Cypen & Cypen
October 6, 2016
Stephen H. Cypen, Esq., Editor
1. COMPLIANCE WITH CHAPTERS 175/185 AND PART VII OF CHAPTER 112, FLORIDA STATUES: The Florida Division of Retirement, Bureau of Local Retirement Systems has issued a memorandum dated October 3, 2016 addressed to Board of Trustee Members, Plan Actuaries, Plan Administrators and Other Interested Parties regarding the Electronic Reporting Portal. The Division of Retirement has received many requests from stakeholders regarding the ability to submit the required reports and disclosures under Chapters 175 and 185 and Part VII of Chapter 112, Florida Statutes, to the division electronically. In 2013, the Florida Legislature enacted Senate Bill 534 (SB 534), requiring electronic submission of additional actuarial disclosures for Florida's local government defined benefit pension plans, and provided the necessary funding for the division to prepare an electronic reporting portal through which these disclosures were to be submitted. This change afforded the division the opportunity to request the funding necessary to implement an electronic reporting mechanism for all local government reporting to the Bureau of Local Retirement Systems, and that request was approved by the Legislature. The division has been working over the past year to complete this project and will be implementing the system toward the end of 2016. For Part VII of Chapter 112, Florida Statutes, the online process will allow plan actuaries to upload a file containing the key actuarial data elements in a specified format, similar to the reporting mechanism currently in place for SB 534 disclosures. Alternatively, plan actuaries may choose to enter the data manually into web forms or to utilize a combination of the two. For Chapter 175 and 185 plans, the annual reporting process will allow designated parties to fill out the report using an online form and upload files containing the plan's statistical data as an attachment. The report data will be carried over from one year to the next, making it easier to append and update new information from year to year rather than completing the whole report manually from scratch each year. The division will be providing a demonstration of the new annual reporting process for compliance with Chapters 175 and 185, Florida Statutes, at its 46thAnnual Municipal Police Officers' and Firefighters' Pension Trustees' Conference on November 2-4, 2016, at the Radisson Resort, Orlando Celebration. Instructions for creating an online account on the Division of Retirement's website and completing and submitting the required annual report and actuarial disclosures will be forthcoming. Please stay tuned for additional information and details.
2. INVESTMENT ADVISOR PERSONALLY LIABLE FOR EMPLOYEE PENSION FUND LOSSES: According to a piece published by the International Foundation of Employee Benefit Plans, an investment advisor for an employee pension plan is liable for $15 million in investment losses and interest for his delay in transferring funds to a more diversified plan, the 2nd U.S. Circuit Court of Appeals ruled. The Retirement Committee of Severstal Wheeling Inc. (SWI), a West Virginia subsidiary of Russian steelmaker OAO Severstal, retained WPN Corp. for investment advisory services in order to manage the assets of its two employee retirement plans. WPN's sole employee and chief officer is Ronald LaBow. Until late 2008, the Severstal plans were funded and maintained through a trust (the combined trust) sponsored by WHX Corp. WHX was a former affiliate of SWI that LaBow had previously managed as a nonexecutive chairman. In 2008, the custodial trustee of the combined trust, Citibank, decided to exit the trust business. By June 2008, Citibank informed WPN, LaBow and WHX that Citibank intended to withdraw as trustee of the combined trust and that the assets of the Severstal plans had to be transferred to a new and separate trust placed with a new trustee. LaBow told a prominent member of the SWI Retirement Committee that LaBow would continue to act as the Severstal plans' investment manager after the trust separation. WPN encountered difficulties in transferring the existing assets of the combined trust, which included many different investment accounts, into a new trust. LaBow originally stated that the assets could be converted to cash and thereafter transferred to a new trust (the Severstal trust), but later determined not to