Posts Tagged "Education"

Most Common Areas for Tax Breaks

Posted on Aug 3, 2018

Tax law changes so frequently that you must be concerned with tax planning year-round, or you’ll miss opportunities to lower your tax bill. Are are some common areas that can mean big money savings with proper planning. 1. Familiarize yourself with the income levels at which various tax breaks phase out. While it doesn’t make sense to make less income just to qualify for a tax break, shifting income from one year to another may sometimes be a smart thing to do. Learn about the tax credits and deductions for which you might qualify. Then estimate your income, and if it will be just beyond qualification range, look for opportunities to defer income until a later year. Investment income can often be shifted, or you might delay the exercise of stock options or the receipt of a bonus. 2. Don’t pay tax on a home sale. The law lets you sell your home tax-free if you meet certain requirements. The home must have been owned and used as your principal residence for at least two of the five years prior to the sale. Couples can enjoy $500,000 of tax-free profits in a home sale, while singles qualify for up to $250,000 of tax-free gain. To the extent possible, time home sales to meet the requirements in order to enjoy tax-free profits. 3. Factor education tax breaks into your college planning. First, there’s the American Opportunity credit for a percentage of qualified higher education expenses. Second, the Lifetime Learning credit allows a deduction for a percentage of qualified expenses paid for any year the American Opportunity credit isn’t claimed, and it even applies to job-related classes. Third, you may qualify for a deduction for interest paid on student loans. Fourth, education savings accounts allow annual nondeductible contributions for every child under 18, with tax-free withdrawals for qualifying education expenses. Section 529 plans to save for college expenses should also be investigated. Check the income phase-out levels for these breaks. Careful planning is required to find what’s best in your particular circumstances. 4. Invest to take advantage of lower long-term capital gains tax rates. You can cut your tax bill significantly by holding an appreciated investment long enough to qualify for long-term rather than short-term tax treatment. 5. Do an investment review to be sure you have the right investments in your tax-deferred accounts. To take best advantage of the lower long-term capital gains tax rates, investments that produce interest income should be held in tax-deferred accounts, while those that produce capital gains should be held in taxable accounts. Putting capital gain investments in tax-deferred retirement accounts could turn income that would be taxed at lower rates into ordinary income taxed at much higher rates. 6. There’s never been a better time to contribute to an IRA. Even nonworking spouses may be able to contribute to an IRA. Individuals covered by a retirement plan at work or whose spouses are covered by a plan may still qualify to make deductible IRA contributions if their income doesn’t exceed certain levels. 7. Your IRA options may include a Roth IRA. With a Roth IRA, your contributions won’t be tax-deductible, but the account will grow tax-free, and you won’t pay federal income tax on distributions from the account once it’s been in existence for five years and after you’ve reached age 59½. 8. Consider rolling your IRA into a Roth. If you have a traditional IRA, you might want to consider rolling your existing IRA into a Roth IRA. You’ll have to pay income tax on the rollover, but the account can escape federal income taxation thereafter. 9. If you work at home, get details on the home office deduction. More people can now qualify to take a deduction for home office expenses. Your home office may qualify as your “principal place of business” if you use it regularly and exclusively for administrative and management activities but perform the income-producing activities at another location. Realize that in tax planning, the earlier you start, the more effective your tax-cutting efforts will be. Also realize that...

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Parents, Children, and Taxes

Posted on Jun 20, 2018

  Being a parent brings tremendous rewards, but also the challenge and responsibility of supporting and educating your child. Fortunately, the tax code has many ways to help ease a parent’s financial burden. Here’s an overview of the many ways that taxes can affect your decisions as a parent. Exemptions and credits   Being a parent usually cuts your tax bill in at least two ways. You can generally claim a dependency exemption for each child under age 19, or under age 24 for full-time students. You can also claim a child tax credit for each child under age 17. This is a direct credit against taxes you owe, and it can be partially refundable. Other credits include the adoption credit to offset expenses of adoption and the child care credit. This credit allows you to offset some of the costs of paying for child care so that both spouses can work or attend school full-time. Many of these tax breaks phase out for those at higher income levels. Education expenses   One of the biggest challenges for a parent is funding a child’s college education. A variety of tax breaks can help with this major expense, including savings plans, tax credits, and tax deductions. These measures all have different rules and eligibility requirements. There are two main types of savings plans for education expenses: Coverdell education savings accounts and Section 529 plans. Coverdell accounts work rather like an IRA. Contributions grow tax-free, and withdrawals are free of tax if used for qualified education expenses. Coverdell accounts can also be used to pay for K-12 expenses as well as college costs. Section 529 plans provide tax-free earnings and distributions for higher education expenses, and they generally have fewer restrictions than Coverdell accounts. The American Opportunity credit and the Lifetime Learning Credit are two tax credits available for education expenses. Each has its own rules and income limits, and you cannot use both credits for the same child in the same year. A limited tax deduction is available for student loan interest expense. In addition, interest on U.S. savings bonds can be tax-free if the bonds are used for education expenses. Child tax issues   The “kiddie tax” is a rule that affects the investment income of children. A child’s unearned income above a threshold amount will be taxed at the parent’s highest rate until the child reaches a certain age. The intent is to stop a high-income parent from shifting large amounts of earnings to a child in a lower tax bracket. A strategy of “income shifting” can make sense for a family once the child is old enough to escape the kiddie tax. Parents can gift income-earning assets to older children (subject to the annual and lifetime gift limits), and the children will pay tax on the income earned at their own (presumably lower) rates. Another tax-cutting strategy is to employ your child in the family business. The business can take a deduction for wages paid, while the child often pays little or no taxes on his or her earnings. It must be a real job, though, and the wages must be reasonable for the work. If your children have earnings from summer or after-school jobs, encourage them to open IRA accounts. The additional years of tax-free compounding can produce huge additional savings by the time your children reach retirement age. Don’t overlook the role of grandparents. They can help pay college expenses, for example, either by contributing to education savings plans or by paying tuition bills directly. Also, by giving appreciated stock to their grandchildren, they may be able to boost the children’s savings while reducing overall taxes for the family unit. Estate planning   For a parent, estate planning is especially important. The first priority is to make sure your children are protected in the event that something happens to you. Your estate plan should appoint guardians for your minor children, as well as provide for their financial well-being. Early estate planning can also help to ensure that your assets pass to your children as you...

