When it comes to saving for education, you aren’t limited to the 529 college savings plan. Learn about the Coverdell Education Savings Account to see if it’s right for your situation.

You’re probably familiar with 529 college savings plans. Named for Section 529 of the Internal Revenue Code, they’re also known as qualified tuition programs, and they offer tax benefits when you save for college expenses.

But are you aware of a lesser-known cousin, established under Section 530 of the code? It’s called a Coverdell Education Savings Account and it’s been available since 1998.

The general idea of Coverdell accounts is similar to 529 plans – to provide tax incentives to encourage you to set money aside for education. However, one big difference between the two is this: Amounts you contribute to a Coverdell can be used to pay for educational costs from kindergarten through college.

Generally, you can establish a Coverdell for a child under the age of 18 – yours or someone else’s. Once the Coverdell is set up, you can make contributions of as much as $2,000 each year. That contribution limit begins to phase out when your income reaches $190,000 for joint filers and $95,000 for single filers.

Anyone, including trusts and corporations, can contribute to the account until the child turns 18. There are no age restrictions when the Coverdell is established for someone with special needs.

While your contribution is not tax-deductible, earnings within the account are tax-free as long as you use them for educational expenses or qualify for an exception. In addition, you can make a tax-free transfer of the account balance to another eligible beneficiary.

Qualified distributions from a Coverdell are tax-free when you use the money to pay for costs such as tuition, room and board, books, and computers.

Please call for information about other rules that apply to Coverdell accounts. We’ll be happy to help you decide whether establishing one makes sense for you.

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IRS is now using collection agencies

The IRS is now using outside collection agencies to collect unpaid tax obligations. This new program will start slowly with only a few hundred taxpayers receiving mailings. The number will grow into the thousands later in the spring and into summer. Taxpayers who are contacted will first receive several collection notices from the IRS before their accounts are turned over to the private collection agencies. The agency will then send its own letter to the taxpayer informing them that the IRS has transferred the account to the agency. These agencies are required to identify themselves as working with the IRS in all communications.

Unfortunately, a change like this can often lead to confusion among taxpayers, which gives scammers a new opportunity to steal taxpayer dollars. The IRS is aware of the potential fraud problems and plans to continue to help taxpayers avoid confusion. The IRS reminds taxpayers that private collection companies, like the IRS, will never approach taxpayers in a threatening way; pressure taxpayers for immediate payment; request credit card information; or request payments in gift cards, prepaid debit cards, or a wire transfer. A legitimate letter from a collection agency associated with the IRS will instruct taxpayers to write a check directly to the IRS.

Has the IRS questioned something on your tax return? Ignoring it is not the proper course of action. Learn the do’s and don’ts of IRS correspondence.

After you file your tax return, the last thing you want to see is a notice from the IRS questioning your return. Some IRS notices involve very minor changes, like a correction to a Social Security number. Some are for serious changes that could involve a lot of money, such as a billing for more taxes, interest, or penalties due for an adjustment to your total tax liability.

So, what should you do if you get a letter from the IRS?

Here is a list of do’s and don’ts concerning contact from the IRS.

• Don’t ignore the notice; the problem will not go away.

• Act promptly. A quick response to the IRS may eliminate further, more complicated correspondence.

• If you agree with the IRS adjustment, you do not need to do anything unless a payment is due.

• If the IRS is requesting more money or a significant amount of new information, be sure to contact your tax preparer immediately.

• Always provide your tax preparer with a copy of any IRS notice, regardless of how minor it appears to be.

• Keep a copy of all the IRS correspondence with your tax return copy for the year in question.

Often taxpayers experience anxiety when they receive correspondence from the IRS. Don’t worry. The most important thing to remember is not to ignore the IRS. Bring any notice you receive to our office and let us assist you in resolving the problem quickly.

Two tax-smart ideas for your tax refund

If you have a tax refund coming, consider investing it in your future.

Are you looking forward to your tax refund? By now you know how much you’ll be getting and approximately when the cash will land in your bank account. The only question is, what’s the best way to put the money to work for you?
Here are two tax-smart ideas.

Fund your IRA. Depending on your income, making a contribution to a Traditional IRA could result in a deduction on next year’s tax return – and possibly a credit of as much as $2,000. For 2016, you can contribute a maximum of $5,500 to your IRA. Add another $1,000 for a total of $6,500 if you’re age 50 or older.

Invest in knowledge. Establish a qualified tuition plan, commonly called a Section 529 plan, or a Coverdell Education Savings Account. While contributions are not tax-deductible, the account earnings grow tax-free, and distributions used for educational expenses are also generally tax-free.

Do you need work-related training? Education required by your employer or courses that improve or maintain skills necessary for your present job, can qualify for a deduction.