make a cash conversion. The combined trust contained a portfolio that included an account managed by Neuberger Berman LLC, composed of 13 large-capitalization equity securities, 11 of which were energy-sector stocks. These stocks comprised approximately 97% of the value of the assets in the account. Instead of converting the combined trust assets to cash, LaBow directed WHX's treasurer to transfer all of the assets maintained in the Neuberger Berman account from the combined trust to the Severstal trust. This large, undiversified portfolio was the only set of assets WPN successfully transferred to the Severstal trust. In March 2009, LaBow finally liquidated the Severstal plans' assets, but did not present the SWI Retirement Committee with any formal plan for investment of the plans' assets. In May 2009, LaBow proposed to invest the trust in a portfolio consisting entirely of mortgage-backed securities. Later that month, the SWI Retirement Committee decided to change its investment advisor to Mercer Investment Consultants, which proposed and implemented a diversified investment allocation of 50% equity securities, 45% bonds and 5% in cash. Thereafter, the SWI Retirement Committee, its members and the Severstal plans brought suit against WPN and LaBow, claiming that the advisors violated the Employee Retirement Income Security Act by failing to prudently and loyally manage and diversify the plans' assets and advise the plans' fiduciaries. They also alleged that WPN and LaBow breached their contract with the Severstal plans by failing to obtain fiduciary insurance that would cover ERISA claims of breach of fiduciary duty. WPN and LaBow argued at trial that they did not exercise full control over the plans' assets or assume fiduciary duties regarding those assets, and thus could not transfer or manage the assets without the SWI Retirement Committee's approval. This was contradicted by WPN's contract with WHX and the Severstal Investment Management Agreement, which gave WPN and LaBow complete control over the combined trust and plans' assets and acknowledged that WPN was an ERISA fiduciary. The district court found WPN and LaBow responsible for the investment losses in the amount of the difference between what a diversified portfolio holding the plans' assets would have earned and what they were actually worth because of WPN's and LaBow's actions. This difference was $9.7 million and interest on the amount was $5.3 million. The court also ordered WPN and LaBow to pay back their management fees of $110,438. Severstal Wheeling Inc. Retirement Committee v. WPN Corp., Case No. 15-2725-CV (2nd Cir., Aug. 30, 2016).
3. WILL PENSIONS AND OPEBS BREAK STATE AND LOCAL BUDGETS?: The Center for Retirement Research at Boston College has issued a brief entitled “Will Pensions And OPEBS Break State And Local Budgets?” The costs of state pension plans are much in the news. Generally, people lump together these unfunded liabilities and make alarming claims that all state plans are about to go bankrupt. The evidence, though, suggests otherwise. On the other hand, looking just at pension plans and just at states does not give the full picture of costs facing states and localities. The brief, based on a recent paper, provides a comprehensive accounting of state and local government liabilities for pensions and other post-employment benefits and the fiscal burden that they pose. In accordance with new accounting guidelines, the analysis apportions the relevant liabilities of state-administered cost-sharing plans to local governments for a more accurate picture of where the burden lies. It also includes debt service costs to provide a full picture of government revenue commitments to long-term liabilities. To gauge the level of the burden, pension, OPEB, and debt service costs are compared to each jurisdiction’s own-source revenue. The discussion proceeds as follows. The first section describes the scope of the analysis. The second section explains the methodology used for calculating the costs and choosing the revenue base. The third section presents the results for states, counties, and cities. The final section concludes that the outlook at the state and local level is extremely heterogeneous; a small minority face dire circumstances, but many jurisdictions appear to have their costs under control. To read the entire informative piece visit: http://crr.bc.edu/wp-content/uploads/2016/10/slp_51.pdf.
