Tax planning is like exercise: You may not always be motivated to do it, but once you’re tackled the task, you feel so much better. (And fortunately for everyone, you don’t need to do tax planning several times a week, consistently, to see a lasting benefit.) I’ve asked Matt Grodin, a San Mateo certified public accountant, to answer three taxing questions:
What are some of key changes in the federal tax law that will affect Bay Area taxpayers?
There’s a $10,000 limit on deductions for state taxes and a $750,000 limit for deductions on new mortgage debt. Previously, home buyers could deduct up to $1 million. As you know, home prices in the Bay Area keep rising to new heights—the median home price hit $820,000 in April—so any restriction on mortgage deductions isn’t exactly good news. (more…)
As the end of the year draws near, the last thing anyone wants to think about is taxes. But if you are looking for ways to minimize your tax bill, there’s no better time for tax planning than before year-end. That’s because there are a number of tax-smart strategies you can implement now that will reduce your tax bill come April 15.
As the year begins to draw to a close, consider how the following strategies might help to lower your taxes. (more…)
The American Taxpayer Relief Act of 2012 created some good news for families paying for, or saving for, college.
Congress and the White House agreed that higher education should remain a priority for American families and have decided to leave in place the tax benefits that have eased the pain of college spending for students and their families over the past several years. To make sure you are taking maximum advantage of the tax benefits available for funding a college education, you may wish to consult with a Certified Financial Planner to ensure that you receive every possible benefit from the recent agreement to extend these benefits to American families.
Education tax breaks extended or made permanent
- The American Opportunity Tax Credit, which helps defray undergraduate college education expenses by allowing borrowers to deduct up to $2,500 was scheduled to expire last year, but has been extended for five years, through the end of 2017.
- The Tuition and Fees Deduction, which allows taxpayers to claim up to $4,000 in tuition expenses, has also been extended. The deduction, which expired at the end of 2011, was retroactively revived for 2012 and will continue through the end of 2013.
- Some changes to the Coverdell Education Savings Accounts have been made permanent. The annual contribution limit continues to be $2,000 and that the account may be used for elementary and secondary school expenses. Higher income phase-outs have also been made permanent.
- The deal permanently repeals a five-year limit for deducting up to $2,500 via the Student Loan Interest Deduction.
- Tax-advantaged education savings accounts – Coverdell Education Savings Accounts and 529 College Savings Plans – have now become even more attractive with higher income tax rates, deduction phase-outs, and the new Medicare tax on investment earnings.
While this news is relatively good however, it wouldn’t be DC if the news was all good. Higher income earners will not benefit from some of these programs, so financial planning for college should remain a priority in 2013 – along with tax planning strategies to shift income and tax benefits to your college student (when parent income is too high). In addition, a decision on funding levels for federal financial aid has been pushed out to March 1, 2013 so we could see reductions in some aid programs.
As part of your comprehensive financial planning, with a certified finance planner, you financial planning for college can be greatly simplified. Tamarind Financial Planning is here for you, with individual financial planning strategies and personal investment management techniques to help you set, meet, and exceed your financial – and life – goals.
To avoid allowing the country to fall off the fiscal cliff, Congress and the President have agreed upon and signed into law the 2012 American Taxpayer Relief Act (ATRA). Among other things, the new law restores nearly all of the tax incentives for education which had been scheduled to expire at the end of the year. One of these education incentives was the Coverdell Education Savings Account (ESA).
The Coverdell ESA is somewhat unique among the menu of fiscal tools that parents may use when performing their financial planning for college, because it operates much like a Roth IRA, and in fact was labeled the Education IRA from its inception until 2002 when it was restructured and renamed. The single greatest advantage of establishing a Coverdell ESA is that it is the only ESA available which allows parents to use the funds to pay for primary education; for example private school K-12. The second greatest advantage to investing in a Coverdell ESA is that you, the investor, are able to choose the investment vehicle.
A Coverdell ESA may be used to fund primary education
While it is certainly a good idea for Congress to encourage savings and long-term planning for college by parents, the array of investment options which they have designed to aid in this can make finance planning for college very confusing. With help from a Certified Finance Planner, the task becomes a great deal easier for parents.
The positive features of a Coverdell Education Savings Account will include, but may not be limited to …
- Earnings accumulate tax free
- Withdrawals for Qualified Education Expenses are also tax free
- Contribution limits were raised temporarily from $500 to $2000 (in 2002) and with the ATRA, the limit will not revert to $500 but will remain at $2000
- Contributions may be made by any family member
- Children can make their own contribution to the account
- Low contribution amounts are accepted
- The account belongs to the “responsible party” (e.g., the Parents) not the beneficiary
- Funds may be used to fund private education for K-12
- Withdrawals for K-12 education may be used for public, private, or religious education
- For students with special needs, there is more flexibility for what types of expenses may be deducted
The negative features of a Coverdell Education Savings Account will include, but may not be limited to …
- Contributions are made post-tax – they are not deductible, similar to a Roth IRA
- Contribution limit of $2000 is phased out for single contributors earning AGI of $95,000 to $110,000
- Contribution limit of $2000 is phased out for joint contributors earning AGI of $190,000 to $220,000
- Funding must cease once the beneficiary reaches the age of maturity (18 years old in most states) but may be extended for special needs beneficiaries
- The account must be fully withdrawn by the time the beneficiary reaches the age of 30, although this rule is relaxed for beneficiaries with special needs
- Funds used for a non-qualified expense will be penalized at 10% and will be taxed as ordinary income
For more information on the pros and cons of various education savings plans, take a look at this Comparison Chart from The Motley Fool. You may also wish to visit the 529 Guru to have some FAQs answered for you.
