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 

THE SECOND ECONOMIC STIMULUS PACKAGE

 

“The Consolidated Appropriations Act of 2021” was finally signed into law by Trump on Sunday night, December 27.  In addition to the $600 per taxpayer and dependent child Economic Impact Payment (discussed here), the Act includes the following items that affect Form 1040 (and 1040-SR) filers -

FOR 2020 RETURNS

Taxpayers can use their 2019 income to determine eligibility for and calculate the 2020 Earned Income Credit and Additional Child Tax Credit if it results in a bigger credit than actual 2020 income.

FOR 2021 AND BEYOND RETURNS

* Business-related “food or beverages provided by a restaurant” are 100% deductible for 2021 and 2022 (remember - employee business expenses, including employee-paid business meals, are no longer deductible on Schedule A).   

* The "above-the-line" deduction of up to $300 per taxpayer for qualifying charitable contributions for taxpayers who do not itemize on Schedule A, a per return deduction for 2020, is per taxpayer for 2021.  The maximum deduction for a married couple filing a joint 2021 return is $600.

* The 7½% of AGI exclusion for medical expenses on Schedule A is made permanent

* The MAGI-based phase-out amounts for the Lifetime Learning Credit are permanently increased to equal the amounts for the American Opportunity Credit.

* The lifetime $500 credit for 10% of qualified residential energy purchases is extended for 2021.

The Act also included new and extended business and payroll tax relief and other non-1040 items.

TTFN

RECORDKEEPING FOR COLLEGE

If you have a child beginning college this fall be sure to have him or her save and give to you the receipts for all textbook purchases.  If purchased online have them print hard copies of the receipts.  The American Opportunity Credit, available for the first 4 calendar years of undergraduate education, allows you to include the cost of books with tuition and fees in calculating the credit.

You should also save, again in hard copy, the bills, receipts and “Bursar’s Statements” that itemize the individual charges for tuition, fees, room and board, and other items and amounts and sources of payments.  You should receive a Form 1098-T from the school in January of 2020, but these forms do not always provide all the information you may need.

If you are paying separately for off-campus lodging for your student while away from home at college keep track of these payments also. 

In addition to claiming an American Opportunity Credit, or a Lifetime Learning Credit, if you have used withdrawals from a Section 529 Qualified Tuition Program to pay for all or some of the college expenses the detailed information of expenses and payments will be needed.

If your level of income turns out to be too high to claim a full American Opportunity Credit your student child may be able to claim a credit on his or her tax return if they have sufficient income to have to pay tax.

TTFN

TECHNICAL CORRECTIONS

Everyone admits that there needs to be “technical corrections” made to the hastily written GOP Tax Act.  In addition to those being discussed, here are some changes I believe should be enacted -

+ If Congress believes the deduction for state and local taxes should be limited to $10,000, the maximum amount allowed for a married couple filing a joint return, currently also $10,000, should be increased to $20,000.  Two single individuals living together can claim $10,000 each for a total of $20,000.  Why should a married couple be penalized by limiting the deduction to $10,000 on a joint return?

+ The Child Tax Credit of $2,000 per child, increased from the previous $1,000 to make up for the loss of the personal exemption, is only allowed for dependent children under age 17.  A dependent child who turns age 17 during the year gets the lower $500 “Other Dependent Credit”.  It is my assumption that the Child Tax Credit was intended to cover dependent children through high school.  The age threshold for the higher Child Tax Credit should be changed from under age 17 to under age 18 or even under age 19. 

+ The American Opportunity Credit was intended to provide tax relief for the 4 years of college leading to an undergraduate degree.  Currently the credit is only available for 4 tax years.  But since a college year begins in the fall of one year and ends in the spring of another year a 4-year degree program actually takes place within 5 calendar years.  Qualified calendar-year taxpayers, which almost everyone is, should be allowed to claim the American Opportunity Credit for 5 tax years.

As an aside - I do not believe the American Opportunity Credit, or any credit or deduction that is in reality a distribution of social welfare or other government benefits, belongs in the US Tax Code.  But as long as it is there it should be done properly to accomplish its intended purpose.  And I oppose the $10,000 SALT limitation, but if it is there it should be applied fairly.

So, what do you think?

TTFN

THE ESSENTIAL 1040

As mentioned in this week’s BUZZ installment, I attended the National Association of Tax Professionals’ annual year-end tax update “The Essential 1040” on Monday at Bally’s on the Boardwalk in Atlantic City.  I attend this one-day seminar every year, and have done so for over 30 years, and also occasionally attend the second day, “Beyond the 1040” (although not this year) depending on the topics being discussed.

