Reducing the Cost of Higher Education
Ideas to manage your tax breaks
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With kids going off to college in September, the fact of higher educational costs is now impossible to ignore. As you or your child navigate campus, you are now in position to start navigating the possible tax implications of your new-found college expense. Outlined here are three of the more popular ways to reduce your taxes in 2012 as a result of this educational expense burden.
What you don't know could cost you
While most interest expense is no longer tax deductible, it is a viable deduction if the interest is on your primary or secondary residence. While limits apply, the use of a secondary loan on your primary or secondary residence can also qualify for interest deductibility. However, “home equity” loan interest can often lose its tax deductibility if you're not careful. Here is what you need to know.
What to do if you miss a quarterly estimated tax payment
Many clients like to keep their Federal Tax Withholdings as low as possible to avoid the IRS having their funds interest-free throughout the year. Other taxpayers, especially those with non-payroll income, must make quarterly payments to the IRS. As long as these quarterly payments are made timely and the amount of the payments is sufficient in the eyes of the IRS you will not be subjected to underpayment penalties. However, if under paid, the IRS applies late payment penalties in addition to the income tax owed. This penalty applies even if you file your 1040 tax return on or before April 15th.
10 ideas to maximize the benefits of your investments
Far more individuals are invested in the stock market through mutual funds than in the past. This phenomenon is due in part to the creation of many forms of tax deferred retirement savings programs such as IRAs, Roth IRAs, company sponsored 401(k) and 403(b) plans. But mutual funds also benefit from the long-standing belief that they allow investors to diversify their holdings without buying individual stocks. From a planning viewpoint, here are some great mutual fund tips. These tips assume your mutual fund investment is NOT in a retirement account unless noted.
Can't itemize? There are still tax breaks for you
A common misconception in tax filing has been that if you use the Standard Deduction versus itemizing your deductions you have few additional benefits available to reduce your tax bill. This is often not the case.
Tips to avoid IRS penalties on 401(k) retirement plan distributions
While each retirement plan has similar early withdrawal penalty exemptions, they are not all alike. Knowing these subtle differences within 401(k) plans can create an avoidable 10% tax penalty if you take money out of the plan prior to reaching age 59 1/2. This is true because a simple roll-over of funds into an IRA is a readily available option to avoid the penalty. You should consider rolling over your 401(k) into an IRA prior to early distribution when:
Tips to make school expenses deductible
It seems like summer has just begun and the Back to School advertising blitz has already started in the media. Are there tax savings tip opportunities within this nightmare for our kids? Certainly, if you are tax smart about your spending. While the amounts may be small, they can add up in a hurry. Here are some ideas:
Ti ps to make school expenses deductible
It seems like summer has just begun and the Back to School advertising blitz has already started in the media. Are there tax savings tip opportunities within this nightmare for our kids? Certainly, if you are tax smart about your spending. While the amounts may be small, they can add up in a hurry. Here are some ideas:
Don't forget to save receipts
The kids are out of school and summer is well underway. Make sure you understand the rules regarding the tax deductibility of summer activities and related daycare expenses. Collecting those receipts now can save plenty during tax time:
Separating Fact from Fiction
There has recently been a rash of emails being passed around making all sorts of claims regarding the upcoming increase in Medicare Taxes to pay for Health Care Reform. Much of the content is filled with misleading information. In an effort to clear the air, noted here are some of the common claims and what you need to know regarding those claims.
It is one thing to be taxed on retirement contributions and their related earnings when you withdraw funds from your Traditional IRA during retirement, it is quite another when you pay the tax PLUS a 10% penalty for early withdrawal. Need funds prior to retirement and want to avoid the early withdrawal penalty? There are cases when this can be done:
- Medical Insurance Premiums if Unemployed. If you have been receiving federal or state unemployment for 12 or more consecutive weeks, you may pay for medical insurance premiums from your Traditional IRA without paying the 10% early withdrawal penalty. The premiums may cover yourself, your spouse, and your dependents’ medical insurance premium.
- Qualified Higher Education Expenses. You may pay for tuition, books, fees, supplies, and equipment at a qualified post-secondary institution for yourself, your spouse, your child or grandchild from your Traditional IRA without paying the 10% penalty.
- Medical Expenses. If you need to withdraw from your IRA to fund medical expenses in excess of 7.5% of your Adjusted Gross Income you may do so penalty-free.
- First-Time Homebuyer Expenses. IRA distributions of up to $10,000 to help pay for the qualified acquisition costs of a first-time home avoid the early withdrawal penalty too. This is a lifetime limit per individual. A first-time homebuyer is defined by the IRS as not having an ownership interest in a principal residence for two years prior to your new home acquisition date. Even better, to qualify the home can be for you, your spouse, your child, your grandchild, your parent or even other ancestors.