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How to Ace the FAFSA

Posted on Oct 1, 2017

The Free Application for Federal Student Aid (FAFSA) is a tool that students use to apply for more than $120 billion in federal funds. Unfortunately, each year many students miss out. Even if you don’t think you or your child qualify for federal aid, filling out a FAFSA is important because it could be used to determine eligibility for nonfederal aid and private funds. FAFSA available October 1, 2017 Previously, the FAFSA was unavailable until January. A recent change makes the application available October 1, 2017. That’s because the 2018-19 FAFSA can be completed with your 2016 tax info. Avoid FAFSA mistakes Don’t forgo federal student aid by making one of the following common filing mistakes: Mistake: Not reading the instructions or questions Tip: Answer all questions – even if the answer is zero. If left blank, the question will be considered unanswered. Check the FAFSA website if you are unsure of definitions of key FAFSA terms. Mistake: Incorrect, incomplete or non-matching data Tip: Complete the FAFSA online. It takes only 3-5 days to process when submitted electronically. The online version has built-in safeguards that identify and prevent many errors. Mistake: Not filing on time Tip: Get the application submitted ASAP. The sooner you or your child gets started, the higher the likelihood of being awarded funds since many are distributed on a first-come, first-served basis. Remember, students need to complete a FAFSA each year because eligibility does Download our...

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Say Goodbye to the College Tuition Deduction

Posted on Sep 20, 2017

Congress decided not to extend this $4,000 deduction for 2017, leaving many parents worried that college will now be more expensive. However, Congress left in place two popular education credits that may offer a more valuable tax break: The AOTC. The American Opportunity Tax Credit (AOTC) is a credit of up to $2,500 per student per year for qualified undergraduate tuition, fees and course materials.The deduction phases out at higher income levels, and is eliminated altogether for married couples with a modified adjusted gross income of $180,000 ($90,000 for singles). Lifetime Learning Credit. The Lifetime Learning Credit provides an annual credit of 20 percent on the first $10,000 of tuition and fees, for either undergraduate or graduate level classes. There is no lifetime limit on the credit, but only couples making less than $131,000 per year (or singles making $65,000) qualify. Unlike the AOTC, this deduction is per tax return, not per student. So who is affected by the loss of the tuition and fees deduction? If you are paying for your student’s graduate-level courses and are making too much to qualify for the Lifetime Learning Credit, the tuition and fees deduction is generally the only means you have to reduce your tax bill. Thankfully, there are many other tax benefits that help reduce the cost of education. There are breaks for employer-provided tuition assistance, deductions for student loan interest, tax-beneficial college savings options, and many other tax-planning...

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SAY GOODBYE TO THE COLLEGE TUITION DEDUCTION

Posted on Aug 30, 2017

It’s hard enough to watch your child leave for college. Now you also have to say goodbye to the tuition and fees tax deduction. Congress decided not to extend this $4,000 deduction for 2017, leaving many parents worried that college will now be more expensive. But it isn’t as bad as it sounds. That’s because Congress left in place two popular education credits that may offer a more valuable tax break: The AOTC. The American Opportunity Tax Credit (AOTC) is a credit of up to $2,500 per student per year for qualified undergraduate tuition, fees and course materials. The deduction phases out at higher income levels, and is eliminated altogether for married couples with a modified adjusted gross income of $180,000 ($90,000 for singles). Lifetime Learning Credit. The Lifetime Learning Credit provides an annual credit of 20 percent on the first $10,000 of tuition and fees, for either undergraduate or graduate level classes. There is no lifetime limit on the credit, but only couples making less than $130,000 per year (or singles making $65,000) qualify. Unlike the AOTC, this deduction is per tax return, not per student. But there’s still hope! In addition to the two alternative education credits, there are many other tax benefits that help reduce the cost of education. There are breaks for employer-provided tuition assistance, deductions for student loan interest, tax-beneficial college savings options, and many other tax-planning alternatives. Please call if you’d like an overview of the alternatives available to you. So who is affected by the loss of the tuition and fees deduction? If you are paying for your student’s graduate-level courses and are making too much to qualify for the Lifetime Learning Credit, the tuition and fees deduction is generally the only means you have to reduce your tax bill. Gilliland & Associates, PC is a full-service CPA firm specializing in tax planning for individuals and businesses in the Northern Virginia area. We are based in Falls Church, VA and also service clients in McLean and Tysons Corner, VA. Gilliland & Associates is known for our superior knowledge and aggressive interpretation and application of tax laws. We help you keep more of your earnings by finding you the lowest possible tax on your business or personal tax return. You can connect with us on Google+, LinkedIn, Facebook, and...

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