4. JOINT RELEASE -- POST PUBLIC SECTIONS OF "TARGETED SUBMISSIONS" FOR EIGHT FIRMS: The Federal Reserve Board and the Federal Deposit Insurance Corporation posted the public portions of the required 'targeted submissions' for the eight systemically important, domestic banking institutions. To foster transparency, the agencies required all of the firms to file a public portion of their targeted submissions. In April, 2016, the agencies jointly determined that each of the 2015 resolution plans of Bank of America, Bank of New York Mellon, JPMorgan Chase, State Street, and Wells Fargo was not credible or would not facilitate an orderly resolution under the U.S. Bankruptcy Code, the standard established in the Dodd-Frank Wall Street Reform and Consumer Protection Act. As such, the agencies issued joint letters to these firms detailing the deficiencies in their plans and the actions the firms must take to address them. The agencies required these five firms to remediate their deficiencies by October 1, 2016, and file a targeted submission to the agencies detailing the remediation. If a firm has not remediated the identified deficiencies, it may be subject to more stringent prudential requirements. The agencies jointly identified weaknesses in the 2015 resolution plans of Goldman Sachs, Morgan Stanley, and Citigroup that the firms must address in their 2017 plans. These firms were also required to file a targeted submission by October 1, 2016, detailing the efforts taken to improve their weaknesses. The Dodd-Frank Act requires bank holding companies with total consolidated assets of $50 billion or more and nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Federal Reserve to periodically submit resolution plans to the Federal Reserve and FDIC. Each plan must describe the company's strategy for rapid and orderly resolution under the U.S. Bankruptcy Code in the event of material financial distress or failure of the company. Under the authority granted to the agencies in Section 165(d), if any of the five firms that received a joint notice of deficiencies did not adequately remediate those deficiencies, the agencies, acting jointly, may impose more stringent prudential requirements on the firm until it remediates them. The prudential requirements may include more stringent capital, leverage, or liquidity requirements, as well as restrictions on growth, activities, or operations of the firm, or its subsidiaries. If, following a two-year period beginning on the date of the imposition of such requirements, a firm still has failed to adequately remediate any deficiencies, the agencies, in consultation with the FSOC, may jointly require the firm to divest certain assets or operations to facilitate an orderly resolution of the firm in bankruptcy. The agencies are posting the public portions of the targeted submissions, as provided by the firms, on the FDIC and Board websites. Neither the confidential nor the public portions of the resolution plans have yet been reviewed by the agencies, which will now be initiating their process for review. FDIC: PR-86-2016 (October 4, 2016).
5. FUNDAMENTALS OF INTERNAL REVENUE CODE SECTION 415(B): An informative piece prepared by GRS Consulting, Inc., says Internal Revenue Code, Section 415 places annual limits on benefits that may be paid from, and contributions that may be made to, retirement plans that are “qualified” under Code §401(a). Code§415(b) limits the amounts that can be paid from defined benefit plans, while §415(c) limits contributions that can be made to defined contribution plans. The limits are fairly large numbers. In 2016, the benefit limit for DB plans is $210,000 and the contribution limit for DC plans is $53,000. Final regulations governing §415 were issued on April 4, 2007. Compliance with §415(b) and the associated regulations is not as simple as limiting all retirement benefits under a DB plan to $210,000 per year. In fact, there are cases where §415(b) permits benefits to exceed that amount, and other cases where §415(b) might only permit half that amount to be paid. The limits are adjusted annually using the index that is used to adjust Social Security benefits. When they occur, adjustments to the §415(b) limit are made in $5,000 increments. To read the entire article visit: http://www.grsconsulting.com/wp-content/uploads/2016/09/GRS-Perspectives-IRC-415b-Final.pdf?utm_source=September2016PublicationsAlert&utm_campaign=Publications+Alert+September+2016&utm_medium=email.
6. SECOND CIRCUIT PROVIDES CLARITY ON KEY INVESTOR PROTECTIONS: The Second Circuit Court of Appeals handed down two decisions important to investor rights: In re Vivendi, S.A. Securities Litigation ("Vivendi") and GAMCO Investors, Inc. v. Vivendi Universal, S.A. ("GAMCO"). In Vivendi, the Second Circuit (i) clarified the requirements for proving "loss causation" in securities fraud cases and (ii) endorsed the "inflation-maintenance" theory of liability, under which defendants may be liable for false statements that maintain (but do not increase) the price of a company's stock. Meanwhile, in GAMCO, the Second Circuit made clear that the fraud-on-the-market theory may be rebutted in efficient-market cases where a security's price is inflated by fraud only in the extraordinary instance where plaintiff would have bought the security even if it had actual knowledge of the alleged fraud.
