Coordinating 529/ESA Plan Withdrawals With Education Expense Benefits

I’m seeing some confusion about this from tax clients this season, so I realized it’s worth explaining a few of the basics regarding education expenses, 529 college savings plan/ Coverdell ESA distributions, and tax credits and deductions.

There are five main tax benefits used to defray the cost of education:

  1. American Opportunity Tax Credit
  2. Lifetime Learning Credit
  3. Deduction for Qualified Education Expenses
  4. Student Loan Interest Deduction
  5. 529 or Coverdell Plan Contributions and Distributions

The American Opportunity Tax Credit reduces your federal tax bill by up to $2,500 per year for each eligible college student for whom you pay qualified tuition expenses. It can be claimed on behalf of an undergraduate for four years. And if you have more than one child in college at the same time, you can claim for each eligible child. The amount of the credit is calculated as 100% of the first $2,000 in qualified tuition and fees costs paid, plus 25% of the next $2,000 paid for such fees. For lower income taxpayers who don’t owe $2,500 in tax, up to $1,000 of the credit is refundable. Source: Coordinating 529 Plan Withdrawals With The American Opportunity Tax Credit

But there are limitations here: The credit phases out if you make too much money, you can’t claim any portion that was already paid with Pell Grant money, and you cannot claim the AOTC (or any of the education benefits) based on expenses that were also used to calculate the tax-free portion of a distribution from a 529 college savings or prepaid plan, or a Coverdell Education Savings Account (ESA).

The Lifetime Learning Credit is nonrefundable but can reduce the amount of tax you owe by up to $2,000. There is no limit to the number of years this credit can be claimed, but eligible expenses are only those charged by the school for attendance that were not paid for with the Pell Grant or 529 college savings or Coverdell ESAs.  Source: http://finance.zacks.com/can-claim-education-tax-deduction-used-pell-grant-pay-5114.html

The Tuition and Fees Tax Deduction is not allowable if you take one of the educational credits — and it’s usually not as good a deal. But if you don’t qualify for one of the credits (which frequently happens, if your income is too high or you’re not able to take your dependent as an exemption), this deduction can be used to lower your taxable income by up to $4,000. You do not have to itemize deductions to get this deduction; instead, it adjusts your reported income.  Obviously, lowering your income is not as good as reducing your tax with a credit, but it’s still a nice benefit.  As with the others, the deduction is limited to the portion of expenses not paid for with the Pell Grant or 529 college savings or Coverdell ESAs.  Source: http://finance.zacks.com/can-claim-education-tax-deduction-used-pell-grant-pay-5114.html

The Student Loan Interest Deduction is something that may be a benefit in future years — but be careful: predatory for-profit colleges and universities are constantly touting this benefit as a reason to take out large loans, but the benefits often do not come to fruition.  For one, there’s a pretty low limit as to how much you can deduct each year — only $2,500 — and if you exceed that limit, the balance does not carry forward.  That college probably also promised you that getting a degree would make you much more valuable to society, and your income would skyrocket — but the loan interest deduction phases out pretty quickly as your income rises, so chances are, if they’re right… most of this interest will not end up being deductible.  Source: https://www.irs.gov/taxtopics/tc456.html

529 College Savings Plans and Coverdell Educational Savings Accounts are both great vehicles to saving for college.  Similar to a Roth IRA, these contributions are not deductible at the federal level, but all of the principal, as well as the interest, dividends and capital gains — all growth — is non-taxable upon distribution if used for qualified education expenses.  (This is pretty fantastic.)  Add to it that most states will allow a deduction for contributions, and you’ve got a no-brainer for college savings.  The important bits to remember here are: each state has pretty strict rules about what qualifies as a plan; each state decides whether the withdrawal is free of income tax or simply deductible from income; and — here’s the theme of my post — if you take a distribution to pay for educational expenses, you may not also take one of the other educational tax benefits above.  529 plans and ESAs are pretty complicated; make sure to compare and contrast, and understand the potential penalties, before signing up.  Source: http://www.360financialliteracy.org/Topics/Paying-for-Education/College-Savings-Options/529-Plans-vs.-Coverdell-Education-Savings-Accounts

I want to recommend two websites with excellent examples of how to combine these plans to get the best overall tax benefits.  Scroll part-way through to see the “example” sections, and see if any of these scenarios come close to matching your own situation.  Have fun!