- Conversions of Traditional IRAs to Roth IRAs. Want to convert your Traditional IRA into a Roth IRA to avoid paying taxes on future account earnings? No problem, this too is considered a qualified event to avoid the 10% penalty.
- You're the Beneficiary. If you are the beneficiary of someone else’s IRA and they die, there is usually an opportunity to withdraw funds without the penalty. Plenty of caution is required in this case, because if treated incorrectly the penalty might apply.
- Qualified Reservist. If you were called to active duty after 9/11/2001 for more than 179 days, amounts withdrawn from your IRA during your active duty can also avoid the 10% penalty.
- Annuity Distributions. There is also a way to avoid the 10% early withdrawal penalty if the distributions “are part of a series of substantially equal payments over your life (or your life expectancy)”. This option is complicated and must use an IRS-approved distribution method to qualify.
Some Final Thoughts.
- Remember, the above ideas help you avoid an early withdrawal penalty for funds taken out of your Traditional IRA prior to reaching the age of 59 ½. After this age, there is no early-withdrawal penalty. The penalty is also waived if you become permanently or totally disabled or use the funds to pay an IRS tax levy.
- While the above events allow you to avoid the 10% early withdrawal penalty you will still need to pay the income tax due on the withdrawn funds.
- While generally the same, the 10% early withdrawal penalty rules are slightly different for defined contribution plans like 401(k)s and other types of IRAs.
- Before taking any action, call to have your situation reviewed. It is almost always better to keep funding your Traditional IRA until you retire.
What every Traditional IRA owner should know
It is one thing to be taxed on retirement contributions and their related earnings when you withdraw funds from your Traditional IRA during retirement, it is quite another when you pay the tax PLUS a 10% penalty for early withdrawal. Need funds prior to retirement and want to avoid the early withdrawal penalty? There are cases when this can be done:
Excess gift giving could cause a tax surprise
In an effort to keep taxpayers from transferring wealth from one generation to the next tax-free, there are specific limits to the amount of gifts one may give to any one person each year. Amounts in excess of this limit are subject to a potential gift tax and require filing an annual gift tax form. For most of us, this is not something we need to worry about, but if handled incorrectly it can create quite a surprise when the tax bill is due.
Don't forget to look at the retirement specials on the tax menu
Wouldn’t it be nice to check out of the workforce early and not have to worry about having enough for retirement? While good financial planning can help you get there, leveraging the tax code as part of your retirement plan is also a good idea. Here are some tax tips that could help you reach your early retirement goal.
Think twice about automatically paying the amount due on a notice
Quotes from actual IRS correspondence received by clients:
"Thank you for your correspondence. We currently do not have a copy of the correspondence we sent to you regarding your child's tax return."
"Our records show we received a 1040X...for the tax year listed above. We're sorry but we cannot find it."
"Our records show you owe a balance due of $0.00. If we do not receive it within 30 days, appropriate collection steps will be taken".
"Payment is due on your account. Please submit payments on or before June 31 to avoid late payment penalties and interest."
Don't get caught by the ''nanny tax''
This often overlooked bookkeeping and payroll tax requirement can cause a tangle of tax problems if not handled correctly. It ended a run for Congress by Caroline Kennedy (JFK’s daughter) and killed a U.S. Attorney General nominee’s chances for appointment. Could you be impacted? This is what you need to know.
Some ideas to keep things simple
The trouble with alimony is the differing tax treatment depending on whether you are paying it or receiving it. Throw in the tax treatment of Child Support and the complex calculation of changes in alimony over time and you can quickly have a tax mess on your hands. Here are some tips to help keep things straight.
Don't miss this often overlooked deduction
With continued turmoil in the job market, the number of people searching for work continues to be at a high level. Because of this, the amount of time it takes to find a new job can be long and expensive. Don't overlook the ability to deduct qualified job hunting expenses on your tax return. Here is what you need to know.
Is it always a good idea to amend your tax return?
There's usually an element of relief after your annual tax return has been filed. But what do you do if you find an error on your tax return? Should you always file an amended return? Here are some things to consider.
Errors in the IRS' favor
Errors discovered that lead to an additional tax obligation are legally required to be fixed by filing an amended tax return. This is especially true if the discovered error is from missing information found on a 1099 form or W-2 reported income. Why? This information is being reported to the IRS and matching programs will typically catch the error. The sooner you amend your return and pay the tax the lower the possible interest and penalties.
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