Bally’s is a good location.  I have no complaints about the classroom facility or my room, which, as a member of the Total Rewards program, was extremely reasonable – certainly cheaper than that at any other location this class is offered.  This year the seminar included, as it does every year, a relatively skimpy, and definitely not diabetic-friendly, continental breakfast buffet, and an afternoon dessert break.  And, for the first time in 30+ years, the cost of the event included a box lunch (also not diabetic-friendly), paid for by a sponsor who gave a presentation for those who wanted to listen.

As a “stand-alone” offering the seminar was, as usual, excellent, and covered just about everything tax preparers need to know to prepare 2018 Form 1040s.  But, as I said to my business banker on the phone on Monday morning, I was listening to what I had already been told 3 times this year.  Because the only real new development for 2018 was the GOP Tax Act, and I had already attended 2 full-day sessions exclusively on the Act and one 2 hour review of it as part of the NATP Forum, almost everything covered at this seminar was truly redundant for me.  I did, however, learn a couple of new things, which I discuss later in this post.

One saving grace – because there was so much to cover with the new Act this year’s seminar did not include the usual 2 hours of redundant and unnecessary (for me) ethics preaching.  So, one paid for eight 50-minute hours of real education and one actually got eight 50-minute hours of real education.

I had signed up for classes that I knew would cover the GOP Tax Act scheduled later in the year, like this one, because I had hoped that the IRS would be releasing new regulations, interpretations, clarifications and information about the tax law changes.  Unfortunately, very little new details have been released.

Three things continue to be reinforced by GOP Tax Act seminars and discussions –

(1) There is still a lot we don’t know yet about how many of the provisions of the Act will be interpreted and implemented.

(2) Because the Act was basically written overnight, the wording of the law is often defective, confusing and unclear.  “Technical corrections” legislation is clearly needed.

(3) It is very obvious that those who actually write tax law and the idiots in Congress who vote on it have absolutely no concept of the practical implementation of the tax legislation they write and pass, or of the actual preparation of tax returns.

Of this I am certain - by the time we tax professionals fully learn and understand the ins and outs of the new law, the IRS has released all the appropriate regulations, and the Tax Court has clarified the issues of confusion, the Act will expire and we will be back to the Tax Code as it was for 2017.

And the more I review the new “postcard” Form 1040 and its 6 supplemental schedules the more I come to believe that this is probably the stupidest thing ever in my 45+ years in the tax preparation business.

So, here is what I learned at the seminar -

* It appears that the Form 1098-T will no longer be as useful as “tits on a bull”. 

The PATH Act of 2015 correctly required educational institutions to report the total amount of payments received for qualifying tuition and fees from a student during the year.  Previously, in most cases, only the amount billed was reported.  The institutions cried that they needed more time to rewrite their software to be able to generate this information (if you ask me a total load of malarkey) and the IRS granted them delays in complying with this new requirement.

Some good news.  It looks like all educational institutions must comply with this requirement for all 2018 Form 1098-T forms.  The draft of the 2018 form shows Item #2, the section previously used to report amounts billed, blocked out with no description and the instructions say this line is “reserved for future use”.

* Sub-chapter S corporation shareholders who have

·         reported a loss from Form K-1, or

·         received a distribution of profits (other than a salary or expense reimbursement), or

·         disposed of shares of stock in the corporation, or

·         received a loan repayment from the corporation

must now attach a computation of their S-corporation stock and loan basis to their Form 1040.  The draft copy of the 2018 Schedule E includes a new column on Page 2 for entries on Line 28 which states “Check if basis computation is required”.  This is not the result of the GOP Tax Act or any tax legislation, but a new requirement established by the IRS.   

* Computers and peripheral equipment are no longer considered to be “listed property”.

Listed property was first created in the Tax Reform Act of 1984.  This act restricted the depreciation deduction for business use of items “lending themselves easily to personal use” and established requirements, such as keeping a log, for substantiating personal and business use.  Computers and peripheral equipment – except for such equipment used 100% for business at a “regular business establishment”, which could include a qualified home office – had been on the “list” of “listed” property.  I explained listed property in a 2008 post here at TWTP – click here.

The GOP Tax Act removed this equipment from the “list”.  Now computers and peripherals can be depreciated or expenses like any other business property and are no longer subject to the additional substantiation requirements.