Winter Storm Extension: IRS Gives Affected Businesses Extra Time to Request 6-Month Extension

S-Corporations and Partnerships had a deadline of March 15th this year to file their returns or request an extension.  However, because of Winter Storm Stella, which hit portions of the Northeast and Mid-Atlantic, the IRS granted affected businesses an additional 5 days to do so.

Business taxpayers who were victims of the storm, and unable to file their tax return by the due date of March 15, can request an automatic extension (by filing the usual Form 7004) on or before March 20, 2017.  Important tip if filing Form 7004 by paper: eligible taxpayers taking advantage of this relief should write “Winter Storm Stella” on their Form 7004 extension request.  However, the fastest and easiest way to get an extension is still to file this form electronically.

Source: Winter Storm Extension: Many Businesses Have Extra Time to Request A Six-Month Extension

IRS Data Retrieval Tool for FAFSA Will Be Unavailable For “Several Weeks” — What Are The Alternatives?

Important news from the IRS and the U.S. Department of Education Office of Federal Student Aid:

The IRS Data Retrieval Tool on fafsa.gov and StudentLoans.gov is currently unavailable. We are working to resolve the issue as quickly as possible. However, at this time, the IRS anticipates the online data tool will be unavailable for several weeks.

The online FAFSA and IDR application tool itself remains operational — it’s just the IRS’s DRT portion, which provides tax data that automatically fills in some of the financial information on the application.  The income information needed to complete the FAFSA form and apply for an IDR plan can be found on your tax return.  If you didn’t keep a copy of your tax return, you may be able to access the tax software you used to prepare your return or contact your tax preparer to obtain a copy (please note that many preparers charge a small fee for a copy, since you should be saving the pdf they send you in a safe, easily retrievable place).

If you are unable to get a copy of your tax return, visit www.irs.gov/transcript to view and download a summary of your tax return, called a tax transcript, at Get Transcript Online.  You must verify your identity to use this tool — review the rigorous identity authentication requirements for Secure Access before attempting to register.  You also may use Get Transcript by Mail or call 1-800-908-9946, and a transcript will be delivered to your address of record within five to 10 days.

While the Data Retrieval Tool is offline, the IRS offers other ways for students and families to find the tax information they need to complete student financial aid applications.

As part of a wider, ongoing effort at the IRS to protect the security of data, the IRS decided to temporarily suspend the Data Retrieval Tool (DRT) as a precautionary step following concerns that information from the tool could potentially be misused by identity thieves.

Source: Internal Revenue Service (IRS) and U.S. Department of Education Office of Federal Student Aid (FSA) Statement‎ about the IRS Data Retrieval Tool (DRT)

Webinar: Organizing & Operating a 501(c)(3) Non-Profit

CPA Academy is one of my favorite sources for topic-specific accounting education, and even better — their webinars are free.  Here’s one on a topic I’ve been asked about frequently: how to organize and operate a non-profit.  Jairo Cano, a tax attorney with Agostino Law, will be teaching this 1.5-hour webinar on Monday, March 13 and again on Monday, May 1.  Here’s a summary of the course:

In 2013, the IRS reported that tax exempt organizations held over $3.5 trillion in assets and received more than $1.8 trillion in gross receipts. Given the amount of money that passes through nonprofit organizations, it is not surprising that the IRS has increased its focus on these organizations. This webinar, offered by a leading tax controversy attorney will introduce attendees to:

  • The procedures to request and receive Section 501(c)(3) tax exempt status.
  • The requirement that the organization be organized for an exempt purpose and that it operate exclusively for exempt purposes. This discussion will include an analysis of the restrictions related to the organization’s ability to engage in for-profit activities.
  • The requirement that the organization not operate in a manner that results in providing private inurement to shareholders or a prohibited private benefit. This discussion will include an analysis on how the IRS evaluates compensation and payments for goods and services.
  • The Unrelated Business Income Tax, when it is required and how it is calculated.
  • The procedures to challenge a denial or revocation of exempt status at the administrative level as well as in Tax Court​.

This short, valuable webinar is appropriate for bookkeepers, accountants, controllers, and other non-profit professionals — as well as those looking to enter the industry or volunteer as a board member.