- In Vivendi, the Second Circuit rejected defendants' attempt to overturn a jury verdict finding that Vivendi violated the securities laws and awarding investors approximately $50 million. The Second Circuit in its affirmance joined the Seventh and Eleventh Circuits in holding that a defendant may be liable for a misstatement that maintains a security's artificially high price, even if the misstatement does not cause an increase in the price of the security. The Second Circuit's approval of this "inflation-maintenance" theory of liability is particularly critical to investor rights because securities frauds often involve repeated misstatements over a long period of time professing that a company has met market expectations when, in reality, it fell short.
In another important part of its decision, the Second Circuit rejected defendants' arguments that plaintiffs failed to prove "loss causation" - a legal doctrine that says a company's misrepresentations caused an investor loss - an essential element for claims under Section 10(b) of the Securities Exchange Act of 1934. The defendants argued that plaintiffs failed to show loss causation because news of Vivendi's liquidity problems and other financial struggles did not specifically mention or correct any of defendants' prior misstatements about the Company's liquidity. The Court disagreed, holding that plaintiffs adequately proved loss causation by showing that news about Vivendi's liquidity problems "revealed the truth about Vivendi's liquidity risk," even if defendants never admitted that their prior statements were untrue. In so holding, the Second Circuit reinforced the commonsense rule that violators of the securities laws are not allowed to escape liability merely by never admitting specifically to the falsity of their prior misstatements.
- GAMCO: Fraud-on-the-Market Presumption for a Security Whose Price Was Inflated by Fraud Can Only Be Rebutted by Proof That Investor Would Have Purchased the Security Even with Knowledge of the Alleged Fraud.
The Second Circuit this week also issued an opinion in GAMCO, an individual action based on the same fraud at issue in the Vivendi class action. In GAMCO, the Second Circuit confirmed that the fraud-on-the-market presumption (that investors can rely on the market price of the stock as reflecting all publicly available information about a company) is alive in individual actions, generally applies to value investors, and may only be rebutted in a case where fraud inflated a security's price by proof that the investor would have purchased the security even if the investor had known of the fraud. Although the Second Circuit affirmed the district court's finding that the presumption had been rebutted in that case, it did so on the narrow ground that it found no "clear error" by the district court. As the Court explained, there was unusually compelling evidence in that case that "GAMCO would have purchased Vivendi securities even had it known of Vivendi's alleged fraud." The Second Circuit reiterated that the presumption of reliance on a security price inflated by fraud is rebuttable only upon a strong showing of this kind, which is a very high hurdle for defendants to clear.
Thanks to Bernstein Litowitz Berger & Grossmann LLP for this piece.
7. ECONOMIC POLICY INSTITUTE REPORTS TEACHERS’ PAY GAP CONTINUES TO WIDEN: In August 2016, the Economic Policy Institutereleased its report, “The Teacher Pay Gap Is Wider Than Ever.” According to the report, public school teachers’ weekly wages were 17% lower than those of similar workers in 2015 as compared with 1.8% lower in 1994. Teachers’ total compensation (wages and benefits) was 11.1% lower than similar workers in 2015 as compared with 0.1% in 1994. The analysis is based on individual data from the Current Population Survey from the Bureau of Labor Statistics. The teachers studied were elementary, middle and secondary school teachers who are full-time workers between the ages of 18 and 64. Some of the key findings include:
- Public school teachers’ average weekly wages (inflation adjusted) have decreased $30 per week from $1,122 in 1996 to $1,092 in 2015.
- By comparison, the weekly wages of all college graduates increased from $1,292 in 1996 to $1,416 in 2015.
- For female teachers, the relative wage gap changed significantly. In 1960, they earned 14.7% more than similar female workers as compared with a decrease of 13.9% in 2015.
