Pros and Cons of 529 Plans

So you want to start saving money for college? With the cost of higher education doubling in the last 30 years, starting to save early is a great idea. Whether it’s for your own kids, grandkids, nieces/nephews, or maybe even your God children, helping a child you love cover at least some of the expenses associated with higher education is an amazing gift. A great option for starting to build an education-specific savings account is a 529 plan. These incredibly popular plans also offer a few tax benefits.

529 plans first came onto the scene in the mid-1980s and originally functioned as a pre-paid tuition account. By the 1990’s, Section 529 (hence the name 529 plan) was added to the Internal Revenue Code, allowing for a tax-free status for certain tuition programs. These accounts grow on a tax-deferred basis (meaning tax isn’t owed on the earnings) and if the recipient makes withdrawals from the account for higher education expenses the withdrawals are not taxed either.

Every state has at least one 529 plan available. However, you do not have to invest in a plan in your state or even the resident state of the intended recipient. Additionally, for most plans, the choice of college is not affected by the state that sponsored the plan. Currently more than 6,000 U.S. colleges and universities and 400 foreign colleges and universities will allow students to utilize a 529 plan for tuition and other education expenses.

What expenses are approved?
Tuition, room and board, and textbooks were the original expenses included in the plans approved costs. In recent years, the original definition of “higher education expenses” has been expanded to reflect the changing landscape and increasing costs of education. These expenses can now include computers, up to $10,000 annually in k-12 tuition, student loan payments, and even the costs of apprenticeship programs.

What are the tax benefits?
From a federal tax perspective, 529 plans offer significant benefit in terms of tax-free growth and tax-free withdrawals. 529 plans can be invested in many ways, such as guaranteed returns and even mutual funds or stock market investments. In a typical investment account, any growth would be considered taxable income. With 529 plans, the accounts can see significant growth and if the withdrawals are made for approved, educational purposes, no tax will be paid on that growth.

State-specific tax benefits generally are enhanced or dependent on the plan being an in-state plan (i.e. the state in which the contributor resides and pays income tax). There are a few exceptions to this: Arizona, Kansas, Maine, Missouri, Montana, and Pennsylvania are referred to as tax-parity states and offer income tax benefits regardless of the state plan utilized.

How much money can I invest in a 529 Plan?
With the gift tax exemption amount (2020) of $15,000, 529 accounts can be funded in large amounts. This means that a married couple can contribute up to $30,000 ($15,000 per contributor) per child each year without having to file gift tax returns. Better yet, for grandparents with the desire to make a large contribution, a 5 year election rule is in place. This means that grandparents can elect to contribute 5 years’ worth of the gift tax exemption at one time, totaling a contribution of $75,000 all at once. While a gift tax return would have to be filed, the use of the 5 year election has no impact to the overall estate exemption.

Unfortunately, there are some funding limitations that do exist. Generally, 529 plans cannot have amounts greater than $235,000 in the plan. However, if the plan does cross that threshold, only contributions need to be suspended.

What if my child doesn’t go to college?
In some cases, children opt out of college education or receive scholarships and grants that cover college expenses. In this case, there will unfortunately be a tax bill to be paid if funds are distributed for a non-qualifying expense. Taxes on distributions of that manner include income taxes on the earnings, as well as a 10% withdrawal penalty. To top it off, many states require the tax benefit to be repaid for funds distributed in this manner.

For families with multiple children or qualifying relatives, there could be a much better way. 529 plans allow owners to add beneficiaries even after the account has been funded. By adding a beneficiary, owners can avoid taking taxable withdrawals as well as provide funds to another child or beneficiary. Adding a beneficiary does not cause a taxable event, so no taxes will be due because of the additional beneficiary either.

Questions about 529 plans or other tax planning strategies? Get in touch with our office!

New Tax Brackets – Tax Years 2019 and 2020

Most years, slight changes are made to tax rates.  These updates are generally minor and reflect changes in inflation.  Major tax code revisions, like those that went into place for 2018 under the new tax law (TCJA), are rare.

For tax years 2019 and 2020, the IRS has made tweaks to roughly 60 tax provisions.  Below are a few highlights that will affect the largest percentage of taxpayers.  If you have specific questions related to your tax situation, be sure to consult with your tax professional.

New Tax Brackets: 

Other changes:

1) Standard Deductions: For tax year 2019 (i.e. the returns you will file over the next few months), the standard deduction for single filers rises to $12,200.  For married/joint filers, it will be $24,400.  For tax year 2020, the amounts will increase again to $12,400 and $24,800 respectively.  For heads of households, the standard deduction increases from $18,000 in 2018 to $18,350 (2019) and $18,650 (2020).  Remember, you take whichever is higher when comparing the standard deduction to your itemized deductions.

