, including federal tax information. Here’s what you need to know.

The easiest way to complete a FAFSA form is online (be sure to head directly to the official site here–other sites may charge you money and may not keep your information secure). If you’re new, just click on “Start here” to begin your application.

The FAFSA will first ask for your FSA ID. An FSA ID is a username and password that you use to log in to the U.S. Department of Education websites. Students and parents each need a separate FSA ID to sign the FAFSA form online. You can create an FSA ID directly on the site.

The FAFSA requires personal information like your name and address as well as your Social Security number. If you don’t have a Social Security number and you are entitled to one, you should take steps to get one (more about taxpayer ID numbers here). If you don’t have a Social Security number because you’re not entitled to one, you cannot complete the FAFSA. If you have a Social Security number but can’t find it or your card, you can apply for a replacement card (more on that here).

The FAFSA also requires financial information, including filing status and which tax form you file. The easiest way to provide your tax information is to use the Internal Revenue Service Data Retrieval Tool (IRS DRT). With the IRS DRT, eligible students and parents can transfer their 2018 federal income tax information into the 2020-2021 FAFSA form. And, if you’re worried about privacy (remember those attempted hacks?), you can rest a little easier: according to the IRS, additional security and privacy protections have been added to the IRS DRT. The tool is now, they claim, “the fastest, most accurate way to input your tax return information into the FAFSA form.”

There’s no separate website to use the tool: you access the IRS DRT from the online FAFSA form by clicking “Link to IRS.” You’ll log in by providing your name and other information exactly as you provided it on your tax return. Once you’re authenticated with the IRS, you can either transfer your information from the IRS or choose to return to the FAFSA.

It’s important to note that if you use the IRS DRT to transfer your tax return information from the IRS, the specific tax information will not show up on your onscreen version of the FAFSA. For your protection, the answer to each question is replaced with “Transferred from the IRS.”

Most folks are eligible to use the IRS DRT if they’ve already filed their taxes. However, some taxpayers cannot use the tool, including those taxpayers who have filed an amended tax return, called a federal form 1040X, Amended U.S. Individual Income Tax Return (downloads as a PDF). Other taxpayers who are not eligible to use the tool include those filing Married Filing Separately or Head of Household, and those who filed a Puerto Rican tax return, a foreign tax return or a form 1040-NR/1040-NR-EZ. Additionally, the tool is not available for students whose parents’ marital status is “Unmarried and both legal parents living together.”

If you filed a federal income tax on extension, you may need to enter your tax information manually. You should generally allow up to three weeks for electronically filed returns, or 11 weeks for mailed returns, to allow the IRS to process and enter that information. If you can’t wait that long, you will need to manually enter their tax return information.

If you are a dependent student, you will also be asked to provide information about your parents, including their federal income tax information. Don’t simply rely on the IRS’ definition of dependency–there are separate standards for FAFSA, though there is some overlap. Consider this specific list of questions used to determine whether you’re a dependent for FAFSA purposes.

  • If you answered yes to any of the questions on the list, you are not considered a dependent for FAFSA purposes and typically need not provide your parents’ financial information on the form. Exceptions do exist. Specifically, health profession students and law school students may be required to provide parent information no matter their dependency status.
  • If you answered no to any of the questions on the list, you are considered a dependent student and must provide information about your parents. This is true even if you do not live with your parents. It’s also true even if your parents refuse to help you with the FAFSA and do not pay your expenses.

If your parents don’t wish to help you complete the FAFSA, just say so on the form when it asks whether you can provide information about your parents (select the “I am unable to provide information about my parent(s)” option). You can only make this notation online: the option is not available on the paper version.

If you have special circumstances, you’ll need to take some extra steps. If, for example, your parents are incarcerated, you don’t know where your parents live, or you’ve left home due to an abusive situation, fill out the FAFSA and indicate that you have unique circumstances (find out more here). You’ll be allowed to finish the FAFSA without entering parent information, but your FAFSA will not be fully processed. It’s your responsibility to get in touch with the financial aid office at your school as soon as possible to find out the next steps.

The IRS DRT isn’t the only tool that can be used to complete the FAFSA. The information needed to complete the FAFSA can be found on a previously filed tax return. If you don’t have a copy of a tax return that you need, ask your preparer. You can also order a tax transcript directly from the IRS using the “Get Transcript” tool at www.irs.gov/transcript, by calling 1-800-908-9946 to order a copy, or using a federal form 4506-T, Request for Transcript of Tax Return (downloads as a PDF).