- For male teachers, the relative wage gap is much larger. In 1979, the wage gap was 22.1% and increased to 15.0% in the mid-1990s and fell to 24.5% in 2015.
- Some of the differences in the widening wage gaps may be attributed to a tradeoff between wages and benefits. In 2015, as a portion of total compensation, non-wage benefits were more important for teachers at 26.6% as compared with other professionals at 21.6%.
- For experienced teachers, the relative wage has steadily worsened from 1.9% in 1996 to a decrease of 17.8% in 2015.
- For unionized teachers, the relative wage gap was 6.0% and for non-unionized teachers was 25.5% in 2015.
The report concludes, “If the policy goal is to improve the quality of the entire teaching workforce, then raising the level of teacher compensation, including wages, is critical to recruiting and retaining higher-quality teachers. Policies that solely focus on changing the composition of current compensation (e.g., merit or pay-for-performance schemes) without actually increasing compensation levels are unlikely to be effective. Simply put, improving overall teacher quality requires correcting the teacher compensation disadvantage.”
8. SIX IN 10 MILLENNIALS WOULD SACRIFICE PAY FOR GUARANTEED RETIREMENT BENEFITS: Faced with mounting worries over their finances and retirement outlook, six-in-10 millennials say they are willing to sacrifice pay for more secure retirement benefits. At the same time, however, their appetite for forgoing some of their pay for reduced or more predictable health benefit costs has decreased over the last few years, according to research by Willis Towers Watson. The Global Benefits Attitudes Survey found the number of millennials willing to pay a higher amount for a guaranteed retirement benefit has increased from 42% in 2009 to 59% this year. Two-thirds of boomers (66%) would also be willing to sacrifice pay for more secure retirement benefits, versus half in 2009. However, only a third of millennials (32%) and boomers (34%) said they are willing to pay a higher amount for lower or more predictable health costs, a decline from 43% and 45%, respectively, in 2009. “Employees of all generations, including millennials, are feeling vulnerable about their long-term security,” said Steve Nyce, senior economist at Willis Towers Watson. “Employees young and old actually have a strong desire for more retirement security and are willing to give up pay to get more guarantees or a larger retirement benefit. Interestingly, employees seem to be saying they have enough health coverage now and are reluctant to pay more.” The survey also highlights the importance of core health care and retirement benefits to millennials. When asked how they would spend money if their employer provided them with an allowance to spend on a variety of benefits, millennials said they would allocate more than half to health care and retirement plan benefits (27% each). Additionally, almost half of millennials (48%) ranked pay and bonus over all other benefits if given a choice, a clear indication of their financial issues and need for more financial flexibility today. Millennials are also much more likely to embrace nontraditional benefits and work/life balance than boomers. Nearly one-third of millennials (32%) ranked more paid time off, greater opportunities for flexible work arrangements and career advancement, and options to purchase a wider variety of benefits as a top priority. That is more than double the percentage of boomers who want these benefits. “Millennials, because of their financial situation, are concerned over how to help make ends meet,” said a senior consultant at Willis Towers Watson. “But millennials also recognize they have long-term financial risks as well, and many agree with having their employer play an active role in encouraging them to better manage their finances. For employers, this is a good opportunity to help their employees make smart financial decisions at pivotal moments through the use of unbiased and personalized budgeting and projection tools.”