Source: CPA Academy

What Trump’s Executive Orders Could Mean For Taxes

Excellent, objective analysis from the most recent issue of Accounting Today on the challenges faced by preparers and tax planners — and their clients, American taxpayers — due to recent executive orders.

In rushing to get out executive orders in the first week in office to help fulfill campaign promises, the Trump administration has often acted without sufficient forethought and before Trump’s entire team has been approved by the Senate and taken their posts. Hopefully, as the Secretary of the Treasury and other key policy positions in the Treasury take their places, there will be a more careful review of how these executive orders and memoranda should apply in the tax context, with adjustments made accordingly. In the meantime, taxpayers and tax return preparers should probably assume that they will have no effect on 2016 tax return preparation. With respect to 2017, however, we will all have to stay tuned.

Read the full article here: Tax Strategy: What Trump’s executive orders could mean for taxes.

IRS Tax Time Guide Released

The IRS has put together a “Tax Time Guide” to help taxpayers navigate the various tools and resources they have available to them to answer tax questions.

Below are a few of the most common tax time queries and the tools to find answers:

Checking on a tax refund?

Taxpayers can easily find information about their refund by using the “Where’s My Refund? tool. It’s available on IRS.gov and on the official IRS mobile app, IRS2Go. Refund information is normally available within 24 hours after the IRS receives a taxpayer’s e-filed return or four weeks after the IRS receives a mailed-in paper return. The system is updated daily, so there’s no need to check more often.

Need help preparing a tax return?

Through the Volunteer Income Tax Assistance and Tax Counseling for the Elderly (VITA/TCE) programs, eligible taxpayers can get help filing their return for free at one of several thousand community-based tax help sites. Sites are staffed by IRS trained and certified volunteers. Low- and moderate-income taxpayers and those age 60 and above can find the nearest site on IRS.gov’s VITA/TCE Site Locator.

Want a free do-it-yourself tax option?

The IRS Free File program, available at IRS.gov, offers 12 brand-name tax preparation software packages for free to the 70% of taxpayers who earned $64,000 or less in 2016. By answering questions in an interview format, the software does the work of finding deductions, credits and exemptions for which the taxpayer qualifies. For those earning more than $64,000 who are comfortable preparing their own taxes, IRS.gov offers Free File Fillable Forms. These are the electronic versions of paper IRS tax forms.

Need a tax return transcript?

For those who need a copy of their tax return, the IRS has an online tool to help. Transcripts are free and available for the most current tax year after the IRS has processed the return. Get Transcript provides online access to transcripts. Taxpayers can view, print or download their transcripts.

Need to make a payment?

IRS Direct Pay offers taxpayers the fastest and easiest way to pay what they owe. Available through the Pay Your Tax Bill icon on IRS.gov, this free online system allows individuals to securely pay their tax bills or make quarterly estimated tax payments directly from checking or savings accounts without fees or pre-registration. See IRS.gov/Payments for information on this and other payment options.

Can’t pay a tax bill?

For taxpayers concerned about a tax bill they can’t pay, the Online Payment Agreement tool can help determine if they qualify for a payment plan with the IRS. The Offer in Compromise Pre-Qualifier can help determine if a taxpayer qualifies for an offer in compromise. An Offer in Compromise is an agreement with the IRS that settles a person’s tax liability for less than the full amount owed.

Questions about an amended return?

The “Where’s My Amended Return? tool provides the status of an amended tax return, Form 1040X. Taxpayers can check on the current year 1040X and up to three prior years. Allow up to three weeks after filing to check on the initial status, and up to 16 weeks for processing.

What about tax withholding?

The IRS Withholding Calculator helps employees make sure the amount of income tax taken out of their pay is neither too high nor too low. This tool can be particularly useful to taxpayers who, after filling out their tax returns, find that the refund or balance due was not what they expected.

Source: IRS Releases Tax Time Guide: Use IRS.gov Tools to Answer Tax Questions

Chicago Bag Tax “Floor Tax Return” Due March 3rd

Just a reminder that the “floor tax return” for the Chicago Bag Tax is due this Friday.  Don’t risk a $100 fine — take a look at my comprehensive guide to the bag tax and get this off your “to-do” list asap.  Please share far and wide with other small business retailers in Chicago; I’ve found very few how-to resources, and none that break it down step-by-step, and I’d love for my research for my own clients to be of use to other small business owners.

