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Tax Planning for College Expenses

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It’s no secret that a college education is expensive. Average annual charges for tuition, fees, and room and board at four-year public colleges and universities stood at $20,770 for in-state students and $36,420 for out-of-state students (this was averages for the 2017-2018 school year.)  Average charges were $46,950 at four-year private colleges and universities.1 Based on historical trends, these costs are likely to increase in the future.

Parents who are intimidated by these figures should realize that the expenses at most colleges and universities are generally less than the quoted prices. There are scholarships, grants, and work-study programs available that can soften the financial impact of a college education.

Parents should take the time to look into the various tax benefits that can help reduce the costs of sending a child to college. Getting an early start on tax planning for college expenses can help reduce some of the anxiety surrounding the whole issue of trying to figure out how to pay for college. Here are some areas worth further investigation.

Savings Programs

Parents have several education savings opportunities that come with built-in tax benefits. Section 529 plans have grown in popularity over the years, but Coverdell education savings accounts also offer valuable tax benefits.

Section 529 Savings Plans

Section 529 college savings plans* are specifically designed for educational saving. You can invest a little at a time or contribute a larger lump sum, whatever approach works best for you. You choose how you want your contributions invested; your plan investments are then professionally managed. These plans offer several features that parents may find appealing:

  • Investment earnings accumulate tax deferred and won’t be subject to federal income taxes when withdrawn for your child’s qualifying educational expenses. (Excess withdrawals are subject to tax and a potential 10% penalty.)
  • Some states offer their residents tax incentives for investing in an in-state plan.
  • As a parent, you retain control of the money in the account even after the child turns 18.
  • If your child does not attend college or deplete the fund, you can change the account beneficiary to another qualifying family member without losing tax benefits.

Coverdell Education Savings Accounts

Annual contributions to these accounts are limited to $2,000 per child. This maximum phases out (is gradually reduced to zero) for taxpayers with modified adjusted gross income (AGI) between $95,000 and $110,000 (between $190,000 and $220,000 for joint filers).

Your contributions accumulate tax deferred at the federal level and earnings are tax-free when used for qualified educational expenses such as tuition, room and board, and books. If you make withdrawals from the account for non-educational expenses, the earnings portion of the withdrawal may be subject to federal income tax and an additional 10% penalty.

Scholarships

Young adults who demonstrate high academic promise or who possess certain desirable skills may receive scholarships that can defray a percentage of the cost of attending college. Scholarships are generally exempt from income tax if the scholarship is not compensation for services and is used for tuition, fees, books, supplies, and similar items (and not for room and board).

Tuition Tax Credits

A tax credit gives you a dollar-for-dollar reduction against the taxes you owe the IRS. The following two education tax credits can help eligible parents alleviate the costs of educating a child.

American Opportunity Tax Credit (AOTC) 

This credit is worth up to $2,500 per year for each eligible student in your family. It’s for the payment of tuition, required enrollment fees, and course materials for the first four years of post-secondary education. The credit is allowed for 100% of the first $2,000 of qualifying expenses, plus 25% of the next $2,000. Were the credit to exceed the amount of tax you owe, you may be eligible for a refund of up to 40% of the credit. The available credit is phased out for single taxpayers with modified AGI between $80,000 and $90,000, and for married couples with modified AGI between $160,000 and $180,000.

Lifetime Learning Credit (LLC)

This credit can be as much as $2,000 a year (per tax return) for the payment of tuition and required enrollment fees at an eligible educational institution. It is calculated as 20% of the first $10,000 of expenses. You cannot claim the credit for a student if you are claiming the AOTC for the student that year. Unlike the AOTC, qualified expenses for the LLC do not include academic supplies and no portion of the credit is refundable. The LLC is phased out (in 2018) for single taxpayers with modified AGI between $57,000 and $67,000, and for married couples with modified AGI between $114,000 and $134,000.

Student Loan Interest Deduction

A tax deduction lowers your tax liability by reducing the amount of income on which you pay tax. You can deduct interest on qualified loans you take out to pay for your child’s post-secondary education. The maximum deduction is $2,500 per year, but it phases out for taxpayers who are married filing jointly with AGI between $135,000 and $165,000 (between $65,000 and $80,000 for single filers). The deduction is available even if you don’t itemize deductions on your return.

*Certain 529 plan benefits may not be available unless specific requirements (e.g., residency) are met. There also may be restrictions on the timing of distributions and how they may be used. Before investing, consider the investment objectives, risks, and charges and expenses associated with municipal fund securities. The issuer’s official statement contains more information about municipal fund securities, and you should read it carefully before investing.

