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Tax Update

Changes to 529 Plans -Start Saving for Jr!

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529 Plans – Does It Make Tax Sense to Contribute?

There have always been huge benefits to saving for higher education using 529 Plans. While the contributions are not deductible,

Jr in First Grade

earnings in a 529 plan grow federal tax-free and will not be taxed when the money is withdrawn to pay for college. The donor stays

in control of the account. The named beneficiary has no legal rights to the funds. You can be assured that the funds will be used for

the intended purpose. This differs from custodial accounts where the child takes control of the assets once he or she reaches legal age. 

Are there any state benefits?

Over 30 states currently offer a full or partial deduction or credit for 529 plan contributions. NJ does not offer any such deduction or credit. However, if you live or work in NY there is a deduction of $5,000 ($10,000 if you’re married filing joint) when you file your NY income taxes.

Are there income limitations?

Unlike Roth IRAs, 529 plans have no income limits, age limits or annual contribution limits. There are lifetime contribution limits per beneficiary depending on the state of approximately $250,000 to $400,000.

One can contribute up to $75,000 in one year per beneficiary and not be subject to a gift tax. Even if the contribution exceeds $75,000, no gift tax is paid until the donor has made lifetime gifts in excess of $10,000,000 (ten million dollars).

What if my child doesn’t use all the funds?

It’s not a “use it or lose it” account. 529 owners can change their beneficiaries at their own discretion and without limitation. For example, if one child doesn’t use all or any of the funds in the 529 plan, the account can be placed in the name of a sibling or other family member.

What’s New in 2018?

The new tax act allows qualified expenses under 529 plans of up to $10,000 per beneficiary per year to be used for elementary and secondary school expenses. These expenses include tuition at religious educational institutions.

And there’s more good news! Amounts from 529 plans may be rolled over to an ABLE account without penalty, provided that the ABLE account is owned by the designated beneficiary of that 529 account, or member of the beneficiary’s family. ABLE (Achieving a Better Life Experience) is a tax-free savings account which meets the needs of individuals with disabilities. An individual’s ABLE account can have up to $100,000 which does not count toward the SSI resource limit.

 Start Saving for Jr. Now!

529 plans were always attractive vehicles to save for higher education. The qualified expenses now expand to elementary and high school tuition. This opens planning opportunities for both low-income families, seeking to receive the earned income credit as well as for high-income families who want to reduce their taxable income.

 

 

IRS Offers New Simplified Option for ‘Office in the Home’ Deduction

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Beginning 2013, the Internal Revenue Service is offering a simplified method that many owners of home-based businesses and some home-based workers may use to figure their deductions for the business use of their homes.

The new optional deduction is capped at $1,500 per year based upon $5 a square foot for up to 300 square feet. This will serve to reduce the paperwork and recordkeeping burden on small businesses.

While the new safe-harbor may be more convenient, in many cases the traditional ‘office in the home’ deduction would yield a greater tax savings. Between mortgage interest, real estate tax and utilities, many taxpayers exceed the $1,500 cap of the new deduction. The new deduction also has the disadvantage that if it would result in a loss it cannot be taken. This is in contrast to a regular office in the home deduction, which can result in a loss carry-forward. The new deduction also cannot be combined with a loss that is carried forward from the previous year.  

Damaged by Hurricane Sandy? Get the Refund You Deserve

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Taxpayers who are victims of Hurricane Sandy have the opportunity of claiming unreimbursed disaster-related casualty losses on their federal tax returns by filing Form 4684 Casualties and Thefts. The loss may be deducted on either the upcoming 2012 return or on an original or amended 2011 return. Claiming the loss on a 2011 return should result in an earlier refund. However in some cases waiting to claim the loss on the 2012 return may result in a greater tax saving, depending on your personal income tax situation.

The deductible loss is calculated by starting with the lesser of:

  1. Adjusted cost basis (original purchase price plus improvements), or
  2. Difference between the fair market value before and after the hurricane,                                             (alternatively the cost of repairing and restoring the home to its original value)

Ten percent of the taxpayer’s Adjusted Gross Income (AGI) is then deducted from the loss to arrive at the deductible amount. To illustrate, let’s assume John’s house was damaged in the storm with the following details:

Cost of house (in 1950)                                                      $10,000

Improvements                                                                   $150,000

Fair Market Value before the Hurricane                                $500,000

Fair Market Value after the Hurricane                                  $200,000

John’s Adjusted Gross Income                                            $100,000

John may only deduct the lesser of his adjusted basis of $160,000 ($10,000 purchase price plus $150,000 of improvements) or the change in fair market value of $300,000 (original fair market value of $500,000 minus $200,000 fair market value after the storm), which leaves him with only a $160,000 loss before deducting another $10,000 (10% of his AGI of $100,000) to arrive at a deductible loss of $150,000.

To view Form 4684, click here:  IRS Casualty Loss Form.  If you would like assistance with amending your 2011 tax return and /or assessing your casualty deduction please contact one of Urbach & Avraham’s tax consultants at 732-777-1158.

Damaged by Hurricane Sandy? Let Your Employer Know

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The IRS has alerted employers and other taxpayers that because Hurricane Sandy is designated as a qualified disaster for federal tax purposes, qualified disaster relief payments made to individuals by their employer can be excluded from taxable income. Qualified disaster relief payments include:

  • Amounts to cover necessary personal, family, living or funeral expenses that were not covered by insurance
  • Expenses to repair or rehabilitate personal residences or repair or replace the contents to the extent that they were not covered by insurance

Another result of the Qualified Disaster status is that employer-sponsored private foundations may provide disaster relief to employee-victims without affecting their tax-exempt status.

IRS Offers Relief to Victims of Hurricane Sandy

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In the aftermath of Hurricane Sandy, the IRS have taken action to aid those affected by the storm. It has postponed various tax filing and payment deadlines that occurred starting in late October to February 1, 2013. These include:

  • Fourth quarter individual estimated tax payment
  • Payroll and excise tax returns
  • Tax-exempt organizations required to file Form 990 with a deadline between October 31, 2012 and January 31, 2013

In addition, the IRS is waiving failure-to-deposit penalties for federal payroll and excise tax deposits normally due on or after the disaster area start date. Taxpayers now have until November 26, 2012 to remit and avoid penalties.

Thus far, IRS filing and payment relief applies to Atlantic, Bergen, Cape May, Essex, Hudson, Middlesex, Monmouth, Ocean, Somerset, and Union counties in New Jersey. To view included counties in New York and Connecticut or for more information click here: IRS Tax Relief for NJ, NY & CT Hurricane Sandy Victims