Tuesday, September 20th, 2016
Section 529 plans provide a tax-advantaged way to help pay for college expenses. Here are just a few of the benefits:
- Although contributions aren’t deductible for federal purposes, plan assets can grow tax-deferred.
- Some states offer tax incentives for contributing in the form of deductions or credits.
- The plans usually offer high contribution limits, and there are no income limits for contributing.
Prepaid tuition plans
With this type of 529 plan, if your contract is for four years of tuition, tuition is guaranteed regardless of its cost at the time the beneficiary actually attends the school. This can provide substantial savings if you invest when the child is still very young.
One downside is that there’s uncertainty in how benefits will be applied if the beneficiary attends a different school. Another is that the plan doesn’t cover costs other than tuition, such as room and board.
This type of 529 plan can be used to pay a student’s expenses at most postsecondary educational institutions. Distributions used to pay qualified expenses (such as tuition, mandatory fees, books, supplies, computer equipment, software, Internet service and, generally, room and board) are income-tax-free for federal purposes and typically for state purposes as well, thus making the tax deferral a permanent savings.
The biggest downside may be that you don’t have direct control over investment decisions; you’re limited to the options the plan offers. Additionally, for funds already in the plan, you can make changes to your investment options only twice during the year or when you change beneficiaries.
But each time you make a new contribution to a 529 savings plan, you can select a different option for that contribution, regardless of how many times you contribute throughout the year. And every 12 months you can make a tax-free rollover to a different 529 plan for the same child.
As you can see, each 529 plan type has its pluses and minuses. Whether a prepaid tuition plan or a savings plan is better depends on your situation and goals. If you’d like help choosing, please contact us.
Tuesday, September 13th, 2016
Income tax generally applies to all forms of income, including cancellation-of-debt (COD) income. Think of it this way: If a creditor forgives a debt, you avoid the expense of making the payments, which increases your net income.
Fortunately, since 2007, homeowners have been allowed to exclude from their taxable income up to $2 million in cancellation-of-debt (COD) income ($1 million for married taxpayers filing separately) in connection with qualified principal residence indebtedness (QPRI). The exclusion had been available only for debts forgiven through 2014, but last year Congress extended it. Now, however, that new expiration date — Dec. 31, 2016 — is rapidly approaching.
Ins and outs
Debt forgiveness is only one of the ways to generate COD income in relation to QPRI. You also can have COD income if a creditor reduces your interest rate or gives you more time to pay. Calculating the amount of income can be complex, but essentially, by making it easier for you to repay the debt, the creditor confers a taxable economic benefit. You can also have COD income in connection with a mortgage foreclosure, including a short sale or deed in lieu of foreclosure.
QPRI means debt used to buy, construct or substantially improve your principal residence, and it extends to the refinance of such debt. Relief isn’t available for a second home, nor is it available for a home equity loan or cash-out refinancing to the extent the proceeds are used for purposes other than home improvement (such as paying off credit cards).
Pluses vs. minuses
If you exclude COD income under this provision and continue to own your home, you must reduce your tax basis in the home by the amount of the exclusion. This may increase your taxable gains when you sell the home.
Nevertheless, the exclusion likely will be beneficial because COD income is taxed at ordinary-income rates, rather than the lower long-term capital gains rates. Plus, it’s generally better to defer tax when possible.
If you’re considering a mortgage foreclosure or restructuring in relation to your home, you may want to act before year end to take advantage of the COD income exclusion in case lawmakers don’t extend it again.
Saturday, September 10th, 2016
Congratulations to Kellan Shuford for passing all the CPA exams!
Tuesday, September 6th, 2016
If you invest, whether you’re considered an investor or a trader can have a significant impact on your tax bill. Do you know the difference?
Most people who trade stocks are classified as investors for tax purposes. This means any net gains are treated as capital gains rather than ordinary income.
That’s good if your net gains are long-term (that is, you’ve held the investment more than a year) because you can enjoy the lower long-term capital gains rate. However, any investment-related expenses (such as margin interest, stock tracking software, etc.) are deductible only if you itemize and, in some cases, only if the total of the expenses exceeds 2% of your adjusted gross income.
Traders have it better in some situations. Their expenses reduce gross income even if they can’t itemize deductions and not just for regular tax purposes, but also for alternative minimum tax purposes.
Plus, in certain circumstances, if traders have a net loss for the year, they can claim it as an ordinary loss (so it can offset other ordinary income) rather than a capital loss. Capital losses are limited to a $3,000 ($1,500 if married filing separately) per year deduction once any capital gains have been offset.
Passing the trader test
What does it take to successfully meet the test for trader status? The answer is twofold:
1. The trading must be “substantial.” While there’s no bright line test, the courts have tended to view more than a thousand trades a year, spread over most of the available trading days, as substantial.
2. The trading must be designed to try to catch the swings in the daily market movements. In other words, you must be attempting to profit from these short-term changes rather than from the long-term holding of investments. So the average duration for holding any one position needs to be very short, generally only a day or two.