If you’re on the fence or having trouble, don’t put it off: Deadlines apply. I know it’s confusing, but each state and school sets its own deadline. You’ll have to check with the school directly for those dates, but you can check the FAFSA deadlines by state here. For federal purposes, the online FAFSA form must be submitted by 11:59 p.m. Central time (CT) on June 30, 2021.

If you still need help, give the folks at the Department of Education a buzz at 1-800-4FED-AID (1-800-433-3243). You can also chat or send an email via the Web.

Presidential hopeful Sen. Bernie Sanders (I-VT) has introduced a plan to cancel all U.S. student loan debt. The debt, which currently totals $1.6 trillion, affects nearly 45 million Americans. The proposal would be paid for by a new tax focused on investors.

Sanders describes the tax as a “Wall Street speculation tax” and claims that it will raise $2.4 trillion over the next ten years. The tax – which is more properly known as a financial transaction tax (FTT) – would include a 0.5% tax on stock trades. The tax would apply to trades on a per transaction basis and would work out to a 50 cent charge for every $100 of stock. The FTT would also include a 0.1% fee on bond trades and a 0.005% fee on derivative trades. Derivatives, like futures and options, can be tough to value, so the tax would be based on the value of the contract and not the underlying assets.

While FTTs have been criticized as creating distortions in the market, proponents argue that it would reduce unnecessary trading and stabilize the markets. That’s because an FTT would necessarily hit high-frequency traders including those that rely on computers to quickly spot trading patterns and buy and sell quantities of stocks. If that sounds familiar, high-frequency trading was considered one of the factors that contributed to high-profile collapses like Knight Capital

According to Sanders, dozens of countries have imposed a similar tax, including Hong Kong, Germany, France, Switzerland, and China. A 2012 paper (downloads as a PDF) prepared for the Committee on Economic and Monetary Affairs claims that $23 billion is raised each year by just seven countries through FTTs: half of this revenue is pulled in by the U.K. and South Korea alone.

A paper authored by Robert Pollin, James Heintz & Thomas Herndon estimating the revenue potential for the tax was published by the Political Economy Research Institute (PERI) at the University of Massachusetts Amherst in 2017. The study focused on the Inclusive Prosperity Act, which was introduced in the U.S. House of Representatives in 2012 and the U.S. Senate in 2015 (downloads as a PDF). The authors concluded that the tax would generate about $220 billion per year, equal to about 1.2% of the current US GDP. You can read the paper here.

Sanders said about his proposal, “In a generation hard hit by the Wall Street crash of 2008, it forgives all student debt and ends the absurdity of sentencing an entire generation to a lifetime of debt for the ‘crime’ of getting a college education.”

To ensure that students do not rack up debt in the future, Sanders also proposed a cap on student loan interest rates. According to Sanders, the average interest rate on undergraduate student loans is currently more than 5%. Under his plan, student loan interest rates would be capped at 1.88%.

Another 2020 presidential candidate, Sen. Elizabeth Warren (D-MA), has also introduced a plan to wipe out student debt. Warren’s plan would cancel up to $50,000 in student loan debt for every person with household income under $100,000. The plan would also phase out student debt for those with household income between $100,000 and $250,000.

Like Sanders’ plan, Warren’s proposal would also be paid for with a tax. However, Warren’s tax focuses not on Wall Street trades, but on the holdings of the super-rich. Warren would impose a wealth tax of 2% on families with fortunes exceeding $50 million. The tax, dubbed “Elizabeth’s Ultra-Millionaire Tax” would affect the top 0.1% of households in the country or about 75,000 families. Warren estimates that the tax would raise $2.75 trillion over 10 years.

The wealth tax got an endorsement from a surprising source: some of America’s richest persons. An open letter to “2020 Presidential Candidates” calling for such a tax was signed by 19 people (including one “Anonymous”). Signatories included Abigail Disney, granddaughter of Roy O. Disney (co-founder of The Walt Disney Company), Facebook co-founder Chris Hughes, hedge fund advisor George Soros, and Asana co-founder Justin Rosenstein. You can read the letter here.

Lives were changed during a 2019 commencement address at Morehouse College when self-made billionaire Robert F. Smith announced that he was paying the student debt for the entire class. Shortly afterward, those students, potential donors, and tax geeks like me began to wonder whether there would be any tax consequences as a result of the windfall (you can read my answer here). But wouldn’t it be better for graduates – and potential donors – if the tax questions were settled?