For Tax Preparers: Forms 1095-B and 1095-C Not Required For Filing — Alternatives Are Acceptable

I had a tough time getting 1095-B & 1095-C forms from clients last year in time for filing, as many of their health insurance providers were delayed in sending them out.  Unfortunately, late last year, the IRS decided to allow providers to file extensions again, and I was dreading the same experience.

So you can imagine that I was pretty pleased to read, in today’s National Association of Tax Professionals e-newsletter:

According to Question 14 on the IRS Health Care Information Forms FAQ, you do not have to wait for either Form 1095-B or 1095-C from your client’s coverage provider or employer to file the individual income tax return. You can use other forms of documentation in lieu of the Form 1095 information returns to prepare the tax return. Other forms of documentation that would provide proof of a taxpayer’s insurance coverage include:

  • Insurance cards.
  • Explanation of benefits statements from the insurer.
  • W-2 or payroll statements reflecting health insurance deductions.
  • Records of advance payments of the premium tax credit.
  • Other statements indicating that the family had health care coverage.

Of course, many of these documents will not confirm that insurance was for the entire year, or all members of the family, so it is still best practice to get the 1095-B or 1095-C.  But when it’s unobtainable, it shouldn’t delay your client’s filing — just make sure they provide it to you once they are able.

Source: Questions and Answers about Health Care Information Forms for Individuals (Forms 1095-A, 1095-B, and 1095-C)

IRS Puts ACA Coverage Requirement On Hold — But Taxpayers Must Still Follow the Law

I’m seeing a lot of questions on my tax professional newsgroups and discussion boards about the so-called “silent return” provision that has made so much news lately, and I want to set the record straight here.

For this filing season, the IRS had put system changes in place “that would reject tax returns during processing in instances where the taxpayer didn’t provide information related to health coverage.”  (I.e., they were “silent” on the topic.)  However, due to an executive order, they have removed this barrier to filing.

From a recent IRS website post:

“Consistent with that, the IRS has decided to make changes that would continue to allow electronic and paper returns to be accepted for processing in instances where a taxpayer doesn’t indicate their coverage status.”

However — and herein lies the confusion — this does not mean the ACA laws have changed (yet).

“Legislative provisions of the ACA law are still in force until changed by the Congress, and taxpayers remain required to follow the law and pay what they may owe‎.”

What it does mean is (as with any other area in a return where a taxpayer or preparer enters information that is incorrect, or does not answer a required question), the IRS has every right to come back and inquire, request further information, or even audit.  If the taxpayer is found to be out of compliance with the law, then corrections, penalties and interest would be due.

“Processing silent returns means that taxpayer returns are not systemically rejected by the IRS at the time of filing, allowing the returns to be processed and minimizing burden on taxpayers, including those expecting a refund. When the IRS has questions about a tax return, taxpayers may receive follow-up questions and correspondence at a future date, after the filing process is completed‎.”

This is no different than how the same issue was handled last filing season: the requirement was there, but ignoring it did not prevent your return from being e-filed or processed.

“This is similar to how we handled this in previous years, and this reflects the normal IRS post-filing compliance procedures that we follow.”

In other words — if your client refused to answer whether they were required to file 1099s or not, you wouldn’t just leave the answer blank on the tax return; you’d make it clear to the client that this is required information.  It’s the same thing here.  Just because refusing to answer the question about health insurance coverage will no longer prohibit the return from being processed does not mean you do not have to answer the question.  You are simply inviting your client to be audited, which is doing them a disservice.

More here, from Accounting Today: IRS puts new regulations and ACA coverage requirement on hold

QB Online Referral Pricing Increase Soon!

I just got word that my accountant-referral pricing on QuickBooks Online is changing soon.  It’s currently a “35%-off for the life of the account” discount.  Due to cost increases from Intuit, they have to switch to “50%-off for 12 months and then full-price afterwards”.  So, if you are thinking of moving to QBO from QB Desktop or spreadsheets, now is the time to do it.

(Yes, of course they’d do this during tax season. Sigh.)

To be fair, the 50%-off for 12-months is still better pricing than Intuit’s 50%-off for 6-months, but it’s not as good as perpetual 35%-off.  Please get in touch with me immediately if you’re interested in trying to get under the wire for the old deal; they haven’t given me an actual date for the change yet, and I’m not sure if I’ll get advance-warning beyond what they’ve just sent.