Is your child or grandchild pursuing educational goals after high school, though not at a traditional four-year college? If so, you may have decided a 529 plan, sometimes called a 529 college savings plan, is not for you. But funds in 529 plans can be used, tax-free, for qualified tuition, books, and computer expenses at eligible technical schools and community colleges.
The tax code definition of “eligible educational institution” is broader than you may think, and includes post-secondary schools that can participate in a student aid program administered by the Department of Education. These include vocational or trade schools such as welding or cosmetology, as well as community colleges offering two-year associate degrees.
When students attend these eligible educational institutions, distributions from a 529 plan are not taxable as long as the total distribution is less than or equal to qualified education expenses. That’s true even if the distribution includes earnings in the account, such as dividends received from stock investments.
To learn if the educational institution your child is interested in attending qualifies, you can ask the school or check a list of participating schools at the website of the U.S. Department of Education.
Remember, the expenses must meet other requirements under the rules to be counted as tax-free 529 plan distributions. For example, amounts paid for room and board must be incurred by a student who is enrolled for at least half the full-time academic workload.
Contact Carl Heinemann, your Chattanooga CPA, for more information about the tax benefits of 529 plans.
In tax law, new rules can seem arbitrary and annoying, especially when what used to take only a few steps now requires many more. But with financial crimes on the increase, recent changes to the way you interact with the IRS may help keep your personal financial information safe. Here are four changes directly related to the prevention and detection of tax-related fraud.
- Get Transcript application security improved. Get Transcript is a web-based tool on the IRS site that you can use to look at and/or print a copy of your prior year tax information. You view the data in transcript form; that is, as a line-by-line listing instead of in the more familiar layout of tax forms. After a breach of the system in 2015, the IRS shut down Get Transcript. The application was re-opened this summer, using a new security process. You’ll need your credit card number or account number from a loan, and a mobile phone with your name on the account in order to register. Alternatively, you can still request transcripts by mail.
- W-2 deadline moved up. The due date for filing paper and electronic Forms W-2, Wage and Tax Statement, with the IRS will be January 31. In the past, you didn’t have to send these returns to the IRS until February (or March if you filed electronically). Moving the due date forward will give the IRS early access to income and withholding information and is expected to help reduce the amount of fraudulent tax refunds issued.
- Account locks on deceased taxpayers. You may have encountered this security measure if you’re a personal representative. The IRS began the program in 2011 to prevent the payment of fraudulent tax refunds claimed using the name and social security number of deceased taxpayers. A taxpayer’s account is locked when IRS files and Social Security Administration data both show a date of death. The purpose is to void tax returns filed using the social security number of a deceased taxpayer and prevent the issuance of a fraudulent refund.
- Limit on number of direct deposits of tax refunds. This rule became effective in January 2015, in response to fraudulent tax returns with refunds issued to the same address or bank account. The change limits the number of direct deposit refunds that you can send to a single bank account to three. Additional deposits are converted to a paper refund check that is mailed to your address of record.
For information on more new rules that will affect how you file your 2016 federal income tax return, please contact Carl Heinemann, your Chattanooga CPA.
In a tax world where change is a constant, knowing that some rules remain the same can be a relief. For example, the tax rule that lets you make charitable contributions from your individual retirement account is permanent, so you can rely on it as you update your 2016 tax plan.
Here are other IRA rules that haven’t changed.
- Required withdrawals. When you reach age 70½, you’re required to withdraw a percentage of your traditional IRA assets each year. You calculate the withdrawal using life expectancy factors from IRS-issued tables. Generally, the withdrawal amount is based on your age and the balance in your IRAs as of the previous December 31.
- Multiple accounts. You can have more than one traditional IRA account. Why would you want to? One reason: If you have several beneficiaries, you may want to establish separate accounts for each.
- Taxability. Withdrawals from traditional IRAs are taxable at ordinary income tax rates, whether you take your required distributions monthly, quarterly, or annually. In some cases, such as if you made nondeductible contributions, the total withdrawal may not be taxable. You can choose to have federal and state income tax withheld from your required IRA distributions, or you can make estimated tax payments throughout the year.
Give us a call if you have questions about the tax rules that apply to IRAs. We’re happy to help you make the right choices.
The Affordable Care Act has been in place a few years now, and you’ve probably noticed that the tax reporting you have to do on your personal return depends in part on the way you obtain health insurance.
For example, say that during 2016 you are enrolled in a plan through your employer, a government plan such as Medicare, or certain self-funded plans. In this case, you generally have what’s known as MEC or “minimum essential coverage.” MEC is insurance that meets specified cost-sharing percentages and that includes benefits such as hospitalization and emergency services. When you’re covered under an MEC plan, Affordable Care Act penalties typically don’t apply, and you report your coverage on your federal tax return by checking a box. You may receive Form 1095-C from your employer, or Form 1095-B if your coverage is provided by certain private insurers or a self-funded plan. You don’t have to attach either of these forms to your return.