Congress may be working on some solutions. In March, Sen. Gary Peters (D-MI) introduced a bill that would exclude post-graduation scholarship grants from gross income in the same manner as scholarships are currently excluded. The bill, S. 676, Workforce Development Through Post-Graduation Scholarships Act of 2019, would exclude post-graduation scholarship grants from gross income if they are distributed through certain tax-exempt organizations. Recipients would be required to live and work in communities that meet certain requirements (typically those that are low income or have a lower graduation rate). The bill, which was introduced in the Senate on March 6, 2019, is co-sponsored by Sen. Shelley Moore Capito (R-WV). You can read the bill, which downloads as a PDF, here.

A similar bill was introduced in the House in 2018 by Rep. Darin LaHood (R-IL). H.R. 6486, Workforce Development Through Post-Graduation Scholarships Act of 2018, was referred to the House Ways and Means Committee where it currently sits. You can read the bill, which downloads as a PDF, here.

Under these bills, donors could make gifts to be used for scholarships to pay off acquired student debt – and qualified recipients wouldn’t have to worry about the potential tax consequences. That would be consistent with existing rules for students who have not yet graduated. The rule that currently excludes traditional (or pre-graduation) scholarships is found at section 117of the Internal Revenue Code, which begins:

(a) General rule.

Gross income does not include any amount received as a qualified scholarship by an individual who is a candidate for a degree at an educational organization described in section 170(b)(1)(A)(ii).

The scholarship exception does not apply to amounts that are paid in exchange for teaching, research, or other services which are a condition for receiving the scholarship (or tuition reduction). If you have to work for the scholarship or grant, that income generally taxable, though some exceptions apply.

Fortunately, if a scholarship is federal income tax-free – and it’s the only income the student receives for the year – they’re off the hook: there’s generally no need to file a federal income tax return. However, any taxable portion of your scholarship or fellowship on your tax return should be reported on a federal income tax return even if there is no tax owed. And of course, under current law, there’s no double-dipping: students can’t exclude fellowships and scholarships from income and then deduct them as educational expenses. You can find out more about the taxation of scholarships and grants here.

As for those of you who are feeling charitable – even if not at Robert F. Smith levels? For now, if you’d like to make a difference in a student’s life AND you’re concerned about tax consequences, remember that you can always pay tuition for a current student directly to the educational institution – and the amount doesn’t count towards the annual exclusion amount (read: no gift tax consequences). If you’re looking to also capture a charitable donation, you can donate to a qualifying educational institution and earmark it for scholarship purposes for current students. If you’re looking for other ways to give, check with your tax professional.

Life just got a whole lot better for some recent college graduates. During the 2019 commencement address at Morehouse College, self-made billionaire Robert F. Smith announced that he was paying the student debt for the entire class.

The gift is estimated to be worth $40 million. It was the second gift that Smith announced during the commencement ceremony. Smith, who received an honorary doctorate from the college, also made a $1.5 million gift to the school to be used for scholarships and the development of a new park. A spokesperson for Morehouse College called it the biggest single gift in the school’s history.

Smith is the chairman and CEO of Vista Equity Partners, a private equity group that invests in software companies. Smith is ranked at #355 on Forbes’ Billionaires 2019 with an estimated worth of $5 billion. He is, according to a 2018 issue of Forbes, the country’s wealthiest African-American (yes, even more than Oprah).

Smith’s generous gift means that the nearly 400 students in the Morehouse College Class of 2019 won’t have to scramble to pay back potentially tens of thousands of dollars worth of debt. Zack Friedman recently reported that there are 44 million borrowers who collectively owe $1.5 trillion in student loan debt in the United States. That makes student loan debt the second-highest consumer debt category in the country – more than credit cards and auto loans. Most students shoulder debt of between $10,000 – $25,000, but a whopping 2.5 million students owe more than $100,000 in debt.

With their debt now discharged, what happens to the students? Besides the yelling and screaming and sighs of relief, of course. What about the tax consequences? And here’s where the students get another break: I don’t think there are any.

You likely already know that winning a prize is similar to winning the lottery – and that means it’s subject to income tax. You can find the specific language in section 74 of the Tax Code:

Except as otherwise provided in this section or in section 117 (relating to qualified scholarships), gross income includes amounts received as prizes and awards.

And while this might feel like winning the lottery for the Class of 2019, it’s not. It wasn’t a promotion or a prize – the students didn’t enter any contests or play any games of chance. Instead, I believe it’s a gift.

The IRS defines a gift as “any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return” based on the gift tax provisions found in the Tax Code beginning at section 2501. In the business, we like to say that gifts are given not for anything in return but out of “love, affection, respect or admiration.”