Schedule Your Midyear Tax Planning Session

Most people don’t include tax planning on their summertime agenda, but maybe they should. The problem with waiting until the end of the year is that you reduce the time for planning strategies to take effect. If you take the time now to schedule a midyear tax planning review, you’ll still have seven months for your actions to make a difference on your 2017 tax return. In addition, proposed tax reform could be cause for additional changes to your tax plan. Planning now for 2017 taxes not only helps reduce your tax burden, but it can help you gain control of your entire financial situation. Give us a call to set up an appointment today.

Taxable or not taxable? The taxability of income, gifts, or services you receive might surprise you.

 

Have you ever wondered about the taxability of funds or services you receive? There are many areas in the tax code that cause confusion regarding what’s taxable. These are some of the most common.

 

 
Alimony. Alimony is taxable to the person who receives it and deductible to the person who pays it. Special rules apply. Make sure you have proper documentation as part of a divorce decree to ensure you can support your tax position.

 
Child support. Child support is not taxable to the person who receives it on behalf of their dependent. It is also not deductible for the person who pays it.

 
Free services. Free service is almost always taxable as ordinary income under IRS barter regulations. You should report the fair market value of services received as income on your tax return. If you exchange services, you can deduct allowable business expenses against the value of services received.
Illegal activities. Even income received from illegal activities is taxable income and must be reported. Incredibly, the IRS even states that stolen items should be reported at the fair market value on the date the thief stole the item.

 
Jury duty pay. This is taxable as ordinary income. Yes, even doing your civic duty can be a taxable event.

 
Legal settlements. A general rule of thumb with legal settlements is to consider what the settlement replaces. If the settlement revenue replaces a taxable item, like lost wages, the settlement often creates taxable income. This area is complex and often requires a detailed review.

 
Life insurance proceeds. Generally life insurance proceeds paid to you because of the death of an insured are not taxable. However, there are a number of exceptions to this general rule. For example, if you receive benefits in installments above the value of the life insurance policy at time of death, or if you receive a cash payout of a policy, you could have taxable income.

 
Prizes. Most prizes received should be reported as ordinary income using the fair market value of the item received. This area has been a major surprise to contestants on game shows and celebrities who have received large gifts at celebrations like the Academy Awards.

 
Unemployment compensation. Typically unemployment compensation is to be reported as taxable income. Many are confused by this because of a temporary federal tax law that made unemployment compensation non-taxable during the recent economic recession. This is no longer the case.

 
Some of these areas can be complicated. What is most important is to realize when to discuss your situation. Call us if you need help.

Tax filing reminder for nonprofit organizations

Nonprofit organizations are required to file annual reports with the IRS. Organizations with gross receipts of $50,000 or less can file an e-Postcard instead of the longer Form 990. The deadline for nonprofit filings is the 15th day of the fifth month after their year-end. For calendar-year organizations, the filing deadline for 2016 reports is May 15, 2017.

 

 

#TaxTipTuesday-Do you know the tax implications of your C corp.’s buy-sell agreement?

Private companies with more than one owner should have a buy-sell agreement to spell out how ownership shares will change hands should an owner depart. For businesses structured as C corporations, the agreements also have significant tax implications that are important to understand.

Buy-sell basics

A buy-sell agreement sets up parameters for the transfer of ownership interests following stated “triggering events,” such as an owner’s death or long-term disability, loss of license or other legal incapacitation, retirement, bankruptcy, or divorce. The agreement typically will also specify how the purchase price for the departing owner’s shares will be determined, such as by stating the valuation method to be used.

Another key issue a buy-sell agreement addresses is funding. In many cases, business owners don’t have the cash readily available to buy out a departing owner. So insurance is commonly used to fund these agreements. And this is where different types of agreements — which can lead to tax issues for C corporations — come into play.

Under a cross-purchase agreement, each owner buys life or disability insurance (or both) that covers the other owners, and the owners use the proceeds to purchase the departing owner’s shares. Under a redemption agreement, the company buys the insurance and, when an owner exits the business, buys his or her shares.

Sometimes a hybrid agreement is used that combines aspects of both approaches. It may stipulate that the company gets the first opportunity to redeem ownership shares and that, if the company is unable to buy the shares, the remaining owners are then responsible for doing so. Alternatively, the owners may have the first opportunity to buy the shares.

C corp. tax consequences

A C corp. with a redemption agreement funded by life insurance can face adverse tax consequences. First, receipt of insurance proceeds could trigger corporate alternative minimum tax.

Second, the value of the remaining owners’ shares will probably rise without increasing their basis. This, in turn, could drive up their tax liability if they later sell their shares.

Heightened liability for the corporate alternative minimum tax is generally unavoidable under these circumstances. But you may be able to manage the second problem by revising your buy-sell as a cross-purchase agreement. Under this approach, owners will buy additional shares themselves — increasing their basis.

