SECTION 529 COLLEGE SAVINGS PLAN

 

Recently I was asked about the tax consequences of contribution to a Section 529 College Savings Plan.
 
The IRS website tells us a Section 529 plan is -
 
“A plan operated by a state or educational institution, with tax advantages and potentially other incentives to make it easier to save for college and other post-secondary training, or for tuition in connection with enrollment or attendance at an elementary or secondary public, private, or religious school for a designated beneficiary, such as a child or grandchild.”
 
And -
 
“Earnings are not subject to federal tax and generally not subject to state tax when used for the qualified education expenses of the designated beneficiary.”  
 
You can contribute as much as you like to a 529 plan, as there are no annual contribution limits under federal law. Technically the contribution is limited to “the amount necessary to provide for qualified expenses of the beneficiary”.  However, individual plans may set a lifetime contribution limit.   
 
Contributions to a 529 plan are considered “gifts” under the federal Estate Tax rules.  However, you can contribute up to five years of excluded gifts in a single year, with the contribution spread equally across five years.  Any additional contributions during the year will be considered “taxable” and applied against the lifetime Estate Tax exclusion (currently $13.99 Million).  In any case, if this option is chosen a Gift Tax return would need to be filed (due same time as the Form 1040).   
 
The gift tax exclusion for 2025 is set at $19,000 per recipient.  You could contribute up to $95,000 in 2025 under 5x annual exclusion rule - $19,000 per year for 2025, 2026, 2027, 2028 and 2029.  If the annual gift tax exclusion increases to, for example, $20,000 for 2026 you can contribute $1,000 to the 529 plan in 2026 as an “excluded” gift, and so on going forward.  
 
Many states have 529 plans and allow for a state tax deduction for a portion of the contribution by a resident to the state plan.  For example, you can deduct up to $10,000 of contributions made during the calendar year to an NJBEST account on your NJ-1040.
 
Qualified education expenses include -
 
· Tuition and fees
· Books
· Required school supplies
· Room and board — the beneficiary must be at least a half-time student; includes off-campus housing up to the cost of on-campus room and board
·Computers and related accessories, such as printers, internet access and educational software primarily used by the beneficiary
· Up to $10,000 per year in tuition for K-12 schools
· Up to $10,000 (lifetime) in principal and interest payments on qualified education loans
 
Annual distributions that are more than qualified expenses paid during the year are considered taxable income to the beneficiary student (not to the contributor) and the amount that is considered “earnings” (interest, dividends, gains on the money invested) may be subject to a 10% penalty.
 
An unused balance after completing the beneficiary’s education may be able to be rolled-over to a ROTH IRA for the beneficiary.
 
If you are considering making a contribution to a Section 529 plan for a child or grandchild, you should consult your tax professional.
 
TTFN 

ONE BIG, BUT NOT SO BEAUTIFUL, TAX BILL

 

The House Ways and Means Committee has “marked up” the tax component of what has been called One Big Beautiful Bill”.  Click here for the TAX FOUNDATION’s analysis of the bill.

The bill would basically make the GOP Tax Act, set to expire on December 31, 2025, permanent, with some adjustments.

As I posted when the GOP Tax Act was first past, it contains good, bad, and ugly.  Here, from a post from last year, is a look at the major tax provisions of the Act affecting Form 1040 that are expiring, and my thoughts on whether they should be renewed.

ABOVE THE LINE:

1. Reduced tax rates.

I would support keeping the lower tax rates and revised brackets of the Act.

2. Replacement of the deduction for Personal Exemptions with an increased Standard Deduction and Child Tax Credit.

I personally preferred the “old” personal exemption deduction, but I would not object to continuing without it and keeping the increased Standard Deduction amounts and the increased Child Tax Credit.  However, while I have no problem with a carryover of excess credits, I strongly oppose all refundable credits, and therefore oppose any unused portion of the Child Tax Credit being refundable.

3. The higher exemption amounts and phase-out ranges of the dreaded Alternative Minimum Tax (AMT).

I support keeping these increases.  I oppose the existence of the AMT and would like to see it totally repealed.

4. The larger lifetime Estate and Gift Tax exemption.

I support keeping these increases.  I am not really a fan of the Estate or Gift Tax – however I support keeping it if it maintains the step-up in basis for inherited assets.

5. Limiting the deduction for job-related moving expenses to members of the military.

I oppose this limit and would welcome the return of the adjustment to income for all job-related moving expenses.  I would not object if this deduction was moved to Schedule A.

6. The Section 199A 20% Qualified Business Income deduction.

I see no reason for this deduction and would not continue it.  I do not believe QBI (basically self-employment income) should be taxed any less or differently than wages, pensions, or other “ordinary” sources of income.