* The ridiculous excessive “due diligence” requirements for tax preparers, causing us to become social workers, will now apply to returns for taxpayers claiming the new Other Dependent Credit (ODC), as well as the Earned Income Credit, the American Opportunity Credit, the Child Tax Credit, and, also new for 2018, Head of Household status.  The draft copy of the 2018 Form 8867 includes the ODC in one of the columns.

This nonsense is getting out of hand.  Originally the excessive due diligence was only to be required for returns claiming refundable tax credits like the Earned Income Credit or the Additional Child Tax Credit.  As I have said in other venues, soon tax preparers will be required to make random bed checks of taxpayer homes during the year to check on where a claimed dependent is sleeping.

* Veterans who received disability severance payments, that were originally reported as taxable income, from January 18, 1991 through 2016 can file amended returns (IRS Form 1040-X) for all applicable years (not limited to “open” tax years) to claim a refund for the tax paid on this income.  This is a result of the “Combat-Injured Veterans Tax Fairness Act of 2016”.

There is an IRS established “safe harbor” amount or refund claim based on the year of payment –

1991 – 2005 = $1,750

2006 – 2010 = $2,400

2011 – 2016 = $3,200

Qualified veterans do not have to complete the entire Form 1040-X to calculate the refund due.  They can elect to submit a shell Form 1040-X with the personal information (name, SS#, address, year) and enter the applicable safe harbor amount on Lines 15 and 22.  As with anything else related to taxes, claiming the safe harbor refund or calculating the actual refund based on the original return depends on the specific facts and circumstances.  If you quality consult your, or a, tax preparer. 

NATP continues to erroneously, in my opinion based on my research and what I have been told by experts, teach that casual gamblers can now also deduct on Schedule A travel expenses to casinos, racetracks, etc. if losses do not equal or exceed gains.    

The IRS draft instructions for the 2018 Schedule A does not mention this alleged change – it specifically identifies deductible gambling losses as non-winning tickets under the discussion of “Other itemized deductions” and makes no mention of any change in the “What’s New” section.  I have seen nothing “official” from the IRS that says what NATP is teaching.  

I have no more federal tax CPE scheduled between now and the beginning of the 2019 tax filing season.  So, I will have to rely on finalized IRS forms, instructions and publications, and future online and print articles, for further guidance on the implementation of the tax law changes.  As I learn new “stuff” I will tell you about it here at TWTP.

TTFN

DOCUMENTION FOR EDUCATION TAX BENEFITS

Parents, if your children are preparing to begin or return to college here is some good advice.

 

The US Tax Code currently provides several benefits to help pay for a college education.  You should save the following documentation and information as it is received and give it to your preparer next year at tax time –

 

(1)  All “Burser’s Statements” and other financial statements from the college that identifies charges and payments for all tuition and fees.  Sometimes a “hard copy” of these statements is not provided – but they are available to download and print from the student’s “account” online at the college website.  While you must give your tax pro any Form 1098-T you receive from the college – the college’s financial statements are usually more important, and provide more accurate and useful information, than the 1098-T (historically the Form 1098-T has been as useful as tits on a bull).

 

(2)  Receipts for all books and other required classroom materials purchased, regardless of where purchased.  If the student sells back used textbooks to the college or other book store be sure to make a note of the amounts received (this is NOT taxable income, but will reduce the amount of allowable expenses).

 

(3)  Receipts for any “off-campus” apartment or room rentals during the school year that are not paid to or through the college and included on college financial statements – for example if your son or daughter rents, alone or with other students, an apartment in town as an alternative to campus housing.  This expense may not provide a tax benefit – but it is important to have the information available just in case. 

 

FYI, the IRS website has a good “Tax Benefits for Education: Information Center” with, as the title suggests, explains the various tax benefits for education. 

 

TTFN

 

 

 

 

 

 

 

 

 

A BETTER WAY

Perhaps the greatest source of tax fraud, and tax return error, is the result of the erroneous policy of distributing government welfare and other social program benefits via the Form 1040 (or 1040A), especially when this takes the form of a refundable tax credit – the Earned Income Tax Credit, the Additional Child Tax Credit, and the American Opportunity Credit.

 

Obviously the best solution to the problem of tax fraud and error in this situation is to remove the distribution of government benefits, and all refundable credits, from the Tax Code. 

 

But if Congress insists on continuing this erroneous practice I have an alternative to forcing paid tax preparers to act as Social Workers and verify that clients qualify for these government program benefit payments via excessive additional “due diligence”, and forcing many legitimate low-income claimants to pay a tax return preparer to apply for government benefits.