While the folks in Washington DC have tried to make it easier to encourage financial planning for college, the range of investment vehicles they have created to do so have become quite complex. The ramifications of these devices on your income and your tax bill, and the resultant confusion, may in fact reduce your incentive to participate. This could be a major mistake, for both you and your child.
As part of your comprehensive financial planning with a certified finance planner, your financial planning for college can be greatly simplified. Tamarind Financial Planning is here for you, with individual financial planning strategies and personal investment management techniques to help you set, meet, and exceed your financial – and life – goals.
In 1996 the Internal Revenue Code was modified to include Section 529, creating an education savings benefit for higher education. While contributions to the Plan are not tax deductible, the earnings on the Plan are; making the 529 College Savings Plan an excellent saving tool when you are doing your financial planning for college for your children. With changes to tax code going into effect this year, the Plan becomes even more attractive.
A financial planner can help you enroll in a 529 College Savings Plan
In 2013, couples earning over $450,000, and singles earning over $400,000, will face higher taxes and lower deductions; while all Americans will see greater withholding from their paychecks. In addition, it is highly likely that we will see significant cuts to Federal Financial Aid even as colleges and universities continue to increase tuition and fees. By beginning to save for college now, your financial planning for college will be much more likely to be successful in covering your child’s tuition and expenses later.
A certified finance planner will help you find the best 529 Plan for your family, taking into account all aspects of your family’s current and expected future needs.
Saving for college continues to be a high priority for families
A 529 College Savings Plan should be the first choice when you and your family are performing your financial planning for college. The Plan makes it easy to save with a low minimum investment, automatic contributions, and target-date funds that manage investment risk for you – moving more into bonds and cash as your student approaches college age. With a 529 Plan, you can start with a small initial investment and adjust as you refine your college savings goals.
Financial planning for college does not need to be complex or difficult. A 529 Plan will allow you to…
- Earn tax free investment returns on your college savings – as long as funds are used to pay qualified higher education expenses
- Retain control of the funds invested throughout the life of the Plan – funds do not become the property of your student
- Benefit from professional investment management with target-date funds
- No tax reporting on earnings until you withdraw the funds
- No income limitations on contribution amounts – high income earners can receive the maximum benefit of 529 contributions
As part of your comprehensive financial planning, with a certified financial planner, your financial planning for college can be greatly simplified. Tamarind Financial Planning is here for you, with individual financial planning strategies and personal investment management techniques to help you set, meet, and exceed your financial – and life – goals.
I have a neighbor who is a big do-it-yourselfer. He cleans his gutters every spring, prunes his rose bushes and replaces his front porch light.
I’m always impressed by people who fearlessly tackle any task. But even my neighbor knows when to summon the pros. He called in contractors to install a new garage door and to repave his driveway.
If you’re a DIYer for tax returns and investment decisions, that’s great. You’re taking charge of your future. Still, it’s always wise to have a stable of professionals you can call on for expert advice. Like my neighbor, knowing when a task is beyond your ability is, truly, the hallmark of a smart DIYer.
Here are three people you’ll want to have on your team to watch your back and protect your assets. Together, they’ll give you unparalleled peace of mind.
Financial planner: I listed this first because, well, I am one. So I have firsthand knowledge of how important my work is to my clients’ wellbeing.
When you collaborate with any certified financial planner, you know you’re on the right track to meet your goals: the freedom to retire, pay for your children’s education or live the kind of lifestyle you envision.
Even if you’ve crafted your own financial map, a financial planner can review it, pointing out shortcomings and other options to help you meet your aims. And if you lack expertise in areas such as insurance or investments, a planner can ably fill in the gaps.
Estate planner: Yes, it can be uncomfortable to think about who will raise your children and receive your property should you die suddenly. But it’s even scarier not to think about those things.
If you and your spouse live in California, have an estate plan in place and die with a home and assets worth $1 million, your heirs will save $23,000 in probate fees. That money stays in your family rather than going to cover court fees. It will also be available quickly, rather than in the 18 months the probate court typically needs to sort out assets.
Another benefit is that you can set the age that your children will receive your assets. The probate court gives heirs the full amount at age 18. But with a plan in place, you can delay and stagger payments to ensure that your children have the maturity to make wise financial decisions.
A seasoned estate planner will create the documents—wills, trusts, durable powers of attorney and healthcare powers—that carry out your wishes after you’re gone.
Tax advisor/CPA: Maybe you’re one of those people who delights in hunkering down each spring at the dining room table with your donation receipts, W-2 forms and mileage records. But most people feel a little queasy at the thought of preparing their own tax return. That’s reason enough to work closely with a CPA.
You give her a neat stack of records, and she’ll do more than fill in all those blanks on your tax return. She’ll also suggest deductions you might have missed that will ease next year’s tax burden. And she’ll educate you about tax-law changes that affect your bottom line.
One of the most valuable services a CPA provides is the reassurance that if you’re audited, you won’t be the one explaining the math and the deductions to the IRS agents.