College Funds Held in Each Account

529 Plans 30%
General Savings Accounts 22%
Investment Accounts 14%
Checking Accounts 8%
Prepaid State Plan 8%
Certificate of Deposit 5%
Other 13%

 

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Source/Disclaimer:

1 Trends in College Pricing 2017, The College Board, 2017

Time for a Tax Checkup

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Midyear is a good time to review your tax situation. You can make sure your estimated tax payments are on track and look ahead to see if there are any tax-saving opportunities you can take advantage of before year-end.1

The Need to Estimate

The IRS requires individual taxpayers to make four quarterly installment payments of estimated tax (based on the amount of the “required annual payment”) to satisfy their tax liability for the year. Individuals also have the option of paying their income taxes throughout the year through payroll withholding.

To avoid penalties, payments must equal the lower of (1) 90% of the tax liability for the current year or (2) 100% (110%, for higher income individuals) of the tax liability on the prior year’s return. No penalty will apply if the tax shown on the return (after withholding) is less than $1,000.

Paying the Right Amount

Though you don’t want to underpay, you might not want to overpay either. A refund may be welcome, but it’s essentially an interest-free loan to the government.

If you need to change the amount being withheld from your paychecks, contact your payroll department and ask for IRS Form W-4 so you can make the appropriate adjustments. If you have additional nonwage income, you may need to increase your withholding or make estimated payments to avoid an underpayment penalty. If you are self-employed, you probably need to make estimated tax payments.

Save Taxes, Save for Retirement

Do you (or your spouse) have a retirement savings plan at work, such as a 401(k) plan or 403(b) tax-sheltered annuity? You can reduce your 2019 income tax liability by making pretax contributions to the plan. Permitted contribution levels for such plans are typically generous. For 2019, an employee may contribute up to $19,000 ($25,000 for those 50 and older) to either a 401(k) or 403(b) plan, unless a lower plan limit applies.

Capitalize on Lower Rates

You also might be thinking about selling an investment that has performed well. If the investment is held in a regular taxable account, your capital gain would potentially be subject to tax. However, long-term capital gains are taxed at lower rates (generally 15% or 20%) than your ordinary income.

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Source/Disclaimer:

1This communication is not intended to be tax advice and should not be treated as such. Each individual’s tax situation is unique. You should contact your tax professional to discuss your personal situation.

What to do when you get an Audit notification?

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You’ve opened the mail and your heart sinks. Your business just received an audit notification from the IRS. Click through to learn how to keep your cool and prepare for what happens next.

You may be surprised to learn that not every audit notification you receive will be legitimate. So, first, make sure you received an official audit notification. The Internal Revenue Service (IRS) will notify you either by letter or by a phone call followed by a letter. The IRS does not notify taxpayers about audits through email, so if you do get an email saying you’ve been selected for an audit, it’s probably fraudulent. If you’ve determined that you’re definitely getting audited, your next step is to learn what’s involved.

What Exactly Is an Audit?

According to the IRS, an audit is “a review/examination of an organization’s or individual’s accounts and financial information to ensure information is being reported correctly, according to the tax laws, to verify the amount of tax reported is substantially correct.”

That’s it. It’s an audit — not an arrest and not a trial — so don’t panic. Contrary to popular belief, an audit doesn’t automatically mean you made a mistake. Yes, an inconsistency can trigger an audit if there’s a discrepancy between what’s on a tax form and what you actually reported. But the IRS may choose to audit a taxpayer based on random selection or a statistical formula. Also, an audit may be less intrusive than you feared. For example, it may be entirely through the mail, although in some cases, it may be at an office or the taxpayer’s home or place of business. And not all audits result in your owing money. In fact, your audit may lead to no changes at all.

Both businesses and individuals may be audited (even sole proprietorships), and there may be some differences in how they are handled. One thing that virtually all audits have in common, however, is access to records. The IRS is going to want to check some of your records, and maybe a lot of them. Did you deduct business expenses? Make some substantial charitable contributions? You’ll need to show the IRS some receipts. The good news is that in many cases the IRS accepts electronic records.

What Happens Next?

There is no typical length of time for an IRS audit, but if you have your records handy and cooperate fully and quickly, you increase your chances that it will be as brief and painless as possible. Ultimately, the IRS may determine that you owe more money. At this point, you can pay it or you can appeal. The audit doesn’t have to be the end of the road. There is a substantial appeal process and a long and expensive court trial may not even be necessary.

The important thing to remember is that you don’t have to go it alone! Your accountant can work with you throughout the audit process, including any appeals. The key factor is to call us as soon as you receive the notification about your audit. We’re ready to work through the details and help you gather any records you may need. Contact us today!

Tax Credit Opportunities

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Tax deductions aren’t the only things to consider when looking for ways to reduce your tax bill. There are a number of tax credits that you may be able to claim. A tax credit reduces your tax liability dollar for dollar (and, in some instances, may be fully or partially “refundable” to the extent of any excess credit).