 

First, require that all taxpayers who claim the Earned Income Tax Credit, whether or not refundable, have their tax returns prepared at an IRS VITA (Volunteer Income Tax Assistance) site, where returns are prepared free of charge for lower-income taxpayers.  Tax preparers would not be permitted to prepare, nor taxpayers to “self-prepare”, tax returns claiming the EITC. 

 

The number of VITA centers would need to be expanded and staffing would include paid IRS employees who, along with volunteer preparers, are specifically trained in verifying EITC qualifications.  Taxpayers would be required to provide VITA preparers with all the appropriate documentation that tax preparers are currently told to ask for.

 

Currently VITA preparers are not required to do the same excessive due diligence as paid tax preparers – which is wrong. 

 

Second, educational institutions must be required to report on the Form 1098-T all cash payments made to the institution during the calendar year for qualifying tuition and fees from all sources (payments from the student or the student’s family, direct student loan or employee benefit payments, and scholarships and grants), net any tuition and fee refunds, without exception (which Congress has already required institutions to do), the Form 1098-T must include a second page that lists the specific details of the charges and payments (as many colleges actually already provide to students), and the Form 1098-T must also be required to be attached to the tax return.

 

Just a thought. 

 

What do you think?

 

TTFN

 

 

 

 

 

 

 

 

 

 

F**KED AGAIN!

It looks like the Form 1098-T – now required to claim an education tax benefit – will remain as useful as tits on a bull for another year!

 

The week-day daily "Checkpoint Newsstand November 18, 2016" brought this bad news on my 63-rd birthday (highlights are mine) -

 

“No penalty for 2017 Forms 1098-T. IRS will extend the relief from penalties under Code Sec. 6721 and Code Sec. 6722, as described in Ann. 2016-17, to 2017 Forms 1098-T. Eligible educational institutions, therefore, will continue to have the option of reporting either the amount of payments of qualified tuition and related expenses received in Box 1 of Form 1098-T or the amount of qualified tuition and related expenses billed in Box 2 of Form 1098-T for the 2017 calendar year without being subject to penalties.

 

This relief is limited to 2017 Forms 1098-T required to be filed by eligible educational institutions by Feb. 28, 2018 (or Apr. 2, 2018, if filed electronically) and furnished to recipients by Jan. 31, 2018.”

 

The IRS had previously rendered most 2016 Form 1098-Ts totally worthless –

 

“Earlier relief. Following the enactment of the PATH Act, numerous eligible educational institutions informed IRS that implementation of the law change will require computer software reprogramming and other changes that cannot be implemented in time to meet the applicable filing and furnishing due dates for Form 1098-T for calendar year 2016. Accordingly, in Ann. 2016-17, IRS provided that these penalties would not be imposed on eligible educational institutions with respect to Forms 1098-T required to be filed and furnished to individuals for the 2016 calendar year if the institution reports the aggregate amount billed for qualified tuition and related expenses on Form 1098-T instead of the aggregate amount of payments received. 

 

And now the bulk of 2017 Form 1098-Ts will also be totally worthless -

 

Continued difficulty. Representatives of eligible educational institutions have informed IRS that, despite diligent efforts, the changes to accounting systems, software, and business practices that eligible educational institutions must make to implement this law change cannot be accomplished in time to apply these changes for calendar year 2017.”

 

Hopefully more than the usual handful of 2016 and 2017 Form 1098-Ts will actually provide useful information - but there is no incentive to make this happen.

 

Bad move by the IRS. 

 

They want tax pros to become Social Workers and do their work for them, and at the same time make it more difficult for us to do our work.  They have added multiple hours to the preparation of returns for lower-income clients who can least afford the appropriate additional fees we should be charging for this extra work.

 

The tax preparation community needs a unified lobbying voice in Washington!

 

 

 

 

 

 

A LITTLE THIS, A LITTLE THAT

+ The July 2016 issue of my free monthly tax planning and preparation newsletter ROBERT D FLACH’S THE 1040 LETTER is now available to download.

This month I explain how much mortgage interest you paid during the year is actually deductible, discuss a Tax Court case that concerns a tuition tax credit, list a dozen “urban tax myths”, and introduce you to a unique newsletter for NJ state taxpayers.

Click here to read the July issue.

+ And the June issue (click here to read) discusses some special Summer Tax tips and has advice for recent college graduates who will soon be starting their first full-time job.

+ Here’s a suggestion.  Follow me by email – by entering your email address in the box in the right border and clicking “submit” – and get my THE WANDERING TAX PRO posts sent to your inbox. This way you will not miss a single tax tidbit.  I promise that I will not use, or sell, your email address for spam promotional activities.