BELOW THE LINE:

1. The $10,000 SALT (state and local tax) cap.

I strongly oppose this limitation on the deduction of state and local income or sales tax and property tax.  This deduction is one way of “geographically equalizing” the income tax (see my commentary “The SALT limitation from a different perspective”).  If it must be continued, the $10,000 limit should be increased to $20,000 on joint returns (and $10,000 for each spouse on separate returns) to make it fair.  FYI, the current bill increases this deduction to $30,000, with a complicated phase down to the original $10,000 limit. 

2. The limitation of the deduction of mortgage interest to acquisition debt.

I do not oppose the elimination of the deduction for up to $100,000 of “home equity” debt and would not object to keeping the mortgage interest deduction limited to “acquisition” debt.  I also have no problem with keeping the lower $750,000 principal limit on the deduction.

3. The elimination of the deduction for theft losses and the limitation of the deduction for casualty losses to those occurring as the result of a federally declared disaster.

I really do not care if this elimination and limitation remains or goes away, although if forced to provide an opinion I think I would support reinstating the casualty loss deduction for all casualties.

4. The elimination of Miscellaneous Itemized Deductions that were previously subject to the 2% of AGI exclusion – employee business expenses, investment expenses, tax preparation costs, etc.

I support allowing these types of itemized deductions and would want this deduction reinstated.  I oppose the 2% of AGI exclusion on these deductions.

5. The elimination of the reduction of total itemized deductions based on AGI.

I oppose reducing total allowable itemized deductions based on AGI (a “back door” tax increase) and would want to keep this provision of the Act.

The bill would also eliminate tax on tips – a stupid “gimmick” used by Trump during the campaign to “buy” votes.  Clearly, as previously posted (click here), I oppose this.

Your thoughts?

BTW – my book THE JOY OF PREPARING TAXES includes a detailed discussion on how I would rewrite the US Tax Code.

TTFN

 

THE JOY OF PREPARING TAXES

 

Most regular readers know that I retired from preparing income tax returns a few years ago after completing my 50th consecutive tax filing season.

I have written a book about my 50 years as a paid tax preparer titled THE JOY OF PREPARING TAXES.

In addition to reminiscing about my 5 decades in “the business” I also provide my best advice, debunk some tax myths, talk about the benefits of blogging, and end with a detailed discussion of how I would rewrite the US Tax Code to make it more fair, equitable, and simple.

I will send this book to you as a pdf email attachment for only $3.00!

Send your check or money order for $3.00 payable to “Taxes and Accounting, Inc”, and your email address, to –

THE JOY OF PREPARING TAXES
TAXES AND ACCOUNTING, INC
PO BOX A
HAWLEY PA 18428

TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

 Some BUZZ is better than no BUZZ.

*  The IRS reports “West Virginia storm victims qualify for tax relief; various deadlines postponed to Nov. 3”.

* Russ Fox is currently running his annual series of “Bozo Tax Tips”.  Click here to check out the series.

* Sean Mullaney, the F.I. TAX GUY, explains in detail “What are Section 199A Dividends?”

* The “IRS reminds taxpayers to access or create an IRS Online Account today”.   

TTFN

YEAR-END CONSOLIDATED 1099 TAX REPORTING STATEMENTS

 

Back when I still prepared 1040s (and 1040-SRs) I was fascinated by the differences in the Year-End Consolidated 1099 Tax Reporting Statements issued by the various brokerage and mutual fund “houses” – Ameritrade (before being bought by Chuck), Charles Schwab, JP Morgan, Prudential, Merrill Lynch, TIAA, Wells Fargo Advisors, etc. and Fidelity and Vanguard Brokerage Services.  Each house’s statement was different.

All started off with the basic required 1099-DIV, 1099-INT, 1099-OID, 1099-MISC, and 1099B format with summary numbers for total ordinary dividends, qualified dividends, capital gain distributions, Section 199a dividends, foreign tax paid, exempt (Municipal) interest and exempt interest dividends, Treasury and Savings Bond interest, bond premium, etc.  What was different was the format and information provided in the accompanying “supplemental” statements.  The format and extent of supplemental information is different for each “house” consolidated tax-reporting statement.

As a tax preparer the more extensive and detailed the information provided the better. 

The supplemental listings provided detailed individual information for the specific stocks, mutual funds, and interest sources.  For dividends the statements identify the total, non-qualified, qualified, capital gain, Section 199a, etc. components of each separate investment – some in “spreadsheet” format and some in separate listings.  Obviously, I preferred the spreadsheet format – I did not want to add up the separately listed components of a specific mutual fund investment to come up with the total ordinary dividends for that fund.

All 1099-B statements provided the individual short-term and long-term sales listed by specific investment broken down into Schedule D categories A, B, D, E, and F.  I wanted a summary compilation listing the totals on one page for the categories and sub-categories (like the one on the first page of the Fidelity Brokerage Services statement), which not all houses provided.