The recipient of a gift isn’t subject to federal income tax on a gift. And if any gift tax is due, gifts are subject to the federal gift tax rules, which means that the giver, not the recipient of the gift, is responsible for the tax. In other words, the recipient of a gift – in this case, each student – isn’t responsible for paying tax (income or gift tax) on the gift.

As for Smith? The annual gift exclusion amount for 2019 is $15,000 per person. That means that if the gifts were made directly to the students, Smith would be able to exclude $15,000 per student ($30,000 if he splits gifts with his wife, Hope). Gifts over that amount would typically be considered taxable gifts (meaning taxable to the donor). Some Morehouse students reported that they shouldered loans of close to $100,000, more than the annual exclusion amount – but it appears that won’t matter. When Smith told the class about the gift, he stated that “my family is making a grant to eliminate their student loans.” In other words, it sounds as though the funds are payable as a grant through the college which likely mitigates any gift tax consequences.

If Smith had paid the tuition of each student directly to the college as they went, that would have not have been considered a taxable gift. That’s because checks written directly to a qualifying educational institution for tuition or to a health care provider for medical expenses are not subject to the gift tax even if they exceed the annual exclusion. However, the educational exclusion is only for tuition and not for books, supplies, room and board, or similar expenses (those would be taxable gifts).

Without that generous gift, it would have likely taken the students years to repay the loans. Fortunately, as you pay back your loans, you may get something of a tax break: the student loan interest deduction. The deduction is an above-the-line deduction, sometimes called an adjustment to income, which means that you don’t have to itemize your deductions to claim the tax break. It’s worth up to $2,500 per return, not per taxpayer; the cap is the same for married couples as individuals. But it’s not for everyone: the deduction is subject to phaseouts which means that in 2019, the amount that you can deduct begins to decline when your modified adjusted gross income (MAGI) hits $70,000 ($140,000 for joint returns).

(You can find out more about the student loan deduction here and see the 2019 tax numbers here.)

And while the relief was granted to all of the students in the class without the need for them to do anything in return (again, the hallmark of a gift), Smith did have some expectations. “I know my class will make sure they pay this forward,” Smith told the students. “[L]et’s make sure every class has the same opportunity going forward because we are enough to take care of our own community.”

Some parents will do anything to get their kids into an elite university—even commit tax fraud. That’s what the Federal Bureau of Investigation (FBI) and the U.S. Attorney’s Office in Boston allege happened as part of a massive multimillion-dollar college entrance admissions scandal. At least 40 people, including actresses Felicity Huffman (Desperate Housewives) and Lori Loughlin (Full House), have been named in the scheme, uncovered in a probe referred to as “Operation Varsity Blues.”

According to federal prosecutors, wealthy parents paid William Rick Singer millions to guarantee placement at high-profile universities, including Georgetown, Stanford, UCLA, and Yale. Singer helped parents fake admissions exam scores and pass off children as student-athletes, even when the students possessed little or no athletic ability. As part of the scheme, Singer helped disguised payments as charitable contributions for a nonprofit organization. The result was that the parents also walked away with a tax break.

In February, Singer agreed to plead guilty on information to charges of racketeering conspiracy; conspiracy to launder money; conspiracy to defraud the United States; and obstruction of justice. When charges are brought on information, it generally means that the defendant has accepted the charges and is cooperating with the investigation.

(You can find the complaint and supporting documents, including a list of those accused in the scheme here.)

Here’s a breakdown of the charges against Singer, and what they mean:

Conspiracy to racketeer. Racketeering can cover a range of illegal activities, including crimes committed through extortion or coercion. According to court documents, Singer and his co-conspirators facilitated cheating on college entrance exams, including the SAT and ACT exams. Parents of prospective students paid up to $15,000 to $75,000 per test; in exchange, others secretly took the exams in place of the actual students, or students’ exam responses were corrected after they had completed the tests. To make it easier to pull off the scheme, Singer bribed test administrators.

Singer was also paid approximately $25 million in a scheme promoting recruits for competitive college athletic teams. In one instance, Singer sent the head coach of the Yale women’s soccer team an athletic profile claiming that a potential student was the co-captain of a prominent club soccer team; the student did not play competitive soccer. The lie costs the parents $1.2 million, but it worked. The student was considered a recruit for the team.

The complaint alleges similar behaviors took place at USC and UCLA for soccer. At USC, four students were considered soccer recruits at the school in exchange for cash even though none of the children played competitive soccer. At UCLA, a coach designated a student as a recruit for the UCLA women’s soccer team in exchange for a bribe.