Child-Related Credits

Parents of children under age 17 may claim a child tax credit of up to $2,000 per qualified child. The child tax credit is phased out for higher income taxpayers. A different credit of up to $13,810 is available for the payment of qualified adoption expenses, such as adoption fees, attorney fees, and court costs. The credit is phased out at certain income levels, and there are certain restrictions as to the tax year in which the credit is available. Look into claiming the child and dependent care credit if you pay for the care of a child under age 13 while you work. It’s available for 20% (or more) of up to $3,000 of qualifying expenses ($6,000 for two or more dependents). This credit isn’t confined to child care expenses — it may also be applicable for the care of a disabled spouse or another adult dependent.

Higher Education Credits

The American Opportunity credit can be as much as $2,500 annually (per student) for the payment of tuition and related expenses for the first four years of college. A different credit — known as the Lifetime Learning credit — is available for undergraduate or graduate tuition and for job training courses (maximum credit of $2,000 per tax return). You’re not allowed to claim both credits for the same student’s expenses, and both credits are subject to income-based phaseouts and other requirements.

Sometimes Overlooked

One credit that taxpayers sometimes miss is the credit for excess Social Security tax withheld. If you work for two or more employers and your combined wages total more than the Social Security taxable wage base ($132,900 in 2019), too much Social Security tax will be withheld from your pay. You can claim the excess as a credit against your income tax. The alternative minimum tax (AMT) credit is another credit that’s easy to overlook. If you paid the AMT last year, you may be able to take a credit for at least some of the AMT you paid. The credit is available only for AMT paid with respect to certain “deferral preference” items, such as the adjustment required when incentive stock options are exercised.

Watson CPA PLLC can provide more details regarding these and other tax credits that may be available to you. Contact us Today!

 

 

Lease or Buy: Business Equipment

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Questions clients ask when deciding to Lease or buy business equipment.
Evaluating costs is more complicated than comparing the price of leasing a piece of equipment versus its purchase price. You will also want to consider these issues:
• How soon will the equipment need to be upgraded or replaced? Highly technical or specialized equipment becomes obsolete quickly and may be a good candidate for leasing.
• How will you arrange for service and repair? Leasing arrangements often include maintenance of the equipment. If you’re thinking of buying, research the equipment’s repair history as well as the cost and availability of reliable service.
• How long will you need the equipment? If your use will be short term, then leasing may be the better option.
Cash
If you’ve been leasing your equipment, then your costs have been predictable. Purchasing equipment can substantially alter your cash flow. Be sure you consider how purchasing your equipment might affect your business’ finances.
• Can you save money by buying or leasing equipment? If — and when — cash savings will be realized is an important factor for you to weigh.
• Do you have the cash available to purchase the equipment? If you use cash for a down payment, you may have less cash for operating and other business expenses.
• How will financing your equipment purchases affect your ability to get credit for other things? If you anticipate having future credit needs, you may want to avoid adding equipment loans to your current debt load.
Contact Watson CPA PLLC today before you decide to lease or buy!

Smart Pricing Strategies

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It’s a given that businesses need to be profitable to survive. A key element in making a profit is pricing. Here are some suggestions that can help you get your pricing right.

Identify Your Costs

If you don’t know what your product’s or service’s total costs are, you can’t price them accurately. What makes up total cost? The components may include:

  • Cost of materials or merchandise
  • Labor costs, including salaries plus benefits
  • Overhead costs, such as taxes, rent, insurance, marketing, utilities, and transportation

Determining how much you need to charge just to cover your costs is an essential first step in setting prices. Be sure to reevaluate your costs regularly. If you are experiencing difficulty moving certain products at an acceptable profit, your costs could be too high.

Know Your Customers

Customers generally fall into distinct categories. Some are very price sensitive. Others focus less on price and more on convenience. The implied status or exclusivity of certain goods and services is very important to certain other customers. Once you identify the type of customer you are targeting, it becomes easier to set your prices accordingly.

Know Your Competitors

Knowing what your competitors charge for similar products or services helps you position your business in the marketplace. For example, if you determine your competitors focus on low prices, you can decide if you want to differentiate your business by focusing on superior service.

Leveraging service as a value proposition may justify charging higher prices than your competition. Or there may be other differentiators that allow you to charge higher prices, such as exclusive merchandise or highly knowledgeable employees.

Experiment and Monitor

Look for ways you can sell options, service contracts, and add-ons to a primary product or service, perhaps by offering several “packages” at different prices. Or consider applying discounts based on the quantity ordered.

Continuously monitor your prices and your profitability. Knowing which products or services are making you money allows you to make data-driven decisions about inventory and pricing.

Watson CPA PLLC can help you price your products or services and help grow your business. Contact us today!