9. PUBLIC PENSION FUND ASSETS CLIMB 1.4% IN SECOND QUARTER: The 100 largest U.S. public employee retirement systems had $3.305 trillion in assets as of June 30, a 1.4% increase from three months earlier, said the U.S. Census Bureau's latest quarterly survey of public pension funds. Compared to the same quarter in 2015, assets were down 2%. Earnings on investments gained $65.5 billion in the second quarter. Corporate stocks, which make up 37.2% of the pension funds' holdings, increased 2% from the previous quarter and 1.4% year-over-year. Corporate bonds, which make up 13% of holdings, had a quarterly increase of 0.67% and a year-over-year increase of 6.1%. International securities, which make up 18.7% of holdings, rose 1.1% in the first quarter but were down 3.7% year-over-year. Other holdings were federal government securities, at 7.7%; state/local government securities at 0.1%; mortgages at 0.2%; cash and short term investments at 3.4%; and other securities, at 19.4%. Government contributions increased 6.6% in the second quarter, reaching $30.4 billion. Employee contributions increased 4.5% for the quarter, to $11.7 billion. The 100 public pension systems represent 88.4% of all U.S. public pension fund assets.
10. MIAMI BEACH POLICE SWITCHING TO BEAN BAG SHOTGUNS:The Miami Beach Police will be switching from lethal shotgun loads to less-lethal “bean bag” rounds, replacing up to 140 patrol shotguns in the process according to leoaffairs.com. The switch is part of an effort to maintain the trust and precarious relationship with the citizenry, as well as allow officer a chance to incapacitate a potentially dangerous or unruly suspect before resorting to lethal force. “We have an obligation to be constantly looking for different options to move the organization forward and reduce the potential of inadvertently harming somebody,” Chief Dan Oates said. The new shotguns will come with a six-week training program to get officers up to speed and their specialty ammunition will allow officers to have a standoff range of up to 70 feet- far beyond the 12 feet of range offered by Tasers. “It creates greater space and distance for the office, and is another compassionate way to take someone into custody without having to use deadly force or expose the officer to that kind of grave danger,” Oates told NBC Miami. While most less-than lethal shotgun ammunition can generally be used in any shotgun that can take a standard shell size, many departments opt for brightly-colored shotguns to differentiate between ammunition usage.
11. IRS REMINDS EXTENSION FILERS OF THE OCTOBER 17, 2016 DEADLINE: Millions of taxpayers ask for an extra six months to file their taxes every year. If you are one of them, then you should know that Monday, October 17 is the extension deadline in 2016. This is so because October 15 falls on a Saturday. If you have not yet filed, here are some things to keep in mind about the extension deadline and your taxes:
- Try IRS Free File or e-file. You can still e-file your tax return for free through IRS Free File. The program is available only on IRS.gov through October 17. IRS e-file is easy, safe and the most accurate way to file your taxes.
- Use Direct Deposit. If you are due a refund, the fastest way to get it is to combine direct deposit and e-file. Direct deposit has a proven track record; eight out of 10 taxpayers who get a refund choose it.
- Use IRS Online Payment Options. If you owe taxes, the best way to pay them is with IRS Direct Pay. It’s the simple, quick and free way to pay from your checking or savings account. You also have other online payment options. Check them out by clicking on the “Payments” tab on the IRS.gov home page.
- Refunds. As you prepare to file your 2015 return, keep in mind next year’s taxes. IRS is urging taxpayers to check their tax withholding as the year winds down. New factors may delay tax refunds in 2017. For more on what you can do now, see our August 31 news release.
- Do not Overlook Tax Benefits. Be sure to claim all the tax breaks you are entitled to. These may include the Earned Income Tax Credit and the Saver’s Credit. The American Opportunity Tax Credit can help offset college costs.
- Keep a Copy of Your Return. Be sure to keep a copy of your tax return and supporting documents for at least three years. Among other things, this will make filing next year’s return easier. When you e-file your 2016 return, for example, you will often need the adjusted gross income (AGI) amount from your 2015 return.
- File On Time. If you owe taxes, file on time to avoid a potential late filing penalty. If you owe and cannot pay all of your taxes, pay as much as you can to reduce interest and penalties for late payment. You might also consider an installment agreement where you can pay over time.
- More Time for the Military. Military members and those serving in a combat zone generally get more time to file. If this applies to you, you typically have until at least 180 days after you leave the combat zone to both file returns and pay any taxes due.