The bad behaviors were rampant in sports other than soccer, too. At USC, the water polo coach designated two students as recruits for the water polo team; in exchange, Singer made private school tuition payments for the coach’s children. At Georgetown, Singer says that he paid bribes to a tennis coach in exchange for labeling 12 applicants as recruits for the Georgetown tennis team; a University of Texas tennis coach accepted a similar bribe. At Wake Forest, Singer paid money to the women’s volleyball coach in exchange for designating a prospective student—who had been wait-listed—as a recruit for the women’s volleyball team. And at Stanford, the sailing coach treated a potential student as a recruit in exchange for payment even though the student had minimal sailing experience. 

The result, of course, of all of these bribes and payments was to enrich Singer and his co-conspirators personally. 

Conspiracy to launder money. According to court documents, Singer conspired with others to conduct and attempt to conduct financial transactions, specifically “payments to athletic coaches, university administrators, and standardized test administrators” knowing that the property was related to unlawful activity, and then, Singer attempted to “conceal and disguise the nature, location, source, ownership and control of the proceeds” of the activity. Money laundering is, at its most basic, hiding or flipping money. Most commonly, it’s used to conceal “dirty money” gained through criminal activities so that it can appear “clean” or legitimate.

Conspiracy to defraud the United States. According to court documents, “a principal purpose and object of the tax fraud conspiracy was to allow clients … to improperly deduct the cost of the bribes from their federal income taxes, and thereby to defraud the United States by underpaying federal income taxes.” Singer directed this behavior through a fraudulent nonprofit called the Key Worldwide Foundation, or KWF. KWF is, by all appearances, a legitimate organization registered in Newport Beach, California. A quick search with the Internal Revenue Service (IRS) website reveals that it has tax-exempt status (you can see it here), receiving a determination letter from the IRS in 2014.

KWF filed its forms 990 with the IRS, as a proper 501(c)(3) is expected to do (you can download the 2016 form as a PDF here). According to the form 990, the organization received nearly $2 million in contributions and grants in 2015, and double that amount in 2016. Singer, who signed the form as President, represented that he received no salary for his role. 

The 2016 form 990 reflects donations made to educational institutions and programs including Chapman University ($150,000), DePaul University ($50,000), NYU Athletics ($83,181), University of Miami ($60,000), University of Texas Athletics ($252,500), USC Soccer program ($25,000) and USC Women’s Athletics Board ($50,000). From 2013 to 2016, KWF allegedly distributed more than $7 million in grants.

(You can find out more about forms 990 here.)

According to court documents, receipts to the KWF were not charitable but were instead payment for services to guarantee college placement. And those grants to schools and other charitable organizations? Disguised bribes.

To keep up appearances, employees of KWF sent acknowledgment letters falsely attesting that no goods or services were exchanged for the purported donations (you can read more about quid pro quo here). Those letters allowed KWF clients—those parents willing to pay to have their children placed—to improperly deduct the bribes from their federal income taxes as charitable contributions.

In addition to generating and supporting false charitable donations, by incorporating KWF as a fake tax-exempt organization, Singer created the perfect cover. And those parents who took advantage of the chance to get their children into an elite school by making a “donation” to KWF? They may now be on the hook for tax fraud.

Obstruction of Justice. Typically, obstruction of justice happens when a defendant “corruptly or by threats or force, or by any threatening letter or communication, influences, obstructs, or impedes, or endeavors to influence, obstruct, or impede, the due administration of justice.” In this case, the feds alleged that Singer gave a heads up to several co-conspirators about the investigation and encouraged them to “take steps to thwart its progress.”

The allegations don’t stop with Singer. Former Yale University women’s soccer coach Rudolph “Rudy” Meredith was also charged in the massive scheme. Meredith eventually pleaded guilty to his participation in the scheme and cooperated with authorities. 

Also charged are Gordon Ernst, the head coach of men’s and women’s tennis at Georgetown; Donna Heinel, the senior associate director of the University of Southern California (USC); Ali Khrosroshahin, the former head of women’s soccer at the USC; Laura Jane, the former assistant coach of women’s soccer at the USC; Jovan Vavic, the water polo coach at the USC; Jorge Salcedo, the head coach of men’s soccer at the University of California at Los Angeles; William Ferguson, the women’s volleyball coach at Wake Forest University; Lisa “Niki” Williams and Igor Dvorskiy, standardized test administrators for the College Board and ACT, Inc.; Martin Fox, president of a private tennis academy and camp in Houston; Steve Masera, an accountant and financial officer for organizations including KWF; and Mikaela Sanford, who was employed in “various capacities” for KWF and related organizations.