Naturally, there are downsides. If owners are required to buy a departing owner’s shares, but the company redeems the shares instead, the IRS may characterize the purchase as a taxable dividend. Your business may be able to mitigate this risk by crafting a hybrid agreement that names the corporation as a party to the transaction and allows the remaining owners to buy back the shares without requiring them to do so.

For more information on the tax ramifications of buy-sell agreements, contact us. And if your business doesn’t have a buy-sell in place yet, we can help you figure out which type of funding method will best meet your needs while minimizing any negative tax consequences.

You might not be used to thinking of your investments in terms of taxable, tax-deferred, and tax-free. Learn why you might want to.

Diversifying your investments involves spreading your risks by investing in a variety of asset classes such as stocks, bonds, commodities, and real estate. But with a changing tax landscape, you might consider three more classes: taxable, tax-deferred, and tax-free.

 
Years ago, taxpayers often worked under the assumption that their tax bracket would be lower after they retire. Therefore, a common strategy was to defer as much taxable income as possible to the golden years. Now, however, with the possibility of higher tax rates in the future, it could be more efficient to pay those taxes today while rates remain lower. Since no one knows for sure what Washington will do, it might be time to hedge your tax risk and allocate your portfolio between accounts with differing tax consequences.

 
* Taxable accounts, such as savings or brokerage accounts, result in current taxation on earnings, but they also provide maximum flexibility. You can withdraw as much as you wish whenever you wish, with no IRS penalties. Keeping some of your nest egg in this type of account will provide immediate funds for major purchases, debt reduction, or emergencies.

 
* Tax-deferred accounts, such as IRAs or 401(k)s, only postpone the payment of taxes; eventually you will have to pay Uncle Sam when you withdraw the funds. But in the meantime, you generally receive a current-year tax deduction when you contribute, and the account can grow tax-deferred until you take it out at retirement.

 
* Tax-free accounts, such as Roth IRAs, are funded with after-tax dollars. What you put in, including any investment earnings, can be later withdrawn tax-free. The downside? You generally must wait until after age 59½ (and the account has to be open for five years) to make a tax-free withdrawal.

 
Diversifying your portfolio is only the first step. The next (and trickiest) step is properly investing in each tax class. For instance, your goal for a taxable account might be to generate growth while keeping taxable earnings to a minimum. This could be done by investing in tax-exempt municipal bonds or low-dividend yielding growth stocks.
In a tax-deferred account, investment income is not taxed until withdrawn, so earnings can come from any source without immediate tax implications. However, since you must start withdrawing funds from an IRA or 401(k) at age 70½, you might want to consider this in your planning.

 
Tax-free Roth IRAs offer the longest time horizon for investing since you are not required to make a withdrawal at any age.

 
In an era of high uncertainty and low-to-moderate economic growth forecasts, tax-efficient investing has never been more important. To review the tax implications of your investments, give our office a call today.

#TaxTipTuesday-Look beyond April 18 to the tax-related deadlines you face for the rest of 2017. If you don’t, you could become subject to interest and penalties or simply miss out on tax-saving opportunities

To help you make sure you don’t miss any important 2017 deadlines, here’s a look at when some key tax-related forms, payments and other actions are due. Keep in mind that this list isn’t all-inclusive, so there may be additional deadlines that apply to you.

Please review the calendar and let us know if you have any questions about the deadlines or would like assistance in meeting them.

June 15

• File a 2016 individual income tax return (Form 1040) or file for a four-month extension (Form 4868), and pay any tax and interest due, if you live outside the United States.
• Pay the second installment of 2017 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

September 15

• Pay the third installment of 2017 estimated taxes, if not paying income tax through withholding (Form 1040-ES).

October 2

• If you’re the trustee of a trust or the executor of an estate, file an income tax return for the 2016 calendar year (Form 1041) and pay any tax, interest and penalties due, if an automatic five-and-a-half month extension was filed.

October 16

• File a 2016 income tax return (Form 1040, Form 1040A or Form 1040EZ) and pay any tax, interest and penalties due, if an automatic six-month extension was filed (or if an automatic four-month extension was filed by a taxpayer living outside the United States).
• Make contributions for 2016 to certain retirement plans or establish a SEP for 2016, if an automatic six-month extension was filed.
• File a 2016 gift tax return (Form 709) and pay any tax, interest and penalties due, if an automatic six-month extension was filed.

December 31

• Make 2017 contributions to certain employer-sponsored retirement plans.
• Make 2017 annual exclusion gifts (up to $14,000 per recipient).
• Incur various expenses that potentially can be claimed as itemized deductions on your 2017 tax return. Examples include charitable donations, medical expenses, property tax payments and expenses eligible for the miscellaneous itemized deduction.