Some statements included a listing the percentage of qualified US government obligation income for specific mutual funds and the state and territory specific percentages for municipal bond mutual funds – and a few actually applied the appropriate percentages to the individual fund investments (more better).

Only one house provided everything I needed in the perfect format, with actual references to tax form and schedule lines – TIAA (Teachers Insurance and Annuity Association).  And not on all statements, but only on the “enhanced” statement provided to “preferred” customers.  I only had one client, a former college professor, who received this statement for several years but, sadly for me, she changed brokerages toward the end of our association.

These statements are mailed to taxpayers and are also available to download online at the house website.  I found that there was a difference in the statement from Fidelity Brokerage Services mailed to customers and the one available online.  The one that was mailed did not include all the supplemental detail that the online statement did.  I told clients who invested with Fidelity to send me the online statement and not the one that was mailed to them.

I always wished all brokerage and mutual fund houses would produce their year-end tax reporting statement in the same format with the same amount of detailed information – preferably the format and information provided in the enhanced TIAA statement.

TTFN

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

* Robert W Wood explains “IRS Forms 1099 Can Be Wrong. Here’s What You Can Do About It” at FORBES.COM.

Do not just assume a 1099 form you receive to report income is correct.  Always check the form against your own records.  And also check to make sure the Social Security number is correct.  Not just Form 1099-NEC but also 1099s from banks and other payers for interest and dividend income.

A bank may issue one Form 1099-INT for all the accounts – savings, money market and CDs – that belong to the same name and Social Security number. There may be 6 or 7 accounts listed on a 1099-INT. It is important to verify each account listed on the form to make sure all of them belong to you. One of my clients received a 1099-INT last year with someone else’s account, that earned $300+ interest, included in the listing! Had he not carefully checked the form he would have paid close to $100.00 in unnecessary federal and state income tax. If you find an error on a Form 1099-INT go to the bank immediately and request a corrected form.

* The IRS “Tax Time Guide” tell us to “Use Where’s My Refund? tool to track refund status”.

* It’s that time of year again – “Dirty Dozen tax scams for 2025: IRS warns taxpayers to watch out for dangerous threats”.

*  The saga continues.  Russ Fox reports “BOI Reporting Again Voluntary” at TAXABLE TALK.

* NJ has changed its previous policy regarding the $50 property tax credit for senior and disabled homeowners who don’t have to file a state income tax return,  The NJ Division of Taxation explains “How to Claim Your Property Tax Credit for 2022 and 2023”.

TTFN 

WHAT’S THE BUZZ, TELL ME WHAT’S A HAPPENNIN’?

 

* Congratulations to Russ Fox on the 20^th Anniversary of his blog TAXABLE TALK – “20 Years Ago Today . . .”

* The latest in the BOI saga – “FinCEN Extends Beneficial Ownership Information Reporting Deadline by 30 Days; Announces Intention to Revise Reporting Rule”.

“With the February 18, 2025, decision by the U.S. District Court for the Eastern District of Texas in Smith, et al. v. U.S. Department of the Treasury, et al., 6:24-cv-00336(E.D. Tex.), beneficial ownership information (BOI) reporting requirements under the Corporate Transparency Act (CTA) are once again back in effect.”

* The damage of the Trump/Musk Administration has hit the IRS.  Michael Cohen tells us “IRS lays off thousands of employees” at ACCOUNTING TODAY -

“The threatened layoffs of Internal Revenue Service employees appeared to be underway Thursday, with estimates of between 6,000 and 7,000 employees being laid off at the agency in the middle of tax-filing season.”

* And at FORBES.COM Howard Gleckman warns “How DOGE’s Access To IRS Data Puts Taxpayer Information At Risk” (highlight is mine) -

“The Trump Administration’s Department of Government Efficiency has pressed the IRS for permission to access individual tax return information of U.S. households and businesses. While the DOGE team says it needs taxpayer data to search out ‘waste, fraud, and abuse, such a move puts at risk deeply personal information on more than 150 million tax filers, with no clear benefit.”

The only true “waste, fraud, and abuse” is by Trump and his cabinet of incompetent, unqualified, and inappropriate arse and ring kissers.

THE LAST WORD

Here is a quote from Prof Jim Maule’s MAULED AGAIN post “Tax Rates -- Just Two Generations Ago” -

“It's a wonder what the lack of education cand do to a person. It's also a wonder what a bad education can do to a person. What's sad is what it does to everyone else.”

It is truly sad that a lack of education, or poor education, put a deplorable and despicable, crooked and corrupt, ignorant and incompetent demagogue who is intent on destroying American democracy and true American values in the White House!

TTFN