Dozens of others are accused of wrongdoing, including well-known actors and entrepreneurs. The cheating scandal extended into Wall Street. The CEO of Hercules Capital, an NYSE-listed lender to Silicon Valley technology companies, Manuel Henriquez and his wife were charged in the scheme for their alleged efforts to pay for fraudulent SAT and ACT scores to get their daughter into Georgetown. William McGlashan, co-founder and CEO of TPG’s Rise Fund, is alleged to have paid for fraudulent scores and bribes paid to an athletic department officer to increase the odds his son would be admitted to USC. A TPG spokesman said about the allegations, “As a result of the charges of personal misconduct against Bill McGlashan, we have placed Mr. McGlashan on indefinite administrative leave effective immediately. Jim Coulter, Co-CEO of TPG, will be the interim managing partner of TPG Growth and The Rise Fund. Mr. Coulter will, in partnership with the organization’s executive team, lead all investment work for both going forward.”

The story is developing and we expect more details as the story unfurls. However, it’s clear that prosecutors aren’t cowed by the potential star power involved. U.S. Attorney Andrew Lelling said about the charges, “There will not be a separate admissions system for the wealthy, and there will not be a separate criminal justice system either.”

I’ve been trying to plan a quick bite with a friend for a few weeks now. The snafu? My kids, who live in Pennsylvania, started school last week while her kids, who live in New Jersey, won’t begin until the end of this week. Coordinating anything this close to back-to-school is necessarily complicated. Sports practices and back to school nights on my end are dovetailed in between back-to-school shopping and last gasps of summer on her end. It’s a dance that many parents engage in around this time of year. And while some school start dates are a little earlier in summer and some a little later, most use a single weekend as the divider: Labor Day.

In years past, school open and closing dates have varied depending on whether the school was located in a hot or cool climate, or an urban versus rural state. In urban areas, schools could run year-round, while in rural areas, schools traditionally opened after Labor Day and closed in mid-spring; the latter schedule allowed farms to operate on schedule without the need to pull kids out of school. As our country has become less agrarian, calendars across the country have shifted, but the reason likely still comes down to economics.

In many states, including Maryland, Michigan, Minnesota, Ohio, and Virginia, state and local school districts have rules in place to make summer to last a little longer. In Maryland, for example, state law requires all Maryland kindergarten through grade 12 public schools to open “no earlier than the Tuesday immediately following the nationally observed Labor Day holiday” (order opens as a PDF).

Legislatures and school boards can be cagey about the reasoning behind school schedules, often citing student engagement and family values. But in some states, like Virginia, they’re rather transparent: the 1986 law that requires schools to seek a waiver to open before Labor Day is referred to as the Kings Dominion law. Kings Dominion is a large amusement park located between Richmond and Washington, D.C., that’s been a fixture in the state since the 1970s. It’s a favorite summer spot for families (even this North Carolina girl went as a baby) so it’s not surprising that, as a symbol of tourism and the hospitality industry, it would be associated with a law intended to boost vacation spending at the end of summer.

Repeated challenges to the law in Virginia have failed. In 2014, a push to change the law faced clear opposition from then-Governor Terry McAuliffe who indicated he would not be inclined to support a change, saying, “I’m very concerned about the tourism issue.” An effort to change the law earlier this year ended by kicking the can down the road: they’ll take it up again next year.

In Maryland, legislative efforts to change school calendars have been mixed. Maryland’s Comptroller, Peter Franchot, had encouraged state residents to support a post-Labor Day start date, noting it would bring an extra $7.7 million in additional tax revenue. In 2016, Governor Larry Hogan issued an executive order delaying the start of school until after Labor Day. His spokesperson said, in response to criticisms, “The order doesn’t change the number of days students are in class.” Nonetheless, a bill which would allow schools to extend the school year by five days without a waiver passed earlier this year but the new law does not affect the start date.

Katie Hellebush, the director of government relations for the Virginia Hospitality and Travel Association (VHTA) in 2012, also justified efforts to start school after Labor Day, saying, “We have conducted studies, and we do anticipate that there would be a significant loss in terms of $369 million, which would include more than $104 million in wages and benefits lost.” That loss of revenue includes not tourist dollars, but dollars (and tax dollars) targeted to teen jobs. Hellebush noted that while tourist dollars suffer with an earlier school start date, education test scores did not decline with a later school start date.