+ Another problem I have with the GOP “Blueprint for Tax Reform” (click here and here for previous posts on the blueprint) concerns the itemized deduction for state and local taxes (property, income, sales). 

See my post “Defending the Deductions for Taxes and Mortgage Interest” from 2013 to see why I would keep this itemized deduction.

+ Kay Bell celebrated the holiday week-end with “13 tax quotes by famous people in positions of power” at her BANKRATE.COM blog.

She began with the old chestnut from James Otis – “Taxation without representation is tyranny."  Taxation with representation, especially the representation we have today, isn’t so great either (someone else said that before me).

I like the quote from Ronald Reagan - “The problem is not that the people are taxed too little. The problem is that government spends too much.”  Ain’t that the truth.  The money paid in salaries and benefits to the idiots in Congress is a total waste.

+ At TAXPRO TODAY Jeff Stimpson shared comments from tax preparers in “Tax Pros Highlight the IRS’s Biggest Challenges”.

Here are what I see as the major challenges facing the Internal Revenue Service –

ü  The idiots in Congress continue to force totally unrelated and unnecessary jobs on the IRS – most prominent being the administration of federal welfare and other social benefit programs like the Earned Income Credit and the refundable Child Tax Credit, educational assistance, and Obamacare.  Neither the IRS, nor tax preparers, should be forced to become Social Workers!

ü  At the same time the idiots in Congress continue to underfund the IRS – actually cutting its budget each year.

ü  Despite underfunding the IRS is faced with having to deal with the growing problem of identity theft, and the tax fraud resulting from refundable credits, which were created by the idiots in Congress.

As with a lot of issues, the cause of the problems and challenges facing the IRS all come back to the incompetence of the idiots in Congress.

The underfunding of the IRS by the idiots in Congress also creates a challenge for taxpayers and tax professionals.  The component of the IRS that has been hardest hit by underfunding, partially because of IRS mismanagement, is “customer” service.  As one example or the mismanagement, the IRS wasted time and money on a useless and valueless voluntary “Annual Filing Season Program” for tax preparers.

Your thoughts?

TTFN

 

 

 

 

NEW 1098-T REQUIREMENTS COULD POST A PROBLEM

Professor Annette Nellen brings up an interesting issue in her recent post “New Rules Can Produce New Problems - AOTC and 1098-T” at 20^th CENTURY TAXATION.

As Annette points out, beginning with tax year 2016 –

“A 2015 law changes requires an individual to have received a Form 1098-T from the university in order to claim the tax benefit.”

The purpose of this new requirement is to enhance the IRS matching program.

Thankfully, the required 1098-T also must now include an entry in Box 1 to indicate the amount of payments received “from any source” – basically by the student (or the student’s family) or for the student (such as student loan proceeds) for qualified tuition and related expenses during the calendar year.  Previously most colleges only reported the amounts billed – making the majority of Form 1098-Ts as useful at tax time as tits on a bull.  In preparing the tax return I don’t give a rat’s hind quarters how much the college billed – I need to know how much was paid by or for the student.  My clients are, after all, cash-basis taxpayers.

However, the American Opportunity Credit is based on qualified tuition and fees paid during the year, now properly reported on the Form 1098-T, and required books and supplies, which are not reported on the Form 1098-T.

The issue that Annette brings up goes like this –

You cannot claim an American Opportunity Credit for 2016 unless the college issues a Form 1098-T.  If a student who is graduating in May of 2016 was billed, and paid for, Spring 2016 tuition (the student’s final semester) at the end of 2015, then there will be no payments made to the college in 2016 and, I expect, no Form 1098-T issued for 2016.  But the student will still be purchasing books for the Spring 2016 semester in 2016, an expense that is eligible for the AOC.  It looks like the student will be screwed out of a legitimate AOC for 2016, based on qualified book purchases, because no Form 1098-T was issued. 

Annette illustrates the problem with a recent court case.

The problem would be fixed if colleges were required to issue Form 1098-T for all students enrolled at a college at least half-time during the year, regardless of whether or not any tuition or fees were paid.

It also occurs to me that a matching problem might also appear.  Since qualified book and material expense are not reported on a Form 1098-T the amount of expenses, if less than the maximum $4,000, reported on the tax return could be more than the amount reported on the Form 1098-T.  An extra line on the Form 8863 to separately identify tuition and fees per Form 1098 and nor-reported books and materials would fix this potential FU.

TTFN