2) Earned Income Credit (EIC): 

2019 (investment income must be $3600 or less for the year)


2020 (investment income must be $3650 or less for the year)


3) Adoption Credit: Taxpayers can receive a credit of up to $14,080 for qualified adoption expenses of a special needs child paid in 2019.  For tax year 2020, the credit increases to $14,300.

4) Healthcare coverage: The penalty for not having the minimum healthcare coverage was $695 on your 2018 return.  For 2019 and beyond, there is $0 penalty.

5) SALT Cap: For the time being, the cap on the deductible portion of State and Local Tax (SALT) will remain unchanged at $10,000 annually.  Repealing the $10,000 cap has been discussed in the House so changes may be coming down the line.

Questions about changes to these or other tax provisions?  Get in touch with Levesque & Associates!

Landlord? Don’t Overlook This Important Tax Info

Many Americans own rental property. Whether you inherited a home, decided to downsize or upsize your personal residence, or just came across a great investment opportunity, people get into the landlord game for many different reasons and via many different avenues. Regardless of which category you fall into, all landlords must be sure to keep detailed records of income and expenses related to the property for tax time.

Deductions
If you are making money from the rental of a property that you own, then you must report the rental income on your tax return. Owning a rental property also means that certain expenses become deductible – thereby reducing the total amount of rental income that’s subject to tax.

Deductions vs. Depreciation

Deductions are very straight forward – these are the costs of operating, repairing, some improvements, and managing your rental property. These expenses should be tracked by the landlord (or his/her employee) and included, along with rental income, on Schedule E of the tax return. Depreciation, on the other hand, is not as straight forward. Generally, the basis or cost of the building (but not the land) is depreciated using straight-line depreciation which is done over 27.5 years. An equal amount of the building’s basis is deducted each year on the tax return. Any additions or improvements costing more than $2500 are also depreciated but are done so separately from the building. Additions or improvements costing less than $2500 can be deducted fully in the year of purchase.

Depreciation must be carefully tracked for tax purposes. Once the property is fully depreciated, no additional depreciation can be taken. Additionally, when a rental property is sold, the depreciation must be recaptured if the sale price of a rental property exceeds the adjusted basis (i.e. the owner’s initial investment plus the cost of certain improvements during ownership). Recaptured depreciation is reported as ordinary income for tax purposes.

Reporting Income and Expenses
At Levesque & Associates, we recommend clients track income and expenses either through bookkeeping software such as QuickBooks (appropriate if you own multiple investment properties) or through a simple excel sheet. You can also easily make use of apps such as Expensify to maintain and categorize receipts. Even though you are tracking the information, be sure to keep receipts with your personal records for at least 7 years.

Management Companies
Some property owners utilize a management company for collections of rent payments as well as property maintenance and other expenses. Typically, these management companies provide a 1099 in January of each year which summarizes the income earned by the owner. If you utilize a management company, we STRONGLY encourage you to keep your own records and compare the information you receive from the management company with what you have on file. Mistakes do happen and property owners should take responsibility for ensuring the accuracy of the of the information reported to the IRS.

Record Keeping
Good record keeping will not only help you determine the profitability of your rental property, but it will help make the preparation of your tax return much easier. Maintain records of everything related to the property. This includes keeping detailed receipts for any expenses such as repairs and improvements. You should also keep detailed records of all rental income received. Should you be selected for an audit, you will need to provide these records to the auditor. If you are audited and cannot provide proof of the expenses and income reported on your return, you may be subject to additional taxes and penalties.

 

 

Do you own a rental property? Make sure you are keeping records of the following items and providing to your tax professional at tax time:

  • All loan and interest payments
  • Repair receipts
  • Personal property costs (such as new appliances or lawn equipment)
  • Driving – if you have to drive to your rental property for any reason, you can either deduct actual auto expenses (gas, upkeep, repairs, etc) or mileage (learn more about mileage write-offs here).
  • Overnight travel, including airfare, hotel costs, meals, and other expenses, can be deducted if they are directly related to your rental property. Be sure to keep detailed records as the IRS is known to scrutinize these kinds of deductions.
  • Home office expenses, provided the landlord meets certain minimum requirements. This includes a percentage of the cost of home expenses including utilities, insurance, and more. Your tax professional will require total square footage of your home, square footage of dedicated office space, and a total of home costs
  • Do you pay an employee or independent contractor for help with your rental? Their pay is a rental business expense.
  • Any insurance you carry related to rental activity should be kept and provided at tax time.
  • Fees associated with legal and professional services such as an attorney, accountant, management company, etc.

Looking for more information? Get in touch with Levesque & Associates by phone or email.