Michigan also touts tourism as the reason for a later start date. In 2012, the Michigan Lodging and Tourism Association (MLTA) reported that tourism dollars have increased each year since a new school start date policy took effect in 2006. Nonetheless, a record number of schools requested waivers to start early in 2017.

In Minnesota, a University of Minnesota Tourism Center study found a pre-Labor Day school start date decreases the chances by 50% that families will take a trip in August or September. And at the State Fair – which runs late August through Labor Day – officials expect a drop in attendance if more schools start in August. Dan McElroy, President & CEO at Hospitality Minnesota, echoed the call in 2013 to keep start dates late, saying, “It is highly disruptive to the economy to go away from that tradition.”

In my state of Pennsylvania, a 2006 push to make school start dates later failed. In a state heavily dependent on travel and tourism (it generates more than $40 billion each year and supports nearly half a million jobs), a later school start date should equal more revenue. A 2013 study found that Pennsylvania would benefit by $378 million in direct net revenue from moving the school start date to after Labor Day.

But would the move be worth it? States that bank on tourist dollars and related tax revenues say yes. In Pennsylvania, the state’s travel and tourism industry generated an estimated $4.4 billion in state and local taxes and $4.5 billion in federal taxes in 2015 (report downloads as a pdf). Those tax dollars are used to fund education and other programs that benefit families. Cutting short the opportunity for more tourism, the argument goes, means fewer tourist dollars and therefore, fewer tax dollars.

However, educators argue that a shorter school year is bad for students and encourages the so-called “summer slide” when some students show a drop in achievement after the summer break. Not everyone is convinced that it makes a difference. A study conducted by Johns Hopkins sociology professor Karl Alexander suggests that low-income students suffer the most in summer but “simply keeping students in school longer is not the key.”

Educators argue that moving the school start date up would boost test scores and student achievement. But at least one district that made the move to a later start date didn’t find that to be the case. In 2013, Minneapolis Public Schools moved its start date to the week before Labor Day, hoping it would have a positive impact on student achievement, but the district was not able to make a direct correlation between the two. Today, Minnesota’s school calendar law assumes that most regular public schools will not begin classes until after Labor Day. Opponents of a later start date note that the overall number of instructional days for the year doesn’t change by pushing the date forward: It simply extends the date for the last day of school. That’s true for my friend in New Jersey. While my kids hope to be out on June 7 (depending on which almanac gets the snow forecast correct this year), her kids have a June 22 stop date.

Some fear that starting school earlier might be a trend towards eating up summer altogether. “Summer creep” is a concern in some families, especially those that depend on seasonal work and summer business to boost household income. And for some families, summer is the only narrow window in which to schedule a vacation (Americans already tend to leave vacations time on the table). Maryland’s Franchot hinted at such, saying, “My major concern is the quality of interaction between families and their kids, which is jeopardized by this creep of starting school earlier and earlier. If we keep going in that direction, it will be July when we start school.” Nancy Marscheider, the executive director of the Virginia Beach Hotel-Motel Association and a mother of two, agrees, saying, “Besides the very real negative economic impact that starting schools before Labor Day would have on our industry, as a parent of two children enrolled in the Virginia Beach school system, I definitely would not like to see their summer cut short.”

So which strategy is best? Are the increased tax dollars worth a delayed start to the school year? Should the end summer last a little longer? The underlying issues may be up for debate, but the question is settled for now, practically speaking: By this time tomorrow, most public school children in the U.S. will be back in school.

As students from elementary age to grad level across the country head back to school this month, parents are grappling with how to pay tuition, buy school supplies, and fit in all of those extracurricular activities. It can be difficult to sort it all out, and in an era where everyone seems to have an opinion about school (and paying for it), it can be even more difficult to separate fact from fiction. In my Back To School Myths series, I’ll help you sort out truths from myths when it comes to school and taxes.

Today’s myth: Federal tax breaks exist for homeschooling.

Homeschooling expenses are not deductible. Like most myths, this one has some roots in reality. There is a tax break available for teachers and other educators on the federal income tax return.

Like the student loan interest deduction, the educator expenses deduction is an “above-the-line” deduction, which means that you can take the deduction even if you don’t itemize. And also like the student loan interest deduction, the educator expenses deduction came under fire as part of the tax reform bill. Specifically, the House proposal would have nixed the deduction, but under the Senate proposal, the deduction would not only have stuck around but doubled to $500. In the final version of the Tax Cuts and Jobs Act of 2017 (TCJA), the deduction for educator expenses remained as is.

Here’s how the educator expenses deduction works. Even if you don’t itemize (and also if you do), you can claim up to $250 for expenses for books, supplies, computer equipment, other equipment and supplementary materials used in the classroom if you are an “eligible educator.” And that’s where this gets tricky for homeschoolers.