- More Time in Disaster Areas. If you have an extension and live or work in a disaster area, you often have more time to file. Currently, taxpayers in parts of Louisiana and West Virginia have additional extensions beyond October 17. See the disaster relief page on IRS.gov for details.
- Try Easy-to-Use Tools on IRS.gov. Use the EITC Assistant to see if you are eligible for the credit. Use the Interactive Tax Assistant tool to get answers to common tax questions. The IRS Tax Map gives you a single point to get tax law information by subject. Find them all on IRS.gov.
12. AGGREGATE FUNDED RATIO OF U.S. CORPORATE PENSION PLANS INCREASED NEARLY ONE PERCENT IN SEPTEMBER: The aggregate funded ratio for U.S. corporate pension plans increased by 0.9 percentage points to end the month of September at 76.9%, narrowing its year-to-date decline to 4.5 percentage points, according to Wilshire Consulting. The monthly change in funding resulted from a 1.6% drop in liability values that outpaced a 0.3% decrease in asset values. This narrowed the year-to-date decline in funding ratios, which is the result of a 12% increase in liability values. “Asset values fell modestly in September due to benefit payments and flat overall asset returns during the month,” stated Ned McGuire, vice president and a member of the Pension Risk Solutions Group of Wilshire Consulting. “The Wilshire 5000 Total Market Index SM was relatively flat, gaining just 0.1%during the month, while rising corporate bond yields pushed liability values lower for the second consecutive month.
13. REMINDER FOR PARENTS AND STUDENTS: CHECK OUT COLLEGE TAX CREDITS FOR 2016 AND YEARS AHEAD: With another school year now in full swing, the Internal Revenue Service reminds parents and students that now is a good time to see if they qualify for either of two college tax credits or other education-related tax benefits when they file their 2016 federal income tax returns next year. In general, the American Opportunity Tax Credit or Lifetime Learning Credit is available to taxpayers who pay qualifying expenses for an eligible student. Eligible students include the taxpayer, spouse and dependents. The American Opportunity Tax Credit provides a credit for each eligible student, while the Lifetime Learning Credit provides a maximum credit per tax return. Though a taxpayer often qualifies for both of these credits, he or she can only claim one of them for a particular student in a particular year. To claim these credits on their tax return, the taxpayer must file Form 1040 or 1040A and complete Form 8863, Education Credits. The credits apply to eligible students enrolled in an eligible college, university or vocational school, including both nonprofit and for-profit institutions. The credits are subject to income limits that could reduce the amount taxpayers can claim on their tax return. To help determine eligibility for these benefits, taxpayers should visit the Education Credits Web page or use the IRS’s Interactive Tax Assistant tool. Both are available on IRS.gov. Normally, a student will receive a Form 1098-T from their institution by January 31, 2017. This form will show information about tuition paid or billed along with other information. However, amounts shown on this form may differ from amounts taxpayers are eligible to claim for these tax credits. Taxpayers should see the instructions to Form 8863 and Publication 970 for details on properly figuring allowable tax benefits. Many of those eligible for the American Opportunity Tax Credit qualify for the maximum annual credit of $2,500 per student. Students can claim this credit for qualified education expenses paid during the entire tax year for a certain number of years:
- The credit is only available for four tax years per eligible student.
- The credit is available only if the student has not completed the first four years of postsecondary education before 2016.
Here are some more key features of the credit:
- Qualified education expenses are amounts paid for tuition, fees and other related expenses for an eligible student. Other expenses, such as room and board, are not qualified expenses.
- The credit equals 100% of the first $2,000 spent and 25% of the next $2,000. That means the full $2,500 credit may be available to a taxpayer who pays $4,000 or more in qualified expenses for an eligible student.
- Forty percent of the American Opportunity Tax Credit is refundable. This means that even people who owe no tax can get a payment of up to $1,000 for each eligible student.
- The full credit can only be claimed by taxpayers whose modified adjusted gross income is $80,000 or less. For married couples filing a joint return, the limit is $160,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $180,000 or more and singles, heads of household and some widows and widowers whose MAGI is $90,000 or more.