If you satisfy these conditions, the chances are good that you’d ultimately be able to prove trader vs. investor status. Of course, even if you don’t satisfy one of the tests, you might still prevail, but the odds against you are higher. If you have questions, please contact us.
Tuesday, August 30th, 2016
If you recently redeemed frequent flyer miles to treat the family to a fun summer vacation or to take your spouse on a romantic getaway, you might assume that there are no tax implications involved. And you’re probably right — but there is a chance your miles could be taxable.
Usually tax free
As a general rule, miles awarded by airlines for flying with them are considered nontaxable rebates, as are miles awarded for using a credit or debit card.
The IRS partially addressed the issue in Announcement 2002-18, where it said “Consistent with prior practice, the IRS will not assert that any taxpayer has understated his federal tax liability by reason of the receipt or personal use of frequent flyer miles or other in-kind promotional benefits attributable to the taxpayer’s business or official travel.”
There are, however, some types of mile awards the IRS might view as taxable. Examples include miles awarded as a prize in a sweepstakes and miles awarded as a promotion.
For instance, in Shankar v. Commissioner, the U.S. Tax Court sided with the IRS, finding that airline miles awarded in conjunction with opening a bank account were indeed taxable. Part of the evidence of taxability was the fact that the bank had issued Forms 1099 MISC to customers who’d redeemed the rewards points to purchase airline tickets.
The value of the miles for tax purposes generally is their estimated retail value.
If you’re concerned you’ve received mile awards that could be taxable, please contact us and we’ll help you determine your tax liability, if any.
Friday, August 26th, 2016
M&J’s Managing Partner, Donny Luker, participated in panel discussion at The Georgia Society of CPAs Southeastern Accounting Show yesterday. The topic was “Hiring and Retaining Your Workforce”
“Most companies struggle to find and keep good employees and accountants are no exception. This panel of experts will give you tips and best practices on finding, hiring and retaining your most important long-term asset – your workforce.”
Along with Donny on this panel was Andy Decker, Robert Half International Inc., Atlanta, Ga, Debbie Sessions, CPA, Porter Keadle Moore, Atlanta, Ga and Angie Farsee, Georgia Transmission Corporation, Tucker, Ga.
Thursday, August 25th, 2016
Wednesday, August 24th, 2016
Last week, the Bradenton team hosted a lemonade stand to support the Alex’s Lemonade Stand Foundation, a charity devoted to finding a cure for childhood cancers.
We are thrilled to report we exceeded our original fundraising goal of $500 and raised a grand total of $1,239! We’d like to take this opportunity to thank everyone who generously donated to this cause.
Ashley Walker did a fabulous job of coordinating this quarter’s community service project for the Bradenton office. A big ‘thank you’ goes out to our volunteers.
You can still donate! Check out our page, here.
Wednesday, August 24th, 2016
Many expenses that may qualify as miscellaneous itemized deductions are deductible only to the extent they exceed, in aggregate, 2% of your adjusted gross income (AGI). Bunching these expenses into a single year may allow you to exceed this “floor.” So now is a good time to add up your potential deductions to date to see if bunching is a smart strategy for you this year.
Should you bunch into 2016?
If your miscellaneous itemized deductions are getting close to — or they already exceed — the 2% floor, consider incurring and paying additional expenses by Dec. 31, such as:
- Deductible investment expenses, including advisory fees, custodial fees and publications
- Professional fees, such as tax planning and preparation, accounting, and certain legal fees
- Unreimbursed employee business expenses, including vehicle costs, travel, and allowable meals and entertainment.
But beware …
These expenses aren’t deductible for alternative minimum tax (AMT) purposes. So don’t bunch them into 2016 if you might be subject to the AMT this year.
Also, if your AGI exceeds the applicable threshold, certain deductions — including miscellaneous itemized deductions — are reduced by 3% of the AGI amount that exceeds the threshold (not to exceed 80% of otherwise allowable deductions). For 2016, the thresholds are $259,400 (single), $285,350 (head of household), $311,300 (married filing jointly) and $155,650 (married filing separately).
If you’d like more information on miscellaneous itemized deductions, the AMT or the itemized deduction limit, let us know.
Wednesday, August 24th, 2016
Year-end tax planning may be a little easier for 2016. For the first time in several years, taxpayers won’t have to wait for Congressional action on late-year “extenders” legislation to know whether certain popular tax breaks are still available to them. The Protecting Americans from Tax Hikes (PATH) Act of 2015 made some of those provisions permanent and extended others for several years.
This 2016 Year-end Tax Planning Guide highlights various PATH Act provisions, along with other potential opportunities for lowering individual and business taxes. As always, it’s best to start planning as early as possible because many strategies will be effective only if they’re implemented before year-end.
However, before you act on any of the information presented in the guide, you’ll want to obtain professional advice. The federal tax law remains highly complex, and your tax planning should be done within the context of your specific situation. Click on the icon below to access the guide!