The definition of an eligible educator for the purpose of the deduction is found at 26 USC §62(d)(1)(A) which says, “For purposes of subsection (a)(2)(D), the term ‘eligible educator’ means, with respect to any taxable year, an individual who is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in a school for at least 900 hours during a school year.”

The definition of school is detailed at 26 USC §62(d)(1)(B), which defines a school as “any school which provides elementary education or secondary education (kindergarten through grade 12), as determined under State law.”
In some states, such as Texas, homeschools are considered private schools by case law and statute. That analysis is enough for some taxpayers to conclude that a homeschooling expense should qualify for the deduction.

Only not so fast. The authority for statutory adjustments to income (the technical name for above-the-line deductions) is found a little bit earlier in the statute at 26 USC §62(a)(2) titled “Certain trade and business deductions of employees.” That’s because the deduction was intended to reimburse paid employees for out-of-pocket expenses, not as a catchall for educators.

All of that statutory interpretation notwithstanding, the IRS also offers a hard “no” at Publication 17, which states: Qualified expenses do not include expenses for homeschooling.

So if you can’t take advantage of the educator expense deduction, is there another tax break (as with school uniforms)? Unfortunately, no. Under the Senate TCJA proposal, the definition of qualified expenses under 529 plans would have been expanded to include elementary and secondary schools, as well as homeschool students. The conference bill reflected that change. But remember when the bill got sent back? After the House and Senate voted, the bill was sent back to the House for a second vote because of procedural issues in the bill. In the final version, the provision as it applies to homeschool students was removed (it’s worth noting that some prominent homeschool proponents expressed relief that the definition was not expanded, fearing that could lead to more government oversight of homeschools).

Coverdell Savings Accounts were not affected by the TCJA and still do not allow distributions for homeschool expenses.

So, that leaves us back where we were in the beginning: There are no federal income tax breaks for homeschool parents. Homeschool parents may not claim the educator expense deduction, nor can tax-favored funds from a 529 plan be used to pay expenses for homeschool students. However, there may be breaks available at the state level. Check with your tax professional to find out more about the rules in your state.

As students from elementary age to grad level across the country head back to school this month, parents are grappling with how to pay tuition, buy school supplies, and fit in all of those extracurricular activities. It can be difficult to sort it all out, and in an era where everyone seems to have an opinion about school (and paying for it), it can be even more difficult to separate fact from fiction. In my Back To School Myths series, I’ll help you sort out truths from myths when it comes to school and taxes.

Today’s myth: School uniforms are deductible.

School uniforms are not deductible.
 The Internal Revenue Service (IRS) does not allow a deduction for school uniforms for public, parochial or private schools. It does not matter if uniforms are required. It does not matter if they are expensive. And it does not matter if the uniforms are so atrocious that your child would never, ever wear them outside of school.

If you are a student at a military school, uniforms are still not deductible – that’s consistent with the rules for public, parochial and private schools. However, you used to be able to deduct the cost of articles not replacing regular clothing, including insignia, shoulder boards, epaulets, and related items. Relatedly, civilian faculty or staff members of a military school used to be able to deduct the cost of uniforms not intended to be worn outside of the classroom as an unreimbursed job expense. Those deductions were previously available to taxpayers who itemized on Schedule A at line 21. However, unreimbursed job expenses – that’s what is reported on line 21 – were eliminated as part of the Tax Cuts and Jobs Act of 2017 (TCJA).

While the IRS won’t allow a tax break for school uniforms, that’s not the case in every state. At least one state, Louisiana, allows a deduction for the cost of school uniforms required by the school for general day-to-day use. Check with your tax professional to find out more about the rules in your state.

That said, even if you can’t deduct the cost of school uniforms, you may still be able to catch a tax break. Funds in a Coverdell Educational Savings Account (ESA) may be used to pay for school uniforms if the uniforms are required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. With a Coverdell ESA, money grows tax-free inside the plan until you take it out to pay qualified education expenses, including uniforms, for a designated beneficiary. There’s no limit on the number of folks who can make contributions on behalf of a beneficiary, but the total contributions for any beneficiary cannot exceed $2,000 in one year (income restrictions apply). Contributions aren’t deductible for federal purposes, but some states may allow you to deduct contributions for state tax purposes.

Bottom line: School uniforms aren’t deductible for federal income tax purposes – but there still may be tax advantageous ways to pay for them. To find out more, ask your tax professional or financial advisor.