The Lifetime Learning Credit of up to $2,000 per tax return is available for both graduate and undergraduate students. Unlike the American Opportunity Tax Credit, the limit on the Lifetime Learning Credit applies to each tax return, rather than to each student. Also, the Lifetime Learning Credit does not provide a benefit to people who owe no tax. Though the half-time student requirement does not apply to the lifetime learning credit, the course of study must be either part of a post-secondary degree program or taken by the student to maintain or improve job skills. Other features of the credit include:
- Tuition and fees required for enrollment or attendance qualify as do other fees required for the course. Additional expenses do not.
- The credit equals 20% of the amount spent on eligible expenses across all students on the return. That means the full $2,000 credit is only available to a taxpayer who pays $10,000 or more in qualifying tuition and fees and has sufficient tax liability.
- Income limits are lower than under the American Opportunity Tax Credit. For 2016, the full credit can be claimed by taxpayers whose MAGI is $55,000 or less. For married couples filing a joint return, the limit is $111,000. The credit is phased out for taxpayers with incomes above these levels. No credit can be claimed by joint filers whose MAGI is $131,000 or more and singles, heads of household and some widows and widowers whose MAGI is $65,000 or more.
- Eligible parents and students can get the benefit of these credits during the year by having less tax taken out of their paychecks. They can do this by filling out a new Form W-4 with their employer to claim additional withholding allowances. There are a variety of other education-related tax benefits that can help many taxpayers. They include:
- Scholarship and fellowship grants -- generally tax-free if used to pay for tuition, required enrollment fees, books and other course materials, but taxable if used for room, board, research, travel or other expenses.
- Tuition and fees deduction claimed on Form 8917-- for some, a worthwhile alternative to the American Opportunity Tax Credit or Lifetime Learning Credit.
- Student loan interest deduction of up to $2,500 per year.
- Savings bonds used to pay for college -- though income limits apply, interest is usually tax-free if bonds were purchased after 1989 by a taxpayer who, at time of purchase, was at least 24 years old.
- Qualified tuition programs, also called 529 plans, used by many families to prepay or save for a child’s college education.
Taxpayers with qualifying children who are students up to age 24 may be able to claim a dependent exemption and the Earned Income Tax Credit. The general comparison table in Publication 970 is a useful guide to taxpayers in determining eligibility for these benefits. Details can also be found in the Tax Benefits for Education Information Center on IRS.gov.
14. 46TH ANNUAL POLICE OFFICERS' AND FIREFIGHTERS' PENSION TRUSTEES' SCHOOL: The 46th Annual Police Officers' & Firefighters' Pension Trustees' School will take place November 2 through 4, 2016. You may access information and updates about the Conference, including area maps, a copy of the program when completed and links to register at the Radisson Resort, Celebration, (Orlando) Florida Please continue to check the FRS website for updates regarding the program at www.myflorida.com/frs/mpf. All police officer and firefighter plan participants, board of trustee members, plan sponsors and anyone interested in the administration and operation of the Chapters 175 and 185 pension plans should take advantage of this unique, insightful and informative program.
15. SIGNS TO GET YOU THROUGH THE DAY: Does seven days without meat make one week?
16. PARAPROSDOKIAN: Change is inevitable, except from a vending machine.
17. TODAY IN HISTORY: In 1945, tavern owner "Billy Goat" Sianis buys seat for his goat for Game 4 of 1945 World Series and is escorted out, he casts goat curse on Cubs.
18. KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items. Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources.
19. PLEASE SHARE OUR NEWSLETTER: Our newsletter readership is not limited to the number of people who choose to enter a free subscription. Many pension board administrators provide hard copies in their meeting agenda. Other administrators forward the newsletter electronically to trustees. In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at http://www.cypen.com/subscribe.htm.
20. REMEMBER, YOU CAN NEVER OUTLIVE YOUR DEFINED RETIREMENT BENEFIT.
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