If you purchased your health plan on the government website known as the Marketplace, the government will send you Form 1095-A. You’ll use the form to complete your income tax return, and keep it with your tax records for the year. Form 1095-A may indicate that you received advance payments of the premium tax credit, a federal tax credit that can reduce your health insurance premium. If so, you’ll need to complete Form 8962 and file it with your income tax return. The form reconciles the premium tax credit you received with the actual amount you should have received.
Tip: Has your life situation changed during 2016? Recalculate your advance payments of the premium tax credit if you recently married, had a baby, or changed jobs. Otherwise you may end up with a surprise in the form of a smaller refund or a required repayment next year when you file your federal income tax return.
What if you don’t have health insurance coverage for 2016? Unless you qualify for an exception, you’ll pay a penalty. For 2016, the penalty is the greater of 2.5% of your household income, or $695 per adult ($347.50 per child under 18). The percentage calculation and the flat dollar amount both have specified maximum limits.
Please contact Carl Heinemann, your Chattanooga CPA, for information about other ways the health care rules can affect your individual income tax return.
Figuring out how much to set aside in a rainy day fund isn’t a one-size-fits-all proposition, though the rule of thumb of three to six months of living expenses is a reasonable guideline — and one that is widely disregarded. According to surveys, two-thirds of American households earning less than $100,000 per year do not have enough available cash to handle $10,000 in unexpected costs. Other studies note that one in four Americans has more credit card debt than emergency savings.
What’s the result? A dependence on credit to get through the rough times. And when reliance on loans and credit cards hardens into a lifestyle, disciplined saving takes a back seat. Consider these questions when deciding how much to stash in your emergency fund.
- How stable is my job? If you’re in a relatively secure position with your company or organization, you may not need to set aside as much for emergencies as someone in a highly-volatile industry that’s prone to layoffs. Think government jobs versus tech start-ups. Of course, as the last recession made abundantly clear, the expectation of one career at one company is no longer common. So it makes sense to err on the side of caution.
- What are my necessities? Think day-to-day costs, not salary. Plan for your emergency account to contain adequate funds to cover fixed costs such as mortgage and car loan payments. Put everyday layouts for food, transportation, child care, insurance, and utilities on the list too. If you lose your job or a medical crisis looms, costs such as dining out, new clothing purchases, and cable television subscriptions may need to be reduced or eliminated.
- Do I have other sources of income or assets? In a true emergency, you might need to cash out a mutual fund or sell an existing asset. These non-salary sources can reduce the amount of cash you’ll need to draw from your emergency fund.
If you run the numbers and still feel overwhelmed, remember that even a small amount set aside from each paycheck will accumulate over time. Make your deposits automatic, so the money is swept from your checking account to a savings account. Then forget about it until that rainy day arrives.
Contact Carl Heinemann, your Chattanooga CPA, for assistance in establishing an adequate emergency fund, as well as budgeting tips to help you achieve your goal.
If a significant portion of your company’s balance sheet consists of inventory, you may find that “shrinkage” — the variance between physical inventory counts and amounts recorded in your company books — is the culprit behind declining profits. A little digging, especially if you’re in a retail business, may uncover an unsettling reason for numbers that don’t add up: employee theft. Studies have shown that, on average, retail workers steal more inventory than shoplifters.
What steps can your company take to mitigate this risk?
- Use security cameras. If you suspect inventory theft may be an issue, consider installing cameras in employee and customer areas, including stock and break rooms. Periodically review video footage. Let employees know that the cameras are active and being monitored.
- Monitor trash bins. Dishonest workers sometimes throw inventory items in dumpsters and return later to pick up the goods. Quash this scheme by requiring all to-be-trashed cartons and boxes be flattened. Use transparent garbage bags. Randomly check trash containers. Let employees know that trash receptacles aren’t exempt from monitoring.
- Restrict access. Ensure that only authorized individuals are allowed to handle inventory. Keep high-value products and tools in a cage within the warehouse and provide keys to supervisors only. Consider locked cabinets for expensive items.
- Make it plain. Establish and communicate written control policies. Guidelines might include prohibitions against taking backpacks into merchandise areas or duplication of access keys. Use time clocks to record when employees are present in warehouse and retail spaces. Require unique login IDs for inventory control systems so you can track transactions by user.
- Detach departments. Keep receiving, warehousing, and shipping functions independent. Separate the purchasing department from accounts receivable and the receipt of merchandise. By maintaining a discrete distance between accounting and inventory-handling functions, you’ll reduce the risk of theft. When warranted, take swift disciplinary action against employees found to be stealing and/or falsifying records.
- Check and recheck. In addition to performing an annual inventory count, spot check merchandise throughout the year against purchase orders, shipping receipts, packing lists, and online inventory records. If you suspect widespread thievery or embezzlement, consider hiring an independent firm to conduct forensic audit procedures.
If you’d like additional tips for preventing employee theft, contact Carl Heinemann, your Chattanooga CPA.